<PAGE>
================================================================================

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                            -------------------------
                                   FORM 10-K/A
                                 AMENDMENT NO. 1

                /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934.

                   For the fiscal year ended December 31, 2003

                                       OR

              / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934.
                For the transition period from_______ to _______

                         Commission File Number 0-32383

                       PEGASUS COMMUNICATIONS CORPORATION
             ------------------------------------------------------
             (Exact name of registrant as specified in its charter)

                 Delaware                                    23-3070336
      -------------------------------                   -------------------
      (State or other jurisdiction of                     (IRS Employer
      incorporation or organization)                    Identification No.)

       c/o Pegasus Communications Management Company
      225 City Line Avenue, Suite 200, Bala Cynwyd, PA          19004
      -------------------------------------------------       ----------
          (Address of principal executive offices)            (Zip Code)

       Registrant's telephone number, including area code: (800) 376-0022
                                 --------------
        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 $0.01
                               -------------------

         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 (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ 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 the Form 10-K or any
amendment to this Form 10-K. / /

         Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act).
         Yes /X/  No __

         The aggregate market value of the voting stock (Class A Common Stock)
held by nonaffiliates of the registrant as of the last business day of the
registrant's most recently completed second fiscal quarter on June 30, 2003 was
approximately $139,237,250, based on the closing price of the Class A Common
Stock on such date on the Nasdaq National Market. (Reference is made to the
paragraph captioned Calculation of Aggregate Market Value of Nonaffiliate Shares
of Part II, Item 5 in our Form 10-K for a statement of assumptions upon which
this calculation is based.)

         Number of shares of each class of the registrant's common stock
outstanding as of December 8, 2004:

                  Class A Common Stock, $0.01 par value              10,032,888
                  (excluding 1,315,208 shares held by Pegasus
                  Satellite Communications, Inc. and 240,003
                  shares held by consolidated subsidiaries)
                  Class B Common Stock, $0.01 par value               1,832,760
                  Non-Voting, Common Stock, $0.01 par value               --

                       DOCUMENTS INCORPORATED BY REFERENCE
                                      None

================================================================================

<PAGE>



                                EXPLANATORY NOTE

         This Annual Report on Form 10-K/A constitutes Amendment No. 1 to the
Registrant's Form 10-K for the fiscal year ended December 31, 2003. This Form
10-K/A is being filed to: (1) correct the classification in the December 31,
2003 balance sheet of our investment in Pegasus PCS Partners, L.P. ("Pegasus PCS
Partners") from other noncurrent assets to equity (see Note 22); (2) restate in
the statements of operations and comprehensive loss for the years ended December
31, 2003, 2002, and 2001 the equity in (losses) earnings of affiliates related
to our investment in Pegasus PCS Partners, with accompanying restatements of the
related investment balances in the balance sheets as of December 31, 2003 and
2002 (see Note 22); (3) restate in the statements of operations and
comprehensive loss for the year ended December 31, 2003 the allocation of income
tax expense (benefit) between continuing operations and discontinued operations
and restate in the statements of operations and comprehensive loss for the years
ended December 31, 2003, 2002 and 2001 the income tax expense (benefit) as a
result of the restatement noted in (2) (see Note 12 and Note 22); (4) restate in
the statements of operations and comprehensive loss for the years ended December
31, 2002 and 2001 the net benefit for income taxes as a result of certain
interest expense not being deductible (see Note 12 and Note 22); (5) restate in
the statements of common stockholders' equity the net loss and the investment in
affiliate related to (1), (2), (3), and (4) above; also to restate in the
statement of common stockholders' equity the January 1, 2001 accumulated deficit
balance related to certain interest expense not being deductible for the year
ended December 31, 2000 (January 1, 2001 accumulated deficit increased by $2.5
million); (6) restate in the statements of cash flows for the years ended
December 31, 2003, 2002, and 2001 the net loss and certain line items in the
adjustments to reconcile net loss to net cash provided by (used for) operating
activities related to (2), (3), and (4) above (the net cash provided by (used
for) operating activities has not changed); (7) restate Note 21 - Quarterly
Information to reflect the statements of operations restatements discussed in
(2), (3), and (4) above and to restate the allocation of the full year income
tax (expense) benefit among the quarters of each year; and (8) restate certain
other references and disclosures in the notes to the financial statements and
management's discussion and analysis of financial condition and results of
operations, required to reflect consistently the restatements noted in (1)
through (7).

         We have also updated Note 23 - Subsequent Events to reflect a two for
one stock split of our common stock. All share and per share amounts included
herein have been retroactively restated to reflect the impact of the stock split
for all periods presented.

         For purposes of this Form 10-K/A, and in accordance with Rule 12b-15
under the Securities Exchange Act of 1934, as amended, each item of our Annual
Report on Form 10-K filed on March 15, 2004 for the year ended December 31, 2003
which was affected by this amendment is hereby amended and restated in its
entirety. No attempt has been made in this Form 10-K/A to modify or update other
disclosures as presented in the original Form 10-K, except as required to
reflect such amendments. Exhibits 10.8, 10.9, 10.15, 10.16, 10.17, and 21.1 were
previously filed with the Form 10-K for the fiscal year ended December 31, 2003.
These exhibits are now incorporated by reference to such Form 10-K of Pegasus
Communications Corporation filed with the Securities and Exchange Commission on
March 15, 2004.


                                       1

<PAGE>

                               TABLE OF CONTENTS

                                    PART II
                                                                            Page
                                                                            ----
ITEM 6.  Selected Financial Data............................................  3

ITEM 7.  Management's Discussion and Analysis of Financial Condition
          and Results of Operations.........................................  4

ITEM 8.  Financial Statements and Supplementary Data........................ 27

ITEM 9A. Controls and Procedures............................................ 27



                                    PART IV

ITEM 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K... 28









                                       2


<PAGE>




ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
In thousands, except per share
   Data                                   2003          2002         2001          2000          1999
                                       ----------    ----------   ----------    ----------     ---------
                                      (Restated -   (Restated -  (Restated -
                                      See Notes 12  See Notes 12 See Notes 12
                                         and 22)      and 22)      and 22)
<S>                                   <C>           <C>           <C>           <C>            <C>
Net revenues:
   Direct broadcast satellite
     business                          $  831,211    $  864,855   $  838,208    $  582,075      $286,353
   Broadcast television and other
     operations                            31,641        32,446       27,710        30,344        30,925
                                       ----------    ----------   ----------    ----------     ---------
Total net revenues                     $  862,852    $  897,301   $  865,918    $  612,419     $ 317,278
                                       ==========    ==========   ==========    ==========     =========
Operating expenses:
   Direct broadcast satellite
     business                          $  775,298    $  826,005   $1,003,744    $  762,597     $ 395,767
   Broadcast television and other
     operations                            30,713        31,626       32,576        33,386        31,202
Loss from operations                       (3,929)      (49,329)    (224,673)     (210,299)     (122,429)
Loss from continuing operations          (153,339)     (148,860)    (272,778)     (223,201)     (193,267)
Loss from continuing operations
   per common share (1)                    (15.16)       (15.08)      (28.70)       (26.51)       (27.81)
Cash and cash equivalents                  82,921        59,814      144,673       214,361        40,453
Total assets                            2,034,746     2,102,518    2,372,561     2,605,386       881,838
Total long term debt (including
   Current portion)                     1,388,228     1,289,082    1,338,651     1,182,858       684,414
Redeemable preferred stocks (2)           324,428       305,737      472,048       491,843       142,734
Cash provided by (used for)
   operating activities                    22,781        29,775     (136,071)      (63,056)      (84,291)
Cash used for investing
   activities                              (2,535)      (30,414)     (60,746)     (158,421)     (138,569)
Cash provided by (used for)
   financing activities                     2,861       (84,220)     127,129       395,385       208,808

Direct broadcast satellite
   operating profit (loss) before
   depreciation and amortization          213,811       211,939       92,007         4,900       (32,579)
</TABLE>
   (1)   Including accrued and deemed preferred stock dividends and accretion of
         $19.8 million, $31.5 million, $49.8 million, $41.1 million, and $16.7
         million, for 2003, 2002, 2001, 2000, 1999, respectively. Basic and
         diluted loss from continuing operations per common share for each year
         were the same as any additional potential common shares were
         antidilutive and excluded from the computation.
   (2)   For 2003, includes liquidation preference value of the 12-3/4% series
         preferred stock of $85.5 million reported as a liability, plus accrued
         and unpaid dividends of $23.4 million associated with this series
         reported as noncurrent accrued interest, on the consolidated balance
         sheet.

         No cash dividends were declared on common stock in any year presented
in the table.

         Comparability between years 1999 through 2001 has been affected due to
acquisitions we made in 1999 through 2000. Our acquisition of Golden Sky
Holdings in May 2000 was individually a significant transaction that materially
affected amounts in the year of and subsequent to the acquisition. The total
consideration for Golden Sky Holdings was $1.2 billion. Additionally, we
completed 15 acquisitions in 1999 and 19 in 2000. Total consideration for these
other acquisitions was $79.5 million and $232.6 million, respectively.




                                        3

<PAGE>




         Direct broadcast satellite operating profit (loss) before depreciation
and amortization, as adjusted for special items, is a generally accepted
accounting principle industry segment measure used by our chief operating
decision maker to evaluate our direct broadcast satellite segment. This measure
was calculated as the direct broadcast satellite business' net operating revenue
less its operating expenses (excluding depreciation and amortization), as
derived from the statements of operations, as adjusted for the special item of
$4.5 million for a contract termination fee within other subscriber related
expenses in the statement of operations within 2003 and 2002. The contract
termination fee was initially accrued in 2002 and increased other subscriber
related expenses. The accrual for this fee was reversed in 2003 because the
related contract was amended to eliminate the fee and decreased other subscriber
related expenses. The calculation of the measure for 2003 adds back to expenses
the reversal of the fee and for 2002 deducts from expenses the initial accrual
of the fee. We present this measure because our direct broadcast satellite
business is our only significant business and this business forms the principal
portion of our results of operations and cash flows.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

         The following discussion of our financial condition and results of
operations should be read in conjunction with the consolidated financial
statements and related notes included herein beginning on page F-1.

GENERAL

         Our principal operating business is the direct broadcast satellite
business. This business provides multichannel direct broadcast satellite
services as an independent provider of DIRECTV services in exclusive territories
primarily within rural areas of 41 states. For 2003, 2002, and 2001, revenues
for this business were 96%, 96%, and 97%, respectively, of total consolidated
revenues, and operating expenses for this business were 89%, 87%, and 92%,
respectively, of total consolidated operating expenses. Total assets of the
direct broadcast satellite business were 81% and 83% of total restated
consolidated assets at December 31, 2003 and December 31, 2002, respectively. As
a distributor of DIRECTV, we may be adversely affected by any material adverse
changes in the assets, financial condition, programming, technological
capabilities, or services of DIRECTV, Inc.

         We are in material litigation with DIRECTV, Inc. An outcome in this
litigation that is unfavorable to us could have a material adverse impact on our
direct broadcast satellite business. Our litigation with DIRECTV, Inc. may have
a bearing on our estimation of the useful lives of our direct broadcast
satellite rights assets. (See ITEM 3. Legal Proceedings - DIRECTV Litigation for
information regarding this litigation.)


RESTATEMENT OF FINANCIAL STATEMENTS

         We restated these financial statements to correct errors related to the
accounting for our investment in Pegasus PCS Partners and our accounting for
income taxes. Specifically we: (1) corrected the classification in the December
31, 2003 balance sheet of our investment in Pegasus PCS Partners, L.P. ("Pegasus
PCS Partners") from other noncurrent assets to equity (see below); (2) restated
in the statements of operations and comprehensive loss for the years ended
December 31, 2003, 2002, and 2001 the equity in (losses) earnings of affiliates
related to our investment in Pegasus PCS Partners, with accompanying
restatements of the related investment balances in the balance sheets as of
December 31, 2003 and 2002 (see below); (3) restated in the statements of
operations and comprehensive loss for the year ended December 31, 2003 the
allocation of income tax expense (benefit) between continuing operations and
discontinued operations and restate in the statements of operations and
comprehensive loss for the years ended December 31, 2003, 2002 and 2001 the
income tax expense (benefit) as a result of the restatement noted in (2) (see
below); (4) restated in the statements of operations and comprehensive loss for
the years ended December 31, 2002 and 2001 the net benefit for income taxes as a
result of certain interest expense not being deductible (see below); (5)
restated in the statements of common stockholders' equity the net loss and the
investment in affiliate related to (1), (2), (3), and (4) above; also restated
in the






                                       4
<PAGE>




statement of common stockholders' equity the January 1, 2001 accumulated deficit
balance related to certain interest expense not being deductible for the year
ended December 31, 2000 (January 1, 2001 accumulated deficit increased by $2.5
million); (6) restated in the statements of cash flows for the years ended
December 31, 2003, 2002, and 2001 the net loss and certain line items in the
adjustments to reconcile net loss to net cash provided by (used for) operating
activities related to (2), (3), and (4) above (the net cash provided by (used
for) operating activities has not changed); (7) restated Note 21 - Quarterly
Information to reflect the statements of operations restatements discussed in
(2), (3), and (4) above and to restate the allocation of the full year income
tax (expense) benefit among the quarters of each year; and (8) restated certain
other references and disclosures in the notes to the financial statements and
management's discussion and analysis of financial condition and results of
operations, required to reflect consistently the restatements noted in (1)
through (7).

         Investment in Affiliate

         Pegasus Development has a limited partnership interest in Pegasus PCS
Partners. Pegasus Development has no control or voice in Pegasus PCS Partners'
matters. The general partner of Pegasus PCS Partners is an entity beneficially
controlled by Marshall W. Pagon, our Chairman of the Board and Chief Executive
Officer.

         In January 1996 and April 1999, Pegasus PCS Partners acquired two
personal communications system licenses in Puerto Rico in FCC auctions. In
August 1999, Pegasus Development made an initial investment of approximately
$4.8 million in Pegasus PCS Partners in return for certain of the limited
partnership interests of Pegasus PCS Partners. Prior to August 1999, Pegasus PCS
Partners was owned by entities beneficially controlled by Marshall W. Pagon. At
the time of the investment, Pegasus PCS Partners still held the aforementioned
two personal communications system licenses in Puerto Rico. In February 2001 and
in May 2001, Pegasus PCS Partners sold its licenses. Aggregate consideration for
the sale of the two licenses was approximately $30.0 million and net proceeds
were approximately $28 million. In February 2002, Pegasus Development granted
Mr. Pagon a ten-year option to purchase its interest in Pegasus PCS Partners for
the market value of that interest, payable in cash or by delivery of marketable
securities (including our securities).

         Approximately $22 million of the net proceeds from the February 2001
and May 2001 Pegasus PCS Partners' license sales were used to make a series of
investments in 2001, 2002, and 2003, in Pegasus Capital Holdings, LLC ("PCH
LLC"); approximately $2 million of the net proceeds were used to purchase 71,000
Class A shares of Pegasus Communications on the open market; and approximately
$4 million was distributed in accordance with the partnership agreement to
satisfy tax obligations. As a result of this use of net proceeds, Pegasus PCS
Partners' assets consist principally of senior preferred equity interests in PCH
LLC, 71,000 Class A shares of Pegasus Communications, and 14,472 Class B shares
of Pegasus Communications. PCH LLC is an entity that is also beneficially
controlled by Marshall W. Pagon. As of December 31, 2003, PCH LLC's assets
consisted of only direct and indirect investments in 1,805,822 Class B shares of
Pegasus Communications. Therefore, the assets underlying Pegasus Development's
interest in Pegasus PCS Partners as of December 31, 2003 were removed from other
noncurrent assets and appropriately classified in equity.

         The approximate fair value of Pegasus Development's investment in
Pegasus PCS Partners at December 31, 2003 was $15.8 million based on our Class A
common share price at that date.

         Also, for the years ended December 31, 2003, 2002, and 2001, we
corrected our equity in earnings (losses) of affiliates related to our
investment in Pegasus PCS Partners. These corrections are the combined result of
incorrect allocations of profits and losses in accordance with the LP agreement
and an impairment of the assets of Pegasus PCS Partners during 2002.





                                        5
<PAGE>


         Income Taxes

         We also corrected the income taxes associated with continuing and
discontinued operations as previously reported in our Form 10-K for the year
ended December 31, 2003. We corrected in the statement of operations for the
year ended December 31, 2003 the allocation of income tax (expense) benefit
between continuing operations and discontinued operations. We also corrected in
the statements of operations and comprehensive loss for the years ended December
31, 2002 and 2001 the net benefit for income taxes as a result of certain
interest expense not being deductible (see Note 12 and Note 22). We also
corrected the unaudited quarterly financial information for the years ended
December 31, 2003 and 2002 to correct the allocation of the full year income tax
(expense) benefit among the quarters of each year (see Note 21). We also
corrected in the statement of operations for the years ended December 31, 2003,
2002 and 2001 the income tax benefit as a result of the restatement of equity
in earnings of affiliates during that year ended.

         Summary of Corrections

         These corrections affected amounts previously reported for the years
ended December 31, 2003, 2002, and 2001 and as of December 31, 2003 and 2002. We
summarized the effects in the following tables.

                    Selected Consolidated Balance Sheet Data
<TABLE>
<CAPTION>
                                                                               December 31,   December 31,
                                                                                   2003           2002
(in thousands)                                                                  ----------     ----------
As previously reported:
<S>                                                                             <C>            <C>
Other noncurrent assets                                                         $  158,256     $  159,929
Total assets                                                                     2,051,100      2,110,788
Investment in affiliates                                                                 -              -
Accumulated deficit                                                             (1,015,979)      (864,942)
Total common stockholders' equity                                                  121,684        278,064
Total liabilities, redeemable preferred stock, minority interest, and
common stockholders' equity                                                     $2,051,100     $2,110,788

As restated:

Other noncurrent assets                                                         $  141,902     $  151,659
Total assets                                                                     2,034,746      2,102,518
Investment in affiliate                                                            (11,955)             -
Accumulated deficit                                                             (1,020,378)      (873,212)
Total common stockholders' equity                                                  105,330        269,794
Total liabilities, redeemable preferred stock, minority interest, and
common stockholders' equity                                                     $2,034,746     $2,102,518

</TABLE>



                                       6
<PAGE>


   Selected Consolidated Statements of Operations and Comprehensive Loss Data
<TABLE>
<CAPTION>

                                                              December 31,  December 31, December 31,
                                                                 2003         2002         2001
(in thousands, except per share amounts)                       ---------     ---------    ---------
As previously reported:
<S>                                                                 <C>            <C>     <C>
Equity in (losses) earnings of affiliates                      $  (3,666)    $     865    $  14,324
Net (expense) benefit for income taxes                              (219)       28,443      117,966
Loss before discontinued operations                             (160,992)     (148,336)    (267,534)
Income (loss) from discontinued operations                         9,955        (5,292)     (10,870)
Net loss                                                        (151,037)     (153,628)    (278,404)
Comprehensive loss                                             $(151,037)    $(154,633)   $(265,423)

Basic and diluted per share amounts:

Loss from continuing operations, including $19,834,
$31,491, and $49,836, respectively, representing
accrued and deemed preferred stock dividends                      (15.83)       (15.04)      (28.23)
Discontinued operations                                             0.87         (0.44)       (0.97)
Net loss applicable to common shares                              (14.95)       (15.48)      (29.20)


As restated:

Equity in (losses) earnings of affiliates                      $     205     $  (4,135)   $  11,054
Net benefit from income taxes                                      3,563        32,919      115,992
Loss before discontinued operations                             (153,339)     (148,860)    (272,778)
Income (loss) from discontinued operations                         6,173        (5,292)     (10,870)
Net loss                                                        (147,166)     (154,152)    (283,648)
Comprehensive loss                                             $(147,166)    $(155,157)   $(270,667)

Basic and diluted per common share amounts:

Loss from continuing operations, including $19,834,
$31,491, and $49,836, respectively, representing
accrued and deemed preferred stock dividends                      (15.16)       (15.08)      (28.70)
Discontinued operations                                             0.54         (0.44)       (0.97)
Net loss applicable to common shares                              (14.62)       (15.52)      (29.67)
</TABLE>






                                       7
<PAGE>



      Selected Consolidated Statements of Common Stockholders' Equity Data
<TABLE>
<CAPTION>

                                                                                              Total
                                                                                              Common
                                                             Investment in   Accumulated   Stockholders'
                                                               Affiliate       Deficit         Equity
(in thousands)                                               -------------   -----------   -------------
As previously reported:
<S>                                                                 <C>            <C>          <C>
January 1, 2001                                                $       -     $  (432,910)    $534,431
Net loss                                                               -        (278,404)    (278,404)
December 31, 2001                                                      -        (711,314)     296,002

January 1, 2002                                                        -        (711,314)     296,002
Net loss                                                               -        (153,628)    (153,628)
December 31, 2002                                                      -        (864,942)     278,064

January 1, 2003                                                        -        (864,492)     278,064
Net loss                                                               -        (151,037)    (151,037)
Investment in affiliate appropriately classified to
contra equity                                                          -               -            -

December 31, 2003                                              $       -     $(1,015,979)    $121,684

As restated:

January 1, 2001                                                $       -     $  (435,412)    $ 531,929
Net loss                                                               -        (283,648)     (283,648)
December 31, 2001                                                      -        (719,060)      288,256

January 1, 2002                                                        -        (719,060)      288,256
Net loss                                                               -        (154,152)     (154,152)
December 31, 2002                                                      -        (873,212)      269,794

January 1, 2003                                                        -        (873,212)      269,794
Net loss                                                               -        (147,166)     (147,166)
Investment in affiliate appropriately classified to
contra equity                                                    (11,955)              -       (11,955)
December 31, 2003                                              $ (11,955)    $(1,020,378)    $ 105,330

</TABLE>


                                       8
<PAGE>

               Selected Consolidated Statements of Cash Flows Data
<TABLE>
<CAPTION>

                                                              December 31,   December 31,         December 31,
(in thousands)                                                    2003          2002                 2001
                                                               ---------     -----------         -------------
As previously reported:
<S>                                                                 <C>            <C>               <C>
Net loss                                                       $(151,037)    $  (153,628)         $(278,404)
Equity in (losses) earnings of affiliates and minority
interests                                                          1,962             (30)           (14,077)
Deferred income taxes                                          $       -     $   (28,676)         $(123,876)

As restated:

Net loss                                                       $(147,166)    $  (154,152)         $(283,648)
Equity in (losses) earnings of affiliates and minority
interests                                                         (1,909)          4,970            (10,807)
Deferred income taxes                                          $       -     $   (33,152)         $(121,902)
</TABLE>

USE OF ESTIMATES AND CRITICAL ACCOUNTING POLICIES

         The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires that we
make certain estimates and assumptions that affect the reported amounts of
revenues, expenses, assets, and liabilities. Actual results could differ from
those estimates. Significant estimates relate to recoverability and useful lives
of our direct broadcast satellite rights assets, patronage with the NRTC,
allowance for doubtful accounts, and valuation allowances for deferred income
tax assets.

         Recoverability and Useful Lives of Direct Broadcast Satellite Rights
Assets. We make significant estimates relating to the useful lives, fair values,
and recoverability of our direct broadcast satellite rights assets. Our direct
broadcast satellite rights are our most significant intangible assets with a net
carrying amount of $1.4 billion at December 31, 2003. In assessing the
recoverability of our direct broadcast satellite rights assets, we must make
assumptions regarding estimated future cash flows. Typically, the cash flows are
based on our estimates and judgments of expected future results. For example,
the value of our direct broadcast satellite rights is in large part based on the
future revenue stream that is generated by our subscriber base. A significant
difference in the actual number of subscribers and/or revenues generated by
subscribers from the amounts we estimate could significantly affect our estimate
of the fair value of the direct broadcast satellite rights.





                                        9
<PAGE>


         Adjustments to the useful lives of our direct broadcast satellite
rights assets have been and could further be significant to the results of our
operations. For example, at January 1, 2002 we extended the useful lives for the
unamortized portion of all of our direct broadcast satellite rights at that date
to end simultaneously in 2016 (see the discussion on depreciation and
amortization in Results of Operations - Comparison of 2002 to 2001 - Direct
Broadcast Satellite Business - Other Operating Expenses for further
information). Prior to 2002, each direct broadcast satellite rights asset
generally had an estimated useful life of 10 years from the date that it was
obtained. As a result, amortization expense for direct broadcast satellite
rights was $110.5 million in 2002 compared to $236.7 million in 2001.

         The lives of our direct broadcast satellite rights are subject to
litigation, and could change based on the outcome of the litigation. (See ITEM
3. Legal Proceedings - DIRECTV Litigation for information regarding this
litigation.) DIRECTV, Inc. has stated in documents filed with the SEC that
DBS-1, the first DIRECTV satellite launched, has an estimated fuel life through
2009, although it has also indicated its belief that the fuel life for purposes
of our direct broadcast satellite rights is 2007. If DIRECTV, Inc. were to
prevail on its counterclaims, the initial term of our DIRECTV rights would
likely be shorter than a term based on other satellite(s) at the 101(degree)
west longitude orbital location providing us programming services, which we
believe measure(s) the initial term. An unfavorable ruling that the initial term
of our agreements with the NRTC is determined by DBS-1 could have a material
adverse impact on our business and would lead to a reassessment of the carrying
amount of our direct broadcast satellite rights, as the underlying assumptions
regarding estimated future cash flows associated with those rights could change
(ignoring any renewal rights or alternatives to generate cash flows from our
subscriber base). Likewise, the election to participate in the settlement
reached among DIRECTV, Inc., the NRTC, and the class could have a material
adverse impact on our business and would lead to a reassessment of the carrying
amounts of our direct broadcast satellite rights using estimates of future cash
flows through June 30, 2011 at the latest instead of 2016 (ignoring alternatives
to generate cash flows from our subscriber base). In the case of an unfavorable
litigation result relating to the term of our agreements or participation in the
settlement, we currently estimate that we could record an impairment loss with
respect to our direct broadcast satellite rights of between $425 million and
$600 million, and that annual amortization expense for direct broadcast
satellite rights could increase by between $12 million and $35 million.

         NRTC Patronage Distributions. Our subsidiaries, Pegasus Satellite
Television and Golden Sky Systems, are affiliates of the NRTC, a tax exempt
entity that is organized to operate on a nonprofit basis. Throughout each year,
the NRTC bills its members and affiliates the costs incurred by it under its
agreement with DIRECTV, Inc., certain other costs incurred by the NRTC relating
to associated direct broadcast satellite projects, and margin on the costs of
providing direct broadcast satellite services pursuant to the NRTC member
agreement for marketing and distribution of direct broadcast satellite services.
The most notable service that the NRTC provides to us is programming related to
the DIRECTV programming that we provide. We record as expenses the amounts we
pay to the NRTC. Members and affiliates that participate in the NRTC's projects
may be eligible to receive an allocation of the NRTC's net savings (generally,
amounts collected from NRTC members and affiliates in excess of the NRTC's
costs) in the form of a patronage distribution through the NRTC's patronage
capital distribution program. Generally, each patron who does business with the
NRTC receives an annual distribution composed of both patronage capital
certificates and cash. The patronage capital certificates represent equity
interests in the NRTC. The amount of the distribution is generally based on the
ratio of business a patron conducts with the NRTC during a given fiscal year of
the NRTC times the NRTC's net savings available for patronage distribution for
that year. Throughout each year, we accrue amounts we estimate to receive from
the NRTC, with an offsetting reduction to the expenses that were recorded by us
for costs incurred with the NRTC during the year. The estimated cash portion of
the distribution is recorded in accounts receivable-other and the estimated
capital portion is recorded as an investment in the NRTC in other noncurrent
assets. Distributions are received in the year subsequent to the year that the
accruals are made. Amounts previously accrued are adjusted in the year that
distributions are received with a like adjustment to the related expenses in and
for the year the distributions are received. Based on past experience, we
estimate that a majority of the patronage capital distribution for 2003 to be
made in 2004 will be tendered by the NRTC in the form of patronage capital
certificates. At December 31, 2003 and 2002, we had accrued in accounts
receivable-other $5.5 million and $7.2 million, respectively, and our capital
investment in the NRTC was $76.3 million and $66.2 million, respectively. The
reduction to programming expense, as adjusted for differences between
distributions received and amounts previously accrued, was $14.5 million, $22.7
million, and $44.8 million in 2003, 2002, and 2001, respectively. We have no
commitment to fund the NRTC's operations or acquire additional equity interests
in the NRTC. The factors that the NRTC uses in determining its patronage are not
in our control, and our estimate of our share of the NRTC patronage can vary
from the actual patronage that we receive.


                                       10

<PAGE>


         Allowance for Doubtful Accounts. Our estimate of the allowance for
doubtful accounts is based on an assessment of account collection experience and
trends relative to the aging of the billings and/or specific identification of
accounts contained in the latest trade receivables balance. The trade receivable
balance is segregated into discrete categories based on the amount of time the
billings are past due. An uncollectible rate is applied to each aging category
based on our historical collection experience for that category in estimating
the amount uncollectible within that category, or specific accounts are
identified for further evaluation. The allowance is periodically reviewed for
sufficiency relative to an evaluation of the aging of the billings or specific
account identification, and the allowance is adjusted accordingly, with an
offsetting adjustment to bad debt expense. Should the quality of our subscriber
base deteriorate or our accounts receivable collection efforts diminish, our
actual bad debt expense may increase. The balance in the allowance for doubtful
accounts was $4.0 million and $7.2 million at December 31, 2003 and 2002,
respectively, and bad debt expense was $9.1 million, $23.8 million, and $36.5
million 2003, 2002, and 2001, respectively.

         Valuation Allowance for Deferred Income Tax Assets. We record a
valuation allowance against deferred income tax assets balance when it is more
likely than not that the benefits of the tax assets balance will not be
realized, and record a corresponding charge to income tax expense. Historically,
we have applied a full valuation allowance against the deferred income tax
assets balances that exist because our past operating results have not provided
us with sufficient evidence that we will realize the benefits of the tax assets.
Our ability to record lesser amounts or no amount for a valuation allowance for
deferred income tax assets will depend upon our ability to generate taxable
income in the future. The balance in the valuation allowance for deferred income
tax assets was $86.1 million and $37.6 million, as restated, at December 31,
2003 and 2002, respectively.

         In addition to the above estimates and accounting policies, we believe
the following concerning our subscriber acquisition costs and direct broadcast
satellite revenues are critical accounting policies in understanding our results
of operations.

         Subscriber Acquisition Costs. Subscriber acquisition costs are incurred
when we enroll new subscribers to our DIRECTV programming. These costs consist
of the portion of programming costs associated with promotional programming
provided to subscribers, equipment related subsidies paid to distributors and
applicable costs incurred by us, installation costs and related subsidies paid
to dealers, dealer commissions, advertising and marketing costs, and selling
costs. Our subscriber acquisition costs may be expensed, deferred, or
capitalized, as explained below.

         Promotional programming costs, which are included in promotions and
incentives expense on the statement of operations, are charged to expense when
incurred. Equipment and installation subsidies that are expensed, as described
below, are charged to expense when the equipment is delivered and the
installation occurs, respectively, and included in promotions and incentives on
the statement of operations. Dealer commissions, advertising and marketing
costs, and selling costs that are expensed, as described below, are charged to
expense when incurred and included in advertising and selling on the statement
of operations.

         Certain subscriber acquisition costs are capitalized or deferred. Under
certain of our subscription plans for DIRECTV programming, we take title to
equipment provided to subscribers. Applicable costs and subsidies related to
this equipment are capitalized as fixed assets and depreciated over their
estimated useful lives of three years and charged to depreciation expense. We
also have subscription plans for our DIRECTV programming that contain minimum
service commitment periods. These plans have early termination fees for
subscribers should service be terminated by subscribers before the end of the
commitment period. Direct and incremental subscriber acquisition costs
associated with these plans, consisting of equipment costs and related subsidies
not capitalized as fixed assets, installation costs and related subsidies, and
dealer commissions, are deferred in the aggregate not to exceed the amounts of
applicable termination fees. These costs are amortized over the minimum service
commitment period of 12 months and charged to amortization expense. Direct and
incremental subscriber acquisition costs deferred are less than the contractual
revenue from the plans over the commitment period. Direct and incremental
subscriber acquisition costs in excess of termination fee amounts are expensed
immediately and charged to promotion and incentives or advertising and selling,
as applicable, in the statement of operations.




                                       11
<PAGE>

         Amounts associated with subscriber acquisition costs are contained in
the following table (in thousands):


                                           2003            2002         2001
                                         --------        --------     --------

Gross subscriber acquisition costs
   incurred                              $ 80,860        $102,576     $185,321
Capitalized                               (22,122)        (27,021)     (20,830)
Deferred                                  (21,100)        (31,086)     (19,421)
                                         --------        --------     --------
Expensed                                 $ 37,638        $ 44,469     $145,070
                                         ========        ========     ========
Promotions and incentives                $ 14,157        $ 13,562     $ 40,393
Advertising and selling                    23,481          30,907      104,677
                                         --------        --------     --------
Total expensed                           $ 37,638        $ 44,469     $145,070
                                         ========        ========     ========
Amortization of amounts deferred         $ 24,656        $ 30,574     $  4,227
Depreciation of amounts capitalized        17,970          16,270        5,380

         Direct Broadcast Satellite Revenue. Principal revenue of the direct
broadcast satellite business is earned by providing our DIRECTV programming on a
subscription or pay per view basis. Effective July 1, 2003, we adopted Emerging
Issues Task Force Issue No. 00-21, "Revenue Arrangements With Multiple
Deliverables" ("EITF 00-21"). Effective with the adoption of EITF 00-21, certain
new subscribers are considered to enroll under multiple deliverable arrangements
with equipment, installation, and programming being separate units of
accounting. Fees that we charge new subscribers for set up and activation upon
initiation of service are included as part of total consideration for these
multiple deliverable arrangements. Under these arrangements, revenue allocated
to delivered units of accounting is recognized immediately upon delivery.
Revenue allocated to undelivered units of accounting is recognized upon their
subsequent delivery. The undelivered units of accounting are programming and, in
cases where we retain title, the satellite receiving equipment. Standard
subscriptions are recognized as revenue monthly at the amount earned and billed,
based on the level of programming content subscribed to during the month, as
adjusted for allocations to separate units of accounting. Promotional
programming provided to subscribers at discounted prices is recognized as
revenue monthly at the promotional amount earned and billed, as adjusted for
allocations to separate units of accounting. Revenue for pay per view is
recognized at the amount billed in the month in which the programming is viewed
and earned. Fees that we charged new subscribers for set up and activation upon
initiation of service prior to July 1, 2003 were deferred as unearned revenue
and recognized as revenue over the expected life of our subscribers of five
years. Amounts that we charged for equipment sold and installations arranged by
us prior to July 1, 2003 were deferred as unearned revenue and recognized as
revenue over the expected life of our subscribers of five years. The fees and
amounts deferred prior to July 1, 2003 continue to be recognized over the
expected life of our subscribers. The adoption of EITF 00-21 did not have a
material impact on our results of operations or financial position.

         In December 2003, the staff of the SEC issued Staff Accounting Bulletin
No. 104 "Revenue Recognition" ("SAB 104"). SAB 104 superseded Staff Accounting
Bulletin No. 101 "Revenue Recognition in Financial Statements" ("SAB 101"). The
principal impact of SAB 104 was the incorporation of the provisions of EITF
00-21. The other revenue recognition principles of SAB 101 remain largely
unchanged by the issuance of SAB 104. SAB 104 had no impact on us since we had
adopted EITF 00-21 prior to SAB 104.





                                       12
<PAGE>



RESULTS OF OPERATIONS

         We have a history of losses principally due to the substantial amounts
incurred by Pegasus Satellite for interest expense and amortization expense
associated with intangible assets. Restated consolidated net losses were $147.2
million, $154.2 million, and $283.6 million for 2003, 2002, and 2001,
respectively. Consolidated interest and amortization expenses were $157.2
million and $130.4 million, respectively, for 2003, $145.4 million and $154.2
million, respectively, for 2002, and $136.3 million and $245.4 million,
respectively, for 2001.

         We made substantial improvements in our operating results in 2003
compared to 2002 and in 2002 compared to 2001. Our loss from operations was $3.9
million in 2003, $49.3 million in 2002, and $224.7 million in 2001. For 2003,
2002, and 2001, the direct broadcast satellite business had income (loss) from
operations of $55.9 million, $38.9 million, and $(165.5) million, respectively.
We primarily attribute the improvement in 2003 compared to 2002 to the
continuation of the direct broadcast satellite business strategy, along with a
decrease of $22.5 million in amortization recorded in 2003 for certain licenses.
The loss from the direct broadcast satellite operations for 2002 included an
accrued expense for a contract termination fee of $4.5 million that was reversed
in 2003. The improvement in 2002 compared to 2001 was primarily a combination of
our direct broadcast satellite business strategy, broad based cost reduction
measures undertaken in 2002, and a decrease in 2002 of amortization of direct
broadcast satellite rights assets of $126.2 million due to a change in
amortization of these assets effected in 2002 (see discussion below under the
Direct Broadcast Satellite business section in the comparison between 2002 and
2001 with respect to the change in amortization of these assets).

         The broad based cost reduction measures we undertook in 2002 to aid in
preserving liquidity and improving operating performance included 1) work force
reductions, 2) reductions in discretionary expenditures, such as advertising and
selling expenses, 3) reduced amounts expended for communication services
resulting from a renegotiation of a contract for such services, 4) reduction in
bad debt expense that resulted from a better quality subscriber base and
improved account collection efforts, and 5) reduction in customer care costs
related to dispatch management and improved customer care efficiency metrics.

         In fiscal 2001, we shifted our business strategy from an emphasis on
subscriber growth to a focus on increasing the quality of new subscribers and
the composition of our existing subscriber base, enhancing the returns on
investment in our subscribers, generating free cash flow, and preserving
liquidity. We continued this strategy in 2002 and 2003. The primary focus of our
"Quality First" strategy is to improve the quality and creditworthiness of our
subscriber base. Our goal is to acquire and retain high quality subscribers, to
cause average subscribers to become high quality subscribers, and to reduce
acquisition and retention investments in low quality subscribers. To achieve
these goals, our subscriber acquisition, development, and retention efforts
focus on subscribers who are less likely to churn and who are more likely to
subscribe to more programming services, including local and network programming,
and to use multiple receivers. "Churn" refers to subscribers whose service has
terminated. Our strategy includes a significant emphasis on credit scoring of
potential subscribers, adding and upgrading subscribers in markets where DIRECTV
offers local channels, and obtaining subscribers who use multiple receivers. It
is our experience that these attributes are closely correlated with lower churn,
increased cash flow, and higher returns on investment. Our strategy also
includes the use of behavioral and predictive scores to group subscribers and to
design retention campaigns, upgrade offers, and consumer offers consistent with
our emphasis on acquiring and retaining high quality subscribers and reducing
our investment in lower quality subscribers.

         Continued improvement in results from operations will in large part
depend upon our obtaining a sufficient number of quality subscribers, retention
of these subscribers for extended periods of time, and maintaining adequate
margins from them. While our direct broadcast satellite business strategy has
resulted in an increase in income from operations, that strategy along with
other very significant factors, has contributed to a certain extent to a
decrease in the number of our direct broadcast satellite subscribers and a
decrease in direct broadcast satellite net revenues for 2003 compared to the
2002, as discussed below under the Direct Broadcast Satellite Business section
in the comparison between 2003 and 2002. We expect that our direct broadcast
satellite business strategy will result in further decreases in the number of
our direct broadcast satellite subscribers and our direct broadcast satellite
net revenues when compared to prior periods, but we believe that our results
from operations for the direct broadcast satellite business will not be
significantly impacted. We cannot make any assurances that this will be the
case, however. If a disproportionate number of subscribers churn relative to the
number of quality subscribers we enroll, we are not able to enroll a sufficient
number of quality subscribers, and/or we are not able to maintain adequate
margins from our subscribers, our results from operations may not improve or
improved results that do occur may not be sustained.




                                       13
<PAGE>


Comparison of 2003 to 2002

         In this section, amounts and changes specified are for the year ended
December 31, 2003 compared to the year ended December 31, 2002, unless otherwise
indicated. With respect to our operations, we focus on our direct broadcast
satellite business, as this is our only significant operating business.

Direct Broadcast Satellite Business
-----------------------------------

         We had 1,155,101 subscribers at December 31, 2003, a decrease of
153,369 from the number of subscribers at December 31, 2002. The average number
of subscribers was 1,235,393 and 1,358,309 during 2003 and 2002, respectively.
Gross subscriber additions were 146,374 and 216,701 in 2003 and 2002,
respectively. In addition to the effects of our "Quality First" strategy on the
number of our subscribers, other reasons for the decrease in subscribers include
a significant competitive disadvantage that we experience in a large number of
our territories in which EchoStar provides local channels but DIRECTV does not;
competition from EchoStar other than with respect to local channels; competition
from digital cable providers; our continued focus on enrolling more creditworthy
subscribers; our continued unwillingness to aggressively invest retention
amounts in low margin subscribers; subscriber reaction to our price increases
instituted in 2003; and a reduction in the number of new subscribers we obtain
from DIRECTV, Inc.'s national retail chains. The number of territories in which
we are disadvantaged by a lack of local channel service increased in 2003 and we
believe will continue to increase in the first two quarters of 2004 because of
DIRECTV Inc.'s delay in launching its DIRECTV 7S spot beam satellite to provide
local channels in markets where EchoStar offers or is introducing local
channels, and DIRECTV Inc.'s failure to provide certain of our key markets with
local channels. DIRECTV, Inc., according to its most recent statements, intends
to launch this satellite in the second quarter of 2004. Additionally, we believe
that all other factors cited above contributing to our subscriber losses will
continue over the near term.

         Despite the decrease in subscribers of 153,369 from December 31, 2002
to December 31, 2003, and the decrease in average subscribers during 2003 from
2002 of 122,916, our continued focus on our "Quality First" strategy has
contributed to year over year increased average monthly revenue generated per
subscriber ("ARPU") of $3.01 (see below for detailed discussion) and increased
direct broadcast satellite operating profit (loss) before depreciation and
amortization of $1.9 million. Also, from 2002 to 2003 our direct broadcast
satellite operating profit (loss) before depreciation and amortization as a
percent of revenue for the direct broadcast satellite business has grown from
24.5% to 25.7%.

Revenues:

         Revenues decreased $33.6 million to $831.2 million primarily due to: 1)
a decrease in our recurring subscription revenue from our core, a la carte, and
premium package offerings of $33.4 million; 2) a decrease in pay per view
revenues of $12.6 million; and 3) a decrease in late fees charged of $2.3
million. These decreases were offset in part by an increase of $9.5 million in
revenues from a royalty fee introduced in July 2002 that passes on to
subscribers a portion of the royalty costs charged to us in providing DIRECTV
service, and an increase of $3.6 million in the fees that we receive from
subscribers for the use of multiple receivers. As of December 31, 2003, 42% of
our subscriber base has more than one receiver, compared to 34% at December 31,
2002. Our average receivers per total subscriber metric stands at 1.54 as
compared to 1.42 at the same time last year. 64.7% of our gross subscriber
additions during 2003 took more than one receiver, versus 46.2% in 2002. Our
average receiver count per gross subscriber added during 2003 was 1.86 compared
to 1.56 in 2002.

         The decreases from our core, a la carte, and premium package offerings
were primarily due to the net reduction in total subscribers described above,
offset in part by increased ARPU during 2003 compared to 2002. ARPU is direct
broadcast satellite revenues for the period divided by the average number of
subscribers during the period, divided by the number of months in the period.
Total ARPU increased to $56.07 for 2003 from $53.06 for 2002. ARPU for core, a
la carte, and premium programming increased to $46.03 for 2003 from $43.91 for
2002. A rate increase to certain a la carte and premium package offerings in the
second quarter 2003, a rate increase to core package offerings in the third
quarter 2003, and our ability to keep subscribers in and upgrade subscribers
into higher retail priced packages, contributed to the increases in ARPU.



                                      14
<PAGE>

Direct Operating Expenses:

         Programming expense decreased $9.3 million to $378.6 million primarily
due to decreases in the cost of our recurring core, a la carte, and premium
package subscription offerings of $9.4 million and decreases in the cost of our
pay per view programming of $5.6 million. Additionally, we recorded a credit to
programming expenses of $1.2 million for a one time adjustment for expenses
allocable to a party that has a minority interest in one of our subsidiaries.
The decreases in the cost of our core, a la carte, and premium package offerings
were primarily due to the net reduction in total subscribers, offset in part by
a 7% increase, effective January 2003, in certain per subscriber programming
costs charged to us by the NRTC. We also experienced a 10% increase, effective
January 2003, in certain pay per view programming costs charged to us by the
NRTC. The net decreases to programming expense were also partially offset by our
estimate of patronage to be received from the NRTC being $8.2 million less for
2003 compared to 2002.

         Other subscriber related expenses decreased $25.0 million to $172.9
million. A portion of the decrease was due to the reversal of a contract
termination fee of $4.5 million that was accrued in 2002. This fee was reversed
in 2003 because the related contract for outsourced customer care services was
amended in 2003 and eliminated the fee. Also contributing to the decreased other
subscriber related expenses were decreases in our customer care costs of $7.4
million, primarily as a result of renegotiated rates in this amended contract,
and decreases in infrastructure, billing and royalty fees of $6.4 million,
primarily due to the net reduction in total subscribers described above.
Further, bad debt expense decreased $14.7 million for reasons related to our
Quality First initiative. The preceding decreases were partially offset by
increases of $12.7 million in the costs of equipment, installation services,
programming, and promotional campaigns related to our efforts to retain and
upgrade our existing subscribers.

Other Operating Expenses:

         The discussion in this paragraph is based on the amounts contained in
the subscriber acquisition costs table above. Gross subscriber acquisition costs
decreased primarily due to a lesser amount of gross subscriber additions in 2003
compared to 2002. Capitalized subscriber acquisition costs decreased as a result
of an approximate 32,000 decrease in the number of receivers that we took title
to that were delivered to new subscribers during 2003. Deferred subscriber
acquisition costs decreased as a result of an approximate 41,000 decrease in the
number of gross subscriber additions for which certain direct and incremental
subscriber acquisition costs were eligible for deferral during 2003. Based on
gross subscriber additions during 2003 and 2002 stated above, total subscriber
acquisition costs per gross subscriber added were $553 and $473, respectively.
The increase was primarily due to: the disproportionate impact our sales
administration costs and other indirect subscriber acquisition costs, including
advertising and marketing costs, have on the subscriber acquisition costs per
gross subscriber added metric when divided by a substantially lesser number of
gross subscriber additions, an impact of $35 per gross subscriber addition; a
greater percentage of our gross subscriber additions taking more than one
receiver that adds incrementally to the receiver and installation per subscriber
cost, an impact of approximately $47 per gross subscriber added; greater costs
of programming provided to new gross subscriber additions at discounted rates as
part of promotional introductory campaigns, an impact of $14 per gross
subscriber added (the cost of such programming is recorded as subscriber
acquisition costs); and a lesser percentage of our gross subscriber additions
coming from national retailers with which we do not have compensation
arrangements. The preceding per gross subscriber increases were partially offset
by decreased aggregate dealer commission costs of $16 per gross subscriber added
for 2003 versus 2002, primarily the result of increased sales through our direct
channel as a relative percent of total sales.

         General and administrative expenses decreased $3.4 million to $23.8
million. The decrease for 2003 was primarily due to reduced expenditures for
communication services resulting from several renegotiations of the related
contract for such services and reduced customer call volume from the lesser
average number of subscribers in the current year.

         Depreciation and amortization decreased $6.2 million to $162.4 million.
The decrease was primarily due to the amounts of deferred subscriber acquisition
costs amortized in those periods, as a result of an approximate 41,000 decrease
in the number of gross subscriber additions for which certain direct and
incremental subscriber acquisition costs were eligible for deferral during 2003.
Deferred subscriber acquisition costs are amortized over 12 months from the date
they are incurred, which is when a new subscriber is added.




                                       15
<PAGE>




Other Statement of Operations and Comprehensive Loss Items
----------------------------------------------------------

         Corporate and development expenses decreased $24.6 million to $32.1
million primarily due to less amortization on certain licenses. Other operating
expenses of $28.6 million for 2003 and $32.2 million for 2002 included aggregate
expenses associated with our DIRECTV, Inc. and patent litigations of $16.3
million in 2003 and $15.8 million in 2002. (See ITEM 3. Legal Proceedings -
DIRECTV Litigation for information regarding these litigations.) Other changes
within other operating expenses were primarily due to increased incentive
compensation in 2003 of $3.3 million, $6.0 million of asset write offs and
impairments in 2002 compared to $829 thousand in 2003, and $2.1 million for
severances recorded in 2002. The loss on impairment of marketable securities for
2002 of $3.3 million was due to the write off of an investment in the common
stock of another entity we owned at the time to the stock's then fair market
value. The decrease in other nonoperating income of $16.4 million to $3.1
million was primarily due to a net gain on the retirement of debt recorded in
2002 of $16.7 million. The increase in equity in earnings of affiliates from a
loss of $4.1 million in 2002 to earnings of $205 thousand in 2003 was primarily
due to an asset impairment recorded by the partnership affiliate in 2002 that
reduced Pegasus Development's share in the equity of the partnership affiliate
by $4.3 million.

     Interest expense increased $11.8 million to $157.2 million primarily due
to:

     1)  dividends on Pegasus Satellite's 12-3/4% preferred stock of $6.9
         million that were classified as interest expense in 2003 due to the
         stock being classified as a liability commencing July 1, 2003 upon our
         adoption on that date of Statement of Financial Accounting Standards
         No. 150;
     2)  $1.8 million of interest on dividends in arrears for Pegasus
         Satellite's 12-3/4% preferred stock;
     3)  net incremental interest expense of $3.7 million associated with
         Pegasus Media's credit agreement, principally due to the Tranche D term
         loan of $300.0 million borrowed in October 2003 at a weighted average
         rate of 9.0%; and
     4)  net interest of $5.5 million with respect to Pegasus Satellite's $100.0
         million term loan due 2009 borrowed in August 2003 at a rate of 12.5%;

offset in part by:

     1)  interest of $3.9 million with respect to Pegasus Media's 12-1/2% notes
         due 2005 redeemed in September 2003 that had outstanding principal on
         the date of redemption of $67.9 million; and
     2)  a reduction of $2.7 million in interest associated with interest rate
         hedging financial instruments for Pegasus Media primarily due to the
         expiration of interest rate swap contracts in March 2003.

         During 2003, Pegasus Satellite completed a series of exchanges in which
was issued an aggregate of $165.9 million principal amount of 11-1/4% notes due
January 2010 in exchange for $168.1 million principal amount of our outstanding
notes, consisting of $33.4 million of 9-5/8% notes due October 2005, $28.9
million of 9-3/4% notes due December 2006, $36.5 million of 12-1/2% notes due
August 2007, $36.8 million of 12-3/8% notes due August 2006, and $32.5 million
of 13-1/2% notes due March 2007. The principal effect of these exchanges was to
extend the maturity of $165.9 million of principal outstanding to 2010. The
effect of the exchanges on interest expense was not significant for 2003.
Excluding the exchanges for the 13-1/2% notes, the effect of the exchanges on
interest expense will not be significant for 2004. However, the aggregate annual
net effect on interest expense thereafter will be an incremental increase, after
giving effect to what would have been the maturity date of each respective note
previously outstanding received in the exchanges and the interest associated
with the principal amount of the 11-1/4% notes issued in their place, for as
long as the 11-1/4% notes remain outstanding. With respect to the exchanges
involving the 13-1/2% notes, we will experience a net reduction in annual
interest expense in excess of $900 thousand in 2004 through what would have been
the maturity date in 2007 of the 13-1/2% notes exchanged. Thereafter, annual
interest expense will increase for the interest associated with the 11-1/4%
notes for as long as these notes remain outstanding.




                                       16
<PAGE>


         In August 2003, Pegasus Satellite borrowed $100.0 million in a term
loan that bears interest at 12.5% and is due August 2009. A portion of the
proceeds was used to redeem in September 2003 all of the $67.9 million principal
outstanding for Pegasus Media's 12-1/2% notes due July 2005. A discount of $8.8
million recorded in the issuance of this term loan is being amortized and
charged to interest expense over the term of the notes. The total debt financing
costs incurred for this loan were $5.5 million, which have been deferred and are
being amortized and charged to interest expense over the term of the loan.
Further, aggregate costs of $1.6 million were incurred to amend Pegasus Media's
credit agreement and for associated consent fees in connection with this term
loan and other matters associated with the credit agreement. These costs have
been deferred and are being amortized and charged to interest expense over the
remaining term of the credit agreement. The rate of interest for this loan is
12.5%. Interest accrues quarterly on the term loan, of which 48% is payable in
cash and 52% is added to principal. Interest added to principal is subject to
the full compounded rate of interest of 12.5%.

         In October 2003, Pegasus Media amended and restated its credit
agreement to create a new $300.0 million Tranche D term loan facility. Pegasus
Media borrowed the full $300.0 million, less a discount of 1.5%, or $4.5
million. Any unpaid loan balance is due July 31, 2006. We may elect an interest
rate for outstanding principal on Tranche D loans of either 1) 7.00% plus the
greater of (i) the LIBOR rate and (ii) 2.0% or 2) the prime rate plus 6.00%. A
portion of the proceeds of the borrowing was used to repay an aggregate of
$235.0 million of initial and incremental term loan principal outstanding under
the credit agreement scheduled for repayment in 2004 and 2005. The initial and
incremental term loans were subject to interest rates based on either the prime
rate plus a margin of 2.5% or LIBOR plus a margin of 3.5%. Another portion of
the proceeds was used to repay $52.0 million principal amount outstanding under
a revolving credit facility formerly in place. The amounts borrowed under the
revolving credit facility were subject to interest rates based on either the
prime rate plus a margin of 1% to 2% or LIBOR plus a margin of 2% to 3%. The
debt financing costs incurred for this borrowing aggregating $9.4 million and
the discount incurred on the amount borrowed are being amortized and charged to
interest expense over the term of the loan.

         For continuing operations, we had an income tax benefit of $3.6 million
as restated for 2003, compared to an income tax benefit of $32.9 million, as
restated, for 2002. See Note 12 of the Notes to Consolidated Financial
Statements. The income tax benefit for 2003 includes state income tax expense of
$219 thousand. For discontinued operations, we had an income tax expense of $3.8
million for 2003, as restated, see Note 12. After considering both continuing
and discontinued operations, no deferred income tax benefit or expense was
recorded for 2003 because we were in a net deferred income tax asset position
throughout the year against which a full valuation allowance was applied. At
December 31, 2003, we had a restated net deferred income tax asset balance of
$86.1 million, offset by a valuation allowance in the same amount. The restated
valuation allowance increased by $48.5 million during 2003. This increase to the
valuation allowance completely offset the deferred income tax benefits generated
during the year and resulted in no deferred income tax expense or benefit for
2003. We believed that a valuation allowance sufficient to bring the deferred
income tax asset balance to zero at December 31, 2003 was necessary because,
based on our history of losses, it was more likely than not that the benefits of
the deferred income tax asset will not be realized. Our effective income tax
rate for continuing operations for 2003 was 2.27%, as restated, compared to the
effective income tax rate for continuing operations for 2002 of 18.11%, as
restated. The effective income tax rates for 2003 and 2002 were impacted by
valuation allowances recorded during each year.

         For discontinued operations, we had net income of $6.2 million for
2003, net of income tax expense of $3.8 million, and net loss of $5.3 million
for 2002. Discontinued operations for 2003 and 2002 consisted of a broadcast
television station located in Mobile, Alabama and two broadcast television
stations located in Mississippi, and also for 2002 our Pegasus Express business
that we ceased in 2002. We completed the sale of three broadcast television
stations in two separate transactions in 2003. The aggregate sale price was
$24.9 million cash, and we recognized a net gain on the sales of $10.3 million.
Aggregate revenues for and pretax income (loss) from discontinued operations
were as follows (in thousands):

                                      2003              2002
                                 ---------------    -------------
Revenues                            $1,533            $ 8,325
Pretax income (loss)                 9,955             (5,292)





                                       17
<PAGE>

Comparison of 2002 to 2001

         In this section, amounts and changes specified are for the year ended
December 31, 2002 compared to the year ended December 31, 2001, unless otherwise
indicated. With respect to our operations, we focus on our direct broadcast
satellite business, as this is our only significant operating business.

Direct Broadcast Satellite Business
-----------------------------------

Revenues:

         Revenues increased $26.6 million to $864.9 million primarily due to: 1)
an increase in our recurring subscription revenue from our core, a la carte, and
premium package offerings of $17.5 million; 2) effective July 2002, a royalty
fee that passes on to subscribers a portion of the royalty costs charged to us
in providing DIRECTV service, amounting to $10.8 million for 2002; 3) an
increase in the fees that we receive from subscribers for the use of multiple
receivers of $5.0 million; and 4) an increase of $5.9 million from other revenue
sources, including sports package offerings, service, shopping networks,
installation and set up fees, and advertising. The $17.5 million increase from
our core, a la carte, and premium package offerings is primarily due to the
fourth quarter 2001 increase to package rates and subscriber migration to higher
priced package offerings, offset in part by the impact of the reduction in total
subscribers. Revenue increases were also partially offset by a $12.6 million
reduction in pay per view revenues.

Direct Operating Expenses:

         Programming expense increased $28.0 million to $387.8 million primarily
due to our estimate of patronage to be received from the NRTC for 2002 being
$22.1 million less than that received in 2001, along with a broad rate increase
commencing January 2002 and a targeted increase to certain programming rates
commencing August 2002 charged to us by the NRTC, amounting to approximately
$19.4 million. Our estimate of patronage that offsets programming expenses was
reduced by $22.1 million to $22.7 million in 2002. Increased costs incurred by
the NRTC in 2002 combined with our reduced number of subscribers in 2002 have
factored into our lowered patronage estimate. The increase in programming
expense was offset in part by approximately $16.6 million of volume variance
related to the reduction in the number of total subscribers in 2002.

         Other subscriber related expenses decreased $7.3 million to $197.8
million primarily due to a decrease in bad debt expense of $12.8 million and a
decrease in customer care costs of $2.9 million related to dispatch management
and improved customer care efficiency metrics. The decrease in other subscriber
related expenses was offset in part by an accrual for a termination fee of $4.5
million payable in 2003 associated with a contract for customer care services
that was intended to be terminated in 2003 and an increase in the royalty fees
charged to us as a provider of DIRECTV service of $1.9 million. The decrease in
bad debt expense was mainly due to our focus in 2002 on improving the quality of
our subscriber base that we obtain and retain and improved account collection
efforts.

Other Operating Expenses:

         Gross subscriber acquisition costs decreased $82.7 million to $102.6
million primarily due to reduced gross subscriber additions this year compared
to last year and to the gross commissions and subsidies we incurred in 2001
under the seamless marketing agreement with DIRECTV, Inc. that was in effect
during part of that year. We incurred gross commissions and subsidies of $80.3
million in 2002 compared to $143.2 million in 2001. Of the amount incurred in
2001, $41.7 million was incurred under the seamless marketing agreement. That
agreement was terminated in July 2001 and is the subject of litigation. (See
ITEM 3. Legal Proceedings -DIRECTV Litigation for information regarding this
litigation.)



                                       18
<PAGE>


         Deferred subscriber acquisition costs increased $11.7 million to $31.1
million primarily due to a greater number of the subscription plans sold in 2002
containing provisions, as described above, that enabled us to defer costs,
whereas for 2001, plans with such provisions principally commenced in the third
quarter 2001. Capitalized subscriber acquisition costs increased $6.2 million to
$27.0 million primarily due to a greater number of plans in place in 2002 than
2001 under which equipment was eligible to be capitalized.

         Primarily as a result of the reduced subscriber additions and increased
amounts deferred and capitalized noted above, expensed subscriber acquisition
costs decreased $100.6 million to $44.5 million. Also contributing to the
decrease in advertising and selling expenses was a reduction in advertising
expenses of $10.2 million primarily due to a focused cost reduction initiative.
Amounts we expend for advertising are discretionary.

         General and administrative expenses decreased $8.9 million to $27.3
million primarily due to a decrease in telephone expenses of $2.7 million from a
renegotiation of a contract for such services and a decrease of $6.2 million as
a result of broad based cost reduction efforts that we undertook in 2002 that
included work force reductions.

         Depreciation and amortization decreased $89.0 million to $168.6 million
primarily due to our adoption in first quarter 2002 of Statement of Financial
Accounting Standards ("FAS") No. 142 "Goodwill and Other Intangible Assets" in
its entirety on January 1, 2002. In accordance with FAS 142, we reassessed the
estimated lives of our intangible assets. We believe that the estimated
remaining useful lives of our direct broadcast satellite rights assets should be
based on the estimated useful lives of the satellites at the 101(Degree) west
longitude orbital location available to provide DIRECTV, Inc. services under the
NRTC/DIRECTV, Inc. contract. The contract sets forth the terms and conditions
under which the lives of those satellites are deemed to expire, based on fuel
levels and transponder functionality. We estimate that the useful life of the
DIRECTV, Inc. satellite resources provided under the contract (without regard to
renewal rights) expires in November 2016. Because the cash flows for all of our
direct broadcast satellite rights assets emanate from the same source, we
believe that it is appropriate for all of the estimated useful lives of our
direct broadcast satellite rights assets to end at the same time. Prior to the
adoption of FAS 142, our direct broadcast satellite rights assets had estimated
useful lives of 10 years from the date we obtained the rights. Linking the lives
of our direct broadcast satellite rights assets in such fashion extended the
amortization period for the unamortized carrying amount of the assets to
remaining lives of approximately 15 years from January 1, 2002. As a result of
the change in useful life, amortization expense for direct broadcast satellite
rights was $110.5 million in 2002 compared to $236.7 million in 2001. The lives
of our direct broadcast satellite rights are subject to litigation. (See ITEM 3.
Legal Proceedings - DIRECTV Litigation for information regarding this
litigation.)

         Included in depreciation and amortization was aggregate depreciation
and amortization of promotions and incentives costs capitalized or deferred and
advertising and selling costs deferred of $46.8 million and $9.6 million for
2002 and 2001, respectively. The difference is due to the increased amount of
costs deferred and capitalized in the current year, as discussed above.

Other Statement of Operations and Comprehensive Loss Items
----------------------------------------------------------

         Corporate and development expenses increased $34.4 million to $56.8
million primarily due to amortization on certain licenses that commenced in
2002. Other operating expenses of $32.2 million for 2002 and $32.0 million for
2001 included expenses associated with our DIRECTV, Inc. and patent litigations
aggregating $15.8 million and $21.4 million, respectively. (See ITEM 3. Legal
Proceedings for information regarding these litigations.) Other changes within
other operating expenses were primarily due to asset write offs and impairments
of $6.0 million for 2002 compared to $1.6 million for 2001, and severances
recorded of $2.1 million for 2002 compared to $1.1 million for 2001.





                                       19
<PAGE>

         Interest expense increased $9.1 million to $145.4 million primarily due
to: 1) $18.9 million for Pegasus Satellite's 11-1/4% notes due 2010 issued in
December 2001; 2) increased interest of $2.3 million incurred in 2002 with
respect to Pegasus Media's swap instruments; and 3) $1.1 million for incremental
accretion of the discount on Pegasus Satellite's 13-1/2% senior discount notes.
These increases in interest expense were offset in part by $14.1 million of
lower variable rate interest incurred in 2002 under credit facilities under
Pegasus Media. With respect to interest expense that Pegasus Media incurred on
its variable rate debt borrowings in 2002, we benefited from lower interest
rates available throughout the year as well as a lesser average amount of debt
outstanding compared to 2001. The average amount of variable rate debt
outstanding for Pegasus Media during 2002 was $309.9 million compared to $399.6
million in 2001. The weighted average interest rate, including applicable
margins but excluding the effects of interest rate hedging instruments, incurred
on variable rate debt in 2002 was 5.46% compared to 7.61% in 2001. Short term
interest rates in general declined throughout 2002 in response to the Federal
Reserve's continuing attempt that was initiated in 2001 to stimulate the economy
by reducing interest rates. Such interest rate reductions in general meant that
continually declining market rates of interest were available to us in 2002
relative to 2001. Borrowings under Pegasus Media's credit facilities are subject
to short term interest rates, principally LIBOR, that vary with market
conditions. However, a portion of this interest has been fixed in connection
with its swap instruments. Under the swaps, we pay fixed rate interest to the
counter parties to the contracts at the rates specified in the contracts. In
exchange, the counter parties pay variable LIBOR interest rates to us as
specified in the contracts. The purpose of the swaps is to protect us from an
increase in market LIBOR rates above the contracted fixed rates. The applicable
LIBOR rates were less than the related fixed swap rates for all of 2002 and
2001, resulting in additional interest expense of $3.6 million in 2002 and $1.3
million in 2001. The LIBOR rates in 2002 were lower than the LIBOR rates in
2001, resulting in the additional interest for the swaps in 2002. The additional
interest incurred by the swaps in both years had the effect of adding 117 and 34
basis points to Pegasus Media's aggregate combined weighted average variable
interest rate associated with amounts outstanding under credit facilities under
Pegasus Media for 2002 and 2001, respectively.

         Interest income decreased by $4.0 million to $905 thousand due to
reduced cash amounts available for earning interest income and much lower
interest rates available during 2002 compared to 2001. Our average monthly cash
balances available to earn interest income were $59.5 million and $99.4 million
for 2002 and 2001, respectively, and the average monthly interest rate available
on such balances was 1.5% and 4.96% for 2002 and 2001, respectively.

         During 2002, we determined that our sole investment in the equity
securities of another company had incurred an other than temporary decline in
market value to zero. Accordingly, we wrote down the carrying amount of our
investment to zero and charged earnings in the amount of $3.3 million for the
impairment loss realized. In connection with the realization of this impairment,
we reclassified $3.9 million, inclusive of accumulated income tax expense of
$616 thousand, from other comprehensive (loss) income in recognition of the
previously accumulated unrealized losses. We recorded an impairment loss of
$34.2 million on this investment in 2001, and reclassified $21.2 million, net of
income tax of $13.0 million, in recognition of the previously accumulated
unrealized losses at that time.

         We had other nonoperating income of $19.5 million in 2002 compared to
other nonoperating expense of $9.6 million in 2001. This difference was
primarily due to a net gain of $16.7 million on the retirement of debt recorded
in 2002 compared to a loss of $2.9 million on the retirement of debt in 2001 and
the changes in the fair values of our interest rate financial instruments, with
a net increase in the fair values in 2002 that resulted in a gain of $3.0
million compared to a net decrease in the fair values in 2001 that resulted in a
loss of $4.2 million.

         The income tax benefit on the loss from continuing operations decreased
$83.1 million to $32.9 million, as restated, due to a reduced amount of pretax
losses in the current year and the effect of a restated valuation allowance of
$37.6 million recorded against the deferred income tax asset balance existing at
December 31, 2002 in the same amount. The valuation allowance was a charge to
income taxes on the loss from continuing operations. We felt a valuation
allowance was necessary at December 31, 2002 because, based on our history of
losses, it was more likely than not that the benefits of this net tax asset
balance would not be realized. The effect of the valuation allowance lowered our
effective income tax rate on continuing operations to 18.11% for 2002, as
restated, from that for 2001 of 29.84%, as restated.




                                       20
<PAGE>

         For discontinued operations, we had a net loss of $5.3 million for 2002
and a net loss of $10.9 million, net of income tax benefit of $6.7 million, for
2001. Discontinued operations consisted of a broadcast television station
located in Mobile, Alabama and two stations located in Mississippi, and our
Pegasus Express business that we ceased in 2002. We completed the sale of three
broadcast television stations in two separate transactions in 2003. Aggregate
revenues for and pretax loss from discontinued operations were as follows (in
thousands):

                                      2002              2001
                                 ---------------    -------------
Revenues                           $ 8,325             $ 7,861
Pretax loss                         (5,292)            (17,533)

LIQUIDITY AND CAPITAL RESOURCES

         We had cash and cash equivalents on hand at December 31, 2003 of $82.9
million compared to $59.8 million at December 31, 2002. Of the total
consolidated cash at December 31, 2003, $55.9 million was held by Pegasus
Communications and its direct subsidiaries other than Pegasus Satellite. The
changes in cash for 2003 and 2002 are discussed below in terms of the amounts
shown on our statement of cash flows.

         Net cash provided by operating activities was $22.8 million and $29.8
million for 2003 and 2002, respectively, with net cash used for operating
activities in 2001 of $136.1 million. We believe that the net cash flows
provided by operating activities for 2003 and 2002 were reflective of our
strategy for our direct broadcast satellite business, as described above, when
compared to 2001. The principal item that contributed to the change in cash
provided by operating activities for 2003 compared to 2002 was a net increase in
cash interest paid in 2003 of $7.8 million to $119.5 million primarily due to
the timing of interest payments associated with Pegasus Satellite's 11-1/4%
notes resulting in increased cash interest paid in 2003. Interest on the 11-1/4%
notes is payable semiannually in January and July. These notes were first issued
in December 2001 with the first interest payment due July 2002. The principal
reasons for the change between 2002 and 2001 were: 1) increased level of direct
broadcast satellite revenues and improved collections on direct broadcast
satellite accounts receivable due to a higher quality subscriber base in place
in 2002; 2) much less subscriber acquisition costs incurred in 2002 primarily
due to reduced gross subscriber additions in the current year and commissions
and subsidies incurred in 2001 under the seamless marketing agreement with
DIRECTV, Inc. that was in effect during part of that year; 3) a lower level of
other subscriber related expenses and general and administrative expenses
achieved by cost reduction measures in place during 2002; and 4) taxes paid in
2001 with respect to the 2000 sale of our cable operations. These decreases were
offset in part by incremental direct broadcast satellite programming expenses
incurred in 2002.

         Net cash was used for investing activities in 2003, 2002, and 2001 of
$2.5 million, $30.4 million, and $60.7 million, respectively. The investing
activities for 2003 primarily reflect cash received of $21.6 million from sales
of three broadcast television stations, cash utilized for direct broadcast
satellite receiver equipment capitalized of $21.5 million, and other capital
expenditures of $2.8 million. The 2002 period primarily consisted of cash
utilized for direct broadcast satellite receiver equipment capitalized of $26.4
million and other capital expenditures of $4.6 million. Primary investing
activities for 2001 were direct broadcast satellite equipment capitalized of
$20.8 million, other capital expenditures of $25.3 million primarily for a new
call center and capital improvements to existing buildings, and purchases of
intangible assets of $13.7 million, consisting of additional guard band licenses
and costs incurred to acquire and convert subscribers of a cable system to our
DIRECTV services.

         Net cash was provided by financing activities of $2.9 million and
$127.1 million for 2003 and 2001, and net cash was used for financing activities
for 2002 of $84.2 million. We received proceeds of $395.5 million from new
borrowings in 2003. The primary expenditures for financing activities for 2003
were: 1) repayments on Pegasus Media's term loan facilities of $239.8 million;
2) redemption of all of the outstanding principal of Pegasus Media's 12-1/2%
notes due July 2005 of $67.9 million; 3) debt financing costs of $17.6 million
incurred with respect to financing activities during the year; and 4) purchases
of 702,120 shares of Pegasus Communications' Class A common stock for $6.5
million. Additionally, Pegasus Media placed $60.1 million as collateral for a
letter of credit facility that is restricted cash to us. The primary
expenditures for financing activities for 2002 were: 1) repayment of amounts
outstanding under Pegasus Media's revolving credit facility of $80.0 million; 2)
aggregate redemptions and repurchases of preferred stock of $29.1 million; 3)
aggregate repurchases of outstanding notes of $25.5 million; and 4) repayment of
other debt of $9.2 million. The primary receipts for financing activities for
2002 were proceeds of $63.2 million from an incremental term loan facility of
Pegasus Media. Primary financing activities in 2001 were proceeds from a note
issuance for Pegasus Satellite of $175.0 million, less repayment of Pegasus
Media's term loans of $37.8 million and incurrence of debt financing costs of
$9.4 million.




                                       21
<PAGE>

         We project that our capital expenditures for 2004 will be approximately
$24 million, of which approximately $15 million will be for capitalized
equipment for the direct broadcast satellite business.

         We amended a contract for call center services in 2003 that was to be
terminated by us in 2003. The fee of $4.5 million we were to incur with respect
to the termination of the contract was eliminated by the amendment.
Additionally, the amended agreement does not require any minimum annual
payments. We also amended our contract for telecommunications services, which
among other things removed the minimum annual commitment payments associated
with the contract.

         As noted above under Results of Operations, a series of exchanges were
completed in which Pegasus Satellite issued an aggregate of $165.9 million
principal amount of 11-1/4% notes due January 2010 in exchange for $168.1
million principal amount of various series of our outstanding notes. The
principal effect of these exchanges was to extend the maturity of $165.9 million
of principal outstanding to 2010. As a result of the exchanges, we experienced a
net reduction in cash interest paid of $2.3 million in 2003. Excluding the
exchanges for the 13-1/2% notes, the effect of the exchanges on cash interest to
be paid in 2004 will not be significant. However, the aggregate annual net
effect on cash interest to be paid thereafter will increase incrementally, after
giving effect to what would have been the maturity date of each respective note
previously outstanding received in the exchanges and the interest associated
with the principal amount of the 11-1/4% notes issued in their place, for as
long as the 11-1/4% notes remain outstanding. With respect to the exchanges
involving the 13-1/2% notes, we will experience a net increase in cash interest
paid in 2004 of $1.3 million, principally due to two interest payments due on
the 11-1/4% notes and only one interest payment that would have been due on the
13-1/2% notes. For 2005 through what would have been the maturity date in 2007
of the 13-1/2% notes exchanged, we will experience a net reduction in annual
cash interest paid in excess of $900 thousand. Thereafter, annual cash interest
paid will increase for the interest associated with the 11-1/4% notes for as
long as these notes remain outstanding.

         In August 2003, Pegasus Satellite borrowed all of the $100.0 million
available under a new term loan agreement. The rate of interest on outstanding
principal is 12.5%. Interest accrues quarterly, of which 48% is payable in cash
and 52% is added to principal. Interest added to principal is subject to the
full compounded rate of interest of 12.5%. All unpaid principal and interest is
due August 1, 2009. Principal may be repaid prior to its maturity date, but
principal repaid within three years from the initial date of borrowing bears a
premium of 103% in the first year, 102% in the second year, and 101% in the
third year. Principal repaid may not be reborrowed. A portion of the proceeds
was used to redeem in September 2003 all of the $67.9 million principal
outstanding for Pegasus Media's 12-1/2% senior subordinated notes due July 2005.

         Pegasus Media entered into a new letter of credit facility with a bank
that became effective August 1, 2003. We pay an annual fee of 1.75% prorated
quarterly of the amount of letters of credit outstanding for this facility.
Outstanding letters of credit are collateralized by cash in an amount equal to
105% of the letters of credit outstanding. The aggregate amount of letters of
credit outstanding under this facility at December 31, 2003 was $59.0 million.

         In October 2003, Pegasus Media amended and restated its credit
agreement. Among other things, this amendment created a new $300.0 million
Tranche D term loan facility. Pegasus Media borrowed the full $300.0 million,
less a discount of 1.5%, or $4.5 million, for net proceeds of $295.5 million. A
portion of the proceeds was used to repay an aggregate of $235.0 million of
initial and incremental term loan principal outstanding under the credit
agreement scheduled for repayment in 2004 and 2005 and to repay the entire
amount outstanding under a revolving credit facility formerly in place under the
credit agreement of $52.0 million. Outstanding principal is required to be
repaid quarterly at .25%, or $750 thousand, of the total facility amount
commencing December 31, 2003, with the balance and any accrued and unpaid
interest due at the maturity of the facility of July 31, 2006. We may elect an
interest rate for outstanding principal on Tranche D loans of either 1) 7.00%
plus the greater of (i) the LIBOR rate and (ii) 2.0% or 2) the prime rate plus
6.00%. Interest on outstanding principal borrowed under base rates is due and
payable quarterly and interest on outstanding principal borrowed under LIBOR
rates is due and payable the earlier of the end of the contracted interest rate
period or three months. Outstanding principal of the Tranche D loans is not
permitted to be repaid until all amounts for the initial and incremental term
loans are paid in full. Thereafter, principal of the Tranche D loans may be
repaid prior to its maturity date, but principal repaid within three years from
the initial date of borrowing bears a premium of 3% in the first year, 2% in the
second year, and 1% in the third year. Principal repaid may not be reborrowed.
Additionally, the above amendment amended certain covenants within the agreement
and terminated the revolving credit facility under the credit agreement and all
commitments and letters of credit related thereto.



                                       22
<PAGE>

         In December 2003, Pegasus Media entered into a new revolving credit
facility with an aggregate commitment of $20.0 million that expires July 31,
2006. However, availability under the new revolving credit facility is limited,
such that the aggregate amount of debt outstanding under this facility and
Pegasus Media's credit agreement cannot exceed $410.0 million through July 31,
2005 and $250.0 million thereafter. Amounts available to be borrowed under the
revolving credit facility are reduced by amounts outstanding for letters of
credit issued under the facility. Borrowed amounts repaid may be reborrowed. At
December 31, 2003, the amount available to be borrowed under the revolving
credit facility was $17.5 million. We may elect an interest rate for outstanding
principal under this facility at either 1) 7.00% plus the greater of (i) the
LIBOR rate and (ii) 2.0% or 2) the base rate plus 6.00%. The base rate is the
higher of the Federal funds rate plus 1% or the prime rate. Interest on
outstanding principal borrowed under the Federal funds rate or prime rate is due
and payable quarterly and interest on outstanding principal borrowed under LIBOR
rates is due and payable the earlier of the end of the contracted interest rate
period or three months. Any aggregate commitment amount in excess of the
outstanding principal borrowed and letters of credit under this facility is
subject to a commitment fee at an annual rate of 1.50% payable quarterly.

         In 2003, at the election of the holders and in accordance with the
terms of Pegasus Communications' Series E preferred stock, 7,028 shares of
Series E with a liquidation preference value of $7.0 million were converted into
22,452 shares of Pegasus Communications' Class A common stock. In accordance
with the terms of the series, accumulated dividends to the date of the
conversion on the Series E shares of $512 thousand were paid to the holder.

         The following table displays payments for our contractual obligations
outstanding at December 31, 2003 (in thousands). It represents contracts and
commitments with initial terms in excess of one year, and excludes accounts
payable and accrued expenses incurred during the normal course of business that
generally have terms of less than one year.
<TABLE>
<CAPTION>
                                                        Payments due by period
                                                   Less than                             More than
Contractual Obligations                  Total      1 year     1-3 Years    3-5 Years     5 Years
-----------------------------------    ----------   -------     --------    --------     --------
<S>                                    <C>          <C>         <C>         <C>          <C>
Long term debt                         $1,447,221    $3,157     $700,672    $247,677     $495,715
Redeemable preferred stock                111,973         -            -     111,973            -
Operating leases                           14,961     3,906        6,691       2,730        1,634
Broadcast programming rights               14,572     3,899        5,953       2,258        2,462
                                       ----------   -------     --------    --------     --------
     Total                             $1,588,727   $10,962     $713,316    $364,638     $499,811
                                       ==========   =======     ========    ========     ========
</TABLE>

         Long term debt is presented in the table based on principal amounts
outstanding at December 31, 2003. Redeemable preferred stock in the table
represents the 12-3/4% series because the stock is mandatorily redeemable at a
scheduled date. The amount includes the series' liquidation preference value at
December 31, 2003 of $91.8 million plus dividends in arrears for the series on
that date of $17.6 million and accrued interest thereon of $2.6 million. The
dividends in arrears and interest thereon were included and assumed to be
payable on the redemption date of the series because they are required to be
paid no later than the redemption date and their payment prior to that date is
at our discretion. All of our other redeemable preferred stocks have been
excluded from the table because they do not have mandatory redemption or
liquidation dates. We had no capital lease obligations at December 31, 2003.



                                       23
<PAGE>


         As permitted by the certificate of designation for Pegasus Satellite's
12-3/4% series preferred stock, the board of directors has the discretion to
declare or not to declare any scheduled quarterly dividends for this series. The
board of directors has not declared any of the scheduled semiannual dividends
for this series since January 1, 2002. Dividends in arrears to unaffiliated
parties at December 31, 2003 were $17.6 million, with accrued interest thereon
of $2.6 million. An additional $5.9 million of dividends payable on January 1,
2004 to unaffiliated parties were not declared or paid and became in arrears on
that date. Dividends not declared accumulate in arrears and incur interest at a
rate of 14.75% per year until paid.

         As permitted by the certificate of designation for Pegasus
Communications' Series C preferred stock, the board of directors has the
discretion to declare or not to declare any scheduled quarterly dividends for
this series. Since January 31, 2002, the board of directors only has declared a
dividend of $100 thousand on the series, which was paid with shares of Pegasus
Communications' Class A common stock. The total amount of dividends in arrears
on Series C at December 31, 2003 was $20.7 million. The dividend on this series
scheduled to be declared on January 31, 2004 of $3.2 million was not declared.
Dividends not declared accumulate in arrears until paid.

         While dividends are in arrears on preferred stock senior to the Series
E preferred stock, Pegasus Communications' board of directors may not declare
dividends for and we may not redeem shares of this series. The Series C
preferred stock is senior to this series. Because dividends on Series C
preferred stock are in arrears, dividends in arrears for Series E preferred
stock at December 31, 2003 amounted to $119 thousand. The dividends scheduled
for January 1, 2004 for Series E preferred stock were not declared, and an
additional $119 thousand of dividends became in arrears on that date. Dividends
not declared accumulate in arrears until paid. While dividends on preferred
stock senior to Series E are in arrears, we are not permitted nor obligated to
redeem the shares of this series. Under these circumstances, our inability to
redeem the shares of this series is not an event of default.

         In January 2004, Pegasus Communications entered into an agreement with
an unrelated party to issue 125,000 shares of its Series C preferred stock in
exchange for all of the remaining 12,500 shares of its Series D preferred stock.
No cash was transferred in the exchange. The Series D shares had accumulated
dividends in arrears to the date of the exchange of $1.0 million. Dividends on
Series C shares are in arrears, and the Series C shares issued in the exchange
were issued with an amount equivalent to dividends in arrears to the date of the
exchange of $1.6 million. Dividends on Series D were payable annually at 4% of
liquidation preference value. Dividends on Series C are payable quarterly at
6-1/2% of liquidation preference value.

         In January 2004, the FCC awarded a license to a direct subsidiary of
Pegasus Communications other than Pegasus Satellite to launch and operate a Ka
band geostationary satellite at the 87(degree) west longitude orbital location.
We posted a $5.0 million bond with the FCC with respect to this license that we
collateralized with cash in the amount of the bond.

         In February 2004, we exercised an option to acquire from a related
party a broadcast television station serving Portland, Maine for approximately
$3.8 million. It is anticipated that the sale of the station to us will result
in the release of approximately $4.0 million of our cash that collateralizes
bank loans of the related party from which we purchased the station. In February
2004, the FCC preliminarily granted a new, digital only, full power construction
permit to this same related party for a broadcast television station licensed to
Hammond, Louisiana and to be located in the New Orleans DMA. We expect this
approval to become final in April 2004, at which time we intend to exercise our
option to acquire the construction permit. The option price for the construction
permit is estimated to be $1.5 million and will further reduce, to the extent
outstanding, our cash that collateralizes bank loans of the related party from
which we purchased the permit. In March 2004, we exercised an option to acquire
from this same related party a broadcast television station in Scranton,
Pennsylvania for approximately $2.0 million. The amount paid by us will further
reduce, to the extent outstanding, our cash that collateralizes bank loans of
the related party from which we purchased the station.


                                       24
<PAGE>


         In February 2004, Pegasus Media and its lenders entered into an
amendment to its credit facility. The amendment, among other things, allows us
to incur additional senior secured debt such that we and Pegasus Media can have
total senior secured debt of up to $650.0 million.

         On a consolidated basis, we are highly leveraged. At December 31, 2003,
we had a combined carrying amount of long term debt, including the portion that
is current, and redeemable preferred stock outstanding, including associated
accrued and unpaid interest, of $1.7 billion. Of this amount, $1.5 billion is
outstanding at Pegasus Satellite and its consolidated subsidiaries. Redeemable
preferred stock with a carrying amount of $215.5 million, including accrued
dividends, is outstanding at Pegasus Communications and a mortgage with a
balance of $8.3 million is outstanding at a subsidiary of Pegasus
Communications. We dedicate a substantial portion of cash to pay amounts
associated with debt. In 2003, 2002, and 2001, Pegasus Satellite paid interest
of $119.5 million, $111.7 million, and $113.2 million, respectively. Our high
leverage makes us more vulnerable to adverse economic and industry conditions
and limits our flexibility in planning for, or reacting to, changes in our
business and the industries in which we operate. Our ability to make payments on
and to refinance indebtedness and redeemable preferred stock outstanding and to
fund operations, planned capital expenditures, and other activities and to fund
preferred stock requirements depends on our ability to generate cash in the
future. Our ability to generate cash depends on the success of our business
strategy, prevailing economic conditions, regulatory risks, competitive
activities by other parties, the business strategies of DIRECTV, Inc. and the
NRTC, equipment strategies, technological developments, levels of programming
costs and subscriber acquisition costs, levels of interest rates, and financial,
business, and other factors that are beyond our control. We cannot assure that
our business will generate sufficient cash flow from operations or that
alternative financing will be available to us in amounts sufficient to fund the
needs previously specified. Our indebtedness and preferred stock contain
numerous covenants that, among other things, generally limit the ability to
incur additional indebtedness and liens, issue other securities, make certain
payments and investments, pay dividends, transfer cash, dispose of assets, and
enter into other transactions, and impose limitations on the activities of our
subsidiaries. Failure to make debt payments or comply with covenants could
result in an event of default that, if not cured or waived, could adversely
impact us.

         At this time, we believe that our capital resources and liquidity are
sufficient to meet our contractual obligations for at least the next 18 to 21
months. We may seek to issue new debt and/or equity securities, refinance
existing debt and/or preferred stock outstanding, continue to extend maturities
of existing debt by issuing debt with later maturities in exchange for debt with
nearer maturities, like the exchanges discussed above, or secure some other form
of financing in meeting our longer term needs. Our financing options and
opportunities will be impacted by general and industry specific economic and
capital market conditions over which we have no control, as well as the outcome
of our litigation with DIRECTV, Inc.

         As indicated above and previously disclosed, we have engaged in
transactions from time to time that involve the purchase, sale, and/or exchange
of our securities, and we may further do so in the future. Such transactions may
be made in the open market or in privately negotiated transactions and may
involve cash or the issuance of new securities or securities that we received
upon purchase or exchange. The amount and timing of such transactions, if any,
will depend on market conditions and other considerations.

NEW ACCOUNTING PRONOUNCEMENTS

         Interpretation No. 46, "Consolidation of Variable Interest Entities"
("FIN 46"), was originally issued by the Financial Accounting Standards Board
("FASB") in January 2003 and was revised in December 2003. FIN 46 clarifies the
application of Accounting Research Bulletin No. 51, "Consolidated Financial
Statements" to certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support. For those entities that are not considered to be
special-purpose entities, as defined, the FASB has deferred the effective date
for applying the provisions of FIN 46 to the end of the first reporting period
ending after March 15, 2004 for public entities that are not small business
issuers.




                                       25

<PAGE>


         We believe that it is reasonably possible that Pegasus will initially
consolidate or disclose information about the following variable interest
entities upon the implementation of FIN 46.

KB Prime Media
--------------

         We entered into an arrangement in 1998 with W.W. Keen Butcher, the
stepfather of Marshall W. Pagon, and certain entities controlled by Mr. Butcher
and the owner of a minority interest in one of the entities. Under this
agreement, as later amended and modified, we agreed to provide and maintain
collateral for the principal amount of bank loans to Mr. Butcher, his affiliated
entities, and the minority owner. Mr. Butcher and the minority owner are
required to lend or contribute the proceeds of those bank loans to one or more
of the entities owned by Mr. Butcher (the "KB Prime Media Companies") for the
acquisition of television broadcast stations to be programmed by us pursuant to
local marketing agreements or for which we have the right to sell all of the
advertising time pursuant to sales agreements. Under the 1998 agreement, as
amended, the KB Prime Media Companies granted us an option to purchase all of
its broadcast station licenses, permits, and/or assets, in whole or in part, if
and when permitted by applicable FCC rules and regulations. The option price is
based upon the cost attributed to an asset, plus compound interest at 12% per
year. The arrangement with Mr. Butcher permits us to realize the benefit or cost
savings for programming and collecting revenues from two or more stations in a
television market where the FCC's ownership rules would otherwise prohibit
outright ownership.

         Pursuant to these arrangements, at December 31, 2003, we had $6.6
million of cash being used to collateralize the bank loans. The KB Prime Media
Companies are required to repay the bank loans with proceeds received from the
disposition of assets.

         We and KB Prime Media Companies amended the 1998 agreement effective
February 1, 2004 to, among other things, (i) decrease the annual interest rate
from 12% to a rate equal to the borrowing interest rate of the KB Prime Media
Companies (2.6% as of December 31, 2003) plus 3% and (ii) limit the amount of
corporate expenses that would be reimbursed.

         KB Prime Media's assets and its operations that are not subject to
local marketing agreements are not significant to Pegasus. At December 31, 2003,
Pegasus' maximum exposure to loss as a result of its involvement with KB Prime
Media is $6.6 million, representing the collateral provided with respect to KB
Prime Media's bank loans.

Pegasus PCS Partners, L.P.
--------------------------

         Pegasus PCS Partners, L.P. ("Pegasus PCS Partners"), a partnership
owned and controlled by Marshall W. Pagon, held two personal communications
system licenses in Puerto Rico. In August 1999, Pegasus Development Corporation,
a direct subsidiary of Pegasus Communications, made an initial investment of
approximately $4.8 million in Pegasus PCS Partners in return for certain of the
limited partnership interests of Pegasus PCS Partners. In February 2001 and in
May 2001, Pegasus PCS Partners sold its licenses. Aggregate consideration for
the sale of the two licenses was approximately $30.0 million. Presently, Pegasus
PCS Partners' activities consist principally of investments in related
companies. At December 31, 2003, the carrying value of such investments on the
balance sheet of Pegasus PCS Partners is $13.9 million, including $.7 million
for investments in common stock of Pegasus Communications (see Note 22). In
February 2002, Pegasus Development granted Mr. Pagon a ten year option to
purchase its interest in Pegasus PCS Partners for the market value of that
interest, payable in cash or by delivery of marketable securities (including our
securities). Pegasus Development's share of undistributed results of operations
of Pegasus PCS Partners was income of $205 thousand in 2003, a loss of $4.1
million in 2002, and income of $11.1 million in 2001. At December 31, 2003,
Pegasus Development's investment in Pegasus PCS Partners is $12.0 million. This
amount has been removed from other noncurrent assets and appropriately
classified in equity as of December 31, 2003 (see Note 22).



                                       26
<PAGE>

         We continue to study the effects, if any, of FIN 46 during the deferral
period. Including those relationships discussed above, we do not believe that
the implementation of FIN 46 will have a significant effect on our financial
position, results of operations, or cash flows.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
         The information required by this item is set forth beginning on page
F-1.

ITEM 9A. CONTROLS AND PROCEDURES

         We maintain disclosure controls and procedures (as defined in Exchange
Act Rule 13a-15(e) and 15d-15(e)) that are designed to ensure that information
required to be disclosed in reports that we file or submit under the Securities
Exchange Act of 1934 is recorded, processed, summarized, and reported within the
time periods specified in the Securities and Exchange Commission's rules and
forms, and that such information is accumulated and communicated to our
management, including our Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow timely decisions regarding the required disclosures. In
designing and evaluating the disclosure controls and procedures, we recognize
that any controls and procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired control objectives.

         At the time the original Annual Report on Form 10-K for the fiscal year
ended December 31, 2003 was prepared and filed, an evaluation within the 90 day
period prior to December 31, 2003 had been carried out under the supervision and
with the participation of our management, including our Chief Executive Officer
and Chief Financial Officer, to determine the effectiveness of our disclosure
controls and procedures. Based on this evaluation, the Chief Executive Officer
and Chief Financial Officer had originally concluded that information required
to be disclosed in reports that we file or submit under the Securities Exchange
Act of 1934 is recorded, processed, summarized, and reported within the time
periods specified in the Securities and Exchange Commission's rules and forms,
and that such information is accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding the required disclosures.

         The Company has identified material weaknesses in our identification
and application of accounting principles and policies related to our accounting
for income taxes and equity method investments. These material weaknesses
contributed to restatements of our financial statements. See Notes 12, 21, and
22 of the Notes to Consolidated Financial Statements.

         In conjunction with the decision to restate our financial statements,
we reevaluated our disclosure controls and procedures over the identification
and application of accounting principles related to our accounting for income
taxes and equity method investments, and concluded that these controls were not
effective. We have taken steps to identify, rectify, and prevent the recurrence
of the circumstances that resulted in the determination to restate prior period
financial statements. As part of this undertaking, we have incorporated
additional levels of review of the application of the related accounting
principles, and increased emphasis on reviewing applicable accounting literature
relating to the application of the related accounting principles. In addition,
we hired a corporate controller and we engaged a public accounting firm to
consult with regarding our accounting for income taxes. We believe these
enhancements to our system of internal controls and our disclosure controls and
procedures will be adequate to provide reasonable assurance that the control
objectives will be met.

                                       27
<PAGE>


                                     PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

      (a) The following documents are filed as part of this Report:

          (1)    Financial Statements

             The financial statements filed as part of this Report are listed on
             the Index to Consolidated Financial Statements and Financial
             Statement Schedule on page F-1.

          (2)    Financial Statement Schedules
                                                                           Page
                                                                           ----
Schedule II - Valuation and Qualifying Accounts..........................  S-1


         All other financial statement schedules are not required under the
related instructions, or are inapplicable and therefore have been omitted.

         (3)     Exhibits

Exhibit
Number        Description of Document
------        -----------------------

2.1           Agreement and Plan of Merger among Pegasus Communications
              Corporation, Pegasus Holdings Corporation I and Pegasus Merger
              Sub, Inc. dated as of February 22, 2001 (which is incorporated
              herein by reference to Exhibit 2.3 to the Form 10-K of Pegasus
              Satellite Communications, Inc. (formerly named Pegasus
              Communications Corporation) filed with the Securities and Exchange
              Commission April 2, 2001).
3.1           Amended and Restated Certificate of Incorporation of Pegasus
              Communications Corporation (which is incorporated herein by
              reference to Exhibit 3.1 to the Form 10-K of Pegasus
              Communications Corporation filed with the Securities and Exchange
              Commission March 31, 2003).
3.2           By-Laws of Pegasus Communications Corporation (which is
              incorporated herein by reference to Exhibit 3.6 to the Form 10-K
              of Pegasus Satellite Communications, Inc. filed with the
              Securities and Exchange Commission April 2, 2001).
3.3           Certificate of Designation, Preferences and Relative,
              Participating, Optional and Other Special Rights of Preferred
              Stock and Qualifications, Limitations and Restrictions Thereof of
              6-1/2% Series C Convertible Preferred Stock of Pegasus
              Communications Corporation (which is incorporated herein by
              reference to Exhibit 3.8 to the Form 10-K of Pegasus Satellite
              Communications, Inc. filed with the Securities and Exchange
              Commission April 2, 2001).
3.4           Certificate of Designation, Preferences and Rights of Series D
              Junior Convertible Participating Preferred Stock of Pegasus
              Communications Corporation (which is incorporated herein by
              reference to Exhibit 3.9 to the Form 10-K of Pegasus Satellite
              Communications, Inc. filed with the Securities and Exchange
              Commission April 2, 2001).
3.5           Certificate of Designation, Preferences and Rights of Series E
              Junior Convertible Participating Preferred Stock of Pegasus
              Communications Corporation (which is incorporated herein by
              reference to Exhibit 3.10 to the Form 10-K of Pegasus Satellite
              Communications, Inc. filed with the Securities and Exchange
              Commission April 2, 2001).



                                       28
<PAGE>

4.1           Indenture, dated as of October 21, 1997, by and between Pegasus
              Satellite Communications, Inc. (then named Pegasus Communications
              Corporation) and First Union National Bank, as trustee, relating
              to the 9-5/8% Senior Notes due 2005 (which is incorporated herein
              by reference to Exhibit 4.1 to Amendment No. 1 to the Form 8-K of
              Pegasus Satellite Communications, Inc. (formerly named Pegasus
              Communications Corporation) filed with the Securities and Exchange
              Commission October 31, 1997).
4.2           Form of 9-5/8% Senior Notes due 2005 (included in Exhibit 4.1
              above).
4.3           Indenture, dated as of November 30, 1998, by and between Pegasus
              Satellite Communications, Inc. (then named Pegasus Communications
              Corporation) and First Union National Bank, as trustee, relating
              to the 9-3/4% Senior Notes due 2006 (which is incorporated herein
              by reference to Exhibit 4.6 to the Registration Statement on Form
              S-3 of Pegasus Satellite Communications, Inc. (formerly named
              Pegasus Communications Corporation) (File No. 333-70949)).
4.4           Form of 9-3/4% Senior Notes due 2006 (included in Exhibit 4.3
              above).
4.5           Indenture, dated as of November 19, 1999, by and between Pegasus
              Satellite Communications, Inc. (then named Pegasus Communications
              Corporation) and First Union National Bank, as Trustee, relating
              to the 12-1/2% Senior Notes due 2007 (which is incorporated herein
              by reference to Exhibit 4.1 to the Registration Statement on Form
              S-4 of Pegasus Satellite Communications, Inc. (formerly named
              Pegasus Communications Corporation) (File No. 333-94231)).
4.6           Form of 12-1/2% Senior Notes due 2007 (included in Exhibit 4.5
              above).
4.7           Indenture, dated as of May 31, 2001, by and between Pegasus
              Satellite Communications, Inc. and First Union National Bank, as
              trustee, relating to the 12-3/8% Senior Notes due 2006 of Pegasus
              Satellite Communications, Inc. (which is incorporated herein by
              reference to Exhibit 4.6 to Form 10-K of Pegasus Communications
              Corporation filed with the Securities and Exchange Commission
              April 3, 2002).
4.8           Form of 12-3/8% Senior Notes due 2006 of Pegasus Satellite
              Communications, Inc. (included in Exhibit 4.7 above).
4.9           Indenture, dated as of May 31, 2001, by and between Pegasus
              Satellite Communications, Inc. and First Union National Bank, as
              trustee, relating to the 13-1/2% Senior Subordinated Discount
              Notes due 2007 of Pegasus Satellite Communications, Inc. (which is
              incorporated herein by reference to Exhibit 4.8 to Form 10-K of
              Pegasus Communications Corporation filed with the Securities and
              Exchange Commission April 3, 2002).
4.10          Form of 13-1/2% Senior Subordinated Discount Notes due 2007 of
              Pegasus Satellite Communications, Inc. (included in Exhibit 4.9
              above).
4.11          Indenture, dated as of December 19, 2001, by and between Pegasus
              Satellite Communications, Inc. and J.P. Morgan Trust Company,
              National Association, as trustee, relating to the 11-1/4% Senior
              Notes due 2010 of Pegasus Satellite Communications, Inc. (which is
              incorporated herein by reference to Exhibit 4.10 to Form 10-K of
              Pegasus Communications Corporation filed with the Securities and
              Exchange Commission April 3, 2002).
4.12          Form of 11-1/4% Senior Notes due 2010 of Pegasus Satellite
              Communications, Inc. (included in Exhibit 4.11 above).
4.13          Amended and Restated Voting Agreement, dated May 5, 2000, among
              Pegasus Communications Corporation, Fleet Venture Resources, Inc.,
              Fleet Equity Partners VI, L.P., Chisholm Partners III, L.P., and
              Kennedy Plaza Partners, Spectrum Equity Investors, L.P. and
              Spectrum Equity Investors II, L.P., Alta Communications VI, L.P.,
              Alta Subordinated Debt Partners III, L.P. and Alta-Comm S By S,
              L.L.C., and Pegasus Communications Holdings, Inc., Pegasus
              Capital, L.P., Pegasus Scranton Offer Corp, Pegasus Northwest
              Offer Corp, and Marshall W. Pagon, an individual (which is
              incorporated herein by reference to Exhibit 10.1 to the Form 8-K
              of Pegasus Satellite Communications, Inc. (formerly named Pegasus
              Communications Corporation) filed with the Securities and Exchange
              Commission May 19, 2000).
4.14          Registration Rights Agreement dated May 5, 2000, among Pegasus
              Communications Corporation, Fleet Venture Resources, Inc., Fleet
              Equity Partners VI, L.P., Chisholm Partners III, L.P., and Kennedy
              Plaza Partners, Spectrum Equity Investors, L.P. and Spectrum
              Equity Investors II, L.P., Alta Communications VI, L.P., Alta
              Subordinated Debt Partners III, L.P. and Alta-Comm S By S, L.L.C.,
              and Pegasus Communications Holdings, Inc., Pegasus Capital, L.P.,
              Pegasus Scranton Offer Corp, Pegasus Northwest Offer Corp, and
              Marshall W. Pagon, an individual (which is incorporated herein by
              reference to Exhibit 10.2 to the Form 8-K of Pegasus Satellite
              Communications, Inc. (formerly named Pegasus Communications
              Corporation) filed with the Securities and Exchange Commission May
              19, 2000).

                                       29
<PAGE>

4.15          Warrant and Investor Rights Agreement, dated April 2, 2003, among
              Pegasus Communications Corporation and the parties set forth on
              Schedule I thereto (which is incorporated herein by reference to
              Exhibit 4.1 to Form 8-K of Pegasus Communications Corporation
              filed with the Securities and Exchange Commission April 3, 2003).
4.16          Amendment No. 1 to Warrant and Investor Rights Agreement among
              Pegasus Communications Corporation and the parties set forth on
              Schedule I thereto dated as of July 30, 2003 (which is
              incorporated herein by reference to Exhibit 4.2 to Form 8-K of
              Pegasus Satellite Communications, Inc. filed with the Securities
              and Exchange Commission August 5, 2003).
4.17          Amendment No. 2 to Warrant and Investor Rights Agreement among
              Pegasus Communications Corporation and the parties set forth on
              Schedule I thereto dated as of August 1, 2003 (which is
              incorporated herein by reference to Exhibit 4.3 to Form 8-K of
              Pegasus Satellite Communications, Inc. filed with the Securities
              and Exchange Commission on August 5, 2003).
10.1          NRTC/Member Agreement for Marketing and Distribution of DBS
              Services, dated June 24, 1993, between the National Rural
              Telecommunications Cooperative and Pegasus Cable Associates, Ltd.
              (which is incorporated herein by reference to Exhibit 10.28 to the
              Registration Statement on Form S-4 of Pegasus Media &
              Communications, Inc. (File No. 33-95042) (other similar agreements
              with the National Rural Telecommunications Cooperative are not
              being filed but will be furnished upon request, subject to
              restrictions on confidentiality, if any)).
10.2          Amendment to NRTC/Member Agreement for Marketing and Distribution
              of DBS Services, dated June 24, 1993, between the National Rural
              Telecommunications Cooperative and Pegasus Cable Associates, Ltd.
              (which is incorporated herein by reference to Exhibit 10.29 to the
              Registration Statement on Form S-4 of Pegasus Media &
              Communications, Inc. (File No. 33-95042)).
10.3          DIRECTV Sign-Up Agreement, dated May 3, 1995, between DIRECTV,
              Inc. and Pegasus Satellite Television, Inc. (which is incorporated
              herein by reference to Exhibit 10.30 to the Registration Statement
              on Form S-4 of Pegasus Media & Communications, Inc.
              (File No. 33-95042)).
10.4          Fourth Amendment and Restatement of Credit Agreement dated as of
              October 22, 2003 by and among Pegasus Media & Communications,
              Inc., the several lenders from time to time parties thereto, Banc
              of America Securities LLC, as sole lead arranger, Deutsche Bank
              Trust Company as resigning agent, and Bank of America, N.A., as
              administrative agent for the lenders (which is incorporated herein
              by reference to Exhibit 10.1 to Form 10-Q of Pegasus
              Communications Corporation filed with the Securities and Exchange
              Commission November 14, 2003).
10.5          First Amendment to Fourth Amendment and Restatement of Credit
              Agreement by and among Pegasus Media & Communications, Inc., the
              lenders party thereto, and Bank of America, N.A. dated February 5,
              2004 (which is incorporated herein by reference to Exhibit 99.1 to
              Form 8-K of Pegasus Satellite Communications, Inc. filed with the
              Securities and Exchange Commission February 17, 2004).
10.6          Credit Agreement among Pegasus Media & Communications, Inc., the
              lenders party thereto, Madeleine L.L.C., and Banc of America
              Securities LLC dated December 19, 2003 (which is incorporated
              herein by reference to Exhibit 99.2 to Form 8-K of Pegasus
              Satellite Communications, Inc. filed with the Securities and
              Exchange Commission February 17, 2004).
10.7          Amended and Restated Term Loan Agreement dated as of August 1,
              2003, among Pegasus Satellite Communications, Inc., the several
              lenders from time to time parties thereto and DBS Investors Agent,
              Inc., as Administrative Agent for such lenders (which is
              incorporated herein by reference to Exhibit 10.1 to Form 8-K of
              Pegasus Satellite Communications, Inc. filed with the Securities
              and Exchange Commission August 5, 2003).
10.8+*        Pegasus Communications 1996 Stock Option Plan, as amended and
              restated effective as of February 13, 2002, and as amended through
              Amendment No. 5.
10.9+*        Pegasus Communications Restricted Stock Plan, as amended and
              restated effective as of February 13, 2002, and as amended through
              Amendment No. 4.


                                       30
<PAGE>



10.10+        Pegasus Communications Corporation Executive Incentive Plan (which
              is incorporated herein by reference to Exhibit 10.1 to the Form
              10-Q of Pegasus Communications Corporation filed with the
              Securities and Exchange Commission May 17, 2001).
10.11+        Executive Employment Agreement effective as of June 1, 2002 for
              Ted S. Lodge (which is incorporated herein by reference to Exhibit
              10.1 to Form 10-Q of Pegasus Communications Corporation filed with
              the Securities and Exchange Commission August 14, 2002).
10.12+        Pegasus Communications Corporation Short Term Incentive Plan
              (Corporate, Satellite and Business Development) for calendar year
              2002 (which is incorporated herein by reference to Exhibit 10.2 to
              the Form 10-Q of Pegasus Communications Corporation filed with the
              Securities and Exchange Commission August 14, 2002).
10.13+        Supplemental Description of Pegasus Communications Corporation
              Short Term Incentive Plan (Corporate, Satellite and Business
              Development) for calendar year 2002 (which is incorporated herein
              by reference to Exhibit 10.3 to the Form 10-Q of Pegasus
              Communications Corporation filed with the Securities and Exchange
              Commission August 14, 2002).
10.14+        Description of Long Term Incentive Compensation Program Applicable
              to Executive Officers for calendar year 2002 (which is
              incorporated herein by reference to Exhibit 10.4 to the Form 10-Q
              of Pegasus Communications Corporation filed with the Securities
              and Exchange Commission August 14, 2002).
10.15+*       Pegasus Communications Corporation Short Term Incentive Plan
              (Corporate, Satellite and Business Development) for calendar year
              2003.
10.16+*       Supplemental Description of Pegasus Communications Corporation
              Short Term Incentive Plan (Corporate, Satellite and Business
              Development) for calendar year 2003.
10.17+*       Description of Long-Term Incentive Compensation Program Applicable
              to Executive Officers for calendar year 2003.
21.1*         Subsidiaries of Pegasus Communications Corporation.
23.1**        Consent of PricewaterhouseCoopers LLP.
24.1*         Power of Attorney.
31.1**        Certification of Chief Executive Officer Pursuant to Securities
              Exchange Act of 1934 Rule 13a-14(a).
31.2**        Certification of Chief Financial Officer Pursuant to Securities
              Exchange Act of 1934 Rule 13a-14(a).
32.1**        Certification of Chief Executive Officer pursuant to 18 U.S.C.
              Section 1350, as adopted pursuant to Section 906 of the
              Sarbanes-Oxley Act of 2002.
32.2**        Certification of Chief Financial Officer pursuant to 18 U.S.C.
              Section 1350, as adopted pursuant to Section 906 of the
              Sarbanes-Oxley Act of 2002.
_________
*        Previously filed with Form 10-K.
**       Filed herewith.
+        Indicates a management contract or compensatory plan.

         (b) Reports on Form 8-K.

         On October 30, 2003, we filed a Current Report on Form 8-K dated
October 22, 2003, reporting under Item 5 that the lenders under the Pegasus
Media credit facility gave their consent to a fourth amendment and restatement
of the credit agreement in order to create a new $300 million term loan tranche
under the credit facility and to terminate the revolving credit commitments. We
further reported that proceeds from the loans made under the new tranche were
used to prepay amounts outstanding under Pegasus Media's existing revolving
credit and term loan facilities and for working capital and general corporate
purposes. We included as an exhibit to the Form 8-K the Fourth Amendment and
Restatement of Credit Agreement, excluding any schedules to the agreement, which
we will provide to the SEC upon request.





                                    31

<PAGE>


         On November 18, 2003, we filed a Current Report on Form 8-K dated
November 13, 2003, reporting under Item 5 that the United Stated District Court
for the Central District of California ruled that the settlement reached among
the NRTC, DIRECTV, Inc. and Hughes Communications has no effect on our rights
under our NRTC Member Agreement and that we may pursue our rights under the
agreement, unencumbered by the settlement. We included as exhibits to the Form
8-K a copy of the press release announcing the ruling and the order entered by
the district court.

         On November 25, 2003, we filed a Current Report on Form 8-K dated
November 25, 2003 reporting under Item 5 that on November 21, 2003, we were sued
in the Delaware Chancery Court by a person claiming to be one of our
stockholders and to represent a class of our stockholders. The complaint
asserted that two matters that we proposed to submit to stockholders at our 2003
annual meeting required a vote of the holders of our Class A common stock voting
as a separate class, rather than only a combined vote of our Class A and Class B
common stock, as stated in the proxy statement. In order to proceed promptly
with the annual meeting, our board of directors decided to remove these matters
from consideration at the annual meeting.


























                                       32
<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.

                                         PEGASUS COMMUNICATIONS CORPORATION



                                            By: /s/ Marshall W. Pagon
                                               ---------------------------------
                                               Marshall W. Pagon
                                               Chairman of the Board and
                                               Chief Executive Officer

Date: December 20, 2004





















                                       33
<PAGE>

            Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<S>                               <C>                                            <C>
By:  /s/ Marshall W. Pagon        Chairman of the Board and Chief               December 20, 2004
         Marshall W. Pagon        Executive Officer

By:  /s/ Joseph W. Pooler, Jr.    Chief Financial Officer                       December 20, 2004
         Joseph W. Pooler, Jr.    (Principal Financial and Accounting Officer)

By:              *                Director                                      December 20, 2004
    -----------------------------
          Ted. S. Lodge

By:              *                Director                                      December 20, 2004
    -----------------------------
         Howard E. Verlin

By:              *                Director                                      December 20, 2004
    -----------------------------
         James J. McEntee, III

* By /s/ Joseph W. Pooler, Jr.
    -----------------------------
         Joseph W. Pooler, Jr.
           Attorney-in-fact
</TABLE>


















                                       34
<PAGE>

                       PEGASUS COMMUNICATIONS CORPORATION
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
                        AND FINANCIAL STATEMENT SCHEDULE

<TABLE>
<CAPTION>
                                                                                                                    Page
                                                                                                                    ----
<S>                                                                                                                 <C>
Financial Statements:

Report of Independent Auditors.....................................................................................  F-2

Consolidated Balance Sheets as of December 31, 2003 and 2002.......................................................  F-3

Consolidated Statements of Operations and Comprehensive Loss for the years ended
December 31, 2003, 2002, and 2001..................................................................................  F-4

Consolidated Statements of Common Stockholders' Equity for the years ended
December 31, 2003, 2002, and 2001..................................................................................  F-5

Consolidated Statements of Cash Flows for the years ended
December 31, 2003, 2002, and 2001..................................................................................  F-8

Notes to Consolidated Financial Statements.........................................................................  F-9

Financial Statement Schedule:

Schedule II - Valuation and Qualifying Accounts for the years ended
December 31, 2003, 2002, and 2001..................................................................................  S-1
</TABLE>


















                                       F-1
<PAGE>


             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders
of Pegasus Communications Corporation.

In our opinion, the consolidated financial statements listed in the index
appearing under 15(a)(1) on page F-1, present fairly, in all material respects,
the financial position of Pegasus Communications Corporation and its
subsidiaries (the "Company") at December 31, 2003 and 2002, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2003 in conformity with accounting principles generally
accepted in the United States of America. In addition, in our opinion, the
financial statement schedule listed in the index appearing under Item 15(a)(2)
on page F-1 presents fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial
statements. These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with the standards of the Public
Company Accounting Oversight Board (United States). 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

As discussed in Note 7, effective July 1, 2003, the Company changed its
accounting for the mandatorily redeemable preferred stock of its subsidiary
pursuant to the provisions of Statement of Financial Accounting Standards No.
150, "Accounting for Certain Financial Instruments with Characteristics of Both
Liabilities and Equity."

As discussed in Note 4, effective January 1, 2002, the Company changed its
accounting for goodwill and other intangible assets pursuant to the provisions
of Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets."

As discussed in Note 22, the Company restated its financial statements to
correct errors related to the accounting for its investment in an affiliated
entity and accounting for certain income tax matters.

/s/ PricewaterhouseCoopers LLP

Philadelphia, Pennsylvania
February 20, 2004, except for Note 23, as to
which the date is August 26, 2004 and Note 22, as to
which the date is December 20, 2004









                                       F-2
<PAGE>
<TABLE>
<CAPTION>



                                            PEGASUS COMMUNICATIONS CORPORATION
                                                CONSOLIDATED BALANCE SHEETS

                                           (In thousands, except share amounts)
                                                                                          December 31,     December 31,
                                                                                              2003             2002
                                                                                          --------------   --------------
                                                                                         (Restated - See  (Restated - See
                                                                                             Note 22)          Note 22)
<S>                                                                                      <C>               <C>
Current assets:
   Cash and cash equivalents                                                               $    82,921       $   59,814
   Restricted cash                                                                              62,517              442
   Accounts receivable:
     Trade, less allowance for doubtful accounts of $3,993 and $7,221, respectively             24,923           27,238
     Other                                                                                       7,529            9,521
   Deferred subscriber acquisition costs, net                                                    9,945           15,706
   Prepaid expenses                                                                              6,953            8,204
   Other current assets                                                                          6,549            7,288
                                                                                           -----------       ----------
     Total current assets                                                                      201,337          128,213
Property and equipment, net                                                                     83,702           85,062
Intangible assets, net                                                                       1,607,805        1,737,584
Other noncurrent assets                                                                        141,902          151,659
                                                                                           -----------       ----------

   Total                                                                                   $ 2,034,746       $2,102,518
                                                                                           ===========       ==========

Current liabilities:
   Current portion of long term debt                                                       $     3,157       $    5,752
   Accounts payable                                                                             12,362           16,773
   Accrued interest                                                                             34,696           35,526
   Accrued programming fees                                                                     54,303           57,196
   Accrued commissions and subsidies                                                            39,114           40,191
   Other accrued expenses                                                                       21,583           32,692
   Other current liabilities                                                                     7,158            7,201
                                                                                           -----------       ----------
     Total current liabilities                                                                 172,373          195,331
Long term debt                                                                               1,385,071        1,283,330
Mandatorily redeemable preferred stock                                                          85,512                -
Other noncurrent liabilities                                                                    70,507           46,169
                                                                                           -----------       ----------
   Total liabilities                                                                         1,713,463        1,524,830
                                                                                           -----------       ----------

Commitments and contingencies  (see Note 18)
Redeemable preferred stocks  (liquidation value at December 31, 2003: $222,269)                215,501            209,211
Redeemable preferred stock of subsidiary                                                             -             96,526
Minority interest                                                                                  452              2,157
Common stockholders' equity:
   Class A common stock, $0.01 par value; 250.0 million shares authorized; shares issued:
     10,886,994 and 10,347,576, respectively; shares outstanding: 9,522,786 and
     9,685,488, respectively                                                                       109                103
   Class B common stock, $0.01 par value; 30.0 million shares authorized; 1,832,760
     issued and outstanding                                                                         18                 18
   Nonvoting common stock, $0.01 par value; 200.0 million shares authorized; no shares
     issued and outstanding                                                                          -                  -
   Additional paid in capital                                                                1,149,306          1,146,728
   Investment in affiliate                                                                     (11,955)                 -
   Deferred compensation expense                                                                (1,396)                 -
   Accumulated deficit                                                                      (1,020,378)          (873,212)
   Class A common stock in treasury, at cost; 1,364,208 and 662,088 shares,
   respectively                                                                                (10,374)            (3,843)
                                                                                           -----------         ----------
     Total common stockholders' equity                                                         105,330            269,794
                                                                                           -----------         ----------

   Total                                                                                   $ 2,034,746         $2,102,518
                                                                                           ===========         ==========
</TABLE>


           See accompanying notes to consolidated financial statements



                                       F-3
<PAGE>



<TABLE>
<CAPTION>



                                        PEGASUS COMMUNICATIONS CORPORATION
                           CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
                                     (In thousands, except per share amounts)

                                                                            Year Ended December 31,
                                                                         2003            2002            2001
                                                                       ---------       ---------      ----------
                                                                       (Restated       (Restated      (Restated
                                                                        - See           - See          - See
                                                                       Notes 12        Notes 12       Notes 12
                                                                        and 22)         and 22)        and 22)
<S>                                                                      <C>             <C>            <C>
Net revenues:
   Direct broadcast satellite                                          $ 831,211       $ 864,855      $  838,208
   Broadcast television and other operations                              31,641          32,446          27,710
                                                                       ---------       ---------      ----------
     Total net revenues                                                  862,852         897,301         865,918
Operating expenses:
   Direct broadcast satellite
     Programming                                                         378,552         387,849         359,879
     Other subscriber related expenses                                   172,873         197,841         205,120
                                                                       ---------       ---------      ----------
       Direct operating expenses (excluding depreciation and
         amortization shown below)                                       551,425         585,690         564,999
     Promotions and incentives                                            14,157          13,562          40,393
     Advertising and selling                                              23,481          30,907         104,677
     General and administrative                                           23,837          27,257          36,132
     Depreciation and amortization                                       162,398         168,589         257,543
                                                                       ---------       ---------      ----------
       Total direct broadcast satellite                                  775,298         826,005       1,003,744
   Broadcast television and other operations (including
     depreciation and amortization of $2,658, $3,476, and
     $4,795, respectively)                                                30,713          31,626          32,576
   Corporate and development expenses (including depreciation
     and amortization of $16,031, $38,575, and $1,607,
     respectively)                                                        32,129          56,760          22,314
   Other operating expenses                                               28,641          32,239          31,957
                                                                       ---------       ---------      ----------
     Loss from operations                                                 (3,929)        (49,329)       (224,673)
Interest expense                                                        (157,203)       (145,395)       (136,296)
Interest income                                                              923             905           4,907
Loss on impairment of marketable securities                                    -          (3,310)        (34,205)
Other nonoperating income (expense), net                                   3,102          19,485          (9,557)
                                                                       ---------       ---------      ----------
       Loss before equity in affiliates, income taxes, and              (157,107)       (177,644)       (399,824)
         discontinued operations
Equity in (losses) earnings of affiliates                                    205          (4,135)         11,054
Net benefit for income taxes                                               3,563          32,919         115,992
                                                                       ---------       ---------      ----------
     Loss before discontinued operations                                (153,339)       (148,860)      (272,778)
Discontinued operations:
  Income (loss) from discontinued operations (including gain on
     disposal of $10,346 in 2003 and $1,395 in 2002), net of
     income tax (expense) benefit of $(3,782) in 2003 and
     $6,663 in 2001                                                        6,173          (5,292)        (10,870)
                                                                       ---------       ---------      ----------

            Net loss                                                    (147,166)       (154,152)       (283,648)
Other comprehensive (loss) income:
  Unrealized loss on marketable securities, net of income tax
    benefit of $5,042 in 2001                                                  -          (4,931)         (8,226)
  Reclassification adjustment for accumulated unrealized loss on
    marketable securities included in net loss, inclusive of
    accumulated income tax expense of $616 in 2002 and net of                  -           3,926          21,207
    benefit of $12,998 in 2001
                                                                       ---------       ---------      ----------
     Net other comprehensive (loss) income                                     -          (1,005)         12,981
                                                                       ---------       ---------      ----------
     Comprehensive loss                                                $(147,166)      $(155,157)     $ (270,667)
                                                                       =========       =========      ==========
Basic and diluted per common share amounts:
  Loss from continuing operations, including $19,834, $31,491,
    and $49,836, respectively, representing accrued and deemed         $  (15.16)      $  (15.08)     $   (28.70)
    preferred stock dividends
  Discontinued operations                                                   0.54           (0.44)          (0.97)
                                                                       ---------       ---------      ----------
   Net loss applicable to common shares                                $  (14.62)      $  (15.52)     $   (29.67)
                                                                       =========       =========      ==========
   Weighted average number of common shares outstanding                   11,424          11,958          11,242
                                                                       =========       =========      ==========
</TABLE>


           See accompanying notes to consolidated financial statements



                                      F-4
<PAGE>
<TABLE>
<CAPTION>


                                          PEGASUS COMMUNICATIONS CORPORATION
                                CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
                                                    (In thousands)

                                 Class A         Class B
                               Common Stock   Common Stock
                              Number         Number           Additional                 Unamortized
                               of      Par     of      Par     Paid In      Investment     Deferred     Accumulated
                              Shares  Value  Shares   Value    Capital     in Affiliate  Compensation     Deficit
                              ------  -----  ------   -----   ----------   ------------  ------------   ------------
                                                                           (Restated -                  (Restated -
                                                                            See Notes                   See Notes 12
                                                                            12 and 22)                     and 22)
<S>                           <C>     <C>    <C>      <C>     <C>          <C>           <C>            <C>
January 1, 2001                9,190  $  92   1,832   $  18   $  979,902              -             -   $   (435,412)
Net loss                                                                                                    (283,648)
Common stock issued for:
  Subscribers acquired            14      -                        1,431
  Exercise of warrants
    and stock options             22      -                        1,258
  Redemption and
    conversion of
    preferred stock              430      4                       50,998
  Employee plans and
    awards                        44      1                        4,495
  Payment of preferred
    stock dividends              296      3                       20,762
  Other                            2      -                          105
Dividends accrued on
  preferred stocks                                               (45,085)
Preferred stock induced
  conversion premium                                              (6,032)
Preferred stock accretion                                            (95)
Compensation related to
  stock options issued                                               339
Preferred stock original
  issue costs written off
  upon conversion of
  preferred stock                                                 (1,117)
Treasury stock canceled                                             (695)
Unrealized loss on
  marketable equity
  securities, net of income
  tax benefit of $5,042
Reclassification
  adjustment for realized
  loss on marketable
  equity securities, net of
  income tax of $12,998
Class A common stock
  repurchased
                              ------  -----  ------   -----   ----------   ------------  ------------   ------------
December 31, 2001              9,998  $ 100   1,832   $  18   $1,006,266              -             -   $   (719,060)
</TABLE>
<PAGE>

                                [RESTUBBED TABLE]
<TABLE>
<CAPTION>


                            Accumulated      Treasury Stock     Total
                              Other          Number             Common
                           Comprehensive       of            Stockholders'
                           Income (Loss)     Shares    Cost    Equity
                           -------------     ------   -----  -------------
                                                             (Restated -
                                                             See Notes 12
                                                                and 22)
<S>                        <C>               <C>      <C>    <C>
January 1, 2001                 $(11,976)         4   $(695) $     531,929
Net loss                                                          (283,648)
Common stock issued for:
  Subscribers acquired                                               1,431
  Exercise of warrants
    and stock options                                                1,258
  Redemption and
    conversion of
    preferred stock                                                 51,002
  Employee plans and
    awards                                                           4,496
  Payment of preferred
    stock dividends                                     297         21,062
  Other                                                                105
Dividends accrued on
  preferred stocks                                                 (45,085)
Preferred stock induced
  conversion premium                                                (6,032)
Preferred stock accretion                                              (95)
Compensation related to
  stock options issued                                                 339
Preferred stock original
  issue costs written off
  upon conversion of
  preferred stock                                                   (1,117)
Treasury stock canceled                          (4)    695              -
Unrealized loss on
  marketable equity
  securities, net of income
  tax benefit of $5,042           (8,226)                           (8,226)
Reclassification
  adjustment for realized
  loss on marketable
  equity securities, net of
  income tax of $12,998           21,207                            21,207
Class A common stock
  repurchased                                          (370)          (370)
                           -------------     ------   -----  -------------
December 31, 2001          $       1,005          -   $ (73) $     288,256
</TABLE>
(continued on next page)

                                       F-5
<PAGE>
<TABLE>
<CAPTION>



                                          PEGASUS COMMUNICATIONS CORPORATION
                          CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY (CONTINUED)
                                                    (In thousands)

                                 Class A        Class B
                               Common Stock   Common Stock
                              Number         Number           Additional                  Unamortized
                                of     Par     of      Par     Paid In      Investment     Deferred      Accumulated
                              Shares  Value  Shares   Value    Capital     in Affiliate  Compensation     Deficit
                              ------  -----  ------   -----   ----------   ------------  ------------   ------------
                                                                           (Restated -                  (Restated -
                                                                            See Notes                   See Notes 12
                                                                            12 and 22)                     and 22)
<S>                           <C>     <C>    <C>      <C>     <C>          <C>           <C>            <C>
January 1, 2002                9,998  $ 100   1,832   $  18   $1,006,266              -             -   $   (719,060)
Net loss                                                                                                    (154,152)
Common stock issued for:
  Conversion of
   preferred stock               114      1                        7,728
  Employee plans and
   awards                        120      1                        1,320
  Payment of preferred
   stock dividends               116      1                        5,206
Dividends accrued on
   preferred stocks                                              (32,331)
Preferred stock accretion                                            (95)
Deemed dividends
  associated with
  preferred stocks                                                 1,572
Beneficial conversion
  feature recovered upon
  redemption of preferred
  stock                                                           (2,441)
Net differential recognized
  in repurchases and
  exchange of preferred
  stock                                                          162,192
Preferred stock original
  issue costs written off
  upon conversion and
  repurchases of preferred
  stock                                                           (2,689)
Unrealized loss on
  marketable equity
  securities
Reclassification
  adjustment for realized
  loss on marketable
  equity securities,
  inclusive of income tax
  expense of $616
Class A common stock
  repurchased and
  exchanged
                              ------  -----  ------   -----   ----------   ------------  ------------   ------------
December 31, 2002             10,348  $ 103   1,832   $  18   $1,146,728              -             -   $   (873,212)
</TABLE>

<PAGE>

                                                  [RESTUBBED TABLE]
<TABLE>
<CAPTION>


                               Accumulated       Treasury Stock      Total
                                 Other          Number              Common
                              Comprehensive       of             Stockholders'
                              Income (Loss)     Shares    Cost      Equity
                              -------------     ------   ------- -------------
                                                                  (Restated -
                                                                 See Notes 12
                                                                    and 22)
<S>                           <C>               <C>      <C>      <C>
January 1, 2002               $       1,005          -   $ (73)   $    288,256
Net loss                                                              (154,152)
Common stock issued for:
  Conversion of
   preferred stock                                                       7,729
  Employee plans and
   awards                                                  680           2,001
  Payment of preferred
   stock dividends                                                       5,207
Dividends accrued on
   preferred stocks                                                    (32,331)
Preferred stock accretion                                                  (95)
Deemed dividends
  associated with
  preferred stocks                                                       1,572
Beneficial conversion
  feature recovered upon
  redemption of preferred
  stock                                                                 (2,441)
Net differential recognized
  in repurchases and
  exchange of preferred
  stock                                                                162,192
Preferred stock original
  issue costs written off
  upon conversion and
  repurchases of preferred
  stock                                                                 (2,689)
Unrealized loss on
  marketable equity
  securities                         (4,931)                            (4,931)
Reclassification
  adjustment for realized
  loss on marketable
  equity securities,
  inclusive of income tax
  expense of $616                     3,926                              3,926
Class A common stock
  repurchased and
  exchanged                                        662    (4,450)       (4,450)
                              -------------     ------   -------  ------------
December 31, 2002                         -        662   $(3,843) $    269,794
</TABLE>

(continued on next page)



                                      F-6
<PAGE>

<TABLE>
<CAPTION>


                                      PEGASUS COMMUNICATIONS CORPORATION
                      CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY (CONTINUED)
                                                (In thousands)

                                Class A        Class B
                             Common Stock    Common Stock
                             Number         Number         Additional                Unamortized
                               of     Par     of      Par   Paid In     Investment    Deferred    Accumulated
                             Shares  Value  Shares   Value  Capital    in Affiliate  Compensation   Deficit
                             ------  -----  ------   ----- ----------  ------------  ------------ -----------
                                                                        Restated -                (Restated -
                                                                        See Notes                 See Notes 12
                                                                        12 and 22)                   and 22)
<S>                          <C>     <C>    <C>      <C>   <C>         <C>           <C>          <C>
January 1, 2003              10,348  $ 103   1,832   $  18 $1,146,728         -                -  $  (873,212)
Net loss                                                                                             (147,166)
Common stock issued for:
   Exercise of warrants
    and stock options             8      -                         47
   Conversion of
    preferred stock              22      -                      7,028
   Employee plans and
    awards                      502      6                      6,031                     $(1,396)
   Payment of preferred
    stock dividends               6      -                         99
Dividends accrued on
  preferred stocks                                            (18,599)
Preferred stock accretion                                      (1,052)
Differential recognized in
  exchange of preferred
  stock                                                           240
Investment in affiliate
  reclassified to contra-                                                  $(11,955)
  equity
  (see Note 22)
Warrants issued                                                 8,784
Class A common stock
  repurchased
                             ------  -----  ------   ----- ----------  ------------  ------------ -----------
December 31, 2003            10,886  $ 109   1,832   $  18 $1,149,306      $(11,955)      $(1,396)$(1,020,378)
                             ======  =====  ======   ===== ==========  ============  ============ ===========
</TABLE>
                                [RESTUBBED TABLE]
<TABLE>
<CAPTION>


                              Accumulated   Treasury Stock         Total
                                 Other     Number                 Common
                             Comprehensive   of                Stockholders'
                             Income (Loss) Shares     Cost        Equity
                             ------------- ------   --------   -------------
                                                                (Restated -
                                                               See Notes 12
                                                                  and 22)
<S>                          <C>           <C>      <C>        <C>
January 1, 2003                          -    662   $ (3,843)  $     269,794
Net loss                                                            (147,166)
Common stock issued for:
   Exercise of warrants
    and stock options                                                     47
   Conversion of
    preferred stock                                                    7,028
   Employee plans and
    awards                                               171           4,812
   Payment of preferred
    stock dividends                                                       99
Dividends accrued on
  preferred stocks                                                   (18,599)
Preferred stock accretion                                             (1,052)
Differential recognized in
  exchange of preferred
  stock                                                                  240
Investment in affiliate
  reclassified to contra-
  equity
  (see Note 22)                                                      (11,955)
Warrants issued                                                        8,784
Class A common stock
  repurchased                                 702     (6,702)         (6,702)
                             ------------- ------   --------   -------------
December 31, 2003                        -  1,364   $(10,374)  $     105,330
                             ============= ======   ========   =============
</TABLE>


         See accompanying notes to consolidated financial statements



                                       F-7
<PAGE>
<TABLE>
<CAPTION>
                                          PEGASUS COMMUNICATIONS CORPORATION
                                         CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                    (In thousands)

                                                                                Year Ended December 31,
                                                                        2003              2002             2001
                                                                    ------------      ------------     -------------
       Cash flows from operating activities:                         (Restated -      (Restated -       (Restated -
                                                                    See Notes 12      See Notes 12     See Notes 12
                                                                       and 22)           and 22)          and 22)
          <S>                                                       <C>               <C>              <C>
          Net loss                                                     $(147,166)        $(154,152)       $(283,648)
          Adjustments to reconcile net loss to net cash provided
            by (used for) operating activities:
            Loss (gain) on extinguishments of debt                           510           (16,688)           2,912
            (Gain) loss on derivative instruments                         (1,210)           (2,962)           4,160
            Depreciation and amortization                                183,488           216,311          270,615
            Amortization of debt discount, premium, and deferred
              financing fees                                              26,689            26,408           24,393
            Noncash incentive compensation                                 4,549             1,743            2,564
            Gain on sale of broadcast television stations                (10,347)                -                -
            Equity in earnings (losses) of affiliates and
              minority interests                                          (1,909)            4,970          (10,807)
            Bad debt expense                                               9,105            23,809           36,511
            Deferred income taxes                                              -           (33,152)        (121,902)
            Impairment losses recognized                                     829             5,788           34,205
            Payments for broadcast television programming rights          (2,733)           (5,075)          (4,629)
            Patronage capital programming expense offset                 (14,475)          (22,686)         (25,063)
            Other                                                          3,891             9,207            7,334
            Change in current assets and liabilities:
              Accounts receivable                                          1,423            (8,393)         (40,701)
              Inventory                                                       34             8,493            6,923
              Deferred subscriber acquisition costs                      (21,046)          (31,086)         (19,421)
              Prepaid expenses                                               894             6,226           (1,440)
              Taxes payable                                                    -                 -          (29,620)
              Accounts payable and accrued expenses                      (18,269)           (3,929)          13,436
              Accrued interest                                             8,227             7,985           (1,180)
              Other current assets and liabilities, net                      297            (3,042)            (713)
                                                                     -----------      ------------     ------------
          Net cash provided by (used for) operating activities            22,781            29,775         (136,071)
                                                                     -----------      ------------     ------------
       Cash flows from investing activities:
          Direct broadcast satellite equipment capitalized               (21,549)          (26,431)         (20,830)
          Other capital expenditures                                      (2,814)           (4,610)         (25,297)
          Purchases of intangible assets                                    (454)             (346)         (13,730)
          Proceeds from sales of broadcast television stations            21,593                 -                -
          Other                                                              689               973             (889)
                                                                     -----------      ------------     ------------
          Net cash used for investing activities                          (2,535)          (30,414)         (60,746)
                                                                     -----------      ------------     ------------
       Cash flows from financing activities:
          Proceeds from notes issued                                           -                 -          175,000
          Borrowings on term loan facilities                             395,500            63,156                -
          Repayments of term loan facilities                            (239,824)           (3,065)         (37,750)
          Repayment of notes                                             (67,895)                -                -
          Net (repayments of) borrowings on revolving credit
            facility                                                           -           (80,000)           8,000
          Repayments of other long term debt                              (2,770)           (6,112)          (7,585)
          Purchases of common stock                                       (6,531)                -                -
          Purchases of outstanding notes                                       -           (25,468)               -
          Cash received upon exchange of notes                             1,948                 -                -
          Restricted cash                                                (60,071)              765             (916)
          Purchases of preferred stock                                         -           (23,345)               -
          Redemption of preferred stock                                        -            (5,717)               -
          Debt financing costs                                           (17,623)           (1,884)          (9,423)
          Other                                                              127            (2,550)            (197)
                                                                     -----------      ------------     ------------
          Net cash provided by (used for) financing activities             2,861           (84,220)         127,129
                                                                     -----------      ------------     ------------
       Net increase (decrease) in cash and cash equivalents               23,107           (84,859)         (69,688)
       Cash and cash equivalents, beginning of year                       59,814           144,673          214,361
                                                                     -----------      ------------     ------------
       Cash and cash equivalents, end of year                        $    82,921      $     59,814     $    144,673
                                                                     ===========      ============     ============
</TABLE>


           See accompanying notes to consolidated financial statements



                                       F-8
<PAGE>

                       PEGASUS COMMUNICATIONS CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.       THE COMPANY

General

         Pegasus Communications Corporation ("Pegasus Communications") is a
holding company and conducts substantially all of its operations through its
subsidiaries. All references to "we," "us," and "our" refer to Pegasus
Communications Corporation, together with its direct and indirect subsidiaries.

         Pegasus Satellite Communications, Inc. ("Pegasus Satellite") is a
direct subsidiary of Pegasus Communications through which we conduct our direct
broadcast satellite and broadcast television businesses. Pegasus Satellite is a
holding company, has issued debt and preferred stock, and is the parent company
of Pegasus Media & Communications, Inc. ("Pegasus Media").

         Pegasus Media has debt outstanding under a credit agreement and has
separate subsidiaries that conduct our direct broadcast satellite business and
substantially all of our broadcast television business. Pegasus Media's
significant direct operating subsidiaries are Pegasus Satellite Television,
Inc., Golden Sky Systems, Inc., and Pegasus Broadcast Television, Inc. Pegasus
Satellite Television and Golden Sky Systems provide multichannel direct
broadcast satellite services as an independent provider of DIRECTV(R)
("DIRECTV") services in specific territories primarily within rural areas within
41 states. DIRECTV is a service of DIRECTV, Inc. Pegasus Broadcast Television
owns and/or programs nine television stations affiliated with CBS Television,
Fox Broadcasting Company, United Paramount Network, or The WB Television
Network.

         Pegasus Development Corporation ("Pegasus Development") is a direct
subsidiary of Pegasus Communications. Pegasus Development holds two Ka band
satellite licenses granted by the Federal Communications Commission ("FCC") and
intellectual property rights licensed from Personalized Media Communications
L.L.C. ("Personalized Media"). Pegasus Guard Band LLC ("Pegasus Guard Band") is
a direct subsidiary of Pegasus Communications and holds FCC licenses to provide
terrestrial communications services in the 700 MHZ spectrum. Pegasus Rural
Broadband LLC ("Pegasus Rural Broadband") is a direct subsidiary of Pegasus
Communications and is developing a business to provide broadband Internet access
in rural areas. Pegasus Communications Management Company ("Pegasus Management")
is a direct subsidiary of Pegasus Communications and provides management
services to Pegasus Satellite, Pegasus Development, Pegasus Guard Band, and
Pegasus Rural Broadband.

         We hold two licenses to launch and operate Ka band geostationary
satellites in the 107(degree) and 87(degree) west longitude orbital locations.
We hold 34 licenses, known as "guard band" licenses, for use of frequencies
located in the 700 MHz frequency band. We have an exclusive licensing
arrangement with Personalized Media that provides us with an exclusive field of
use with respect to Personalized Media's patent portfolio concerning the
distribution of satellite services from specified orbital locations. The
carrying amount of these licenses and intellectual property, which are held by
direct subsidiaries of Pegasus Communications other than Pegasus Satellite, was
$158.5 million at December 31, 2003.

         Pegasus Communications is controlled by Marshall W. Pagon, chief
executive officer and chairman of the board of directors of Pegasus
Communications, by virtue of the ownership of all shares of Pegasus
Communications' Class B common stock by intermediate affiliates controlled by
Mr. Pagon. Because Pegasus Communications' Class B common stock is entitled to
10 votes per share, and its Class A common stock is entitled to one vote per
share, the Class B common stock accounts for a majority of the voting power for
matters upon which all classes of voting stock vote together and not by class.

         We restated our consolidated financial statements for the years ended
December 31, 2003, 2002, and 2001 (see Notes 12 and 22).



                                       F-9
<PAGE>

                       PEGASUS COMMUNICATIONS CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


Significant Risks and Uncertainties

         We have a history of losses principally due to the substantial amounts
incurred by Pegasus Satellite for interest expense and amortization expense
associated with intangible assets. Restated consolidated net losses were $147.2
million, $154.2 million, and $283.6 million for 2003, 2002, and 2001,
respectively. Interest and amortization expenses were $157.2 million and $130.4
million, respectively, for 2003, $145.4 million and $154.2 million,
respectively, for 2002, and $136.3 million and $245.4 million, respectively, for
2001. We have an accumulated deficit balance at December 31, 2003 of $1.0
billion. We primarily attribute the improvement in 2003 compared to 2002 to the
continuation of the direct broadcast satellite business strategy (discussed
below), along with a decrease of $22.5 million in amortization recorded in 2003
for certain licenses.

         On a consolidated basis, we are highly leveraged. At December 31, 2003,
we had long term debt including the portion that is current, of approximately
$1.4 billion, substantially all of which was outstanding at Pegasus Satellite
and its consolidated subsidiaries. In addition, we had $324.4 million of
redeemable preferred stock outstanding, including associated accrued and unpaid
dividends and dividends considered to be interest. Of this amount, $108.9
million is outstanding at Pegasus Satellite and $215.5 million is outstanding at
Pegasus Communications. Total consolidated cash at December 31, 2003 was $82.9
million, of which $55.9 million was held by Pegasus Communications and its
direct subsidiaries other than Pegasus Satellite.

         We dedicate a substantial portion of cash to pay amounts associated
with debt. In 2003, 2002, and 2001, Pegasus Satellite paid interest of $119.5
million, $111.7 million, and $113.2 million, respectively. Our high leverage
makes us more vulnerable to adverse economic and industry conditions and limits
our flexibility in planning for, or reacting to, changes in our business and the
industries in which we operate. Our ability to make payments on and to refinance
indebtedness and redeemable preferred stock outstanding and to fund operations,
planned capital expenditures, and other activities and to fund preferred stock
requirements depends on our ability to generate cash in the future. Our ability
to generate cash depends on the success of our business strategy, prevailing
economic conditions, regulatory risks, competitive activities by other parties,
the business strategies of DIRECTV, Inc. and the National Rural
Telecommunications Cooperative, equipment strategies, technological
developments, levels of programming costs and subscriber acquisition costs,
levels of interest rates, and financial, business, and other factors that are
beyond our control. We cannot assure that our business will generate sufficient
cash flow from operations or that alternative financing will be available to us
in amounts sufficient to fund the needs previously specified. Our indebtedness
and preferred stock contain numerous covenants that, among other things,
generally limit the ability to incur additional indebtedness and liens, issue
other securities, make certain payments and investments, pay dividends, transfer
cash, dispose of assets, and enter into other transactions, and impose
limitations on the activities of our subsidiaries. Failure to make debt payments
or comply with covenants could result in an event of default that, if not cured
or waived, could adversely impact us.

         For 2003, 2002, and 2001, the direct broadcast satellite business had
income (loss) from operations of $55.9 million, $38.9 million, and $(165.5)
million, respectively. The loss from the direct broadcast satellite operations
for 2002 included an accrued expense for a contract termination fee of $4.5
million that was reversed in 2003. The improvement in 2002 compared to 2001 was
primarily a combination of our direct broadcast satellite business strategy,
broad based cost reduction measures undertaken in 2002, and a decrease in 2002
of amortization of direct broadcast satellite rights assets of $126.2 million
due to a change in amortization of these assets effected in 2002 (see Note 4).





                                      F-10
<PAGE>

                       PEGASUS COMMUNICATIONS CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


         This strategy focuses on increasing the quality of new subscribers and
the composition of our existing subscriber base, enhancing the returns on
investment in our subscribers, generating free cash flow, and preserving
liquidity. The primary focus of our "Quality First" strategy is to improve the
quality and creditworthiness of our subscriber base. Our goal is to acquire and
retain high quality subscribers, to cause average subscribers to become high
quality subscribers, and to reduce acquisition and retention investments in low
quality subscribers. To achieve these goals, our subscriber acquisition,
development, and retention efforts focus on subscribers who are less likely to
churn and who are more likely to subscribe to more programming services,
including local and network programming, and to use multiple receivers. "Churn"
refers to subscribers whose service has terminated. Our strategy includes a
significant emphasis on credit scoring of potential subscribers, adding and
upgrading subscribers in markets where DIRECTV offers local channels, and
obtaining subscribers who use multiple receivers. It is our experience that
these attributes are closely correlated with lower churn, increased cash flow,
and higher returns on investment. Our strategy also includes the use of
behavioral and predictive scores to group subscribers and to design retention
campaigns, upgrade offers, and consumer offers consistent with our emphasis on
acquiring and retaining high quality subscribers and reducing our investment in
lower quality subscribers.

         Continued improvement in results from operations will in large part
depend upon our obtaining a sufficient number of quality subscribers, retention
of these subscribers for extended periods of time, and maintaining adequate
margins from them. While our direct broadcast satellite business strategy has
resulted in an increase in income from operations, that strategy along with
other very significant factors, has contributed to a certain extent to the
decrease in the number of our direct broadcast satellite subscribers of 153,369
during 2003 and the decrease of $33.6 million in direct broadcast satellite net
revenues for 2003 compared to the 2002. These other significant factors include
a significant competitive disadvantage that we experience in a large number of
our territories in which EchoStar Communications Corporation ("EchoStar"), a
competing direct broadcast satellite provider, provides local channels but
DIRECTV does not; competition from EchoStar other than with respect to local
channels; competition from digital cable providers; our continued focus on
enrolling more creditworthy subscribers; our continued unwillingness to
aggressively invest retention amounts in low margin subscribers; subscriber
reaction to our price increases instituted in 2003; and a reduction in the
number of new subscribers we obtain from DIRECTV, Inc.'s national retail chains.
The number of territories in which we are disadvantaged by a lack of local
channel service increased in 2003 and we believe will continue to increase in
the first two quarters of 2004 because of DIRECTV Inc.'s delay in launching its
DIRECTV 7S spot beam satellite to provide local channels in markets where
EchoStar offers or is introducing local channels, and DIRECTV Inc.'s failure to
provide certain of our key markets with local channels. DIRECTV, Inc. according
to its most recent statements, intends to launch this satellite in the second
quarter of 2004. We expect that our direct broadcast satellite business strategy
will result in further decreases in the number of our direct broadcast satellite
subscribers and our direct broadcast satellite net revenues when compared to
prior periods, but we believe that our results from operations for the direct
broadcast satellite business will not be significantly impacted. We cannot make
any assurances that this will be the case, however. If a disproportionate number
of subscribers churn relative to the number of quality subscribers we enroll, we
are not able to enroll a sufficient number of quality subscribers, and/or we are
not able to maintain adequate margins from our subscribers, our results from
operations may not improve or improved results that do occur may not be
sustained. Additionally, we believe that all other factors cited above
contributing to our subscriber losses will continue over the near term.

         Dividends on all of our preferred stock series are in arrears. (See
Notes 6 and 7 for further information on the nondeclaration of dividends on
preferred stock.)

Reliance on DIRECTV, Inc.

         Our principal operating business is the direct broadcast satellite
business. For 2003, 2002, and 2001, revenues for this business were 96%, 96%,
and 97%, respectively, of total consolidated revenues, and operating expenses
for this business were 89%, 87%, and 92%, respectively, of total consolidated
operating expenses. Total assets of the direct broadcast satellite business were
81% and 83% of total restated consolidated assets at December 31, 2003 and
December 31, 2002, respectively. As a distributor of DIRECTV, we may be
adversely affected by any material adverse changes in the assets, financial
condition, programming, technological capabilities, or services of DIRECTV, Inc.





                                      F-11
<PAGE>

                       PEGASUS COMMUNICATIONS CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


         We are in material litigation with DIRECTV, Inc. An outcome in this
litigation that is unfavorable to us could have a material adverse impact on our
direct broadcast satellite business. Our litigation with DIRECTV, Inc. may have
a bearing on our estimation of the useful lives of our direct broadcast
satellite rights assets. (See Note 18 for information regarding this
litigation.)

Direct Broadcast Satellite Sales and Distribution

         We obtain new subscribers through several channels of distribution. Our
marketing efforts related to subscriber acquisition focus on subscribers who are
less likely to churn and who are more likely to be interested in more expansive
and higher revenue generating programming packages and services, including local
and network programming, and the use of multiple receivers. There is a
significant emphasis on credit scoring potential subscribers, adding subscribers
in markets where DIRECTV offers local channels, and adding subscribers that want
multiple receivers. These attributes provide significant competitive advantages
that closely correlate to favorable churn performance and cash flow generation,
and provide the best return on invested capital.

         Many of the markets that we serve are not passed by cable or are passed
by older cable systems with limited numbers of channels. We actively market our
DIRECTV programming to potential subscribers in these market segments as their
primary source of television programming. We believe that these market segments
will continue to be a source for new subscribers for us in the future.

         We offer a variety of incentives to our subscribers, dealers, and
distributors. Incentives to subscribers consist of free or discounted prices for
DIRECTV programming, equipment needed to access the programming, and
installation of equipment that accesses the programming. Incentives in the form
of equipment subsidies, installation subsidies, commissions, and/or flex
payments are paid directly to dealers and distributors. Our incentives are
changed from time to time in accordance with certain business rules to reward
particular dealer behavior or to achieve a particular mix of sales offers.

         Independent Retail Network. Our independent retail network consists of
dealer relationships. These dealer relationships include over 4,000 independent
retailers, consumer electronics, and other retailers serving rural areas. We
began the development of our retail network in 1995 in order to distribute
DIRECTV in our original DIRECTV exclusive territories in New England. We have
expanded this network into 41 states as a result of our acquisitions of DIRECTV
rural affiliates since 1996. Today, our retail network is one of the few sales
and distribution channels available to digital satellite service providers
seeking broad and effective distribution in rural areas throughout the
continental United States.

         We have developed and are continuing to develop programs to make our
retail network more effective and valuable to us by eliminating dealers
associated with high churn subscribers, establishing eligibility requirements
for all of our consumer offers, and providing dealer incentive compensation
programs that reward dealers for the acquisition of high quality subscribers.

         Dealers enroll subscribers to our DIRECTV programming, provide them
with equipment, and arrange for installation of the equipment. We create and
launch the promotions for our DIRECTV programming, equipment, and installations.
Once subscribers have been enrolled through this network, they contact us
directly to activate their programming.

         In order to facilitate the acquisition of subscribers by our retail
network, we have entered into certain distribution arrangements with national
distributors (see Two Step Distributor Relationships below) whereby our dealers
can obtain DIRECTV equipment systems with equipment subsidies provided by us.





                                      F-12
<PAGE>


                       PEGASUS COMMUNICATIONS CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


         Direct and Other Sales Channel. We have developed direct sales
capabilities to facilitate the acquisition of new subscribers via outbound
telemarketing, advertising and marketing driven inbound efforts, and other
direct strategies, and to reduce subscriber acquisition costs. We directly
enroll subscribers through our direct sales channel and arrange for equipment
delivery and installation through distribution arrangements with third party
service providers and national distributors.

         We intend to continue subscriber acquisition from other channels such
small cable, multichannel multipoint distribution services, and other
multichannel video system subscriber conversions, regional consumer electronic
outlets, commercial establishments, and certificate based models. In these
channels, we can utilize our direct sales capabilities to facilitate equipment
delivery and installation through fulfillment arrangements with third party
service providers and national distributors. (See Two Step Distributor
Relationships below). Once subscribers have been enrolled through these
channels, they contact us directly to activate their programming.

         National Retail Chains. We also obtain subscribers to our DIRECTV
programming through national retail chains that sell DIRECTV under arrangements
directly with DIRECTV, Inc.

         Two Step Distributor Relationships. In order to facilitate the
acquisition of subscribers via our retail network, our direct sales
capabilities, and alternate channels of distribution, we have entered into
certain distribution and fulfillment arrangements with national distributors.
Distributors purchase directly from manufacturers and maintain in their
inventory the equipment needed by subscribers to access our DIRECTV programming.
Distributors sell this equipment to dealers who, in turn, provide the equipment
to subscribers. Distributors directly charge the dealers for the equipment they
sell to them. Dealers enroll subscribers to our DIRECTV programming, provide
them with equipment, and arrange for installation of the equipment. Distributors
also drop ship to subscribers or arrange for equipment fulfillment to
subscribers obtained through our direct sales channel or through one of our
other alternate channels of distribution. For these channels of distribution, we
directly enroll subscribers and arrange for equipment delivery and installation
through distributors.

         Currently, we obtain substantially all of our subscribers through one
of two consumer offers: the Pegasus Digital One Plan or the Standard Sale Plan.

         The Pegasus Digital One Plan. Under this plan, subscribers are provided
with equipment, consisting of one or more receivers, obtain DIRECTV programming
for a monthly programming fee, enter into an initial 12 month commitment secured
by a credit card, and enjoy the benefits of repair service without additional
monthly cost (subject to certain limitations). All subscribers are credit scored
prior to enrollment, and consumer offers and dealer compensation are modified
according to the results. Under this plan, we obtain title to the receivers and
remote controls provided to subscribers. Subscribers who terminate service but
do not return equipment and access cards are assessed equipment and access card
nonreturn fees. Failure to comply with the 12 month commitment, including, in
some instances, suspension and discontinuance or downgrading of service, can
result in the imposition of cancellation fees intended to reimburse us in part
for our cost of special introductory promotional offers, equipment and
installation subsidies, and dealer commissions.

         Standard Sale Plan. Under this plan, subscribers obtain equipment,
consisting of one or more receivers, and obtain DIRECTV programming for a
monthly programming fee. All subscribers originated through our Independent
Retail Network and Direct Sales Channel are credit scored prior to enrollment,
and consumer offers and dealer compensation are modified according to the
results. We require most standard sale subscribers to make an initial 12 month
programming commitment. Failure to comply with the 12 month commitment,
including, in some instances, suspension and discontinuance or downgrading of
service, can result in the imposition of cancellation fees intended to reimburse
us in part for our cost of special introductory promotional offers, equipment
and installation subsidies, and dealer commissions.





                                      F-13
<PAGE>

                       PEGASUS COMMUNICATIONS CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


2.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

         The financial statements include the accounts of Pegasus Communications
and its subsidiaries on a consolidated basis. All intercompany transactions and
balances have been eliminated. Investments in other entities in which we do not
have a significant or controlling interest are accounted for using the cost
method. Prior year amounts have been reclassified where appropriate to conform
to the current year classification for comparative purposes.

         Minority interest at December 31, 2003 and 2002 represents an interest
in a partnership that is a consolidated entity of Golden Sky Systems.

Use of Estimates in the Preparation of Financial Statements

         The preparation of financial statements in conformity with generally
accepted accounting principles in the United States of America requires that we
make estimates and assumptions that affect the reported amounts of revenues,
expenses, assets, and liabilities and the disclosure of contingencies. Actual
results could differ from those estimates. Significant estimates relate to
useful lives and recoverability of our long lived assets, including our
investment in the National Rural Telecommunications Cooperative ("NRTC"), and
intangible assets, amounts associated with barter transactions, NRTC patronage,
allowance for doubtful accounts, and valuation allowances associated with
deferred income tax assets.

Cash and Cash Equivalents

         Cash and cash equivalents include highly liquid investments purchased
with an initial maturity of three months or less. We have cash balances in
excess of the federally insured limits at various banks.

Trade Receivables and Related Allowance for Doubtful Accounts

         Trade receivables of our direct broadcast satellite business are
primarily comprised of unpaid subscriber billings for programming related
services and applicable sales taxes net of an estimated provision for doubtful
(uncollectible) accounts. Direct broadcast satellite programming subscription
services are generally billed month to month on a staggered basis throughout the
month and are billed in advance of services to be rendered for the month. Since
direct broadcast satellite subscription services are billed in advance,
outstanding billings are adjusted for amounts unearned in arriving at the amount
receivable at any period ending date. Pay per view direct broadcast satellite
programming purchased is billed as the related service is rendered. Estimates of
the allowance for doubtful accounts are based on an assessment of account
collection experience relative to the aging of the billings contained in the
latest trade receivables balance. The trade receivable balance is segregated
into discrete categories based on the amount of time the billings are past due.
An uncollectible rate is applied to each aging category based on our historical
collection experience for that category in estimating the amount uncollectible
within that category. The uncollectible rate increases the longer the aging
category is past due. The allowance is periodically reviewed for sufficiency
relative to an evaluation of the aging of the billings, and the allowance is
adjusted accordingly, with an offsetting adjustment to bad debt expense. Trade
receivables are written off after exhaustion of all reasonable collection
efforts, with an offsetting adjustment to the allowance for doubtful accounts.

         Trade receivables of our broadcast television business are primarily
comprised of unpaid billings for advertisements aired by our stations net of an
estimated provision for uncollectible accounts. Broadcast television advertisers
are generally billed for the advertisements after the advertisements have been
aired. The trade receivable balance is segregated into discrete categories based
on the amount of time the billings are past due. Estimates of the allowance for
doubtful accounts are based on our historical collection experience. The
allowance is periodically reviewed for sufficiency relative to an evaluation of
the aging of the billings or specific accounts identified for further
evaluation, and the allowance is adjusted accordingly, with an offsetting
adjustment to bad debt expense. Trade receivables are written off after
exhaustion of all reasonable collection efforts, with an offsetting adjustment
to the allowance for doubtful accounts.






                                      F-14
<PAGE>


                       PEGASUS COMMUNICATIONS CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



NRTC Patronage Distributions

         Pegasus Satellite Television and Golden Sky Systems are affiliates of
the NRTC, a tax exempt entity that is organized to operate on a nonprofit basis.
The NRTC is a cooperative organization whose members and affiliates are engaged
in the distribution of telecommunications and other services in predominantly
rural areas of the United States. Throughout each year, the NRTC bills its
members and affiliates the costs incurred by it under its agreement with
DIRECTV, Inc., certain other costs incurred by the NRTC relating to associated
direct broadcast satellite projects, and margin on the costs of providing direct
broadcast satellite services pursuant to the NRTC member agreement for marketing
and distribution of direct broadcast satellite services. The most notable
service that the NRTC provides to us is programming related to the DIRECTV
programming that we provide. We record as expenses the amounts we pay to the
NRTC. Members and affiliates that participate in the NRTC's projects may be
eligible to receive an allocation of the NRTC's net savings (generally, amounts
collected from NRTC members and affiliates in excess of the NRTC's costs) in the
form of a patronage distribution through the NRTC's patronage capital
distribution program. Generally, each patron who does business with the NRTC
receives an annual distribution composed of both patronage capital certificates
and cash. The patronage capital certificates represent equity interests in the
NRTC. The amount of the distribution is generally based on the ratio of business
a patron conducts with the NRTC during a given fiscal year of the NRTC times the
NRTC's net savings available for patronage distribution for that year.
Throughout each year, we accrue amounts we estimate to receive from the NRTC,
with an offsetting reduction to the expenses that were recorded by us for costs
incurred with the NRTC during the year. The estimated cash portion of the
distribution is recorded in accounts receivable-other and the estimated capital
portion is recorded as an investment in the NRTC in other noncurrent assets.
Distributions are received in the year subsequent to the year that the accruals
are made. Amounts previously accrued are adjusted in the year that distributions
are received with a like adjustment to the related expenses in and for the year
the distributions are received. Based on past experience, we estimate that a
majority of the patronage capital distribution for 2003 to be made in 2004 will
be tendered by the NRTC in the form of patronage capital certificates. At
December 31, 2003 and 2002, we had accrued in accounts receivable-other $5.5
million and $7.2 million, respectively, and our capital investment in the NRTC
included in other noncurrent assets was $76.3 million and $66.2 million,
respectively. We have no commitment to fund the NRTC's operations or acquire
additional equity interests in the NRTC. The reduction to programming expense,
as adjusted for differences between distributions received and amounts
previously accrued, was $14.5 million, $22.7 million, and $44.8 million in 2003,
2002, and 2001, respectively.

Property and Equipment

         Property and equipment are stated at cost. The cost and related
accumulated depreciation of assets sold, retired, or otherwise disposed of are
removed from the respective accounts and, other than for direct broadcast
satellite receivers, any resulting gains and losses are included in results of
operations. The group depreciation method is employed for direct broadcast
satellite receivers, because they consist of a large number of homogenous units
at relatively nominal per unit cost to us. Under the group depreciation method,
gains and losses resulting from disposals are recorded in accumulated
depreciation. Expenditures for repairs and maintenance are charged to expense
when incurred. Direct broadcast satellite receivers provided to subscribers that
came from inventory and to which we retained title was capitalized at its
inventory carrying amount. We ceased carrying such inventory in early 2002.
Direct broadcast satellite receivers delivered to subscribers by our authorized
dealers to which we take title is capitalized at the amount of the subsidy we
pay for the equipment. We have a process in place to recover the receivers or
the cost thereof from subscribers in the event subscribers terminate their
subscriptions.





                                      F-15
<PAGE>


                       PEGASUS COMMUNICATIONS CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



         Expenditures for major renewals and betterments that extend the useful
lives of the related assets are capitalized and depreciated. Depreciation is
computed for financial reporting purposes using the straight line method based
upon the estimated useful lives of the assets.

Intangible Assets

         Intangible assets are stated at cost. The cost and related accumulated
amortization of assets sold, retired, or otherwise disposed of are removed from
the respective accounts and any resulting gains and losses are included in
results of operations. Amortization of intangible assets is computed for
financial reporting purposes using the straight line method based upon the
estimated useful lives of the assets. Leasehold improvements are amortized over
the lesser of the lease term or life of the related asset to which the
improvement was made.

Impairment of Long Lived Assets

         Impairment is the condition that exists when the carrying amount of a
long lived asset exceeds its fair value. For long lived assets that are not
depreciable or amortizable, an impairment loss is recognized for the excess of
carrying amount over fair value. For long lived assets that are depreciable or
amortizable, an impairment loss is recognized only when the carrying amount of
the asset exceeds its fair value and the carrying amount is not recoverable.
Long lived assets that are not depreciable or amortizable are tested for
impairment annually, or more frequently if events or changes in circumstances
indicate that the asset might be impaired. Long lived assets that are
depreciable or amortizable are reviewed for impairment whenever events or
circumstances suggest the carrying amounts may not be recoverable. Our long
lived assets that are not depreciable or amortizable consist of broadcast
licenses and goodwill. Our long lived assets that are depreciable or amortizable
primarily consist of property and equipment, intangibles consisting
predominately of direct broadcast satellite rights and various licenses, and
programming rights.

Deferred Financing Costs

         Financing costs incurred in obtaining long term financing are deferred
and amortized to interest expense over the term of the related financing. We use
the straight line method to amortize these costs. Deferred financing costs of
$31.3 million, net of accumulated amortization of $32.2 million, and $23.0
million, net of accumulated amortization of $25.2 million, were included in
other noncurrent assets at December 31, 2003 and 2002, respectively.

Broadcast Television Assets Sale/Leaseback Transaction

         We retained a continuing interest in broadcast television assets that
had been sold and leased back. This sale/leaseback is accounted for under the
financing method in which we continue to record and depreciate the related
assets and defer the gain resulting from the sale portion of the transaction
that would have otherwise been recognized at the date of the sale. In accordance
with certain requirements of the financing method, lease payments for the assets
leased back are charged to interest expense. The amount of interest expense
recorded for the sale/leaseback assets was insignificant in each of 2003, 2002,
and 2001. The accounting of the sale/leaseback transaction under the financing
method will continue until our continuing interest in the related assets ceases.





                                      F-16
<PAGE>


                       PEGASUS COMMUNICATIONS CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


Revenues

         Principal revenue of the direct broadcast satellite business is earned
by providing our DIRECTV programming on a subscription or pay per view basis.
Effective July 1, 2003, we adopted Emerging Issues Task Force Issue No. 00-21,
"Revenue Arrangements With Multiple Deliverables" ("EITF 00-21"). Effective with
the adoption of EITF 00-21, certain new subscribers are considered to enroll
under multiple deliverable arrangements with equipment, installation, and
programming being separate units of accounting. Fees that we charge new
subscribers for set up and activation upon initiation of service are included as
part of total consideration for these multiple deliverable arrangements. Under
these arrangements, revenue allocated to delivered units of accounting is
recognized immediately upon delivery. Revenue allocated to undelivered units of
accounting is recognized upon their subsequent delivery. The undelivered units
of accounting are programming and, in cases where we retain title, the satellite
receiving equipment. Standard subscriptions are recognized as revenue monthly at
the amount earned and billed, based on the level of programming content
subscribed to during the month, as adjusted for allocations to separate units of
accounting. Promotional programming provided to subscribers at discounted prices
is recognized as revenue monthly at the promotional amount earned and billed, as
adjusted for allocations to separate units of accounting. Revenue for pay per
view is recognized at the amount billed in the month in which the programming is
viewed and earned. Fees that we charged new subscribers for set up and
activation upon initiation of service prior to July 1, 2003 were deferred as
unearned revenue and recognized as revenue over the expected life of our
subscribers of five years. Amounts that we charged for equipment sold and
installations arranged by us prior to July 1, 2003 were deferred as unearned
revenue and recognized as revenue over the expected life of our subscribers of
five years. The fees and amounts deferred prior to July 1, 2003 continue to be
recognized over the expected life of our subscribers. The adoption of EITF 00-21
did not have a material impact on our results of operations or financial
position.

         In December 2003, the staff of the SEC issued Staff Accounting Bulletin
No. 104 "Revenue Recognition" ("SAB 104"). SAB 104 superseded Staff Accounting
Bulletin No. 101 "Revenue Recognition in Financial Statements" ("SAB 101"). The
principal impact of SAB 104 was the incorporation of the provisions of EITF
00-21. The other revenue recognition principles of SAB 101 remain largely
unchanged by the issuance of SAB 104. SAB 104 had no impact on us since we had
adopted EITF 00-21 prior to SAB 104.

         Principal revenue of the broadcast television business is earned by
selling advertising airtime. This revenue is recognized when the advertising
spots are aired.

Subscriber Acquisition Costs and Advertising Expenses

         Subscriber acquisition costs are incurred when we enroll new
subscribers to our DIRECTV programming. These costs consist of the portion of
programming costs associated with promotional programming provided to
subscribers, equipment related subsidies paid to distributors and applicable
costs incurred by us, installation costs and related subsidies paid to dealers,
dealer commissions, advertising and marketing costs, and selling costs. Our
subscriber acquisition costs may be expensed, deferred, or capitalized, as
explained below.

         Promotional programming costs, which are included in promotions and
incentives expense on the statement of operations and comprehensive loss, are
charged to expense when incurred. Promotional programming amounted to $3.5
million, $2.1 million, and $2.3 million in 2003, 2002, and 2001, respectively.
Equipment costs and related subsidies and installation costs and related
subsidies, which are included in promotions and incentives on the statement of
operations and comprehensive loss, are charged to expense when the equipment is
delivered and the installation occurs, respectively. Dealer commissions,
advertising and marketing costs, and selling costs, which are included in
advertising and selling on the statement of operations and comprehensive loss,
are charged to expense when incurred. Subscriber acquisition costs expensed as
included in the accompanying consolidated statements of operations and
comprehensive loss were $37.6 million, $44.5 million, $145.1 million in 2003,
2002, and 2001, respectively. These amounts exclude amounts capitalized or
deferred, as discussed below.





                                      F-17
<PAGE>


                       PEGASUS COMMUNICATIONS CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


         Under certain of our subscription plans for DIRECTV programming, we
take title to equipment provided to subscribers. Applicable costs and subsidies
related to this equipment are capitalized as fixed assets and depreciated.
Direct broadcast satellite equipment capitalized during 2003, 2002, and 2001 was
$22.1 million, $27.0 million, and $20.8 million, respectively.

         We also have subscription plans for our DIRECTV programming that
contain minimum service commitment periods. These plans have early termination
fees for subscribers should service be terminated by subscribers before the end
of the commitment period. Direct and incremental subscriber acquisition costs
associated with these plans are deferred in the aggregate not to exceed the
amounts of applicable termination fees. Direct and incremental subscriber
acquisition costs are less than the contractual revenue from the plans over the
minimum service commitment period of 12 months. These costs are amortized over
the commitment period and are charged to amortization expense. Direct and
incremental subscriber acquisition costs consist of equipment costs and related
subsidies not capitalized as fixed assets, installation costs and related
subsidies, and dealer commissions. Direct and incremental subscriber acquisition
costs in excess of termination fee amounts are expensed immediately and charged
to promotion and incentives or advertising and selling, as applicable, in the
statement of operations and comprehensive loss. Subscriber acquisition costs
deferred in 2003, 2002, and 2001 were $21.1 million, $31.1 million, and $19.4
million, respectively. Amortization of deferred subscriber acquisition costs was
$24.7 million, $30.6 million, and $4.2 million for 2003, 2002, and 2001,
respectively.

         Total subscriber acquisition costs expensed, capitalized, and deferred
were $80.9 million, $102.6 million, and $185.3 million in 2003, 2002, and 2001,
respectively.

         Total advertising expenses incurred for all of our operations were $6.4
million, $6.4 million, and $18.0 million for 2003, 2002, and 2001, respectively.

Other Subscriber Related Expenses

         Other subscriber related expenses associated with our direct broadcast
satellite business include infrastructure costs billed to us by the NRTC,
expenses associated with call centers, bad debt expense, franchise fees, and
other expenses that vary with changes in our number of subscribers served.
Franchise fees represent payments made to the NRTC in accordance with the NRTC
member agreement for marketing and distribution of direct broadcast satellite
services. Fees are calculated based on certain revenues earned by us.

Broadcast Television Barter Transactions

         The broadcast television stations that we own and operate obtain
programming for viewing from the networks they are affiliated with, as well as
from independent producers and syndicators. Broadcast television barter
transactions represent the exchange of advertising time for programming, except
those involving the exchange of advertising time for network programming. We do
not report revenue or expenses for barter transactions involving the exchange of
advertising time for network programming. Barter transactions are reported at
the fair market value of the advertising time relinquished. Barter programming
revenue and the related programming expense are recognized at the time that the
advertisement is broadcast. For 2003, 2002, and 2001, $7.4 million, $8.6
million, and $6.6 million, respectively, related to barter transactions were
included in revenue and programming expense of broadcast television and other
operations in the statements of operations and comprehensive loss.





                                      F-18
<PAGE>


                       PEGASUS COMMUNICATIONS CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


Deferred Income Taxes

         We account for deferred income taxes utilizing the asset and liability
approach, whereby deferred income tax assets and liabilities are recorded for
the tax effect of differences between the financial statement carrying values
and tax bases of assets and liabilities. Deferred income taxes are measured
using enacted tax rates and laws that will be in effect when the underlying
assets or liabilities are expected to be received or settled. A valuation
allowance is recorded for a deferred income tax assets balance when it is more
likely than not that the benefits of the net tax asset balance will not be
realized.

Net Loss Available for Common Shares and Computation of Per Common Share Amounts
- As Restated

         Net loss available for common shares equals net loss as reported
increased by accrued and deemed preferred stock dividends. Basic per share
amounts are computed by dividing net income or loss applicable to common shares
by the weighted average number of common shares outstanding during the periods
reported. Dividends and accretion on preferred stock and deemed dividends
associated with preferred stock issuances, conversions, and redemptions adjust,
as appropriate, net income or loss and results from continuing operations to
arrive at the amount applicable to common shares. The computation of net loss
available for common shares for 2003, 2002, and 2001 was as follows (in
thousands):
<TABLE>
<CAPTION>
                                                         2003         2002        2001
                                                       ---------    ---------   ---------
<S>                                                    <C>          <C>         <C>
Net loss, as restated................................  $(147,166)   $(154,152)  $(283,648)
Accrued dividends on preferred stock.................     18,782       32,968      45,085
Deemed dividends associated with preferred stock.....          -       (1,572)      4,656
Accretion on preferred stock.........................      1,052           95          95
                                                       ---------    ---------   ---------
    Total accrued and deemed preferred stock
      dividends......................................     19,834       31,491      49,836
                                                       ---------    ---------   ---------
Net loss, as restated, available for common shares...  $(167,000)   $(185,643)  $(333,484)
                                                       =========    =========   =========
</TABLE>

         The weighted average number of common shares outstanding is based upon
the number of shares of Class A, Class B, and Nonvoting common stock outstanding
during the periods reported. Diluted per common share amounts give effect to
potential common shares outstanding during the periods reported and related
adjustments to the net amount applicable to common shares and other reportable
items. Basic and diluted per common share and related weighted average number of
common share amounts are the same within each period reported because potential
common shares were antidilutive and excluded from the computation due to our
loss from continuing operations. The number of potential common shares at
December 31, 2003, 2002, and 2001 was 4.7 million, 2.5 million, and 2.6 million,
respectively.

Stock Based Compensation - As Restated

         We account for stock options and restricted stock issued using the
intrinsic value method. The plans under which these are issued are fixed award
plans. Compensation expense with respect to stock options is recognized for the
excess, if any, of the fair value of the stock underlying the option at the date
of grant of the option over the exercise price of the option. Compensation
expense with respect to restricted stock is the fair value of the stock at the
date of award since the recipient does not pay anything to receive the stock.




                                      F-19
<PAGE>

                       PEGASUS COMMUNICATIONS CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


         The following table illustrates the estimated pro forma effect on our
net loss and basic and diluted per common share amounts for net loss applicable
to common shares if we had applied the fair value method in recognizing stock
based employee compensation (in thousands, except per share amounts):
<TABLE>
<CAPTION>
                                                               2003            2002          2001
                                                             ---------       ---------     ---------
<S>                                                          <C>             <C>           <C>
Net loss, as restated....................................    $(147,166)      $(154,152)    $(283,648)
Add all stock based employee compensation
  expense, net of income tax, included in net income,
  as reported............................................        3,567             885         1,443
Deduct all stock based employee compensation
  expense, net of income tax, determined under fair
  value method...........................................       (8,927)         (4,472)       (9,643)
                                                             ---------       ---------     ---------
Net loss, pro forma as restated..........................    $(152,526)      $(157,739)    $(291,848)
                                                             =========       =========     =========
Basic and diluted per common share amounts:
   Net loss applicable to common shares, as restated.....      $(14.62)        $(15.52)      $(29.67)
   Net loss applicable to common shares, pro forma as
     restated............................................       (15.09)         (15.82)       (30.39)
</TABLE>
         Note 17 contains the assumptions used in developing the stock based
employee compensation expense under the fair value method used in the above
table.

Accretion on Notes Issued at a Discount and Amortization of Premium and Discount
on Other Notes

         For Pegasus Satellite's 13-1/2% senior subordinated discount notes due
March 2007, the discount from their full face value is accreted to interest
expense and the carrying amount of the notes over the discount period that ends
with the date that cash interest begins to accrue, at which time the carrying
amount of the notes will equal their full face value. Cash interest begins to
accrue for these notes in March 2004.

         Discount or premium recognized on other notes issued is amortized to
interest expense and the carrying amount of the notes over the term of the
related notes at the effective rate of interest of the notes when issued.

Dividends and Accretion on Redeemable Cumulative Preferred Stock

         The carrying amounts of Pegasus Communications' Series C, D, and E
redeemable cumulative preferred stock are periodically increased by dividends
not currently declared or paid but which will be payable under the redemption or
liquidation features. The increases in carrying amounts are effected by charges
to additional paid in capital, in the absence of retained earnings. Accrued
dividends that are subsequently declared and payable in cash are deducted from
the carrying amount of the preferred stock and classified as dividends payable
in current liabilities.

         Dividends accrued and unpaid associated with Pegasus Satellite's
12-3/4% series mandatorily redeemable cumulative preferred stock are recorded as
a liability separate from the liquidation preference value of the stock. The
liquidation preference value of this series is recorded as a separate liability.

         Preferred stock issued at a discount from its full liquidation
preference value is initially recorded at the amount of the discounted cash
proceeds or consideration received. For the 12-3/4% series preferred stock, the
difference between the carrying amount and the full liquidation preference value
is amortized to interest expense and to the carrying amount of the preferred
stock over the period that ends with the date that the stock first become
redeemable, at which time the carrying amount of the stock will equal its full
liquation par value. The amortization of the discount is recorded to interest
expense because the 12-3/4% preferred stock is classified as a liability.

         For the Series C preferred stock, no redemption date is specified or
determinable at this time, although redemption of the series is out of our
control. Since redemption of this series is uncertain, any discount or premium
recognized upon issuance is not being amortized. Amortization will commence when
redemption of the series becomes known or probable.





                                      F-20
<PAGE>


                       PEGASUS COMMUNICATIONS CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


Concentration of Credit Risk

         Financial instruments that potentially subject us to concentrations of
credit risk consist principally of trade receivables, cash, and cash
equivalents. Concentrations of credit risk with respect to trade receivables are
limited due to the large numbers comprising our subscriber and customer base and
their dispersion across varied businesses and geographic regions. At December
31, 2003 and 2002, no significant concentrations of credit risk existed.

New Accounting Pronouncements

         Interpretation No. 46, "Consolidation of Variable Interest Entities"
("FIN 46"), was originally issued by the Financial Accounting Standards Board
("FASB") in January 2003 and was revised in December 2003. FIN 46 clarifies the
application of Accounting Research Bulletin No. 51, "Consolidated Financial
Statements" to certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support. For those entities that are not considered to be
special-purpose entities, as defined, the FASB has deferred the effective date
for applying the provisions of FIN 46 to the end of the first reporting period
ending after March 15, 2004 for public entities that are not small business
issuers.

         We believe that it is reasonably possible that Pegasus will initially
consolidate or disclose information about the following variable interest
entities upon the implementation of FIN 46.

KB Prime Media
--------------

         We entered into an arrangement in 1998 with W.W. Keen Butcher, the
stepfather of Marshall W. Pagon, and certain entities controlled by Mr. Butcher
and the owner of a minority interest in one of the entities. Under this
agreement, as later amended and modified, we agreed to provide and maintain
collateral for the principal amount of bank loans to Mr. Butcher, his affiliated
entities, and the minority owner. Mr. Butcher and the minority owner are
required to lend or contribute the proceeds of those bank loans to one or more
of the entities owned by Mr. Butcher (the "KB Prime Media Companies") for the
acquisition of television broadcast stations to be programmed by us pursuant to
local marketing agreements or for which we have the right to sell all of the
advertising time pursuant to sales agreements. Under the 1998 agreement, as
amended, the KB Prime Media Companies granted us an option to purchase all of
its broadcast station licenses, permits, and/or assets, in whole or in part, if
and when permitted by applicable FCC rules and regulations. The option price is
based upon the cost attributed to an asset, plus compound interest at 12% per
year. The arrangement with Mr. Butcher permits us to realize the benefit or cost
savings for programming and collecting revenues from two or more stations in a
television market where the FCC's ownership rules would otherwise prohibit
outright ownership.

         Pursuant to these arrangements, at December 31, 2003, we had $6.6
million of cash being used to collateralize the bank loans. The KB Prime Media
Companies are required to repay the bank loans with proceeds received from the
disposition of assets.

         We and KB Prime Media Companies amended the 1998 agreement effective
February 1, 2004 to, among other things, (i) decrease the annual interest rate
from 12% to a rate equal to the borrowing interest rate of the KB Prime Media
Companies (2.6% as of December 31, 2003) plus 3% and (ii) limit the amount of
corporate expenses that would be reimbursed.








                                      F-21
<PAGE>


                       PEGASUS COMMUNICATIONS CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


         KB Prime Media's assets and its operations that are not subject to
local marketing agreements are not significant to Pegasus. At December 31, 2003,
Pegasus' maximum exposure to loss as a result of its involvement with KB Prime
Media is $6.6 million, representing the collateral provided with respect to KB
Prime Media's bank loans.

Pegasus PCS Partners, L.P. - As Restated
----------------------------------------

         Pegasus PCS Partners, L.P. ("Pegasus PCS Partners"), a partnership
owned and controlled by Marshall W. Pagon, held two personal communications
system licenses in Puerto Rico. In August 1999, Pegasus Development Corporation,
a direct subsidiary of Pegasus Communications, made an initial investment of
approximately $4.8 million in Pegasus PCS Partners in return for certain of the
limited partnership interests of Pegasus PCS Partners. In February 2001 and in
May 2001, Pegasus PCS Partners sold its licenses. Aggregate consideration for
the sale of the two licenses was approximately $30.0 million. Presently, Pegasus
PCS Partners' activities consist principally of investments in related
companies. At December 31, 2003, the carrying value of such investments on the
balance sheet of Pegasus PCS Partners is $13.9 million, including $0.7 million
for investments in common stock of Pegasus Communications (see Note 22). In
February 2002, Pegasus Development granted Mr. Pagon a ten year option to
purchase its interest in Pegasus PCS Partners for the market value of that
interest, payable in cash or by delivery of marketable securities (including our
securities).

         Pegasus Development's share of undistributed results of operations of
Pegasus PCS Partners was income of $205 thousand in 2003, a loss of $4.1 million
in 2002, and income of $11.1 million in 2001. At December 31, 2003, Pegasus
Development's investment in Pegasus PCS Partners is $12.0 million. This amount
has been removed from other noncurrent assets and appropriately classified in
equity as of December 31, 2003 (see Note 22).

         We continue to study the effects, if any, of FIN 46 during the deferral
period. Including those relationships discussed above, we do not believe that
the implementation of FIN 46 will have a significant effect on our financial
position, results of operations, or cash flows.

3.       PROPERTY AND EQUIPMENT

         Property and equipment, along with the applicable estimated useful life
of each category, consisted of the following at December 31, 2003 and 2002 (in
thousands):
<TABLE>
<CAPTION>
                                                                          2003                2002
                                                                        --------            --------
<S>                                                                        <C>                   <C>
Towers, antennas, and related equipment (7 to 20 years)................  $ 7,630             $ 6,872
Television broadcasting and production equipment (7 to 10 years).......   17,291              17,131
Equipment, furniture, and fixtures (5 to 10 years).....................   34,756              33,865
Direct broadcast satellite equipment capitalized (3 years).............   65,778              56,280
Building and improvements (up to 40 years).............................   25,495              24,997
Land...................................................................    6,036               6,036
Other..................................................................    3,559               4,615
                                                                        --------            --------
                                                                         160,545             149,796
Accumulated depreciation...............................................  (76,843)            (64,734)
                                                                        --------            --------
Property and equipment, net............................................  $83,702             $85,062
                                                                        ========            ========
</TABLE>
         Total depreciation expense was $25.7 million, $26.5 million, and $15.3
million for 2003, 2002, and 2001, respectively. Depreciation expense associated
with direct broadcast satellite equipment capitalized was $18.0 million, $16.3
million, and $5.4 million for 2003, 2002, and 2001, respectively.





                                      F-22
<PAGE>

                       PEGASUS COMMUNICATIONS CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


4.       INTANGIBLE ASSETS AND GOODWILL - AS RESTATED

         In conjunction with adopting Statement of Financial Accounting
Standards No. 142 "Goodwill and Other Intangible Assets" in the first quarter
2002, effective on January 1, 2002, we reassessed the estimated useful lives of
our direct broadcast satellite rights assets to expire in November 2016. Prior
to our reassessment, our broadcast satellite rights assets had estimated useful
lives of 10 years from the date we obtained the rights. As a result of our
reassessment, we extended the estimated useful lives of the unamortized carrying
amount of these assets at January 1, 2002 to approximately 15 years from that
date. As a result of the change in useful life, amortization expense for
broadcast satellite rights was $110.5 million in 2002 compared to $236.7 million
in 2001. The lives of our broadcast satellite rights are subject to litigation.
(See Note 18 for information regarding this litigation.)

         The term "intangible asset or assets" means an intangible asset or
assets other than goodwill. Intangible assets, along with the applicable
estimated useful life of each category, consisted of the following at December
31, 2003 and 2002 (in thousands):
<TABLE>
<CAPTION>
                                                                          2003                2002
                                                                       ----------          ----------
<S>                                                                     <C>                    <C>
Assets subject to amortization:
    Cost:
       Direct broadcast satellite rights (remaining life of 13
         years at December 31, 2003)...............................    $2,289,137          $2,289,068
       Other (2 to 40 years) ......................................       257,921             257,394
                                                                       ----------          ----------
                                                                        2,547,058           2,546,462
                                                                       ----------          ----------
    Accumulated amortization:
       Direct broadcast satellite rights...........................       862,903             752,396
       Other.......................................................        89,020              69,152
                                                                       ----------          ----------
                                                                          951,923             821,548
                                                                       ----------          ----------
Net assets subject to amortization.................................     1,595,135           1,724,914
Assets not subject to amortization:
    Broadcast television licenses..................................        12,670              12,670
                                                                       ----------          ----------
Intangible assets, net.............................................    $1,607,805          $1,737,584
                                                                       ==========          ==========
</TABLE>
         Total amortization expense was $130.4 million, $154.2 million, and
$245.4 million for 2003, 2002, and 2001, respectively.

         We determined that our broadcast licenses had indefinite lives because
under past and existing Federal Communications Commission's regulations the
licenses can be routinely renewed indefinitely with little cost. In accordance
with FAS 142, intangible assets with indefinite lives are not subject to
amortization commencing upon our adoption of FAS 142. At December 31, 2003 and
2002, total goodwill had a carrying amount of $15.0 million and $15.8 million,
respectively, and was entirely associated with our Broadcast operations. In
accordance with FAS 142, goodwill is not subject to amortization commencing upon
our adoption of FAS 142 on January 1, 2002. Because the carrying amount of
goodwill is not significant, it is included in other noncurrent assets on the
balance sheet.




                                      F-23
<PAGE>


                       PEGASUS COMMUNICATIONS CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


         A reconciliation of net loss, as restated in arriving at the net loss,
as adjusted and restated, for the effects of applying FAS 142 for 2001 is as
follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
                                                                             Per
                                                                            Share
                                                                           -------
<S>                                                          <C>           <C>
Net loss, as restated.....................................   $(283,648)    $(29.67)
Add back goodwill amortization............................         432         .04
Add back amortization on broadcast television
   licenses...............................................         407         .04
Adjust amortization for change in useful life of
   direct broadcast satellite rights assets...............      71,177        6.33
                                                             ---------     -------
Net loss, as adjusted and restated........................   $(211,632)    $(23.26)
                                                             =========     =======
</TABLE>
         The estimated aggregate amount of amortization expense for intangible
assets subject to amortization for each of the next five years based on the
balance of these assets at December 31, 2003 is $130.3 million, $128.3 million,
$125.7 million, $124.9 million, and $124.9 million, respectively.

5.       COMMON STOCK AND UNDISTRIBUTED EARNINGS OF 50% OR LESS OWNED ENTITIES -
         AS RESTATED

         At December 31, 2003, Pegasus Communications had three classes of
common stock: Class A, Class B, and Nonvoting. No shares of Nonvoting stock have
been issued. Holders of Class A and Class B are entitled to one vote per share
and ten votes per share, respectively. We have authorized shares of 250 million
for Class A, 30 million for Class B, and 200 million for Nonvoting. Our ability
to pay dividends on common stock is subject to certain limitations imposed by
our preferred stock and indebtedness. No dividends were declared for common
stocks during 2003 or 2002.

         During 2003 and 2002, our subsidiaries purchased an aggregate of
702,120 and 362,620, respectively, shares of the Class A common stock from
unaffiliated parties for $6.5 million and $1.9 million, respectively, that we
hold as treasury stock. Additionally in 2002, we obtained 299,468 Class A shares
in exchange for Pegasus Satellite's preferred stock (see Note 7). The value
attributed to the common shares obtained in the exchange was $1.9 million.

         The amount within accumulated deficit, as restated, that represents
undistributed earnings of 50% or less owned entities accounted for under the
equity method is $6.5 million and $6.3 million at December 31, 2003 and 2002,
respectively.

6.       REDEEMABLE PREFERRED STOCKS

         At December 31, 2003, Pegasus Communications had the following
preferred stock series outstanding: 6-1/2% Series C convertible ("Series C");
Series D junior convertible participating ("Series D"); and Series E junior
convertible participating ("Series E"). All of the outstanding shares for Series
D were exchanged for shares of Series C in January 2004 (see below).

         Redeemable preferred stocks consisted of the following at December 31,
2003 and 2002 (dollars in thousands):
<TABLE>
<CAPTION>
                                   2003                      2002
                           ----------------------------------------------
                                       CARRYING                  CARRYING
                            SHARES      AMOUNT        SHARES      AMOUNT
                           ---------   --------     ----------   --------
<S>                        <C>         <C>          <C>          <C>
Series C................   1,828,796   $198,788      1,808,114   $185,811
Series D................      12,500     13,500         12,500     13,000
Series E................       2,972      3,213         10,000     10,400
                                       --------                  --------
                                       $215,501                  $209,211
                                       ========                  ========
</TABLE>





                                      F-24
<PAGE>



                       PEGASUS COMMUNICATIONS CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


         The net increase in Series C was due to net dividends accrued and
unpaid during the year of $11.9 million, plus $1.1 million of value attributed
to 20,682 shares issued in June 2003 in exchange for shares of Pegasus
Satellites' 12-3/4% cumulative exchangeable preferred stock ("12-3/4% series")
(see Note 7). The $1.1 million represented the fair value of the Series C shares
issued, adjusted for consideration received and given in the exchange. The
Series C shares issued included accumulated dividends accrued and unpaid from
February 1, 2002 to the date of the exchange of $184 thousand. The aggregate par
value of the Series C shares issued in the exchange was $2.1 million. The
certificate of designation for the series does not provide for any mandatory
redemption requirements or dates and does not state any specific redemption
available at the option of holders. However, there may be situations in which
redemption of Series C may be required that are not in our control and,
accordingly, we classify this series as redeemable preferred stock. Since
redemption of Series C is uncertain, the difference of $1.0 million between the
par value of and the amount recorded for the shares issued in September 2003 is
not being accreted to the shares' carrying amount or included for purposes of
determining the preferred stock dividend requirement in per share computations.
Accretion of the difference will commence when redemption of the series is known
or becomes probable.

         The increase in Series D is due to dividends accrued and unpaid during
the year.

         The net decrease in Series E was due to the conversion of 7,028 shares
with a liquidation preference value of $7.0 million into 22,540 shares of
Pegasus Communications' Class A common stock, payment of accumulated dividends
associated with the shares converted of $512 thousand, and dividends accrued and
unpaid during the year of $353 thousand. The conversion was in accordance with
the terms of Series E's certificate of designation.

Series C Convertible

         Each whole share of Series C has a liquidation preference value of $100
plus accrued and unpaid dividends, and is convertible at any time at the option
of the holder into approximately .314 shares of Pegasus Communications' Class A
common stock. This conversion ratio is subject to adjustment under certain
circumstances. Holders of shares of Series C are entitled to receive, when, as,
and if declared by our board of directors, dividends at a rate of 6-1/2% payable
quarterly on January 31, April 30, July 31, and October 31 of each year.
Dividends are payable, at the option of Pegasus Communications, in cash, shares
of Pegasus Communications' Class A common stock, or a combination thereof. In
the past, dividends for this series have all been paid with shares of Class A
common stock. Dividends on Series C are payable on a cumulative basis when in
arrears. In the event of liquidation, Series C ranks senior to Series D and
Series E, and senior to all classes of Pegasus Communications' common stock.
Pegasus Communications at its option may redeem shares in whole or part of
Series C any time on at premiums specified in the certificate of designation for
this series. Holders of Series C have no voting rights other than those granted
by law, except that holders voting as a class are entitled to elect two
directors to the board of directors in the event dividends payable on the series
are in arrears for six quarterly periods until such arrearage is paid in full
and concerning matters that affect the terms and ranking of the series or
amendments to Pegasus Communications' charter that may adversely affect their
rights. Although the holders of Series C do not have the right to require
redemption under the terms of the certificate of designation, Series C is
considered to be redeemable because there may be situations in which redemption
of the series may be required that are not in our control.

         As permitted by the certificate of designation for the Series C,
Pegasus Communications' board of directors has the discretion to declare or not
to declare any scheduled quarterly dividends for this series. Since January 31,
2002, the board of directors only has declared a dividend of $100 thousand on
the series that was paid with shares of Pegasus Communications' Class A common
stock. Dividends not declared accumulate in arrears until paid. Dividends in
arrears on Series C accrue without interest. The total amount of dividends in
arrears on Series C at December 31, 2003 was $20.7 million. The dividend on this
series scheduled to be declared on January 31, 2004 of $3.2 million was not
declared.





                                      F-25
<PAGE>

                       PEGASUS COMMUNICATIONS CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


Series E

         Each share of Series E has a liquidation preference value of $1,000
plus accrued and unpaid dividends. Each share of Series E is convertible at any
time at the option of the holder into approximately 3.208 shares of Pegasus
Communications' Class A common stock, subject to adjustment under certain
circumstances. Each share of Series E is redeemable at the option of holders at
a price of $1,000 plus accrued and unpaid dividends. Pegasus Communications may
at its option redeem shares of Series E at any time at a price of $1,000 per
share. The redemption price is in addition to any accrued and unpaid dividends.
Holders of shares of Series E are entitled to receive, when, as, and if declared
by the board of directors, dividends of 4% payable annually on January 1.
Dividends on Series E are payable, at the option of Pegasus Communications, in
cash or shares of Pegasus Communications' Class A common stock. Dividends on
Series E are payable on a cumulative basis when in arrears. In the event of
liquidation, Series E ranks, to the extent of its liquidation preference, junior
to Series C preferred stock and senior to all classes of Pegasus Communications'
common stock. Upon liquidation, holders of Series E are entitled to participate
with holders of Pegasus Communications' common stock and other participating
stock, if any, in the remaining assets of Pegasus Communications after certain
other distributions have been satisfied. Generally, Series E has no voting
rights other than those granted by law.

         While dividends are in arrears on preferred stock senior to the Series
E preferred stock, Pegasus Communications' board of directors may not declare
dividends for and we may not redeem shares of this series. The Series C
preferred stock is senior to this series. Because dividends on Series C
preferred stock are in arrears, dividends in arrears for Series E preferred
stock at December 31, 2003 amounted to $119 thousand. The dividends scheduled
for January 1, 2004 for Series E preferred stock were not declared, and an
additional $119 thousand of dividends became in arrears on that date. Dividends
not declared accumulate in arrears until paid. While dividends on preferred
stock senior to Series E is in arrears, we are not permitted nor obligated to
redeem the related shares of this series. Under these circumstances, our
inability to redeem the shares of this series is not an event of default.

Series D

         In January 2004, Pegasus Communications entered into an agreement with
an unrelated party to issue 125,000 shares of its Series C preferred stock in
exchange for all of the remaining 12,500 shares of its Series D preferred stock.
No cash was transferred in the exchange. The Series D shares had accumulated
dividends in arrears to the date of the exchange of $1.0 million, of which $500
thousand were in arrears at December 31, 2003. Dividends on Series C shares are
in arrears, and the Series C shares issued in the exchange were issued with an
amount equivalent to dividend in arrears to the date of the exchange of $1.6
million. The exchange was accounted for as a capital transaction involving
equity securities and, accordingly, no gain or loss was recognized. A discount
of $3.8 million was recognized on the Series C shares issued in the exchange.
Since redemption of Series C is uncertain, the discount is not being accreted to
the shares' carrying amount or included for purposes of determining the
preferred stock dividend requirement in per share computations. Accretion of the
difference will commence when redemption of the series is known or becomes
probable.




                                      F-26
<PAGE>
                       PEGASUS COMMUNICATIONS CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



7.       MANDATORILY REDEEMABLE PREFERRED STOCK AND REDEEMABLE PREFERRED STOCK
         OF SUBSIDIARY

         The Financial Accounting Standards Board ("FASB") issued Statement No.
150 "Accounting for Certain Financial Instruments with Characteristics of Both
Liabilities and Equity" ("FAS 150") in May 2003. FAS 150 established standards
for how an issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an issuer
classify a financial instrument within its scope as a liability (or an asset in
some circumstances). Many of those instruments were previously classified as
equity. FAS 150 requires, among other things, an issuer to classify a financial
instrument issued in the form of shares that is mandatorily redeemable as a
liability. FAS 150 also requires that amounts paid or to be paid for those
instruments as returns on the instruments, for example, "dividends," are
required to be reported as interest costs. Restatement of periods prior to the
adoption of FAS 150 presented in financial statements issued after its adoption
is not permitted. For mandatorily redeemable financial instruments, "dividends"
and other amounts paid or accrued prior to reclassification of the instrument as
a liability are not to be reclassified as interest cost upon adoption of the
statement.

         Pegasus Satellite's 12-3/4% series preferred stock is mandatorily
redeemable on January 1, 2007 at its liquidation preference value, plus accrued
and unpaid dividends on that date. This series of preferred stock is a financial
instrument within the scope of FAS 150 that has the characteristics of a
liability as specified therein. Accordingly, we classified the combined
liquidation preference value of and unamortized original issue discount for the
series of $84.5 million on the date of our adoption of FAS 150 on July 1, 2003
as a noncurrent liability in "Mandatorily redeemable preferred stock" on the
balance sheet. Also, we classified the dividends accrued and unpaid balance for
the series of $17.6 million on the date of adoption of FAS 150 as a separate
other noncurrent liability. Dividends accrued and accretion of discount
associated with this series on and after the date of our adoption of FAS 150
have been charged to interest expense, with accrued and unpaid dividends being
classified to a noncurrent liability. The dividends for this series are
classified as noncurrent because we have the ability and intent to not declare
or pay the dividends within the next 12 months. In the periods presented prior
to our adoption of FAS 150, the 12-3/4% series was presented on the balance
sheet as "Redeemable preferred stock of subsidiary" between liabilities and
stockholders' equity for the combined amount of its liquidation preference
value, dividends accrued and unpaid thereon, and unamortized discount. Dividends
accrued and accretion of discount for the series in periods prior to our
adoption of FAS 150 were charged to additional paid in capital and included in
preferred dividend requirements for per share calculations.

         The combined balance of the 12-3/4% series at December 31, 2003 on a
consolidated basis was $108.9 million, consisting of $85.5 million of
mandatorily redeemable preferred stock and $23.4 million of accrued and unpaid
dividends in other noncurrent liabilities, compared to the balance of the series
at December 31, 2002 of $96.5 million in redeemable preferred stock of
subsidiary. The change was primarily due to dividends accrued of $11.5 million
and accretion of discount of $2.1 million, reduced by $1.2 million liquidation
preference value for 1,250 shares that we received in exchange for 20,682 shares
of our Series C preferred stock that were issued in the exchange that took place
in June 2003 (see Note 6). The 1,250 shares of the 12-3/4% series we received
included accrued interest of $16 thousand on the accumulated dividends
associated with the shares. We accounted for the 12-3/4% series shares received
as if they were constructively retired. In the exchange for and retirement of
the 12-3/4% series shares, we recognized an increase of $240 thousand in
additional paid in capital for the differential between the aggregate fair value
of and accumulated dividends associated with the Series C shares issued and the
aggregate par value of, accumulated dividends, and accrued interest associated
with the 12-3/4% series shares received. The liquidation value of the series on
a consolidated basis at December 31, 2003 was $115.2 million.




                                      F-27
<PAGE>


                       PEGASUS COMMUNICATIONS CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


         On a consolidated basis, the number of shares outstanding for the
12-3/4% series was 91,822 and 93,072 at December 31, 2003 and 2002,
respectively. Each whole share has a liquidation preference value of $1,000 plus
accrued and unpaid dividends. Dividends are payable in cash semiannually on
January 1 and July 1, when declared, and are payable on a cumulative basis when
in arrears. Subject to certain conditions, the series is exchangeable in whole
at the option of Pegasus Satellite for its 12-3/4% senior subordinated exchange
notes due 2007. The exchange notes would contain substantially the same
redemption provisions, restrictions, and other terms as the preferred stock. At
December 31, 2003, no shares had been exchanged for notes. At its option,
Pegasus Satellite may redeem the series in whole or part at redemption prices
specified in the certificate of designation for this series. On January 1, 2007,
Pegasus Satellite is scheduled to redeem all of the shares of the series
outstanding at that date at a redemption price equal to the liquidation
preference value per share plus accrued and unpaid dividends. The series ranks
senior to all other outstanding classes or series of capital stock with respect
to dividend rights and rights on liquidation.

         As permitted by the certificate of designation for this series, the
board of directors has the discretion to declare or not to declare any scheduled
quarterly dividends for this series. The board of directors has not declared any
of the scheduled semiannual dividends for this series since January 1, 2002.
Dividends in arrears to unaffiliated parties at December 31, 2003 were $17.6
million, with accrued interest thereon of $2.6 million. An additional $5.9
million of dividends payable on January 1, 2004 to unaffiliated parties were not
declared or paid and became in arrears on that date. Dividends not declared
accumulate in arrears and incur interest at a rate of 14.75% per year until
paid.

         At December 31, 2003, the number of shares of 12-3/4% series
outstanding for Pegasus Satellite was 183,978, with a carrying amount of $224.6
million, including accrued dividends of $46.9 million. Dividends in arrears on
this series at December 31, 2003 for Pegasus Satellite were $35.2 million. The
difference in these amounts from those on a consolidated basis indicated above
is due to the shares of this series owned by Pegasus Communications that were
eliminated in consolidation. The liquidation value of the series for Pegasus
Satellite at December 31, 2003 was $230.9 million.







                                      F-28
<PAGE>

                       PEGASUS COMMUNICATIONS CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


8.       LONG TERM DEBT

          Long term debt consisted of the following at December 31, 2003 and
2002 (in thousands):
<TABLE>
<CAPTION>
                                                                         DECEMBER 31,     DECEMBER 31,
                                                                             2003             2002
                                                                          ----------       ----------
<S>                                                                       <C>              <C>
Initial term loan facility of Pegasus Media due April 2005........        $   75,631       $  269,500

12-1/2% senior subordinated notes of Pegasus Media due July
    2005, net of unamortized discount of $813 thousand............                 -           67,082

Incremental term loan facility of Pegasus Media due July 2005.....            17,636           62,841

9-5/8% senior notes of Pegasus Satellite due October 2005.........            81,591          115,000

Tranche D term loan facility of Pegasus Media due July 2006, net
    of unamortized discount of $4.2 million.......................           295,025                -

12-3/8% senior notes of Pegasus Satellite due August 2006.........           158,205          195,000

9-3/4% senior notes of Pegasus Satellite due December 2006........            71,055          100,000

13-1/2% senior subordinated discount notes of Pegasus Satellite
    due March 2007, net of unamortized discount of $2.7 million
    and $22.7 million, respectively...............................           126,076          138,515

12-1/2% senior notes of Pegasus Satellite due August 2007.........           118,521          155,000

Term loan facility of Pegasus Satellite due August 2009, net of
    unamortized discount of $8.5 million..........................            94,221                -

11-1/4% senior notes of Pegasus Satellite due January 2010, net of
    unamortized net premium of $1.0 million.......................           341,893          175,000

Mortgage payable due 2010, interest at 9.25%......................             8,349            8,470

Other note due 2004 with stated interest of 6.75%.................                25            2,674
                                                                          ----------       ----------
                                                                           1,388,228        1,289,082
Less current maturities...........................................             3,157            5,752
                                                                          ----------       ----------
Long term debt....................................................        $1,385,071       $1,283,330
                                                                          ==========       ==========
</TABLE>
         In July 2003, Pegasus Media entered into a new letter of credit
facility with a bank for a maximum amount of $59.0 million that terminates in
July 2004. The bank issues letters of credit under the facility on behalf of us.
Letters of credit issued are in favor of amounts owed to the National Rural
Telecommunications Cooperative by subsidiaries of Pegasus Media. We pay an
annual fee of 1.75% prorated quarterly of the amount of letters of credit
outstanding for this facility. Outstanding letters of credit are collateralized
by cash provided by us in an amount equal to 105% of the letters of credit
outstanding. We are entitled to all earnings earned by the cash collateral. Cash
collateral provided by us is reported as restricted cash within current assets
on the consolidated balance sheets. The aggregate amount of letters of credit
outstanding under this facility at December 31, 2003 was $59.0 million. The
amount of restricted cash for this facility was $61.9 million at December 31,
2003.

         In August 2003, Pegasus Satellite borrowed all of the $100.0 million
financing available under a term loan agreement with a group of institutional
lenders. This term loan is senior to all existing and future indebtedness of
Pegasus Satellite. All unpaid principal and interest is due August 1, 2009. The
rate of interest on outstanding principal is 12.5%. Interest accrues quarterly,
of which 48% is payable in cash and 52% is added to principal. Interest added to
principal is subject to the full compounded rate of interest of 12.5%. Principal
may be repaid prior to its maturity date, but principal repaid within three
years from the initial date of borrowing bears a premium of 103% in the first
year, 102% in the second year, and 101% in the third year. Principal repaid may
not be reborrowed. Proceeds of the borrowing were used as follows: $69.3 million
to redeem all of the outstanding principal and associated accrued interest of
Pegasus Media's 12-1/2% notes (see below); $2.5 million for costs associated
with the term loan agreement; and $28.2 million to fund cash collateral placed
into Pegasus Media's letter of credit facility referred to above. The total debt
financing costs incurred for this agreement were $5.5 million, which have been
deferred and are being amortized and charged to interest expense over the term
of the agreement. In connection with the term loan agreement, Pegasus
Communications issued 1.0 million warrants to purchase 2.0 million shares of
nonvoting common stock to the group of institutional investors providing the
funds for the term loan financing. A portion of the proceeds of the loan
amounting to $8.8 million was attributed to the warrants based on the warrants'
relative fair value to the overall consideration in the transaction. The amount
attributed to the warrants was recorded as a discount to the amount of the term
loan borrowed, and is being amortized and charged to interest expense over the
term of the term loan facility.




                                      F-29
<PAGE>


                       PEGASUS COMMUNICATIONS CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


         In September 2003, all of the remaining outstanding principal of
Pegasus Media's 12-1/2% senior subordinated notes due July 2005 of $67.9 million
was redeemed, and accrued interest associated with the notes to the date of
redemption of $1.4 million was paid. The carrying amount of the notes of $67.3
million and unamortized debt issue costs for the notes of $456 thousand were
written off upon redemption of the notes, and a loss of $1.1 million on the
redemption was recorded in other nonoperating expenses in the statement of
operations.

         Pegasus Media has a credit agreement containing a term loan facility,
an incremental term loan facility, and a Tranche D term loan facility. Amounts
outstanding under Pegasus Media's credit agreement are senior to other
indebtedness. Amounts borrowed under the agreement are collateralized by
substantially all of the assets of Pegasus Media and its subsidiaries. The
agreement contains certain financial covenants. For each facility, Pegasus Media
has the option of selecting the applicable interest rate, between either the
lender's base rate plus an applicable margin or LIBOR plus an applicable margin.
Interest on outstanding principal borrowed under base rates is due and payable
quarterly and interest on outstanding principal borrowed under LIBOR rates is
due and payable the earlier of the end of the contracted interest rate period or
three months.

         In October 2003, Pegasus Media amended and restated its credit
agreement. This amendment created a new $300.0 million Tranche D term loan
facility. Pegasus Media borrowed the full $300.0 million under this facility,
less a discount of 1.5%, or $4.5 million, for net proceeds of $295.5 million.
Proceeds of the borrowing were used as follows: 1) repay outstanding initial
term loan principal under the credit agreement of $190.6 million, plus accrued
interest thereon of $539 thousand; 2) repay outstanding incremental term loan
principal under the credit agreement of $44.4 million, plus accrued interest
thereon of $126 thousand; 3) repay the entire amount outstanding for a revolving
credit facility formerly in place under the credit agreement of $52.0 million,
plus accrued interest thereon and other amounts related to the facility of $166
thousand; and 4) pay costs associated with the financing of $5.4 million. The
remaining proceeds of $2.2 million were used for working capital and general
corporate purposes. The debt financing costs incurred for this borrowing
aggregating $9.4 million and the discount incurred on the amount borrowed are
being amortized and charged to interest expense over the term of the loan.
Outstanding principal under Tranche D is required to be repaid quarterly at
..25%, or $750 thousand, of the total facility amount, with the balance and any
accrued and unpaid interest due at the maturity of the facility on July 31,
2006. We may elect an interest rate for outstanding principal on Tranche D loans
of either 1) 7.00% plus the greater of (i) the LIBOR rate and (ii) 2.0% or 2)
the prime rate plus 6.00%. Outstanding principal of the Tranche D loans is not
permitted to be repaid until all amounts for the initial and incremental term
loans under Pegasus Media's credit agreement are paid in full. Thereafter,
principal of the Tranche D loans may be repaid prior to its maturity date, but
principal repaid within three years from the initial date of borrowing bears a
premium of 3% in the first year, 2% in the second year, and 1% in the third
year. Principal repaid may not be reborrowed. The weighted average variable rate
of interest including applicable margins on principal outstanding under this
facility at December 31, 2003 was 9.0%.






                                      F-30
<PAGE>


                       PEGASUS COMMUNICATIONS CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


         The proceeds from the Tranche D borrowing of $190.6 million used to
repay principal outstanding under the initial term loan facility of Pegasus
Media's credit agreement were applied to all scheduled quarterly principal
amounts due through March 31, 2005 for this facility. Accrued interest at the
time of this principal repayment of $539 thousand was also repaid from the
proceeds of the Tranche D borrowing. All remaining principal and unpaid interest
for this facility are payable when the facility expires on April 30, 2005. No
further funds are available to be borrowed under this facility, and principal
repaid under this facility may not be reborrowed. Margins on this facility are
2.5% for base rates and 3.5% for LIBOR rates. The weighted average variable
rates of interest including applicable margins on principal outstanding under
this facility were 4.69% and 5.31% at December 31, 2003 and 2002, respectively.

         The proceeds from the Tranche D borrowing of $44.4 million used to
repay principal outstanding under the incremental term loan facility of Pegasus
Media's credit agreement were applied to all scheduled quarterly principal
amounts due through June 30, 2005 for this facility. Accrued interest at the
time of this principal repayment of $126 thousand was also repaid from the
proceeds of the Tranche D borrowing. All remaining principal and unpaid interest
for this facility are payable when the facility expires on July 31, 2005. No
further funds are available to be borrowed under this facility, and principal
repaid under this facility may not be reborrowed. Margins on this facility are
2.5% for base rates and 3.5% for LIBOR rates. The weighted average variable
rates of interest including applicable margins on principal outstanding under
this facility were 4.69% and 5.31% at December 31, 2003 and 2002, respectively.

         In December 2003, Pegasus Media entered into a new revolving credit
facility with an aggregate commitment of $20.0 million that expires July 31,
2006. However, availability under the new revolving credit facility is limited,
such that the aggregate amount of debt outstanding under this facility and
Pegasus Media's credit agreement cannot exceed $410.0 million through July 31,
2005 and $250.0 million thereafter. Amounts available to be borrowed under the
revolving credit facility are reduced by amounts outstanding for letters of
credit issued under the facility. Borrowed amounts repaid may be reborrowed. At
December 31, 2003, the amount available to be borrowed under the revolving
credit facility was $17.5 million. We may elect an interest rate for outstanding
principal under this facility at either 1) 7.00% plus the greater of (i) the
LIBOR rate and (ii) 2.0% or 2) the base rate plus 6.00%. The base rate is the
higher of the Federal funds rate plus 1% or the prime rate. Interest on
outstanding principal borrowed under the Federal funds rate or prime rate is due
and payable quarterly and interest on outstanding principal borrowed under LIBOR
rates is due and payable the earlier of the end of the contracted interest rate
period or three months. Any aggregate commitment amount in excess of the
outstanding principal borrowed and letters of credit under this facility is
subject to a commitment fee at an annual rate of 1.50% payable quarterly.

         During 2003, Pegasus Satellite completed a series of exchanges in which
was issued an aggregate of $165.9 million principal amount of 11-1/4% notes in
exchange for $168.1 million principal amount of our outstanding notes,
consisting of $33.4 million of 9-5/8% notes, $28.9 million of 9-3/4% notes,
$36.5 million of 12-1/2% notes, $36.8 million of 12-3/8% notes, and $32.5
million of 13-1/2% notes. All of the above exchanges except one were accounted
for as exchanges because the net present values of the cash flows of the
respective series in these exchanges were not substantially different.
Accordingly, no gain or loss was recognized. The unamortized balances of debt
issue costs associated with the previously outstanding notes received in these
exchanges remained as previously recorded and are being amortized to interest
expense over the remainder of the term of the new notes issued in these
exchanges. Generally, in exchanges of debt that are not extinguishments there
are no changes in the net carrying amounts of debt recorded before and after the
exchanges. However, a net premium of $1.0 million resulted from these exchanges
for the aggregate net difference in principal amounts involved and net cash
received by us.







                                      F-31
<PAGE>

                       PEGASUS COMMUNICATIONS CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


         One of the above exchanges was recorded as an extinguishment because
the net present values of the cash flows of the respective series in the
exchange were substantially different. In this exchange, we issued $9.1 million
principal amount of 11-1/4% notes with a fair value of $8.6 million for $9.5
million aggregate principal amount of 9-3/4% notes and 13-1/2% notes with an
aggregate carrying amount of $9.2 million plus aggregate unamortized debt issue
costs of $142 thousand. We recorded a gain of $543 thousand in other
nonoperating income on the statement of operations for this extinguishment.

         Pegasus Satellite's 9-5/8% senior notes due October 2005, 9-3/4% senior
notes due December 2006, and 12-1/2% senior notes due August 2007 are
effectively subordinated to all liabilities of our subsidiaries and are on
parity with other senior indebtedness of Pegasus Satellite. Pegasus Satellite
presently has the option to redeem the 9-5/8% notes, 9-3/4% notes, and the
12-1/2% notes, each at prices specified in the indenture for each respective
note. Interest is payable semiannually on April 15 and October 15 for the 9-5/8%
notes, June 1 and December 1 for the 9-3/4% notes, and February 1 and August 1
for the 12-1/2% notes. Pegasus Satellite's 12-3/8% senior notes due August 2006
and 11-1/4% senior notes due January 2010 are unsecured senior obligations. They
rank senior to subordinated indebtedness of Pegasus Satellite and rank equally
in right of payment with its other senior indebtedness. The 13-1/2% senior
subordinated discount notes due March 2007 are unsecured senior subordinated
obligations and are subordinated in right of payment to all existing and future
senior indebtedness of Pegasus Satellite. The discount on the 13-1/2% notes will
be fully amortized at March 1, 2004, at which time cash interest begins to
accrue. Each of these series of notes rank junior to the indebtedness of our
subsidiaries, including their subordinated indebtedness. Pegasus Satellite has
the option to redeem any or all of the 12-3/8% notes commencing August 1, 2003
and the 13-1/2% notes commencing March 1, 2004, each at prices specified in
their respective indentures. Pegasus Satellite has the option to redeem 35% of
the 11-1/4% notes prior to January 15, 2005 at a price of 111.25% of their face
amount, plus accrued interest, with the net proceeds of certain equity
offerings. Otherwise, Pegasus Satellite can redeem any or all of the 11-1/4%
notes anytime on and after January 15, 2006 at prices specified in the indenture
for the notes. Subject to certain exceptions described in the indenture, Pegasus
Satellite must offer to repurchase each of these notes if certain assets of
Pegasus Satellite or its restricted subsidiaries are sold or if changes in
control specified in the indentures occur with respect to Pegasus Satellite, its
subsidiaries, or Pegasus Communications. Interest is payable semiannually on
February 1 and August 1 for the 12-3/8% notes, March 1 and September 1 for the
13-1/2% notes after cash interest begins to accrue, and January 15 and July 15
for the 11-1/4% notes.

         The indentures for each of the notes and provisions of the Pegasus
Media's credit agreement and Pegasus Satellite's term loan agreement generally
limit the ability of the issuing companies and their respective subsidiaries in
varying degrees to, among other things, sell assets, incur additional
indebtedness and create liens, issue or sell other securities, make certain
payments, including dividends and investments, transfer cash, engage in certain
transactions with affiliates, and merge or consolidate.

         In 2002, Pegasus Satellite purchased $31.9 million in maturity value of
its 13-1/2% senior subordinated discount notes due March 2007 and $17.1 million
in maturity value of Pegasus Media's 12-1/2% senior subordinated notes due July
2005 in negotiated transactions with unaffiliated holders. The aggregate amount
paid for the notes was $25.5 million, and the aggregate carrying amount of the
notes at the dates of purchase was $42.2 million, net of associated unamortized
discount and deferred financing fees. As a result, a net gain of $16.6 million
was recorded in other nonoperating expenses in the statement of operations.

         In 2001, we wrote off unamortized balances aggregating $2.9 million for
deferred financing costs associated with debt repaid and credit agreements
terminated during the year, which was charged to other nonoperating expenses in
the statement of operations.




                                      F-32
<PAGE>


                       PEGASUS COMMUNICATIONS CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



         Aggregate commitment fees incurred under all credit facilities
outstanding in the respective periods were $428 thousand, $910 thousand, and
$999 thousand for 2003, 2002, and 2001, respectively.

         Scheduled maturities of long term debt at their stated maturity values
and principal amounts and repayment of principal outstanding under all credit
facilities based on amounts outstanding at December 31, 2003 for the next five
years are $3.2 million in 2004, $178.0 million in 2005, $522.7 million in 2006,
$247.5 million in 2007, and $191 thousand in 2008.

         Pegasus Satellite has a note payable to Pegasus Communications with a
balance of $45.7 million at December 31, 2003 that was eliminated in
consolidation.

         In February 2004, Pegasus Media and its lenders entered into an
amendment to its credit facility. The amendment, among other things, allows us
to incur additional senior secured debt such that we and Pegasus Media can have
total senior secured debt of up to $650.0 million.

9.       LEASES

         We lease certain buildings, vehicles, and various types of equipment
through separate operating lease agreements. The operating leases expire at
various dates through 2009. Rent expense for all rentals and leases was $3.3
million, $2.9 million, and $3.5 million for 2003, 2002, and 2001, respectively.
At December 31, 2003, minimum lease payments on noncancellable operating leases
with terms in excess of one year scheduled for the next five years were $3.0
million in 2004, $2.7 million in 2005, $2.2 million in 2006, $677 thousand in
2007, and $59 thousand in 2008, and $10 thousand thereafter.

         At December 31, 2003, minimum lease payments associated with assets
subject to sale/leaseback scheduled for the next five years were $870 thousand
in 2004, $904 thousand in 2005, $940 thousand in 2006, $978 thousand in 2007,
$1.0 million in 2008, and $1.6 million thereafter. Payments for these leases are
recorded to interest expense. Leases for property subject to sale/leaseback are
scheduled to expire in 2010. We had no capital leases at December 31, 2003.

10.      OTHER OPERATING EXPENSES

         Other operating expenses for 2003, 2002, and 2001 included expenses
associated with our DIRECTV, Inc. and patent infringement litigations
aggregating $16.3 million, $15.8 million, and $21.4 million, respectively. (See
Note 18 for information concerning this litigation.)

11.      IMPAIRMENTS

         We recognized impairment losses of $829 thousand and $6.0 million in
2003 and 2002, respectively. These losses are contained within other operating
expenses on the statement of operations and comprehensive loss. Of these
amounts, $670 thousand and $2.0 million were associated with programming rights
of our broadcast television operations for 2003 and 2002, respectively. The fair
values of the affected programming rights and the impairments and amount of the
losses were based upon the present value of the expected cash flows associated
with the related programming agreements that provide the rights. Also in 2002,
we wrote off $2.1 million of costs for intangible assets and $1.5 million for
certain set top boxes that had no future benefit to us.

         During 2002, we determined that our sole investment in the equity
securities of another company had incurred an other than temporary decline in
market value to zero. Accordingly, we wrote down the carrying amount of our
investment to zero and charged earnings in the amount of $3.3 million for the
impairment loss realized. In connection with the realization of this impairment,
we reclassified $3.9 million, inclusive of accumulated income tax expense of
$616 thousand, from other comprehensive (loss) income in recognition of the
previously accumulated unrealized losses. We recorded an impairment loss of
$34.2 million on this investment in 2001, and reclassified $21.2 million, net of
income tax of $13.0 million, in recognition of the previously accumulated
unrealized losses at that time.





                                      F-33
<PAGE>


                       PEGASUS COMMUNICATIONS CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


12.      INCOME TAXES - AS RESTATED

         We have corrected the income taxes associated with continuing and
discontinued operations as previously reported in our Form 10-K for the year
ended December 31, 2003. We restated in the statement of operations for the year
ended December 31, 2003 the allocation of income tax (expense) benefit between
continuing operations and discontinued operations (See Note 22). We also
corrected in the statements of operations and comprehensive loss for the years
ended December 31, 2002 and 2001 the net benefit for income taxes as a result of
certain interest expense not being deductible (see Note 22). We also restated
the unaudited quarterly financial information for the years ended December 31,
2003 and 2002 to correct the allocation of the full year income tax (expense)
benefit among the quarters of each year (see Note 21). We also restated in the
statement of operations for the year ended December 31, 2003, 2002 and 2001 the
income tax benefit as a result of the restatement of equity in earnings of
affiliates during that year ended (see Note 22).

         Following is a summary of income taxes for 2003, 2002, and 2001 (in
thousands), as previously reported:
<TABLE>
<CAPTION>
                                                          2003        2002        2001
                                                         -----       -------    --------
<S>                                                      <C>         <C>        <C>
State and local - current (expense) benefit..........    $(219)      $  (233)   $    753
                                                         -----       -------    --------
State - deferred:
   Net operating loss carryforwards..................        -         3,569       6,208

  Extinguishment of debt.............................        -          (501)         87

  Other..............................................        -          (805)      2,953
                                                         -----       -------    --------
     Total state deferred............................        -         2,263       9,248
                                                         -----       -------    --------
Federal - deferred:
   Net operating loss
    carryforwards....................................        -        41,640      72,427
  Extinguishment of debt.............................        -        (5,840)      1,019
   Other.............................................        -        (9,387)     34,519
                                                         -----       -------    --------
     Total federal deferred..........................        -        26,413     107,965
                                                         -----       -------    --------
Net benefit attributable to continuing operations....     (219)       28,443     117,966
Income taxes associated with other items:
   Deferred benefit for discontinued operations......        -             -       6,663
   Deferred benefit for unrealized loss on marketable
    equity securities................................        -             -       5,042
   Deferred tax associated with reclassification of
    realized loss on marketable equity
    securities......................                         -           616     (12,998)
                                                         -----       -------    --------
   Total income tax (expense) benefit recorded.......    $(219)      $29,059    $116,673
                                                         =====       =======    ========
</TABLE>


         Following is a summary of income taxes for 2003, 2002, and 2001 (in
thousands), as restated:
<TABLE>
<CAPTION>
                                                           2003       2002        2001
                                                         --------    -------    --------
<S>                                                      <C>         <C>        <C>
State and local - current (expense) benefit..........    $  (219)    $  (233)   $    753
                                                         --------    -------    --------
State - deferred:
   Net operating loss
    carryforwards....................................       2,030      3,460       4,498
  Extinguishment of debt.............................           -       (501)         87

  Other..............................................      (1,732)      (343)      4,507
                                                         --------    -------    --------
     Total state deferred............................         298      2,616       9,092
                                                         --------    -------    --------
Federal - deferred:
   Net operating loss carryforwards..................      23,698     40,363      52,476
   Extinguishment of debt............................           -     (5,840)      1,019
   Other.............................................     (20,214)    (3,987)     52,652
                                                         --------    -------    --------
     Total federal deferred..........................       3,484     30,536     106,147
                                                         --------    -------    --------
Net benefit attributable to continuing operations....       3,563     32,919     115,992
Income taxes associated with other items:
   Deferred benefit for discontinued operations......      (3,782)         -       6,663
   Deferred benefit for unrealized loss on marketable
    equity securities................................           -          -       5,042
   Deferred tax associated with reclassification of
    realized loss on marketable equity
    securities......................                            -        616     (12,998)
                                                         --------    -------    --------
   Total income tax (expense) benefit recorded.......    $   (219)   $33,535    $114,699
                                                         ========    =======    ========
</TABLE>




                                      F-34
<PAGE>


                       PEGASUS COMMUNICATIONS CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


         Following were the deferred income tax assets and liabilities at
December 31, 2003 and 2002 (in thousands), as previously reported:
<TABLE>
<CAPTION>
                                                                                2003             2002
                                                                              -------          -------
<S>                                                                            <C>              <C>
Deferred tax assets:
   Current assets and liabilities............................................ $ 1,517           $ 4,454
   Excess of tax basis over book basis - marketable equity securities........  27,378            27,378
   Excess of tax basis over book basis - notes exchanged.....................   3,726                 -
   Loss carryforwards........................................................ 409,367           375,603
   Other.....................................................................     862               454
                                                                              -------           -------
       Total assets.......................................................... 442,850           407,889

Deferred tax liabilities:
   Excess of book basis over tax basis - property and equipment..............  (2,328)           (2,987)
   Excess of book basis over tax basis - amortizable intangible assets.......(346,671)         (362,360)
   Other.....................................................................    (148)
                                                                              -------           -------
       Total liabilities.....................................................(349,147)         (365,347)
                                                                              -------           -------
Net deferred tax assets (liabilities)........................................  93,703            42,542
Valuation allowance.......................................................... (93,703)          (42,542)
                                                                              -------           -------
Net deferred tax balance.....................................................  $    -            $    -
</TABLE>

         Following were the deferred income tax assets and liabilities at
December 31, 2003 and 2002 (in thousands), as restated:
<TABLE>
<CAPTION>
                                                                                2003             2002
                                                                              -------           -------
<S>                                                                             <C>              <C>
Deferred tax assets:
   Current assets and liabilities............................................ $ 1,517           $ 4,454
   Excess of tax basis over book basis - marketable equity securities........  27,378            27,378
   Excess of tax basis over book basis - PCS Partners investment                1,650             1,650
   Excess of tax basis over book basis - notes exchanged.....................   3,726                 -
   Loss carryforwards........................................................ 377,430           351,704
   Excess of tax basis over book basis - AHYDO Note                            22,711            17,348
   Other.....................................................................     862               455
                                                                              -------           -------
       Total assets.......................................................... 435,274           402,989
Deferred tax liabilities:
   Excess of book basis over tax basis - property and equipment..............  (2,328)           (2,987)
   Excess of book basis over tax basis - amortizable intangible assets.......(346,671)         (362,360)
   Other.....................................................................    (148)                -
                                                                              -------           -------
       Total liabilities.....................................................(349,147)         (365,347)
                                                                              -------           -------
Net deferred tax assets (liabilities)........................................  86,127            37,642
Valuation allowance.......................................................... (86,127)          (37,642)
                                                                              -------           -------
Net deferred tax balance.....................................................  $    -            $    -
                                                                              =======           =======

</TABLE>




                                      F-35
<PAGE>

                       PEGASUS COMMUNICATIONS CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


         We had an income tax benefit of $3.6 million for continuing operations,
for 2003, compared to an income tax benefit of $32.9 million for 2002. The
income tax benefit for 2003 includes state income tax expense of $219 thousand.
For discontinued operations, we had an income tax expense of $3.8 million for
2003. After considering both continuing and discontinued operations, no deferred
income tax benefit or expense was recorded for 2003 because we were in a net
deferred income tax asset position throughout the year against which a full
valuation allowance was applied. At December 31, 2003, we had a net deferred
income tax asset balance of $86.1 million, offset by a valuation allowance in
the same amount. The valuation allowance increased by $48.5 million during 2003.

         This increase to the valuation allowance completely offset the deferred
income tax benefits generated during the year and resulted in no deferred income
tax expense or benefit for 2003. We believed that a valuation allowance
sufficient to bring the deferred income tax asset balance to zero at December
31, 2003 was necessary because, based on our history of losses, it was more
likely than not that the benefits of the deferred income tax asset will not be
realized. Our effective income tax rate for continuing operations for 2003 was
2.27%, as restated, compared to the effective income tax rate for continuing
operations for 2002 of 18.11%, as restated. The effective income tax rates for
2003 and 2002 were impacted by valuation allowances recorded during each year.

         Following is a reconciliation of the federal statutory income tax rate
to our effective income tax rate attributable to continuing operations for 2003,
2002, and 2001, as previously reported:
<TABLE>
<CAPTION>
                                                           2003            2002             2001
                                                          ------         -------           ------
<S>                                                        <C>              <C>              <C>
Statutory rate.........................................    35.00%          35.00%           35.00%
Effect of valuation allowance..........................   (29.31)         (22.16)               -
Other..................................................    (5.69)           2.10            (6.99)
                                                          ------         -------           ------
Effective tax rate.....................................        -%          14.94%           28.01%
                                                          ======         =======           ======
</TABLE>

         Following is a reconciliation of the federal statutory income tax rate
to our effective income tax rate attributable to continuing operations for 2003,
2002, and 2001, as restated:
<TABLE>
<CAPTION>
                                                           2003            2002             2001
                                                          ------          ------           ------
<S>                                                        <C>              <C>              <C>
Statutory rate.........................................    35.00%          35.00%           35.00%
Effect of valuation allowance..........................   (28.46)         (19.07)               -
Effect of permanently disallowed interest..............    (4.33)          (1.44)           (0.76)
Other..................................................     0.01            2.31            (6.94)
                                                          ------         -------           ------
Effective tax rate.....................................     2.22%          16.80%           27.30%
                                                          ======         =======           ======
</TABLE>
         At December 31, 2003, we had net operating loss carryforwards for
income tax purposes of $993.2 million available to offset future taxable income
that expire beginning 2004 through 2023.



13.      SUPPLEMENTAL CASH FLOW INFORMATION

         Following are significant noncash investing and financing activities
for 2003, 2002, and 2001 (in thousands):
<TABLE>
<CAPTION>
                                                                          2003           2002           2001
                                                                         -------        -------       -------
<S>                                                                      <C>            <C>           <C>
Preferred stock dividends, accrued and deemed, and accretion on
preferred stock with reduction of additional paid in capital.............$19,834        $31,491       $49,836

Payment of preferred stock dividends with shares of stock................     99         16,233        41,171

Net additional paid in capital from repurchase, exchange, conversion
and/or redemption of preferred stock.....................................    240        162,192             -

Redemption and conversion of preferred stock with issuance of Class
A common stock...........................................................  7,028          7,729        51,002

Common stock issued for employee benefits and awards.....................  4,633          2,001         4,496

Value of common stock warrants applied to debt discount..................  8,784              -             -
</TABLE>





                                      F-36
<PAGE>

                       PEGASUS COMMUNICATIONS CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


         For 2003, 2002, and 2001, we paid cash interest of $119.5 million,
$111.7 million, and $113.2 million, respectively. We paid no federal income
taxes in 2003, 2002, and 2001. The amount paid for state income taxes was not
significant in each of 2003, 2002, and 2001.

14.      DISPOSITIONS

         In 2003, we completed the sale of three broadcast television stations
in two separate transactions. One station was located in Mobile, Alabama and the
other two stations were located in Mississippi. The aggregate sale price was
$24.9 million cash, and we recognized a net gain on the sales of $10.3 million.
The operations of these stations, including the net gain recognized on the
sales, are classified as discontinued in the statement of operations and
comprehensive loss for all periods presented. Aggregate assets and liabilities
associated with the broadcast television stations above were not significant to
our financial position to show separately as held for sale on the balance sheet
at December 31, 2002, but such have been classified as other current and
noncurrent assets and liabilities as appropriate.

         We ceased operating our Pegasus Express business in 2002. Accordingly,
the operations for this business for 2002 were classified as discontinued in the
statement of operations and comprehensive loss.

         Aggregate revenues for and pretax income (loss) from discontinued
operations were as follows (in thousands):

                                2003              2002              2001
                              -------            -------          --------
Revenues                       $1,533            $ 8,325          $  7,861
Pretax income (loss)            9,955             (5,292)          (17,533)

         In a separate but concurrent transaction to the sale of the Mississippi
stations, we waived our rights under an option agreement to acquire a broadcast
television construction permit held by KB Prime Media and consented to the sale
of the permit by KB Prime Media to an unaffiliated party. As consideration for
our waiver and consent, we received $1.5 million that we recorded as other
nonoperating income. In association with this transaction, $2.6 million of our
cash collateralizing certain debt of KB Prime Media was released. Pegasus
Satellite is party to an option agreement with W.W. Keen Butcher, certain
entities controlled by Mr. Butcher (the "KB Companies"), and the owner of a
minority interest in the KB Companies. Mr. Butcher is the stepfather of Marshall
W. Pagon, chairman of the board of directors and chief executive officer of
Pegasus Satellite and Pegasus Communications. KB Prime Media is one of the KB
Companies.



                                      F-37
<PAGE>
                       PEGASUS COMMUNICATIONS CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

15.      FINANCIAL INSTRUMENTS

         The carrying amount and fair value of our long term debt and redeemable
preferred stock at December 31, 2003 and 2002 were as follows (in thousands):
<TABLE>
<CAPTION>
                                                                      2003                         2002
                                                            -------------------------    ------------------------
                                                             CARRYING        FAIR         CARRYING        FAIR
                                                              AMOUNT         VALUE         AMOUNT        VALUE
<S>                                                        <C>            <C>           <C>           <C>
Long term debt (including current portion).............      $1,388,228    $1,363,603     $1,289,082     $864,557
Redeemable preferred stocks (including the 12-3/4% series
preferred stock reported as a liability, along with
accrued and unpaid dividends thereon)..................         324,428       228,742        305,737       88,618
</TABLE>

         Not all of our preferred stock and debt are traded. Fair values of our
preferred stock, notes, and certain term loans were based on the latest
available determinable trade prices for those that have trading activity and an
estimate of trade prices based on our comparable instruments for those that do
not have trading activity. Other debt included in the table was not significant
and its fair value was assumed to be equal to its carrying amount.

         We use interest rate hedging financial instruments principally as a
condition to our credit agreement to reduce the impact of interest rate
increases on our variable rate debt. We do not hold or issue interest rate
hedging financial instruments for trading or speculative purposes. The
counterparties to these instruments are major financial institutions. We are
exposed to credit loss in the event of nonperformance by these institutions,
however, we do not anticipate nonperformance by any of them. Notional amounts
established for each interest rate hedging financial instrument are used to
measure interest to be paid or received. We do not pay or receive any cash for
the notional amounts during the term of the instruments or when the instruments
terminate.

         We measure our interest rate hedging financial instruments based on
their fair values, and recognize related assets or liabilities as appropriate in
the statement of financial position. The fair values of our interest rate
hedging financial instruments are determined by the counterparties. The fair
values are measured by the amount that the instruments could be settled at on
any designated day. No cash is exchanged on these assumed settlements, but we
record gains for increases and losses for decreases in the fair values between
assumed settlement dates. These gains and losses are recorded in the period of
change in other nonoperating income/expense as appropriate.





                                      F-38
<PAGE>
                       PEGASUS COMMUNICATIONS CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


         At December 31, 2003, we had two interest rate cap contracts with a
combined notional amount of $31.5 million. These contracts terminate in
September 2005. The cap rate for one contract is 9.0% and the other is 4.0%. The
premiums we paid to enter into these contracts were not significant. The
variable market interest rate for the contracts is based on the three month
LIBOR rate in effect at the beginning of each three month resetting period.
Under the caps, we receive interest from the counterparties to the contracts
when the variable market rates of interest specified in the contracts exceed the
contracted interest cap rates. The effects of the caps are recorded as
adjustments to our interest expense. Premiums paid by us to enter into these
contracts are amortized to interest expense. The aggregate fair values of our
caps at December 31, 2003 and 2002 were nominal.

         For 2001, 2002, and into March 2003, we utilized interest rate swaps as
a condition to our credit agreement. The swaps terminated in March 2003, and
were not replaced. The aggregate fair value of the swaps at December 31, 2002
was approximately $1.2 million. We recognized gain of approximately $1.2 million
and $3.0 million in 2003 and 2002, respectively, and a loss of approximately
$4.2 million in 2001 with respect to the change in the fair values of the swaps.
As a result of market LIBOR rates that were applicable to us for the swaps being
lower than the fixed rates we paid on the swaps in each of 2003, 2002, and 2001,
we incurred net additional interest of $935 thousand, $3.6 million, and $1.3
million in 2003, 2002 and 2001, respectively.

16.      WARRANTS

         We have issued warrants to purchase shares of Pegasus Communications'
Class A common and nonvoting common stocks. Information on warrants outstanding
at December 31, 2003 was as follows:
<TABLE>
<CAPTION>
                         RATE OF CONVERSION
     NUMBER                INTO COMMON              EXERCISE            YEAR OF
   OUTSTANDING                STOCK                  PRICE             EXPIRATION
------------------    -----------------------    -------------------  -------------
<S>                   <C>                        <C>                   <C>
           800                 1.0               $230.58 - 234.50        2005
        25,950                .774                     37.50             2007
         9,656                 1.0                     36.60             2007
     1,000,000                 0.4                     225.00            2010
     1,000,000(a)              2.0                       8.00            2010
</TABLE>

(a) Exercisable into shares of nonvoting common stock. All other warrants are
exercisable into shares of Class A common stock.

         All warrants outstanding in the above table are exercisable into a like
number of shares of common stock. No warrants were exercised in 2003.


17.      EMPLOYEE BENEFIT PLANS

         Pegasus Communications has employee benefit plans under which shares of
Pegasus Communications Class A common stock may be issued to eligible plan
participants. These plans are discussed below.





                                      F-39
<PAGE>

                       PEGASUS COMMUNICATIONS CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


1996 Stock Option Plan

         This plan provides for the granting of nonqualified and qualified
options to purchase a maximum of 2.0 million shares of Pegasus Communications'
Class A common stock or, as amended in 2003, shares of nonvoting common stock.
Participants in the plan are eligible employees, executive officers, and
nonemployee directors. As amended in 2003, an employee may be granted a maximum
of 400 thousand options in any one year, compared to the maximum grant of 400
thousand options over the term of the plan prior to the amendment. The plan and
employee maximums are subject to adjustment to reflect stock dividends, stock
splits, recapitalizations, and similar changes in the capitalization of Pegasus
Communications. The plan terminates in September 2006. The plan provides that
the exercise price of options granted is no less than the fair market value of
the common stock underlying the options at the date the options are granted.
Options granted have a term no greater than 10 years from the date of grant.
Options vest and become exercisable in accordance with a schedule determined at
the time the option is granted. Exercisable options may be exercised any time up
to the expiration or termination of the option. Outstanding options become
exercisable immediately in the event of a change in control. New full time
employees receive on the first anniversary of employment one time grants of 100
options and new part time employees receive one time grants of 50 options that
are fully vested at the date of grant.

Restricted Stock Plan

         This plan provides for the granting of a maximum of 800 thousand, as
amended in 2003, shares in the form of restricted stock or options to purchase
stock. Stock issued may be in Pegasus Communications' Class A common stock or,
as amended in 2003, nonvoting common stock. This plan provides for the granting
of two types of restricted stock awards. One award is in the form of restricted
Class A or, as amended in 2003, nonvoting common stock. For the other type of
restricted stock award, recipients may elect to receive stock options for the
purchase of shares of Pegasus Communications Class A common stock or, as amended
in 2003, nonvoting common stock. Participants in the plan are eligible employees
and executive officers. The maximum number of shares that may be granted for
options that an individual may elect to receive in any one year under the plan
is ten thousand. The maximum number of shares and options available annually is
subject to adjustment to reflect stock dividends, stock splits,
recapitalizations, and similar changes in the capitalization of Pegasus
Communications. The plan terminates in September 2006. Restricted stock received
under the plan generally vests based on years of service, except for special
recognition awards that are fully vested on the date of grant. Recipients of
restricted stock awards do not pay for any portion of the stock received. The
plan provides that the exercise price of options granted is no less than the
fair market value of the common stock underlying the options at the date the
options are granted. Options granted have a term no greater than 10 years from
the date of grant. Options vest and become exercisable ratably from two to four
years based upon a participant's years of service with us and are fully vested
for participants that have at least four years of service with us at the date of
grant. At December 31, 2003 and 2002, 479,154 and 119,678, respectively, shares
of restricted stock had been granted under the plan. The cost of restricted
stock issued under the plan was $5.0 million in 2003, $1.0 million in 2002, and
$1.2 million in 2001. The costs for 2002 and 2001 were expensed in the year
incurred. Of the $5.0 million cost for 2003, $3.6 million was expensed in 2003,
with the remaining cost of $1.4 million being amortized over the remaining
graded vesting period of 17 months. The weighted average fair value of shares
issued under the plan was 13.88, $33.48, and $142.32 per share in 2003, 2002,
and 2001, respectively.




                                      F-40
<PAGE>
                       PEGASUS COMMUNICATIONS CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



Stock Options Issued under the 1996 Stock Option and Restricted Stock Plans

         The following table summarizes information about our stock options
outstanding at December 31, 2003:
<TABLE>
<CAPTION>
                                                                     WEIGHTED
                                                   WEIGHTED          AVERAGE                                WEIGHTED
                             OUTSTANDING AT         AVERAGE          REMAINING        EXERCISABLE AT        AVERAGE
   RANGE OF                   DECEMBER 31,          EXERCISE        CONTRACTUAL        DECEMBER 31,         EXERCISE
EXERCISE PRICES                   2003               PRICE          LIFE (YEARS)           2003              PRICE
----------------             ---------------       ----------       ------------       --------------       ---------
<S>                              <C>                  <C>                <C>               <C>                 <C>
 $  0.40 - 79.99               1,134,920            $19.04               7.7               737,616           $22.72

  80.00 - 154.99                 200,260            104.47               6.0               195,456           104.19

 155.00 - 234.99                 138,682            198.41               6.1               124,416           199.70

 235.00 - 309.99                   3,072            247.02               3.9                 3,072           247.02

 310.00 - 389.99                     400            341.57               6.2                   400           341.57
                               ---------                                                 ---------
          Total                1,477,334             48.02               7.3             1,060,960            59.25
                               =========                                                 =========
</TABLE>

         The following table summarizes stock option activity over the past
three years:
<TABLE>
<CAPTION>
                                                                                    WEIGHTED
                                                                  NUMBER OF          AVERAGE
                                                                    SHARES        EXERCISE PRICE
                                                                  ---------       --------------
<S>                                                                   <C>              <C>
Outstanding at January 1, 2001............................          641,764          $111.45
Granted...................................................          341,812            45.75
Exercised.................................................           (1,070)           85.80
Canceled or expired.......................................          (56,658)          127.15
                                                                  ---------
Outstanding at December 31, 2001..........................          925,848            86.77
Granted...................................................          412,504             5.73
Canceled or expired.......................................         (112,470)           88.95
                                                                  ---------
Outstanding at December 31, 2002..........................        1,225,882            59.30
Granted...................................................          353,070            13.40
Exercised.................................................           (7,578)            5.18
Canceled or expired.......................................          (94,040)           50.97
                                                                  ---------
Outstanding at December 31, 2003..........................        1,477,334            48.02
                                                                  =========

Options exercisable at December 31, 2001..................          617,316            83.30
Options exercisable at December 31, 2002..................          814,458            73.53
</TABLE>
         If we had used the fair value method of valuing our stock options, the
estimated weighted average fair value of options granted would have been $9.88,
$37.30, and $21.25 per share for 2003, 2002, and 2001, respectively. The fair
value of options was estimated using the Black-Scholes option pricing model with
the following weighted average assumptions:
<TABLE>
<CAPTION>
                                                   2003                 2002                 2001
                                                  ------               ------               ------
<S>                                                 <C>                  <C>                   <C>
Risk free interest rate....................        2.65%                4.67%                 4.70%
Dividend yield.............................        0.00%                0.00%                 0.00%
Volatility factor..........................        87.9%                68.4%                 59.4%
Weighted average expected life (years).....         6.0                  6.0                   6.0
</TABLE>


                                      F-41
<PAGE>


                       PEGASUS COMMUNICATIONS CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


Employee Stock Purchase Plan

         The plan encourages stock ownership in Pegasus Communications by all
eligible employees through the automatic grant of options to purchase Pegasus
Communications' Class A common stock or, as amended in 2003, nonvoting common
stock. The maximum number of shares that may be issued under options under the
plan is 600 thousand, subject to adjustment under certain circumstances
specified in the plan. Eligible employees are those who have completed at least
30 days of employment. No otherwise eligible employee may be granted an option
if such employee, immediately before or after the option is granted, owns stock
possessing five percent or more of the total combined voting power or value of
all classes of stock of Pegasus Communications, including stock which the
employee may purchase under options outstanding under any other program intended
to qualify as an employee stock purchase plan. Eligible employees may contribute
up to 10% of their base or regular rate of compensation through payroll
deductions to purchase newly issued shares of Pegasus Communications under the
plan. Each employee is limited in any calendar year to purchasing no more than
$25,000 in fair market value of shares purchased under all of our outstanding
employee stock purchase plans. Options to purchase shares are granted on the
first business day of the first month of each calendar quarter, and options are
automatically exercised on the last business day of the last month of each
calendar quarter. Option terms are three months ending on the last day of the
last month of each calendar quarter. The exercise price of options is 85% of the
lesser of the per share fair market value of Class A common stock on the grant
date or exercise date. The number of shares of Class A common stock issued under
this plan was 32,438, 45,400, and 2,396 in 2003, 2002, and 2001, respectively.

401(k) Plan

         Pegasus Communications maintains a 401(k) plan that covers eligible
employees in the United States. Substantially all employees that complete two
months of service are eligible to participate. Participants other than highly
compensated employees are permitted to make salary deferral contributions,
subject to dollar limitations imposed by existing tax laws, of up to 50%. Highly
compensated employees may make salary deferral contributions of no more than
15%. Pegasus Communications matches 100% of employee contributions up to 6% of
employees' before tax salary contributed. Pegasus Communications may make
additional contributions at its discretion to eligible employees. Pegasus
Communications' contributions to the plan are allocable to each participant's
account. Pegasus Communications' contributions are made in the form of its Class
A common stock or in cash used to purchase its Class A common stock. Pegasus
Communications has authorized and reserved for issuance up to 82 thousand shares
of Class A common stock in connection with the plan. Pegasus Communications'
contributions to the plan are subject to limitations under applicable laws and
regulations. All employee contributions to the plan are fully vested at all
times and all of Pegasus Communications' contributions, if any, vest ratably
from two to four years of service. Pegasus Communications' contributions are
fully vested for participants that have at least four years of service at the
date of the contribution. The expense for these plans was $1.2 million, $601
thousand, and $1.6 million for 2003, 2002, and 2001, respectively.

18.      COMMITMENTS AND CONTINGENCIES

Legal Matters

DIRECTV, Inc. Litigation
------------------------

         Pegasus Satellite Television, Inc. and Golden Sky Systems, Inc. and
their subsidiaries (together, "Pegasus Satellite Television") are affiliates of
the NRTC that participate through 160 agreements in the NRTC's direct broadcast
satellite program. DIRECTV, Inc. and the NRTC are parties to an agreement called
the DBS Distribution Agreement, as amended (the "DBS Distribution Agreement").
Pegasus Satellite Television and the NRTC are parties to agreements called the
NRTC/Member Agreements for the Marketing and Distribution of DBS Services, as
amended (the "NRTC/Member Agreements"). "DIRECTV" refers to the programming
services provided by DIRECTV, Inc.





                                      F-42
<PAGE>


                       PEGASUS COMMUNICATIONS CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


         In 1999, the NRTC filed two lawsuits in United States District Court,
Central District of California against DIRECTV, Inc. seeking, among other
things, enforcement of the NRTC's contractual rights to obtain from DIRECTV,
Inc. (i) certain premium programming (including HBO, Cinemax, Showtime, and The
Movie Channel) for exclusive distribution by the NRTC's members and affiliates
in their rural markets, (ii) certain advanced services (such as Tivo) for
exclusive distribution, and (iii) the NRTC's share of launch fees and other
benefits that DIRECTV, Inc. and its affiliates obtain relating to programming
and other services. DIRECTV, Inc. filed a counterclaim seeking a declaration
clarifying the initial term (or duration) of the DBS Distribution Agreement, and
its obligations after that initial term. The NRTC and DIRECTV, Inc. have entered
into a settlement of these claims, which is described more fully below.

         In 2000, Pegasus Satellite Television filed a lawsuit in the same
federal court against DIRECTV, Inc. asserting claims seeking declaratory relief
and various torts and unfair business practices claims under California law
seeking damages (including punitive damages) and restitution and injunctive
relief. These claims assert DIRECTV, Inc.'s failure to provide the NRTC with the
premium programming, advanced services, launch fees, and other benefits and
DIRECTV, Inc.'s positions regarding the initial term of the DBS Distribution
Agreement and its obligations after that initial term. A class of participants
in the NRTC's direct broadcast satellite project other than Pegasus Satellite
Television filed a lawsuit asserting similar claims against DIRECTV, Inc. in the
same court. DIRECTV, Inc. filed counterclaims against Pegasus Satellite
Television and the class members asserting claims for declaratory relief
regarding the initial term of the NRTC/Member Agreement and DIRECTV, Inc.'s
obligations to Pegasus Satellite Television and the class members after the
initial term. The class and DIRECTV, Inc. have settled their claims, as
described more fully below.

         The initial term of our NRTC/Member Agreements with the NRTC (and the
NRTC's DBS Distribution Agreement with DIRECTV, Inc. until modified by the
settlement) is not stated according to a period of years but is based on the
lives of a satellite or satellites. We believe that it is governed by the lives
of the satellite resources available to DIRECTV, Inc. at the 101(degree) west
longitude orbital location for delivery of services under those agreements.
DIRECTV, Inc. is seeking in its counterclaim against Pegasus Satellite
Television, a declaratory judgment that the initial term of Pegasus Satellite
Television's NRTC/Member Agreements is measured only by the life of DBS-1, the
first DIRECTV satellite launched, and not the orbital lives of the other
DIRECTV, Inc. satellites at the 101(degree) west longitude orbital location.
DBS-1 suffered a failure of one of its two satellite control processors in 1998.
DIRECTV, Inc. has stated in documents filed with the SEC that DBS-1 has an
estimated fuel life through 2009, although it has also indicated its belief that
the fuel life for purposes of our direct broadcast satellite rights is 2007. If
DIRECTV, Inc. were to prevail on its counterclaims, the initial term of our
DIRECTV rights would likely be shorter than a term based on other satellite(s)
at the 101(degree) west longitude orbital location providing us programming
services, which we believe measure(s) the initial term. Moreover, any premature
failure of DBS-1 could adversely impact our DIRECTV rights and our business.
During the course of the litigation, DIRECTV, Inc. has twice filed summary
judgment motions seeking declarations that the term under both the DBS
Distribution Agreement and the NRTC/Member Agreement is measured by DBS-1. The
motions were denied by orders of the court in 2001 and 2003. DIRECTV, Inc. has
filed a motion for reconsideration of the court's denial of DIRECTV, Inc.'s 2001
motion relating to term under the NRTC/Member Agreement.





                                      F-43
<PAGE>


                       PEGASUS COMMUNICATIONS CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


         While the NRTC obtained a right of first refusal to receive certain
services after the expiration of the term of the NRTC's DBS Distribution
Agreement with DIRECTV, Inc., the scope and terms of this right of first refusal
were disputed as part of DIRECTV, Inc.'s counterclaim against the NRTC. In
December 1999, DIRECTV, Inc. filed a motion for partial summary judgment seeking
an order that the right of first refusal does not include programming services
and is limited to 20 program channels of transponder capacity, which the court
denied in 2001. DIRECTV, Inc.'s counterclaim against Pegasus Satellite
Television also sought a declaratory judgment that DIRECTV, Inc. is not under a
contractual obligation to provide Pegasus Satellite Television with services
after the expiration of the term of its agreements with the NRTC. In 2003, the
court granted a summary judgment motion of DIRECTV, Inc. ruling that DIRECTV,
Inc. has no obligation to provide Pegasus Satellite Television with services
after the NRTC/Member Agreements expire, except that the ruling specifically
does not affect: (1) obligations the NRTC has or may have to Pegasus Satellite
Television under the NRTC/Member Agreements or otherwise; (2) obligations
DIRECTV, Inc. has or may have, in the event it steps into the shoes of the NRTC
as the provider of services to Pegasus Satellite Television; or (3) fiduciary or
cooperative obligations to deliver services owed Pegasus Satellite Television by
DIRECTV, Inc. through the NRTC.

         In response to motions filed by DIRECTV, Inc., the court has dismissed
the tort and punitive damages claims of Pegasus Satellite Television, and its
claims for restitution with respect to premium services and advanced services,
but has not dismissed the injunctive relief and launch fee restitution portions
of Pegasus Satellite Television's unfair business practices claims. The court
has also denied requests by DIRECTV, Inc. for dismissal of Pegasus Satellite
Television's claims for declaratory relief regarding rights to various services
and benefits under the DBS Distribution Agreement. As a result of these rulings,
Pegasus Satellite Television continues to have claims in district court
regarding the initial term of the DBS Distribution Agreement, rights after the
initial term, rights to launch fees, and rights to distribute premiums and
advanced services in the future.

         The lawsuits described above, including the NRTC, class and Pegasus
Satellite Television lawsuits were set to be tried together in phases beginning
August 14, 2003. After DIRECTV, Inc. and the NRTC informed the court of a
settlement among DIRECTV, Inc., the NRTC, and the class relating to all of their
claims, conditioned on a satisfactory fairness hearing in the class action
lawsuit, the court vacated the trial date. Pegasus Satellite Television is not a
party to the settlement, which was formally available for its participation
until March 8, 2004. A copy of the settlement has been filed as exhibits 99.1
and 99.2 to Pegasus Communications' Form 8-K filed on August 13, 2003.

         Among other things, the settlement amends the DBS Distribution
Agreement between DIRECTV, Inc. and the NRTC to: (i) change the expiration date
of the initial term of that agreement to the later of the date that DBS-1 is
removed from its assigned orbital location under certain specified conditions or
June 30, 2008; (ii) eliminate the contractually provided rights after the
initial term but provide an extension of the term through either December 31,
2009 or June 30, 2011 at the election of the participating member or affiliate
and subject to acceptance of certain conditions; (iii) eliminate the
contractually provided right to provide the premiums as exclusive distributor
and replace it with a right to provide the premiums on an agency basis; (iv)
redefine the contractually provided rights to launch fees and advertising
revenues; (v) relinquish claims relating to past damages and restitution on
account of the premiums, launch fees, and advertising revenues; and (vi) accept
an agency role for the sale of certain advanced services, including Tivo.

         On September 24, 2003, Pegasus Satellite Television moved to intervene
in the lawsuits between the NRTC and DIRECTV, Inc. for the limited purpose of
objecting to the proposed settlement. Based primarily on the court's finding
that it should reverse its reasoning in a prior holding allowing Pegasus
Satellite Television to pursue declaratory relief under the DBS Distribution
Agreement, the court, on November 13, 2003, declined to permit Pegasus Satellite
Television to intervene in the NRTC actions. However, the court also ruled that
Pegasus Satellite Television's rights under its agreements with the NRTC are not
affected by the proposed settlement and that notwithstanding the proposed
settlement, Pegasus Satellite Television is free to seek to enforce its rights
under those agreements. A copy of the order denying the Pegasus Satellite
Television motion to intervene has been filed as exhibit 99.2 to Pegasus
Communications' Form 8-K filed on November 18, 2003.





                                      F-44
<PAGE>
                       PEGASUS COMMUNICATIONS CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


         On December 4, 2003, Pegasus Satellite Television filed with the court
a motion for clarification and contingent motion for reconsideration or, in the
alternative, a stay pending appeal. In this motion, Pegasus Satellite Television
sought among other things, clarification of the court's November 13, 2003 order
denying Pegasus Satellite Television's motion to intervene in the NRTC/DIRECTV,
Inc. lawsuits. Among other things, Pegasus Satellite Television asked the court
to clarify whether the court's ruling means that Pegasus Satellite Television is
entitled to compel performance of its rights under the NRTC/Member Agreements,
particularly in light of assertions to the contrary by DIRECTV, Inc. The court
declined to provide such clarification and denied Pegasus Satellite Television's
motion. Pegasus Satellite Television appealed the district court's ruling to the
United States Court of Appeals for the Ninth Circuit. Pegasus Satellite
Television sought from the court of appeals a stay of the dismissal of the NRTC
lawsuits and the settlement between the NRTC and DIRECTV, Inc., pending
resolution of the appeal. On December 22, 2003, the court of appeals denied the
stay.

         The fairness hearing for the class settlement occurred on January 5,
2004, and the court subsequently issued a final order approving that settlement.
A copy of the order granting final approval of the class settlement has been
filed as exhibit 99.1 to Pegasus Communications' Form 8-K filed on January 8,
2004. As a result, the settlement between the NRTC and DIRECTV, Inc. has, by its
terms, become effective.

         On January 8, 2004, the court set a briefing schedule for further
motions in the Pegasus Satellite Television litigation against DIRECTV, Inc.
DIRECTV, Inc. has filed a motion to dismiss the remaining Pegasus Satellite
Television claims, including our declaratory relief claims relating to the
initial term and rights after term under the DBS Distribution Agreement and our
unfair competition law claims relating to premiums, advanced services, and
launch fees. As discussed above, DIRECTV, Inc. has also filed a motion for
reconsideration of the court's 2001 order denying DIRECTV, Inc.'s motion for
summary judgment seeking a declaration that the term of the NRTC/Member
Agreement is governed by DBS-1. In addition to DIRECTV, Inc.'s motions, Pegasus
Satellite Television filed a contingent motion to dismiss DIRECTV, Inc.'s
counterclaim relating to the term of the NRTC/Member Agreement in the event that
the court grants DIRECTV, Inc.'s motion to dismiss Pegasus Satellite
Television's claims. We anticipate that the court will decide these motions in
by the end of March 2004.

         We believe, based on the rulings of the court to date, that the
settlement does not change our rights under our agreements with the NRTC,
including our right to services for a term based on the estimated remaining
useful lives of the satellites at the 101(degree) west orbital location
providing our programming services. We are in the process of evaluating our
options to enforce our rights in light of the settlement.

         Despite the foregoing, an unfavorable ruling that the initial term of
our agreements with the NRTC is determined by DBS-1 could have a material
adverse impact on our business and would lead to a reassessment of the carrying
amount of our direct broadcast satellite rights, as the underlying assumptions
regarding estimated future cash flows associated with those rights could change
(ignoring any renewal rights or alternatives to generate cash flows from our
subscriber base). Likewise, the election to participate in the settlement
reached among DIRECTV, Inc., the NRTC, and the class, if participation is again
made available, could have a material adverse impact on our business and would
lead to a reassessment of the carrying amounts of our direct broadcast satellite
rights using estimates of future cash flows through June 30, 2011 at the latest
instead of 2016 (ignoring alternatives to generate cash flows from our
subscriber base). In the case of an unfavorable litigation result relating to
the term of our agreements or participation in the settlement, we currently
estimate that we could record an impairment loss with respect to our direct
broadcast satellite rights of between $425 million and $600 million, and that
annual amortization expense for direct broadcast satellite rights could increase
by between $12 million and $35 million.




                                      F-45
<PAGE>


                       PEGASUS COMMUNICATIONS CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


         On February 5, 2004, DIRECTV, Inc. announced that it was unilaterally
terminating court ordered mediation with us. A copy of DIRECTV, Inc.'s
announcement has been filed as exhibit to Pegasus Communications' Form 8-K filed
on February 6, 2004.

Seamless Marketing Litigation
-----------------------------

         In 2001, DIRECTV, Inc. brought suit against Pegasus Satellite
Television for Pegasus Satellite Television's alleged failure to make payments
required by the Seamless Marketing Agreement dated August 9, 2000, as amended,
between DIRECTV, Inc. and Pegasus Satellite Television. The Seamless Marketing
Agreement provided for seamless marketing and sales for DIRECTV retailers and
distributors and also provided for reciprocal obligations by DIRECTV, Inc. and
Pegasus Satellite Television to pay "acquisition fees" to each other under
certain circumstances where subscribers activated DIRECTV service through
dealers to whom the other party had paid a commission. As amended, the agreement
also provided for reciprocal obligations by DIRECTV, Inc. and Pegasus Satellite
Television to make payments to each other in connection with so-called "buy
down" programs under which distributors of DIRECTV equipment were provided
subsidies to lower the cost of such equipment to dealers. Pegasus Satellite
Television filed a cross complaint against DIRECTV, Inc. alleging, among other
things, that DIRECTV, Inc. breached the Seamless Marketing Agreement and
DIRECTV, Inc. engaged in unlawful and/or unfair business practices. In 2002,
Pegasus Satellite Television filed first amended counterclaims against DIRECTV,
Inc. Among other things, the first amended counterclaims added a claim for
rescission of the Seamless Marketing Agreement on the ground of fraudulent
inducement. The case is currently pending in the United States District Court
for the Central District of California in Los Angeles.

         DIRECTV, Inc. has asserted that it is entitled to an award of damages
in an amount exceeding $50 million, plus prejudgment interest of approximately
$10 million. Pegasus Satellite Television has asserted that it has defenses to
DIRECTV, Inc.'s claim and an affirmative claim for recovery that would include
the approximately $29 million it paid under the agreement (subject to any
potential offsets that may be found) plus additional amounts to compensate it
for damages proximately caused by DIRECTV, Inc.'s fraudulent inducement of the
Seamless Marketing Agreement.

         On November 6, 2003, the court held a status conference for the purpose
of setting pretrial and trial dates. At that time, the court set the case for
trial on March 23, 2004. The trial will be conducted before a jury, although, if
the jury finds that Pegasus Satellite Television has established a factual basis
to rescind the agreement, the court will make the ultimate decision as to
whether the agreement will be rescinded and if so, on what terms. At DIRECTV,
Inc.'s request, the court has ordered that the trial will proceed in the
following phases. First, the jury will consider DIRECTV, Inc.'s breach of
contract and common count claims against Pegasus Satellite Television along with
Pegasus Satellite Television's defenses and its claims against DIRECTV, Inc. for
breach of contract, breach of the implied covenant of good faith and fair
dealing, and fraudulent inducement claims. In this phase, the jury will also
consider whether Pegasus Satellite Television is entitled to an award of
punitive damages against DIRECTV, Inc. In subsequent stages, if necessary, the
jury will take up the amount of punitive damages, if any to which Pegasus
Satellite Television is entitled and finally, if necessary, the court will
consider the issue of whether Pegasus Satellite Television is entitled to
rescission of the agreement, and if so, on what terms.

Patent Infringement Litigation
------------------------------

         On December 4, 2000, Pegasus Development and Personalized Media
Communications, LLC. ("Personalized Media") filed a patent infringement lawsuit
in the United States District Court, District of Delaware against DIRECTV, Inc.,
Hughes Electronics Corporation ("Hughes"), Thomson Consumer Electronics
("Thomson"), and Philips Electronics North America Corporation ("Philips").
Personalized Media is a company with which Pegasus Development has a licensing
arrangement. Pegasus Development and Personalized Media are seeking injunctive
relief and monetary damages for the defendants' alleged patent infringement and
unauthorized manufacture, use, sale, offer to sell, and importation of products,
services, and systems that fall within the scope of Personalized Media's
portfolio of patented media and communications technologies, of which Pegasus
Development is an exclusive licensee within a field of use. The technologies
covered by Pegasus Development's exclusive license include services distributed
to consumers using certain Ku band BSS frequencies and Ka band frequencies,
including frequencies licensed to affiliates of Hughes and used by DIRECTV, Inc.
to provide services to its subscribers.




                                      F-46
<PAGE>
                       PEGASUS COMMUNICATIONS CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


         DIRECTV, Inc. also filed a counterclaim against Pegasus Development
alleging unfair competition under the federal Lanham Act. In a separate
counterclaim, DIRECTV, Inc. alleged that both Pegasus Development's and
Personalized Media's patent infringement lawsuit constitutes "abuse of process."
Those counterclaims have since been dismissed by the court or voluntarily by
DIRECTV, Inc. Separately, Thomson has filed counterclaims against Pegasus
Development, Personalized Media, Gemstar-TV Guide, Inc. (and two Gemstar-TV
Guide affiliated companies, TVG-PMC, Inc. and Starsight Telecast, Inc.),
alleging violations of the federal Sherman Act and California unfair competition
law as a result of alleged licensing practices.

         The Judicial Panel on Multidistrict Litigation subsequently transferred
Thomson's antitrust/unfair competition counterclaims to an ongoing Multidistrict
Litigation in the United States District Court for the Northern District of
Georgia. The Panel found that these counterclaims presented common questions of
fact with actions previously consolidated for pretrial proceedings in the
Northern District of Georgia and that including Thomson's claims in the
coordinated pretrial proceedings would promote the just and efficient conduct of
the litigation.

         The court decided several important motions in favor of Pegasus
Development and Personalized Media. The court granted Pegasus Development and
Personalized Media's motion for leave to amend the complaint to limit the relief
sought and it also granted their motion to bifurcate the trial into two
proceedings to address the patent and antitrust issues separately. The court
denied a motion originally brought by DIRECTV, Inc. and Hughes, which was later
joined by Thomson and Philips, for partial summary judgment under the doctrine
of prosecution laches.

         In March 2003, a hearing was held before a special master appointed by
the Delaware district court to recommend constructions of disputed terms in the
patent claims in suit. On March 24, 2003, the special master issued his report,
recommending claim constructions largely favorable to the plaintiffs. The report
of the special master is subject to review by the district judge.

         In April 2003, the United States Patent and Trademark Office granted a
petition filed by defendant Thomson seeking reexamination of one of the patents
in suit in the Delaware litigation. Additional petitions seeking Reexamination
of other patents in suit have either already been filed by Thomson, or are
anticipated to be filed in the near future. On April 14, 2003, the defendants
filed a motion in the Delaware district court seeking a stay of the patent
litigation pending completion of reexamination proceedings. On May 14, 2003, the
Delaware district court granted defendants' motion pending a disposition of the
United States Patent and Trademark Office's reexamination of several of the
patents in suit. Also on May 14, 2003, the Delaware district court denied all
pending motions without prejudice. The parties may refile those motions
following the stay and upon the entry of a new scheduling order.

         Thomson's antitrust counterclaims against Pegasus Development,
Personalized Media, and Gemstar (the "Thomson claims"), which were transferred
to the Northern District of Georgia pursuant to an order of the Judicial Panel
on Multidistrict Litigation, have not been stayed. Discovery has closed on the
merits of the Thomson claims and briefing on Pegasus Development's summary
judgment motion on those claims has been completed. The Georgia court has
deferred discovery with respect to damages until after a ruling on the summary
judgment motion on liability. Gemstar and Thomson have settled the Thomson
claims brought against Gemstar, and Thomson has dismissed these claims, as to
Gemstar only, with prejudice.





                                      F-47
<PAGE>

                       PEGASUS COMMUNICATIONS CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



Other Legal Matters
-------------------

         In addition to the matters discussed above, from time to time we are
involved with claims that arise in the normal course of our business. We believe
that the ultimate liability, if any, with respect to these claims will not have
a material effect on our consolidated operations, cash flows, or financial
position.

Other

         At December 31, 2003, we were scheduled to make payments for rights to
air programming of $3.9 million in 2004, $3.5 million in 2005, $2.5 million in
2006, $1.3 million in 2007, $900 thousand in 2008, and $2.5 million thereafter.

         In connection with our initial investment in a licensing arrangement
with Personalized Media (see note 19), we issued to Personalized Media 1,000,000
warrants to purchase 400,000 shares of our Class A common stock at an exercise
price of $225 per share. The warrants expire if not exercised prior to January
2010. If the warrants are exercised within 120 days before the end of their
ten-year term, and if the market price per share of our Class A common stock at
the time of exercise exceeds the per-share exercise price of $225 by less than
$80, we will be required to pay the exercising holder the difference between $80
per share and the amount of that excess.

19.      RELATED PARTY TRANSACTIONS - AS RESTATED

         Pegasus Satellite is party to an option agreement with W.W. Keen
Butcher, certain entities controlled by Mr. Butcher (the "KB Companies"), and
the owner of a minority interest in the KB Companies. Mr. Butcher is the
stepfather of Marshall W. Pagon. The KB Companies own a number of Federal
Communications Commission television station licenses or permits. The option
agreement provides Pegasus Satellite with the exclusive and irrevocable option
to purchase capital stock, membership interests, and assets of the KB Companies,
subject to the terms and conditions of the agreement. In return for its option,
Pegasus Satellite has agreed to provide and maintain cash collateral for certain
of the principal amount of bank loans made to these individuals and entities.
Pegasus Satellite is required to provide security so long as the agreement is in
effect, and the agreement has no specified termination date. The amount of
collateral that Pegasus Satellite is to provide and maintain under the
arrangement equals the principal amount of bank loans outstanding. Other than
its interests in the assets of the KB Companies, Pegasus Satellite's collateral
is unsecured with respect to this arrangement. Pursuant to this arrangement, at
December 31, 2003 and 2002, Pegasus Satellite had provided collateral of $6.6
million and $8.3 million, respectively, which is recorded as restricted cash on
the balance sheet.

         At December 31, 2003, we have a loan outstanding to Nicholas Pagon, a
former executive of Pegasus Communications and the brother of Marshall W. Pagon,
amounting to $269 thousand for principal and interest accrued on the loan. The
loan has been extended to mature February 1, 2005 and bears interest at 6% per
annum. Principal and any accrued and unpaid interest are due at maturity. The
loan is collateralized by shares of Pegasus Communications Class A common stock.




                                      F-48
<PAGE>
                       PEGASUS COMMUNICATIONS CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


         Pegasus Development has a limited partnership interest in Pegasus PCS
Partners. Pegasus Development has no control or voice in Pegasus PCS Partners'
matters. The general partner of Pegasus PCS Partners is an entity beneficially
controlled by Marshall W. Pagon. Pegasus Development's restated investment in
Pegasus PCS Partners was $12.0 million and $11.8 million at December 31, 2003
and 2002, respectively. Pegasus Development's share of undistributed results of
Pegasus PCS Partners varies depending on a variety of factors specified in the
operating agreement between Pegasus Development and Pegasus PCS Partners.
Pegasus Development's share of Pegasus PCS Partners undistributed results of
operations included in our results from continuing operations was income of $205
thousand in 2003, a loss of $4.1 million in 2002 and income of $11.1 million in
2001. Pegasus Development granted Marshall Pagon a ten year option to purchase
its interest in Pegasus PCS Partners for the market value of that interest,
payable in cash or by delivery of marketable securities. Pegasus Development's
investment in Pegasus PCS Partners was reclassified to equity on December 31,
2003 (see Note 22).

         Pegasus Development has a licensing arrangement with Personalized
Media. Mary Metzger, a member of Pegasus Communications' board of directors, has
a controlling interest in Personalized Media. Pegasus Development paid a total
of $112.2 million in a combination of cash, 80,000 shares of Pegasus
Communications Class A common stock, and warrants to purchase 400,000 shares of
Class A common stock in 2000 to enter into the arrangement. Pegasus
Development's carrying amount of the license it recorded with respect to this
arrangement was $82.3 million and $89.8 million at December 31, 2003 and 2002,
respectively. The license provides Pegasus Development with an exclusive field
of use with respect to Personalized Media's patent portfolio concerning the
distribution of satellite services from specified orbital locations. Pegasus
Development paid an annual fee for this license of $100 thousand in each of
2003, 2002, and 2001. No further fees for the license are due.

         A subsidiary of Pegasus Satellite has from time to time provided
accounting and administrative services to companies affiliated with Marshall W.
Pagon and has paid certain expenses on behalf of the affiliated companies which
expenses have been reflected on Pegasus Satellite's books and financial
statements as receivables from the affiliated companies. These receivables are
primarily comprised of legal, accounting, and corporate organizational fees
charged by third parties and paid by the subsidiary and of allocations to the
affiliated companies by the subsidiary of a portion of the subsidiary's
accounting and overhead costs. At December 31, 2003, the aggregate amount of
receivables outstanding was $497 thousand. No interest was charged with respect
to amounts outstanding from time to time.

20.      INDUSTRY SEGMENTS

         Our only reportable segment at December 31, 2003 was our direct
broadcast satellite business. Our direct broadcast satellite business provides
multichannel DIRECTV services in rural areas of the United States on a
subscription basis. Audio and video programming provided 89%, 92%, and 93% of
the total direct broadcast satellite business revenues in 2003, 2002, and 2001,
respectively. Information on the direct broadcast satellite business' revenue
and how it contributed to our consolidated loss from continuing operations
before income taxes for each period reported is as presented on the statements
of operations. The direct broadcast satellite business derived all of its
revenues from external customers for each period presented. Capital expenditures
for the direct broadcast satellite business were $22.3 million, $28.2 million,
and $37.0 million for 2003, 2002, and 2001, respectively. Capital expenditures
for all other operations were $2.1 million, $2.8 million, and $9.1 million for
2003, 2002, and 2001, respectively. Identifiable total assets for direct
broadcast satellite business were $1.6 billion and $1.7 billion at December 31,
2003 and 2002, respectively. Identifiable total assets for all other operations,
as restated, were $389.3 million and $364.5 million at December 31, 2003 and
2002, respectively. Our chief operating decision maker uses the measure "Direct
broadcast satellite operating profit (loss) before depreciation and
amortization," as adjusted for special items, to evaluate our direct broadcast
satellite business segment. This is calculated as the direct broadcast satellite
business' net operating revenue less its operating expenses (excluding
depreciation and amortization), as derived from the statements of operations, as
adjusted for the special item of $4.5 million for a contract termination fee
within other subscriber related expenses in the statement of operations and
comprehensive loss. The contract termination fee was initially accrued in 2002
and increased other subscriber related expenses. The accrual for this fee was
reversed in the second quarter 2003 because the related contract was amended to
eliminate the fee and decreased other subscriber related expenses. The
calculation of the measure for 2003 adds back the reversal of the fee and for
2002 deducts the initial accrual of the fee.




                                      F-49
<PAGE>
                       PEGASUS COMMUNICATIONS CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

21.      QUARTERLY INFORMATION (UNAUDITED) - AS RESTATED
         (in thousands, except per share amounts)

         We restated the unaudited quarterly financial information below for the
years ended December 31, 2003 and 2002 to correct for the restatements discussed
in Notes 12 and 22. These restatements had no impact on cash flows for the
annual periods.
<TABLE>
<CAPTION>
                                                                  Quarter Ended
As previously reported:                           March 31,   June 30,    September 30,    December 31,
                                                    2003        2003          2003            2003
                                                  --------    --------    -------------    ------------
<S>                                               <C>         <C>         <C>              <C>
Net revenues......................................$213,118    $214,177      $214,654         $220,903
(Loss) income from operations...................... (5,701)     (1,836)       (4,861)           8,469
Net loss...........................................(36,687)    (38,595)      (41,185)         (34,570)
Basic and diluted per common share amounts:
Net loss applicable to common shares,
   including accrued and deemed preferred
   stock dividends................................   (3.80)      (4.01)        (3.85)           (3.31)

As previously reported:                           March 31,   June 30,    September 30,    December 31,
                                                    2002        2002           2002           2002
                                                  --------    --------    -------------    ------------
Net revenues......................................$221,729    $224,019      $224,754        $226,799
Loss from operations.............................. (14,175)     (6,489)      (12,845)        (15,820)

Net loss.......................................... (31,740)    (29,868)      (37,935)        (54,085)
Basic and diluted per common share amounts:
Net loss applicable to common shares,
   including accrued and deemed preferred
   stock dividends................................   (3.33)      (3.22)        (3.83)          (5.12)

                                                                   Quarter Ended
As restated:                                      March 31,   June 30,    September 30,    December 31,
                                                    2003        2003          2003            2003
                                                  --------    --------    -------------    ------------
Net revenues                                      $213,118    $214,177      $214,654         $220,903
(Loss) income from operations                       (5,701)     (1,836)       (4,861)           8,469
Net loss                                           (35,284)    (36,809)      (41,185)         (33,888)
Basic and diluted per common share amounts:
Net loss applicable to common shares,
   including accrued and deemed preferred
   stock dividends................................  (3.68)       (3.85)        (3.85)          (3.25)

As restated:                                      March 31,   June 30,    September 30,    December 31,
                                                    2002        2002          2002            2002
                                                  --------    --------    -------------    ------------
Net revenues                                      $221,729    $224,019      $224,754         $226,799
Loss from operations                               (14,175)     (6,489)      (12,845)         (15,820)
Net loss                                           (42,178)    (40,044)      (25,849)         (46,081)
Basic and diluted per common share amounts:
Net loss applicable to common shares,
   including accrued and deemed preferred
   stock dividends.................................  (4.20)      (4.06)        (2.82)           (4.45)
</TABLE>






                                      F-50
<PAGE>
                       PEGASUS COMMUNICATIONS CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


22.      RESTATEMENT OF FINANCIAL STATEMENTS

         We restated these financial statements to correct errors related to the
accounting for our investment in Pegasus PCS Partners and our accounting for
income taxes. Specifically we: (1) corrected the classification in the December
31, 2003 balance sheet of our investment in Pegasus PCS Partners from other
noncurrent assets to equity (see below); (2) restated in the statements of
operations and comprehensive loss for the years ended December 31, 2003, 2002,
and 2001 the equity in (losses) earnings of affiliates related to our investment
in Pegasus PCS Partners, with accompanying restatements of the related
investment balances in the balance sheets as of December 31, 2003 and 2002 (see
below); (3) restated in the statements of operations and comprehensive loss for
the year ended December 31, 2003 the allocation of income tax expense (benefit)
between continuing operations and discontinued operations and restate in the
statements of operations and comprehensive loss for the years ended December 31,
2003, 2002 and 2001 the income tax expense (benefit) as a result of the
restatement noted in (2) (see Note 12); (4) restate in the statements of
operations and comprehensive loss for the years ended December 31, 2002 and 2001
the net benefit for income taxes as a result of certain interest expense not
being deductible (see below); (5) restated in the statements of common
stockholders' equity the net loss and the investment in affiliate related to
(1), (2), (3), and (4) above; also to restate in the statement of common
stockholders' equity the January 1, 2001 accumulated deficit balance related to
certain interest expense not being deductible for the year ended December 31,
2000 (January 1, 2001 accumulated deficit increased by $2.5 million); (6)
restated in the statements of cash flows for the years ended December 31, 2003,
2002, and 2001 the net loss and certain line items in the adjustments to
reconcile net loss to net cash provided by (used for) operating activities
related to (2), (3), and (4) above (the net cash provided by (used for)
operating activities has not changed); (7) restated Note 21 - Quarterly
Information to reflect the statements of operations restatements discussed in
(2), (3), and (4) above and to restate the allocation of the full year income
tax (expense) benefit among the quarters of each year; and (8) restated certain
other references and disclosures in the notes to the financial statements and
management's discussion and analysis of financial condition and results of
operations, required to reflect consistently the restatements noted in (1)
through (7).

         Investment in Affiliate

         Pegasus Development has a limited partnership interest in Pegasus PCS
Partners. Pegasus Development has no control or voice in Pegasus PCS Partners'
matters. The general partner of Pegasus PCS Partners is an entity beneficially
controlled by Marshall W. Pagon, our Chairman of the Board and Chief Executive
Officer.

         In January 1996 and April 1999, Pegasus PCS Partners acquired two
personal communications system licenses in Puerto Rico in FCC auctions. In
August 1999, Pegasus Development made an initial investment of approximately
$4.8 million in Pegasus PCS Partners in return for certain of the limited
partnership interests of Pegasus PCS Partners. Prior to August 1999, Pegasus PCS
Partners was owned by entities beneficially controlled by Marshall W. Pagon. At
the time of the investment, Pegasus PCS Partners still held the aforementioned
two personal communications system licenses in Puerto Rico. In February 2001 and
in May 2001, Pegasus PCS Partners sold its licenses. Aggregate consideration for
the sale of the two licenses was approximately $30.0 million and net proceeds
were approximately $28 million. In February 2002, Pegasus Development granted
Mr. Pagon a ten-year option to purchase its interest in Pegasus PCS Partners for
the market value of that interest, payable in cash or by delivery of marketable
securities (including our securities).





                                      F-51
<PAGE>

                       PEGASUS COMMUNICATIONS CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


         Approximately $22 million of the net proceeds from the February 2001
and May 2001 Pegasus PCS Partners' license sales were used to make a series of
investments in 2001, 2002, and 2003, in Pegasus Capital Holdings, LLC ("PCH
LLC"); approximately $2 million of the net proceeds were used to purchase 71,000
Class A shares of Pegasus Communications on the open market; and approximately
$4 million was distributed in accordance with the partnership agreement to
satisfy tax obligations. As a result of this use of net proceeds, Pegasus PCS
Partners' assets consist principally of senior preferred equity interests in PCH
LLC, 71,000 Class A shares of Pegasus Communications, and 14,472 Class B shares
of Pegasus Communications. PCH LLC is an entity that is also beneficially
controlled by Marshall W. Pagon. As of December 31, 2003, PCH LLC's assets
consisted of only direct and indirect investments in 1,805,822 Class B shares of
Pegasus Communications. Therefore, the assets underlying Pegasus Development's
interest in Pegasus PCS Partners as of December 31, 2003 were removed from other
noncurrent assets and appropriately classified in equity.

         The approximate fair value of Pegasus Development's investment in
Pegasus PCS Partners at December 31, 2003 was $15.8 million based on our Class A
common share price at that date.

         Also, for the years ended December 31, 2003, 2002, and 2001, we
corrected our equity in earnings (losses) of affiliates related to our
investment in Pegasus PCS Partners. These corrections are the combined result of
incorrect allocations of profits and losses in accordance with the LP agreement
and an impairment of the assets of Pegasus PCS Partners during 2002.

         Income Taxes - See Note 12

         We also corrected the income taxes associated with continuing and
discontinued operations as previously reported in our Form 10-K for the year
ended December 31, 2003. We corrected in the statement of operations for the
year ended December 31, 2003 the allocation of income tax (expense) benefit
between continuing operations and discontinued operations. We also corrected in
the statements of operations and comprehensive loss for the years ended December
31, 2002 and 2001 the net benefit for income taxes as a result of certain
interest expense not being deductible. We also corrected the unaudited quarterly
financial information for the years ended December 31, 2003 and 2002 to correct
the allocation of the full year income tax (expense) benefit among the quarters
of each year (see Note 21). We also corrected in the statement of operations for
the years ended December 31, 2003, 2002 and 2001 the income tax benefit as a
result of the restatement of equity in earnings of affiliates during that year
ended.

         Summary of Corrections

         These corrections, along with the tax corrections discussed in Note 12,
affected amounts previously reported for the years ended December 31, 2003,
2002, and 2001 and as of December 31, 2003 and 2002. We summarized the effects
in the following tables.
<TABLE>
<CAPTION>
                               Selected Consolidated Balance Sheet Data

                                                                         December 31,      December 31,
                                                                             2003             2002
(in thousands)                                                           -----------       -----------
<S>                                                                      <C>               <C>
As previously reported:

Other noncurrent assets                                                  $   158,256       $  159,929
Total assets                                                               2,051,100        2,110,788
Investment in affiliates                                                           -                -
Accumulated deficit                                                       (1,015,979)        (864,942)
Total common stockholders' equity                                            121,684          278,064
Total liabilities, redeemable preferred stock, minority interest, and
common stockholders' equity                                              $ 2,051,100       $2,110,788

As restated:

Other noncurrent assets                                                  $   141,902       $  151,659
Total assets                                                               2,034,746        2,102,518
Investment in affiliate                                                      (11,955)               -
Accumulated deficit                                                       (1,020,378)        (873,212)
Total common stockholders' equity                                            105,330          269,794
Total liabilities, redeemable preferred stock, minority interest, and
common stockholders' equity                                              $ 2,034,746       $2,102,518
</TABLE>


                                      F-52
<PAGE>

                       PEGASUS COMMUNICATIONS CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

<TABLE>
<CAPTION>
               Selected Consolidated Statements of Operations and Comprehensive Loss Data

                                                            December 31,     December 31,    December 31,
(in thousands, except per share amounts)                       2003             2002            2001
As previously reported:                                      ---------        ---------       ---------
<S>                                                          <C>              <C>             <C>
Equity in (losses) earnings of affiliates                    $  (3,666)       $     865       $  14,324
Net (expense) benefit for income taxes                            (219)          28,443         117,966
Loss before discontinued operations                           (160,992)        (148,336)       (267,534)
Income (loss) from discontinued operations                       9,955           (5,292)        (10,870)
Net loss                                                      (151,037)        (153,628)       (278,404)
Comprehensive loss                                           $(151,037)       $(154,633)      $(265,423)

Basic and diluted per share amounts:

Loss from continuing operations, including $19,834,
$31,491, and $49,836, respectively, representing
accrued and deemed preferred stock dividends                    (15.83)          (15.04)         (28.23)
Discontinued operations                                           0.87            (0.44)          (0.97)
Net loss applicable to common shares                            (14.95)          (15.48)         (29.20)


As restated:

Equity in (losses) earnings of affiliates                    $     205        $  (4,135)      $  11,054
Net benefit for income taxes                                     3,563           32,919         115,992
Loss before discontinued operations                           (153,339)        (148,860)       (272,778)
Income (loss) from discontinued operations                       6,173           (5,292)        (10,870)
Net loss                                                      (147,166)        (154,152)       (283,648)
Comprehensive loss                                           $(147,166)       $(155,157)      $(270,667)

Basic and diluted per common share amounts:

Loss from continuing operations, including $19,834,
$31,491, and $49,836, respectively, representing
accrued and deemed preferred stock dividends                    (15.16)          (15.08)         (28.70)
Discontinued operations                                           0.54            (0.44)          (0.97)
Net loss applicable to common shares                            (14.62)          (15.52)         (29.67)
</TABLE>





                                      F-53
<PAGE>
                       PEGASUS COMMUNICATIONS CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


<TABLE>
<CAPTION>
                                  Selected Consolidated Statements of Common Stockholders' Equity Data

                                                                                                            Total Common
                                                                 Investment in         Accumulated         Stockholders'
                                                                    Affiliate             Deficit               Equity
(in thousands)                                                  -----------------    -----------------    -----------------
<S>                                                             <C>                  <C>                  <C>
As previously reported:

January 1, 2001                                                       $       -           $ (432,910)           $534,431
Net loss                                                                      -             (278,404)           (278,404)
December 31, 2001                                                             -             (711,314)            296,002

January 1, 2002                                                               -             (711,314)            296,002
Net loss                                                                      -             (153,628)           (153,628)
December 31, 2002                                                             -             (864,942)            278,064

January 1, 2003                                                               -             (864,492)            278,064
Net loss                                                                      -             (151,037)           (151,037)
Investment in affiliate appropriately classified to
contra equity                                                                 -                    -                   -
December 31, 2003                                                     $       -          $(1,015,979)           $121,684

As restated:

January 1, 2001                                                       $       -            $(435,412)           $531,929
Net loss                                                                      -             (283,648)           (283,648)
December 31, 2001                                                             -             (719,060)            288,256

January 1, 2002                                                               -             (719,060)            288,256
Net loss                                                                      -             (154,152)           (154,152)
December 31, 2002                                                             -             (873,212)            269,794

January 1, 2003                                                               -             (873,212)            269,794
Net loss                                                                      -             (147,166)           (147,166)
Investment in affiliate appropriately classified to
contra equity                                                           (11,955)                   -             (11,955)
December 31, 2003                                                     $ (11,955)         $(1,020,378)           $105,330
</TABLE>



               Selected Consolidated Statements of Cash Flows Data
<TABLE>
<CAPTION>
                                                                     December 31,         December 31,         December 31,
                                                                         2003                 2002                 2001
(in thousands)                                                       -----------          -----------          -----------
As previously reported:
<S>                                                                     <C>                  <C>                  <C>
Net loss                                                              $(151,037)           $(153,628)           $(278,404)
Equity in (losses) earnings of affiliates and minority
interests                                                                 1,962                  (30)             (14,077)
Deferred income taxes                                                 $       -             $(28,676)           $(123,876)

As restated:

Net loss                                                              $(147,166)           $(154,152)           $(283,648)
Equity in (losses) earnings of affiliates and minority
interests                                                                (1,909)               4,970              (10,807)
Deferred income taxes                                                 $       -            $ (33,152)           $(121,902)
</TABLE>





                                      F-54
<PAGE>


                       PEGASUS COMMUNICATIONS CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


23.      SUBSEQUENT EVENTS

Acquisition of Broadcast Television Stations

         In February 2004, we exercised an option to acquire from a related
party a broadcast television station serving Portland, Maine for approximately
$3.8 million. It is anticipated that the sale of the station to us will result
in the release of approximately $4.0 million of our cash that collateralizes
bank loans of the related party from which we purchased the station. In February
2004, the FCC preliminarily granted a new, digital only, full power construction
permit to this same related party for a broadcast television station licensed to
Hammond, Louisiana and to be located in the New Orleans DMA. We expect this
approval to become final in April 2004, at which time we intend to exercise our
option to acquire the construction permit. The option price for the construction
permit is estimated to be $1.5 million and will further reduce, to the extent
outstanding, our cash that collateralizes bank loans of the related party from
which we purchased the permit. In March 2004, we exercised an option to acquire
from this same related party a broadcast television station in Scranton,
Pennsylvania for approximately $2.0 million. The amount paid by us will further
reduce, to the extent outstanding, our cash that collateralizes bank loans of
the related party from which we purchased the station.

Stock Split

         On August 5, 2004, we announced that our Board of Directors had
declared a two for one stock split of our common stock which was effected in the
form of a stock dividend for holders of record on August 19, 2004. The dividend
was distributed on August 26, 2004. As of August 19, 2004, we had 11,472,942
million shares of Class A common stock and 1,832,760 shares of Class B common
stock outstanding, including 1,315,208 Class A shares held by Pegasus Satellite
Communications, Inc., our unconsolidated subsidiary; 195,000 Class A shares held
by Pegasus Development, our consolidated subsidiary; and 71,000 Class A and
14,472 Class B shares held by Pegasus PCS Partners, a consolidated variable
interest entity.

         All share and per share amounts included herein have been retroactively
restated to reflect the impact of the stock split for all periods presented.







                                      F-55
<PAGE>

PEGASUS COMMUNICATIONS CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001
(IN THOUSANDS)
<TABLE>
<CAPTION>
                                     BALANCE AT        ADDITIONS         ADDITIONS
                                    BEGINNING OF      CHARGED TO        CHARGED TO                         BALANCE AT
          DESCRIPTION                  PERIOD          EXPENSES       OTHER ACCOUNTS      DEDUCTIONS      END OF PERIOD
<S>                                 <C>               <C>             <C>                 <C>             <C>
         Allowance for
       Doubtful Accounts
       -----------------
           Year 2003                   $ 7,221          $ 9,105                           $12,333 (a)        $ 3,993
           Year 2002                     6,016           23,809                            22,604 (a)          7,221
           Year 2001                     3,303           36,511                            33,798 (a)          6,016


  Valuation Allowance for Net
  Deferred Income Tax Assets
  --------------------------
           Year 2003 (as restated)     $37,642          $48,485                                              $86,127
           Year 2002 (as restated)                       37,642                                               37,642
</TABLE>
(a) Amounts written off, net of recoveries.




                                      S-1
<PAGE>


                                  Exhibit Index

Exhibit
Number        Description of Document
------        -----------------------

2.1           Agreement and Plan of Merger among Pegasus Communications
              Corporation, Pegasus Holdings Corporation I and Pegasus Merger
              Sub, Inc. dated as of February 22, 2001 (which is incorporated
              herein by reference to Exhibit 2.3 to the Form 10-K of Pegasus
              Satellite Communications, Inc. (formerly named Pegasus
              Communications Corporation) filed with the Securities and Exchange
              Commission April 2, 2001).
3.1           Amended and Restated Certificate of Incorporation of Pegasus
              Communications Corporation (which is incorporated herein by
              reference to Exhibit 3.1 to the Form 10-K of Pegasus
              Communications Corporation filed with the Securities and Exchange
              Commission March 31, 2003).
3.2           By-Laws of Pegasus Communications Corporation (which is
              incorporated herein by reference to Exhibit 3.6 to the Form 10-K
              of Pegasus Satellite Communications, Inc. filed with the
              Securities and Exchange Commission April 2, 2001).
3.3           Certificate of Designation, Preferences and Relative,
              Participating, Optional and Other Special Rights of Preferred
              Stock and Qualifications, Limitations and Restrictions Thereof of
              6-1/2% Series C Convertible Preferred Stock of Pegasus
              Communications Corporation (which is incorporated herein by
              reference to Exhibit 3.8 to the Form 10-K of Pegasus Satellite
              Communications, Inc. filed with the Securities and Exchange
              Commission April 2, 2001).
3.4           Certificate of Designation, Preferences and Rights of Series D
              Junior Convertible Participating Preferred Stock of Pegasus
              Communications Corporation (which is incorporated herein by
              reference to Exhibit 3.9 to the Form 10-K of Pegasus Satellite
              Communications, Inc. filed with the Securities and Exchange
              Commission April 2, 2001).
3.5           Certificate of Designation, Preferences and Rights of Series E
              Junior Convertible Participating Preferred Stock of Pegasus
              Communications Corporation (which is incorporated herein by
              reference to Exhibit 3.10 to the Form 10-K of Pegasus Satellite
              Communications, Inc. filed with the Securities and Exchange
              Commission April 2, 2001).
4.1           Indenture, dated as of October 21, 1997, by and between Pegasus
              Satellite Communications, Inc. (then named Pegasus Communications
              Corporation) and First Union National Bank, as trustee, relating
              to the 9-5/8% Senior Notes due 2005 (which is incorporated herein
              by reference to Exhibit 4.1 to Amendment No. 1 to the Form 8-K of
              Pegasus Satellite Communications, Inc. (formerly named Pegasus
              Communications Corporation) filed with the Securities and Exchange
              Commission October 31, 1997).
4.2           Form of 9-5/8% Senior Notes due 2005 (included in Exhibit 4.1
              above).
4.3           Indenture, dated as of November 30, 1998, by and between Pegasus
              Satellite Communications, Inc. (then named Pegasus Communications
              Corporation) and First Union National Bank, as trustee, relating
              to the 9-3/4% Senior Notes due 2006 (which is incorporated herein
              by reference to Exhibit 4.6 to the Registration Statement on Form
              S-3 of Pegasus Satellite Communications, Inc. (formerly named
              Pegasus Communications Corporation) (File No. 333-70949)).
4.4           Form of 9-3/4% Senior Notes due 2006 (included in Exhibit 4.3
              above).
4.5           Indenture, dated as of November 19, 1999, by and between Pegasus
              Satellite Communications, Inc. (then named Pegasus Communications
              Corporation) and First Union National Bank, as Trustee, relating
              to the 12-1/2% Senior Notes due 2007 (which is incorporated herein
              by reference to Exhibit 4.1 to the Registration Statement on Form
              S-4 of Pegasus Satellite Communications, Inc. (formerly named
              Pegasus Communications Corporation) (File No. 333-94231)).


                                       1

<PAGE>

4.6           Form of 12-1/2% Senior Notes due 2007 (included in Exhibit 4.5
              above).
4.7           Indenture, dated as of May 31, 2001, by and between Pegasus
              Satellite Communications, Inc. and First Union National Bank, as
              trustee, relating to the 12-3/8% Senior Notes due 2006 of Pegasus
              Satellite Communications, Inc. (which is incorporated herein by
              reference to Exhibit 4.6 to Form 10-K of Pegasus Communications
              Corporation filed with the Securities and Exchange Commission
              April 3, 2002).
4.8           Form of 12-3/8% Senior Notes due 2006 of Pegasus Satellite
              Communications, Inc. (included in Exhibit 4.7 above).
4.9           Indenture, dated as of May 31, 2001, by and between Pegasus
              Satellite Communications, Inc. and First Union National Bank, as
              trustee, relating to the 13-1/2% Senior Subordinated Discount
              Notes due 2007 of Pegasus Satellite Communications, Inc. (which is
              incorporated herein by reference to Exhibit 4.8 to Form 10-K of
              Pegasus Communications Corporation filed with the Securities and
              Exchange Commission April 3, 2002).
4.10          Form of 13-1/2% Senior Subordinated Discount Notes due 2007 of
              Pegasus Satellite Communications, Inc. (included in Exhibit 4.9
              above).
4.11          Indenture, dated as of December 19, 2001, by and between Pegasus
              Satellite Communications, Inc. and J.P. Morgan Trust Company,
              National Association, as trustee, relating to the 11-1/4% Senior
              Notes due 2010 of Pegasus Satellite Communications, Inc. (which is
              incorporated herein by reference to Exhibit 4.10 to Form 10-K of
              Pegasus Communications Corporation filed with the Securities and
              Exchange Commission April 3, 2002).
4.12          Form of 11-1/4% Senior Notes due 2010 of Pegasus Satellite
              Communications, Inc. (included in Exhibit 4.11 above).
4.13          Amended and Restated Voting Agreement, dated May 5, 2000, among
              Pegasus Communications Corporation, Fleet Venture Resources, Inc.,
              Fleet Equity Partners VI, L.P., Chisholm Partners III, L.P., and
              Kennedy Plaza Partners, Spectrum Equity Investors, L.P. and
              Spectrum Equity Investors II, L.P., Alta Communications VI, L.P.,
              Alta Subordinated Debt Partners III, L.P. and Alta-Comm S By S,
              L.L.C., and Pegasus Communications Holdings, Inc., Pegasus
              Capital, L.P., Pegasus Scranton Offer Corp, Pegasus Northwest
              Offer Corp, and Marshall W. Pagon, an individual (which is
              incorporated herein by reference to Exhibit 10.1 to the Form 8-K
              of Pegasus Satellite Communications, Inc. (formerly named Pegasus
              Communications Corporation) filed with the Securities and Exchange
              Commission May 19, 2000).
4.14          Registration Rights Agreement dated May 5, 2000, among Pegasus
              Communications Corporation, Fleet Venture Resources, Inc., Fleet
              Equity Partners VI, L.P., Chisholm Partners III, L.P., and Kennedy
              Plaza Partners, Spectrum Equity Investors, L.P. and Spectrum
              Equity Investors II, L.P., Alta Communications VI, L.P., Alta
              Subordinated Debt Partners III, L.P. and Alta-Comm S By S, L.L.C.,
              and Pegasus Communications Holdings, Inc., Pegasus Capital, L.P.,
              Pegasus Scranton Offer Corp, Pegasus Northwest Offer Corp, and
              Marshall W. Pagon, an individual (which is incorporated herein by
              reference to Exhibit 10.2 to the Form 8-K of Pegasus Satellite
              Communications, Inc. (formerly named Pegasus Communications
              Corporation) filed with the Securities and Exchange Commission May
              19, 2000).

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<PAGE>

4.15          Warrant and Investor Rights Agreement, dated April 2, 2003, among
              Pegasus Communications Corporation and the parties set forth on
              Schedule I thereto (which is incorporated herein by reference to
              Exhibit 4.1 to Form 8-K of Pegasus Communications Corporation
              filed with the Securities and Exchange Commission April 3, 2003).
4.16          Amendment No. 1 to Warrant and Investor Rights Agreement among
              Pegasus Communications Corporation and the parties set forth on
              Schedule I thereto dated as of July 30, 2003 (which is
              incorporated herein by reference to Exhibit 4.2 to Form 8-K of
              Pegasus Satellite Communications, Inc. filed with the Securities
              and Exchange Commission August 5, 2003).
4.17          Amendment No. 2 to Warrant and Investor Rights Agreement among
              Pegasus Communications Corporation and the parties set forth on
              Schedule I thereto dated as of August 1, 2003 (which is
              incorporated herein by reference to Exhibit 4.3 to Form 8-K of
              Pegasus Satellite Communications, Inc. filed with the Securities
              and Exchange Commission on August 5, 2003).
10.1          NRTC/Member Agreement for Marketing and Distribution of DBS
              Services, dated June 24, 1993, between the National Rural
              Telecommunications Cooperative and Pegasus Cable Associates, Ltd.
              (which is incorporated herein by reference to Exhibit 10.28 to the
              Registration Statement on Form S-4 of Pegasus Media &
              Communications, Inc. (File No. 33-95042) (other similar agreements
              with the National Rural Telecommunications Cooperative are not
              being filed but will be furnished upon request, subject to
              restrictions on confidentiality, if any)).
10.2          Amendment to NRTC/Member Agreement for Marketing and Distribution
              of DBS Services, dated June 24, 1993, between the National Rural
              Telecommunications Cooperative and Pegasus Cable Associates, Ltd.
              (which is incorporated herein by reference to Exhibit 10.29 to the
              Registration Statement on Form S-4 of Pegasus Media &
              Communications, Inc. (File No. 33-95042)).
10.3          DIRECTV Sign-Up Agreement, dated May 3, 1995, between DIRECTV,
              Inc. and Pegasus Satellite Television, Inc. (which is incorporated
              herein by reference to Exhibit 10.30 to the Registration Statement
              on Form S-4 of Pegasus Media & Communications, Inc.
              (File No. 33-95042)).
10.4          Fourth Amendment and Restatement of Credit Agreement dated as of
              October 22, 2003 by and among Pegasus Media & Communications,
              Inc., the several lenders from time to time parties thereto, Banc
              of America Securities LLC, as sole lead arranger, Deutsche Bank
              Trust Company as resigning agent, and Bank of America, N.A., as
              administrative agent for the lenders (which is incorporated herein
              by reference to Exhibit 10.1 to Form 10-Q of Pegasus
              Communications Corporation filed with the Securities and Exchange
              Commission November 14, 2003).
10.5          First Amendment to Fourth Amendment and Restatement of Credit
              Agreement by and among Pegasus Media & Communications, Inc., the
              lenders party thereto, and Bank of America, N.A. dated February 5,
              2004 (which is incorporated herein by reference to Exhibit 99.1 to
              Form 8-K of Pegasus Satellite Communications, Inc. filed with the
              Securities and Exchange Commission February 17, 2004).
10.6          Credit Agreement among Pegasus Media & Communications, Inc., the
              lenders party thereto, Madeleine L.L.C., and Banc of America
              Securities LLC dated December 19, 2003 (which is incorporated
              herein by reference to Exhibit 99.2 to Form 8-K of Pegasus
              Satellite Communications, Inc. filed with the Securities and
              Exchange Commission February 17, 2004).
10.7          Amended and Restated Term Loan Agreement dated as of August 1,
              2003, among Pegasus Satellite Communications, Inc., the several
              lenders from time to time parties thereto and DBS Investors Agent,
              Inc., as Administrative Agent for such lenders (which is
              incorporated herein by reference to Exhibit 10.1 to Form 8-K of
              Pegasus Satellite Communications, Inc. filed with the Securities
              and Exchange Commission August 5, 2003).

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<PAGE>

10.8+*        Pegasus Communications 1996 Stock Option Plan, as amended and
              restated effective as of February 13, 2002, and as amended through
              Amendment No. 5.
10.9+*        Pegasus Communications Restricted Stock Plan, as amended and
              restated effective as of February 13, 2002, and as amended through
              Amendment No. 4.
10.10+        Pegasus Communications Corporation Executive Incentive Plan (which
              is incorporated herein by reference to Exhibit 10.1 to the Form
              10-Q of Pegasus Communications Corporation filed with the
              Securities and Exchange Commission May 17, 2001).
10.11+        Executive Employment Agreement effective as of June 1, 2002 for
              Ted S. Lodge (which is incorporated herein by reference to Exhibit
              10.1 to Form 10-Q of Pegasus Communications Corporation filed with
              the Securities and Exchange Commission August 14, 2002).
10.12+        Pegasus Communications Corporation Short Term Incentive Plan
              (Corporate, Satellite and Business Development) for calendar year
              2002 (which is incorporated herein by reference to Exhibit 10.2 to
              the Form 10-Q of Pegasus Communications Corporation filed with the
              Securities and Exchange Commission August 14, 2002).
10.13+        Supplemental Description of Pegasus Communications Corporation
              Short Term Incentive Plan (Corporate, Satellite and Business
              Development) for calendar year 2002 (which is incorporated herein
              by reference to Exhibit 10.3 to the Form 10-Q of Pegasus
              Communications Corporation filed with the Securities and Exchange
              Commission August 14, 2002).
10.14+        Description of Long Term Incentive Compensation Program Applicable
              to Executive Officers for calendar year 2002 (which is
              incorporated herein by reference to Exhibit 10.4 to the Form 10-Q
              of Pegasus Communications Corporation filed with the Securities
              and Exchange Commission August 14, 2002).
10.15+*       Pegasus Communications Corporation Short Term Incentive Plan
              (Corporate, Satellite and Business Development) for calendar year
              2003.
10.16+*       Supplemental Description of Pegasus Communications Corporation
              Short Term Incentive Plan (Corporate, Satellite and Business
              Development) for calendar year 2003.
10.17+*       Description of Long-Term Incentive Compensation Program Applicable
              to Executive Officers for calendar year 2003.
21.1*         Subsidiaries of Pegasus Communications Corporation.
23.1**        Consent of PricewaterhouseCoopers LLP.
24.1*         Power of Attorney.
31.1**        Certification of Chief Executive Officer Pursuant to Securities
              Exchange Act of 1934 Rule 13a-14(a).
31.2**        Certification of Chief Financial Officer Pursuant to Securities
              Exchange Act of 1934 Rule 13a-14(a).
32.1**        Certification of Chief Executive Officer pursuant to 18 U.S.C.
              Section 1350, as adopted pursuant to Section 906 of the
              Sarbanes-Oxley Act of 2002.
32.2**        Certification of Chief Financial Officer pursuant to 18 U.S.C.
              Section 1350, as adopted pursuant to Section 906 of the
              Sarbanes-Oxley Act of 2002.
_________
*        Previously filed with Form 10-K.
**       Filed herewith.
+        Indicates a management contract or compensatory plan.



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