<PAGE>
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

(X)      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934. For the fiscal year ended December 31, 1998
                                                         -----------------
                                       OR
( )      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES 
         EXCHANGE ACT OF 1934.
         For the transition period from__________ to __________
                         Commission File Number 0-21389
                                                -------

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

            Delaware                                           51-0374669
            --------                                           ----------
 (State of other jurisdiction of                             (IRS Employer
 incorporation of organization)                          Identification Number)

  c/o Pegasus Communications Management Company;
  5 Radnor Corporate Center; Suite 454, Radnor, PA                 19087
  ------------------------------------------------                 -----
      (Address of principal executive offices)                   (Zip code)

       Registrant's telephone number, including area code: (888) 438-7488
                                                            -------------
           Securities registered pursuant to section 12(b) of the Act:

                                      None

           Securities registered pursuant to section 12(g) of the Act:

                               Title of each class
                               -------------------
                     Common Stock, Class A; $0.01 par value

         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. [ X ]

         The aggregate market value of the voting stock (Class A Common Stock)
held by non-affiliates of the Registrant as of the close of business on March 1,
1999 was approximately $206,980,808 based on the average bid and asked prices 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 herein 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 March 1, 1999:

          Class A, Common Stock, $0.01 par value        11,315,809 
          Class B, Common Stock, $0.01 par value         4,581,900

<PAGE>

<TABLE>
<CAPTION>
                                                                                               Page
                                                                                               ----
                                                     PART I
<S>              <C>                
Item 1.         Business                                                                          3
Item 2.         Properties                                                                       27
Item 3.         Legal Proceedings                                                                27
Item 4.         Submission of Matters to a Vote of Security Holders                              27

                                                     PART II
Item 5.         Market for the Registrant's Common Equity and Related Stockholder Matters        28
Item 6.         Selected Financial Data                                                          29
Item 7.         Management's Discussion and Analysis of Financial Condition and Results of
                Operations                                                                       31
Item 7A.        Quantitative and Qualitative Disclosures About Market Risk                       43
Item 8.         Financial Statements and Supplementary Data                                      43
Item 9.         Changes in and Disagreements with Accountants on Accounting and Financial   
                Disclosure                                                                       43

                                                    PART III
Item 10.        Directors and Executive Officers of the Registrant                               43
Item 11.        Executive Compensation                                                           46 
Item 12.        Security Ownership of Certain Beneficial Owners and Management                   51
Item 13.        Certain Relationships and Related Transactions                                   53  

                                                     PART IV
Item 14.        Exhibits, Financial Statement Schedules, and Reports on Form 8-K                 57
</TABLE>

                                       2
<PAGE>

                                     PART I


         This Report contains certain forward-looking statements (as such term
is defined in the Private Securities Litigation Reform Act of 1995) and
information relating to us that are based on the beliefs of our management, as
well as assumptions made by and information currently available to our
management. When used in this Report, the words "estimate," "project,"
"believe," "anticipate," "intend," "expect" and similar expressions are intended
to identify forward-looking statements. Such statements reflect our current
views with respect to future events and are subject to unknown risks,
uncertainties and other factors that may cause actual results to differ
materially from those contemplated in such forward-looking statements. Such
factors include, among others, the following: general economic and business
conditions, both nationally, internationally and in the regions in which we
operate; demographic changes; existing government regulations and changes in, or
the failure to comply with government regulations; competition; the loss of any
significant numbers of subscribers or viewers; changes in business strategy or
development plans; technological developments and difficulties (including any
associated with the Year 2000); the ability to attract and retain qualified
personnel; our significant indebtedness; the availability and terms of capital
to fund the expansion of our businesses; and other factors referenced in this
Report.

         The information is this Report assumes the completion of certain
pending acquisitions described in "Item 1: Business -- Recent and Pending
Transactions."

ITEM 1: BUSINESS

General

     Pegasus Communications Corporation is:

         o        The largest independent provider of DIRECTV(R) with 464,000
                  subscribers at January 31, 1999. We have the exclusive right
                  to distribute DIRECTV digital broadcast satellite services to
                  over 4.8 million rural households in 36 states. We distribute
                  DIRECTV through the Pegasus retail network, a network of
                  approximately 2,000 independent retailers.

         o        The owner or programmer of nine TV stations affiliated with
                  either Fox, UPN or the WB network and the owner of a large
                  cable system in Puerto Rico serving approximately 50,000
                  subscribers.

         o        One of the fastest growing media companies in the United
                  States. We have increased our revenues at a compound growth
                  rate of 100% per annum since our inception in 1991.


Direct Broadcast Satellite Television

         The introduction of direct broadcast satellite, or DBS, receivers is
widely regarded as the most successful introduction of a consumer electronics
product in U.S. history, surpassing the rollout of color televisions,
videocassette recorders and compact disc players. According to a recent Paul
Kagan study, in 1998 DBS was the fastest growing multichannel television service
in the country, capturing almost two out of every three new subscribers to those
services. There are currently three nationally branded DBS programming services:
DIRECTV, Primestar and EchoStar. At January 31, 1999, there were 8.9 million DBS
subscribers in the United States:

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<PAGE>

         o        4.6 million DIRECTV subscribers, including approximately 3.6
                  million subscribers served by DIRECTV itself, 464,000
                  subscribers served by Pegasus and 500,000 subscribers served
                  by the approximately 100 other DIRECTV rural affiliates.

         o        2.3 million Primestar subscribers.

         o        2.0 million EchoStar subscribers.

         All three DBS programming services are digital satellite services, and
therefore require that a subscriber install a satellite receiving antenna or
dish and a digital receiver. DIRECTV and EchoStar require a satellite dish of
approximately 18 inches in diameter that may be installed by the consumer
without professional assistance. Primestar requires a dish of approximately 36
inches in diameter that generally must be professionally installed. The market
shares of DIRECTV, Primestar and EchoStar among all DBS subscribers nationally
are currently 51%, 26% and 23%, respectively. The Carmel Group has estimated
that the number of DBS subscribers will grow to 21.1 million by 2003. As
described below under "-- Recent DBS Developments," DIRECTV has announced an
agreement to acquire Primestar's business.

DIRECTV

         DIRECTV is a service of Hughes Electronics, a subsidiary of General
Motors Corporation. After completing its announced acquisition of United States
Satellite Broadcasting, Inc. and Primestar described below, DIRECTV will offer
in excess of 370 entertainment channels of near laser disc quality video and
compact disc quality audio programming. DIRECTV currently transmits via three
high-power Ku band satellites and has announced its intention to launch a fourth
Ku band satellite in the third quarter of this year. We believe that DIRECTV's
extensive line-up of cable networks, pay-per-view movies and events and sports
packages, including the exclusive "NFL Sunday Ticket," have enabled DIRECTV to
capture a majority market share of existing DBS subscribers and will continue to
drive strong subscriber growth for DIRECTV services in the future. DIRECTV added
1.2 million new subscribers in 1998, which was a greater increase than any other
DBS service and accounted for approximately 48% of all new DBS subscribers in
that year.

DIRECTV Rural Affiliates

         Prior to the launch of DIRECTV's programming service, Hughes
Electronics (which was succeeded by its subsidiary DIRECTV) entered into an
agreement with the National Rural Telecommunications Cooperative, or NRTC,
authorizing the NRTC to offer its members and associates the opportunity to
acquire exclusive rights to distribute DIRECTV programming services in rural
areas of the United States. The NRTC is a cooperative organization whose members
and associates are engaged in the distribution of telecommunications and other
services in predominantly rural areas of the United States. Approximately 250
NRTC members and associates acquired such exclusive rights, thereby becoming
DIRECTV rural affiliates. The DIRECTV exclusive territories acquired by
DIRECTV's rural affiliates include approximately 9.0 million rural households.
Pegasus was the largest of the original DIRECTV rural affiliates, acquiring a
DIRECTV exclusive territory of approximately 500,000 homes in four New England
states. Since 1996 we have increased our DIRECTV exclusive territories to more
than 4.8 million homes through the completed or pending acquisitions of 81 other
DIRECTV rural affiliates, including the acquisition of Digital Television
Services, Inc., with which we merged in 1998.

Pegasus Rural Focus and Strategy

         We believe that DBS and other digital satellite services will achieve
disproportionately greater consumer acceptance in rural areas than in
metropolitan areas. DBS services have already achieved a penetration of more
than 17% in rural areas of the United States, as compared to approximately 5% in
metropolitan areas.

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<PAGE>

         Our long-term goal is to become an integrated provider of DBS and other
digital satellite services for the 76.0 million people, 30.0 million homes and
3.0 million businesses located in rural areas of the United States. To
accomplish our goal, we are pursuing the following strategy:

         o        Continue to Grow Our Rural Subscriber Base by Aggressively
                  Marketing DIRECTV: Pegasus currently serves in excess of
                  464,000 DIRECTV subscribers, which represents a penetration of
                  approximately 10%. We estimate that we have a 55% share of all
                  DBS subscribers in our DIRECTV exclusive territories and that
                  the remaining DBS subscribers are shared approximately equally
                  between Primestar and EchoStar. Our rate of growth has
                  accelerated as we have increased our scale and expanded the
                  Pegasus network of independent retailers.

         o        Continue to Acquire Other DIRECTV Rural Affiliates: We
                  currently own approximately 55% of the DIRECTV exclusive
                  territories held by DIRECTV's rural affiliates. We have had an
                  excellent track record of acquiring DIRECTV rural affiliates
                  and believe that we have a competitive advantage in acquiring
                  additional DIRECTV rural affiliates. We base this belief on
                  our position as the largest DIRECTV rural affiliate, our
                  access to the capital markets and our strong reputation in the
                  DBS industry. We will continue to pursue our strategy of
                  acquiring other DIRECTV rural affiliates.

         o        Continue to Develop the Pegasus Retail Network: We have
                  established the Pegasus network of independent retailers in
                  order to distribute DIRECTV in our DIRECTV exclusive
                  territories. Our consolidation of DIRECTV's rural affiliates
                  has enabled us to expand the Pegasus retail network to 2,000
                  independent retailers in 36 states. We believe that the
                  Pegasus retail network is one of the few sales and
                  distribution channels for digital satellite services with
                  broad and effective reach in rural areas of the U.S. We intend
                  to further expand the Pegasus retail network in order to
                  increase the penetration of DIRECTV in rural areas and to
                  enable us to distribute additional digital satellite services
                  that will complement our distribution of DIRECTV.

         o        Generate Future Growth By Bundling Additional Digital
                  Satellite Services with DIRECTV: We believe that new digital
                  satellite services, such as digital audio services, broadband
                  multimedia services and mobile satellite services, will be
                  introduced to consumers and businesses in the next five years.
                  These services, like DBS, should achieve disproportionate
                  success in rural areas. However, because there are limited
                  sales and distribution channels in rural areas, new digital
                  satellite service providers will confront the same
                  difficulties that DBS service providers have encountered in
                  establishing broad distribution in rural areas, as compared to
                  metropolitan areas. We believe that the Pegasus retail network
                  will enable us to establish relationships with digital
                  satellite service providers that will position us to
                  capitalize on these new opportunities.

Satellite Services in Rural Areas

         Rural areas include approximately 85% of the total landmass of the
continental United States and have an average home density of less than 12 homes
per square mile. Because the cost of reaching a household by a cable or other
wireline distribution system is generally inversely proportional to home density
and the cost of providing satellite service is not, satellite services have
strong cost advantages over cable in rural areas.

         There are approximately 76.0 million people, 30.0 million households
and 3.0 million businesses located in rural areas of the United States. Annual
household income in rural areas totaled over $1.1 trillion in 1997, an average
of approximately $38,000 per household. Rural areas therefore represent a large
and attractive market for DBS and other digital satellite services.
Approximately 

                                       5
<PAGE>

65% of all U.S. DBS subscribers reside in rural areas. It is likely that future
digital satellite services, such as soon to be launched digital audio services
and satellite broadband multimedia services, will also achieve disproportionate
success in rural areas as compared to metropolitan areas.

         It is difficult, however, for satellite and other service providers to
establish sales and distribution channels in rural areas. In contrast to
metropolitan areas, where there are many strong national retail chains, few
national retailers have a presence in rural areas. Most retailers in rural areas
are independently owned and have only one or two store locations. For these
reasons, satellite providers seeking to establish broad and effective rural
distribution have limited alternatives:

         o        They may seek to distribute their services through one of the
                  few national retailers, such as Radio Shack or Wal-Mart, that
                  have a strong retail presence in rural areas.

         o        They may seek to establish direct sales channels in rural
                  areas, as Primestar initially sought to do through its cable
                  partners.

         o        They may seek to distribute through national networks of
                  independent retailers serving rural areas, such as have been
                  established by EchoStar and by Pegasus.

Consolidation of DIRECTV Rural Affiliates

         When DIRECTV was launched in 1994, small DIRECTV rural affiliates held
approximately 95% of the DIRECTV rural affiliate exclusive territories. In 1996,
Pegasus first acquired another DIRECTV rural affiliate, thereby beginning a
process of consolidation that has significantly changed the composition of
DIRECTV's rural affiliates. Since 1996, Pegasus, its subsidiary, Digital
Television Services, Inc., or Golden Sky Systems has acquired approximately 150
DIRECTV rural affiliates. Today, Pegasus represents 55% of the DIRECTV exclusive
territories held by DIRECTV's rural affiliates, Golden Sky holds 19%, and the
approximately 100 remaining rural affiliates total 26%. Pegasus believes that
consolidation among DIRECTV's rural affiliates will continue.

         Upon completion of our pending acquisitions, we will distribute DIRECTV
in the following DIRECTV exclusive territories:
<TABLE>
<CAPTION>

   Exclusive                                               Homes 
    DIRECTV            Total Homes   Homes Not Passed     Passed          Total
   Territory           in Territory     by Cable          by Cable     Subscribers   Penetration
   ---------           ------------     --------          --------     -----------   -----------
<S>                      <C>            <C>               <C>             <C>           <C> 
   Northeast             751,745        182,245           569,500         65,189        8.7%
   Central             1,163,510        287,306           876,204        105,523        9.1%
   Southeast             993,379        343,805           649,574         99,476       10.0%
   Midwest               612,579        183,098           429,481         65,930       10.8%
   Central Plains        375,410         73,516           301,894         29,174        7.8%
   Texas                 465,835        150,987           314,848         50,448       10.8%
   Southwest             322,438         57,028           265,410         32,442       10.1%
   Northwest             143,754         56,726            87,028         15,487       10.8%
      Total            4,828,650      1,334,711         3,493,939        463,669        9.6%

--------------------------------------------------------------------------------------------
</TABLE>
Total homes in territory, homes not passed by cable, and homes passed by cable
are based on estimates of primary residences by Claritas, Inc.

The Pegasus Retail Network

         The Pegasus retail network is a network of 2,000 independent satellite,
consumer electronics and other retailers serving rural areas. We began the
development of the Pegasus retail network in 1995 in order to distribute DIRECTV
in our original DIRECTV exclusive territories in New England. We have expanded
this network into 36 states as a result of our acquisitions of


                                       6
<PAGE>

DIRECTV rural affiliates since 1996. Today, the Pegasus 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 believe that the national reach of the Pegasus retail network has
positioned us to:

         o        Improve the penetration of DIRECTV in DIRECTV exclusive
                  territories that we now own or that we may acquire from other
                  DIRECTV rural affiliates.

         o        Assist DIRECTV in improving DIRECTV's DBS market share in
                  rural areas outside of the DIRECTV exclusive territories held
                  by DIRECTV rural affiliates.

         o        Offer providers of new digital satellite services (such as the
                  soon to be launched digital audio and broadband multimedia
                  satellite services) an effective and convenient means for
                  reaching the approximately 30% of America's population that
                  live and work in rural areas.

Recent DBS Developments

         Three important events have occurred recently in the DBS industry.

         DIRECTV/Hughes Acquisition of United States Satellite Broadcasting
Company, Inc. In December 1998, Hughes Electronics, the parent company of
DIRECTV, announced that it had reached an agreement with United States Satellite
Broadcasting Company, Inc. to acquire its business and assets for approximately
$1.3 billion in cash and stock. The transaction will enable DIRECTV to add such
premium networks as multichannel HBO, Cinemax and Showtime. We expect these
added offerings to increase DIRECTV's appeal to consumers and drive subscriber
growth. DIRECTV and United States Satellite Broadcasting Company have said that
they expect the transaction to close in the first half of this year. It is
subject to review and approval by the FCC and other conditions. We are still
evaluating the impact of this transaction on our business.

         DIRECTV/ Hughes Acquisition of Primestar. In January 1999, Hughes
announced that it reached agreement with Primestar to acquire Primestar's DBS
business and rights to acquire certain other DBS satellite assets in two
transactions valued at approximately $1.8 billion. DIRECTV has stated that it
intends to operate Primestar's business for approximately two years, during
which time it will attempt to transition Primestar's approximately 2.3 million
subscribers to the DIRECTV service. DIRECTV has also said it expects that its
acquisition of the other Primestar DBS assets along with its pending acquisition
of assets of United States Satellite Broadcasting will enable DIRECTV to offer
more than 370 entertainment channels, almost twice its current channel capacity.
If the Primestar and United States Satellite Broadcasting transactions are
consummated, we expect that DIRECTV and EchoStar will be the only distributors
of DBS services. The Primestar transactions are subject to approval of the FCC
and other conditions. We estimate that there are between 200,000 and 250,000
Primestar subscribers in our DIRECTV exclusive territories. Our estimate is
based on DIRECTV's estimate of the proportion of Primestar subscribers in the
exclusive territories of DIRECTV rural affiliates and our proportionate
ownership of those territories. We are targeting Primestar customers in our
territories with promotions that we hope will encourage them to convert to
DIRECTV. EchoStar is doing the same thing. It is not possible to predict with
certainty how well these efforts will succeed. We are continuing to evaluate the
effects of the Primestar transactions on our business.

         EchoStar-News Corporation-MCI Agreement. In November 1998, EchoStar,
News Corporation, MCI WorldCom Inc. and certain other parties reached an
agreement for the transfer to EchoStar of a license to operate a DBS business at
the 110(Degree) west longitude orbital location and certain other DBS assets in
exchange for shares of EchoStar. EchoStar already operates a DBS business at the
119(Degree) west longitude orbital location. The agreement with News Corporation
and MCI has been approved by the Department of Justice and is pending approval
of the FCC. EchoStar plans to launch satellites for operation at the 110(Degree)
west longitude orbital slot in 1999. While we believe 

                                       7
<PAGE>

that this transaction, if completed, will help increase the overall competitive
position of DBS relative to cable, it could also increase EchoStar's competitive
position relative to DIRECTV. See "--Competition."

Broadcast Television

         Our operating strategy in broadcast television is focused on:

         o        developing strong local sales forces and sales management to
                  maximize the value of our stations' inventory of advertising
                  spots,

         o        improving the stations' programming, promotion and technical
                  facilities in order to maximize their ratings in a
                  cost-effective manner, and

         o        maintaining strict control over operating costs while
                  motivating employees through the use of incentive plans, which
                  reward our employees in proportion to annual increases in
                  location cash flow.

         We have purchased or launched TV stations affiliated with the "emerging
networks" of Fox, the WB and UPN, because, while affiliates of these networks
generally have lower revenue shares than stations affiliated with ABC, CBS and
NBC, we believe that they will experience growing audience ratings and therefore
afford us greater opportunities for increasing their revenue share. We are
pursuing expansion in our existing markets through local marketing agreements,
or LMAs, because they provide additional opportunities for increasing revenue
share with limited additional operating expenses. However, the FCC is
considering proposals which, if adopted, could prohibit us from expanding in our
existing markets through LMAs and require us to modify or terminate our existing
agreements. We have entered into LMAs to program one station as an affiliate of
Fox, two stations as affiliates of the WB network and one station as an
affiliate of UPN. We plan to enter into an additional LMA in 2000, if permitted
by the FCC.

         The following table sets forth general information for each of Pegasus'
stations.
<TABLE>
<CAPTION>
                      Acquisition        Station                                        Number of TV
       Station            Date         Affiliation        Market Area      DMA (1)     Households (2)
       -------            ----         -----------        -----------      -------     --------------
<S>                    <C>                 <C>          <C>                 <C>           <C>
  WDBD-40               May 1993           Fox            Jackson, MS         91          298,000

  WDSI-61               May 1993           Fox          Chattanooga, TN       82          332,000

  WGFL-53 (3)              (3)              WB          Gainesville, FL      167          101,000

  WOLF-56/

  WILF-53 (4)           May 1993           Fox          Northeastern PA       47          566,000

  WSWB-38 (4)              (4)              WB          Northeastern PA       47          566,000

  WPXT-51             January 1996         Fox           Portland, ME         79          353,000

  WPME-35 (5)              (5)             UPN           Portland, ME         79          353,000

  WTLH-49/ 
  WFXU (6)             March 1996          Fox          Tallahassee, FL      116          221,000
</TABLE>

---------------
(1)  There are 211 designated market areas or DMAs in the United States with
     each county in the continental United States assigned uniquely to one DMA.
     Ranking of DMAs is based upon Nielsen estimates of the number of television
     households.

(2)  Represents total homes in a DMA for each television station as estimated by
     Broadcast Investment Analysts ("BIA").

(3)  Pegasus began programming WGFL in October 1997 pursuant to an LMA as an
     affiliate of the WB network.

(4)  WILF and WWLF until November 1998 had simulcast the programming of WOLF. In
     November 1998, the station then known as WOLF (Channel 38) was sold to KB
     Prime Media LLC. That station has changed its call letters to WSWB, 

                                       8
<PAGE>

     and is now programmed by Pegasus pursuant to an LMA as an affiliate of the
     WB network. The station formerly know as WWLF changed its call letters to
     WOLF, and simulcasts Fox programming on WILF. See Item 13: Certain
     Relationships and Related Transactions - Relationship with KB Prime Media
     and Affiliated Entities.

(5)  Pegasus began programming WPME in August 1997 pursuant to an LMA as an
     affiliate of UPN.

(6)  Pegasus programs WFXU pursuant to an LMA. WFXU has simulcast the
     programming of WTLH since July 1998. See Item 13: Certain Relationships and
     Related Transactions - Relationship with KB Prime Media and Affiliated
     Entities.

Cable Television

         We own and operate a cable system serving areas of western and
southwestern Puerto Rico, and are acquiring a contiguous system serving areas of
northwestern Puerto Rico. Our Puerto Rico cable system serves franchised areas
of approximately 111,000 households consisting of the port city of Mayaguez and
ten contiguous communities, eight of which are currently served by our Puerto
Rico cable system, and serves approximately 30,000 subscribers. After completion
of our acquisition of the Aguadilla cable system, our Puerto Rico cable system
will hold franchises for communities representing almost 20% of Puerto Rico,
will pass in excess of 170,000 homes and will serve approximately 50,000
subscribers.

         Other cable operators serving Puerto Rico include Century
Communications serving San Juan and surrounding areas, TCI International
(recently merged with Liberty Communications, a subsidiary of TCI) serving
eastern and northern Puerto Rico, and an independent system serving Ponce.
Century has recently announced that it is considering "strategic alternatives,"
including a possible sale of its assets. We believe that it is possible that
other strategic transactions may soon occur involving other cable operators in
Puerto Rico or that consolidation may occur among some or all of Puerto Rico's
cable operators.

         We believe that significant opportunities for growth in revenues and
location cash flow exist in Puerto Rico from the delivery of traditional cable
services. Cable penetration in Puerto Rico averages 34% (versus a U.S. average
of 65% to 70%). We believe that this low penetration is due principally to the
limited amount of Spanish language programming offered on Puerto Rico's cable
systems. In contrast, Spanish language programming represents virtually all of
the programming offered by television stations in Puerto Rico. We believe that
cable penetration in our Puerto Rico cable systems will increase over the next
five years by the addition of Spanish language networks, locally originated
programming and Internet access and other broadband and telecommunications
services.

Recent and Pending Transactions

Completed Transactions

         Completed DBS Acquisitions. From January 1, 1998 to February 9, 1999,
Pegasus made 32 acquisitions from independent DIRECTV providers (the "Completed
DBS Acquisitions"). These territories include in the aggregate approximately 2.9
million television households (including approximately 152,000 seasonal
residences and 294,000 business locations) and approximately 273,000
subscribers. We paid $518.6 million for all of these acquisitions. In buying
these territories, we have used a combination of cash, promissory notes, shares
of our Class A Common Stock, and options and warrants to purchase our Class A
Common Stock and/or assumed liabilities. One of the Completed DBS Acquisitions
was our acquisition of Digital Television Services, Inc., or DTS, on April 27,
1998. Pursuant to a merger agreement, DTS became one of our wholly-owned
subsidiaries. We acquired DTS in exchange for total consideration of
approximately $363.9 million, which consisted of approximately 5.5 million
shares of our Class A Common Stock (which had a value of $118.8 million),
options and warrants to purchase a total of 224,038 shares of our Class A Common
Stock (amounting to $3.3 million at the time of issuance), approximately $158.9
million in assumed net liabilities and approximately $82.9 million of a deferred
tax liability. Our acquisition of DTS gave us the right to provide DIRECTV
services in 11 states.

                                       9
<PAGE>

         New England Cable Sale. Effective July 1, 1998, we sold all of our New
England cable systems to Avalon Cable of New England, LLC for $30.1 million in
cash. We recognized a gain of approximately $24.7 million on this sale.

         Note Offering. On November 30, 1998, we issued $100.0 million of our 9
3/4% Senior Notes due 2006. Of the $96.8 million we had left after paying the
initial purchasers' discount, fees and expenses, we applied $64.0 million to pay
down indebtedness under the Pegasus Media & Communications credit facility and
$32.8 million to the cash portion of certain completed DBS acquisitions.

Pending Transactions

         Pending DBS Acquisitions. As of February 9, 1999, we have entered into
letters of intent or definitive agreements to acquire DIRECTV distribution
rights in rural areas of Colorado, Indiana, Minnesota, and Ohio. These
territories include approximately 115,000 television households (including
approximately 5,800 seasonal residences and 11,600 business locations), and
approximately 9,400 subscribers. In the aggregate, the consideration for the
pending DBS acquisitions is $14.4 million in cash and $3.1 million in promissory
notes and assumed liabilities. The closings of these acquisitions are subject to
the negotiation of definitive agreements, third party approvals and other
customary conditions. We cannot assure you that these conditions will be
satisfied.

         Pending Cable Acquisition. We have entered into an agreement to
purchase a cable system serving Aguadilla, Puerto Rico and neighboring
communities for a purchase price of approximately $42.0 million in cash. As of
December 31, 1998, the Aguadilla cable system served approximately 21,500
subscribers and passed approximately 81,300 of the 83,300 homes in the franchise
area. The Aguadilla cable system is contiguous to our existing Puerto Rico cable
system and, upon completion of the purchase, we intend to consolidate the
Aguadilla cable system with our existing cable system. The closing of this
acquisition is subject to third party approvals and other customary conditions.
One of these conditions is that the Puerto Rico franchising authority will not
impose greater burdens on us than it imposes on the present owner. We expect we
will have to negotiate terms with the Puerto Rico authority. While we believe we
will reach a satisfactory agreement, we cannot be sure. If we do, and the other
conditions are met, we expect to close the acquisition in the first quarter of
1999.

         Equity Offering. In January 1999, we filed a registration statement
with the Securities and Exchange Commission to offer 3,000,000 shares of our
Class A Common Stock and 1,714,200 shares of Class A Common Stock held by
certain existing stockholders for sale. We expect to complete the offering in
March 1999. If the offering is completed, we plan to use the proceeds for
acquisitions, capital expenditures and general corporate purposes. We will
receive no proceeds from the sale of Class A Common Stock by our existing
stockholders. After the offering is completed, we will have approximately 14.3
million shares of Class A Common Stock outstanding. We have granted the
underwriters of our offering an option to purchase up to an additional 707,130
shares to cover over-allotments, if any.

Competition

         Our DBS business faces competition from other current or potential
multichannel programming distributors, including other DBS operators,
direct-to-home or DTH providers, cable operators, wireless cable operators,
internet and local and long-distance telephone companies, which may be able to
offer more competitive packages or pricing than we or DIRECTV can provide. In
addition, the DBS industry is still evolving and recent or future competitive
developments could adversely affect us. For example, on November 30, 1998,
EchoStar, which competes with us in the sale of DBS programming, announced that
it had entered into an agreement with News Corporation and MCI providing for the
transfer to EchoStar of the license to operate a high-powered DBS business at
the 110(Degree) west longitude orbital location consisting of 28 frequencies and
the sale of two satellites that are currently under construction. This could
adversely affect us in several ways. First, 


                                       10
<PAGE>

EchoStar could develop greater channel capacity than DIRECTV and offer more and
a wider selection of programming than offered by DIRECTV. Second, DBS is limited
by the copyright laws from retransmitting television signals to local markets,
and EchoStar has been at the forefront of a legislative effort to change the
laws in order to permit EchoStar and other DBS providers to deliver local
network signals. The additional frequencies being acquired by EchoStar could
provide it with enough capacity to retransmit local signals in larger television
markets if the law is changed. DIRECTV does not have this capacity.

         Our TV stations compete for audience share, programming and advertising
revenue with other television stations in their respective markets and with DBS
operators, cable operators and other advertising media. DBS and cable operators
in particular are competing more aggressively than in the past for advertising
revenues in our TV stations' markets. This competition could adversely affect
our stations' revenues and performance in the future.

         Our cable systems face competition from television stations, satellite
master antennae television systems, wireless cable systems, direct-to-home
providers, DBS systems and open video systems.

         In addition, the markets in which we operate are in a constant state of
change due to technological, economic and regulatory developments. We are unable
to predict what forms of competition will develop in the future, the extent of
such competition or its possible effects on our businesses.

Employees

         As of December 31, 1998, we had 749 full-time and 130 part-time
employees. We also had 8 general managers, 37 department managers and 9
corporate managers as of this date. We are not a party to any collective
bargaining agreements, and we consider our relations with our employees to be
good.

Executive Officers of the Registrant

         For biographies and other information about our executive officers, see
Item 10: Directors and Executive Officers of the Registrant.

DBS Agreements, Licenses, LMAs and Cable Franchises

DBS Agreements

         Prior to the launch of the first DIRECTV satellite in 1993, Hughes
entered into various agreements intended to assist it in the introduction of
DIRECTV services, including agreements with RCA/Thomson for the development and
manufacture of DBS reception equipment and with USSB for the sale of five
transponders on the first satellite. At this time, Hughes also offered members
and associates of the NRTC the opportunity to become the exclusive providers of
DIRECTV services in rural areas of the U.S. in which an NRTC member or associate
purchased such a right. The NRTC is a cooperative organization whose members and
associates are engaged in the distribution of telecommunications and other
services in predominantly rural areas of the U.S. Participating NRTC members and
associates acquired the exclusive right to provide DIRECTV programming services
to residential and commercial subscribers in certain service areas. Service
areas purchased by participating NRTC members and associates comprise
approximately 9.0 million television households and were initially acquired for
aggregate purchase payments exceeding $100 million.

         The agreements between DIRECTV and NRTC and between NRTC and its
members and associates provide the participating NRTC members and associates in
their service areas substantially all of the rights and benefits otherwise
retained by DIRECTV in other areas, including the right to set pricing, to
retain all subscription remittances and to appoint sales agents within their
distribution areas (subject to certain obligations to honor sales agents
appointed by DIRECTV). In 

                                       11
<PAGE>

exchange, participating NRTC members and associates paid to DIRECTV a one-time
purchase price. In addition to the purchase price, NRTC members and associates
are required to reimburse DIRECTV for the allocable share of certain common
expenses (such as programming, satellite-specific costs and expenses associated
with the billing and authorization systems) and to remit to DIRECTV a 5% royalty
on subscription revenues.

         The agreement with DIRECTV authorizes participating NRTC members and
associates to provide all commercial services offered by DIRECTV that are
transmitted from 27 frequencies that the FCC has authorized for DIRECTV's use at
its present orbital location for a term running through the life of DIRECTV's
current satellites. The NRTC has advised us that its agreement with DIRECTV also
provides the NRTC a right of first refusal to acquire comparable rights in the
event that DIRECTV elects to launch successor satellites upon the removal of the
present satellites from active service. The financial terms of any such purchase
are likely to be the subject of negotiation and Pegasus is unable to predict
whether substantial additional expenditures by the NRTC will be required in
connection with the exercise of such right of first refusal.

         The agreements between the NRTC and participating NRTC members and
associates terminate when the DIRECTV satellites are removed from their orbital
location. If the satellites are removed earlier than June 2004, the tenth
anniversary of the commencement of DIRECTV services, Pegasus will receive a
prorated refund of its original purchase price for the DIRECTV rights. Our
agreements with the NRTC may be terminated prior to the expiration of its term
as follows: (a) if the agreement between DIRECTV and the NRTC (the "DIRECTV/NRTC
Agreement" and, together with the NRTC member agreements, the "DBS Agreements")
is terminated because of a breach by DIRECTV, the NRTC may terminate its
agreements with us, but the NRTC will be responsible for paying to us our pro
rata portion of any refunds that the NRTC receives from DIRECTV, (b) if we fail
to make any payment due to the NRTC or otherwise breach a material obligation of
our agreements with the NRTC, the NRTC may terminate our agreement with the NRTC
in addition to exercising other rights and remedies against us and (c) if the
NRTC's agreement with DIRECTV is terminated because of a breach by the NRTC,
DIRECTV is obligated to continue to provide DIRECTV services to Pegasus (i) by
assuming the NRTC's rights and obligations under the NRTC's agreement with
DIRECTV or (ii) under a new agreement containing substantially the same terms
and conditions as NRTC's agreement with DIRECTV.

         We are not permitted under our agreements with the NRTC to assign or
transfer, directly or indirectly, our rights under these agreements without the
prior written consent of the NRTC and DIRECTV, which consents cannot be
unreasonably withheld.

         The NRTC has adopted a policy requiring any party acquiring DIRECTV
distribution rights from an NRTC member or associate to post a letter of credit
to secure payment of NRTC's billings if the acquiring person's monthly payments
to the NRTC (including payments on account of the acquired territory) exceeds a
specified amount. Pursuant to this policy, Pegasus or its subsidiaries have
posted letters of credit of approximately $21.2 million in connection with
completed DBS acquisitions. Although this requirement can be expected to reduce
somewhat our acquisition capacity inasmuch as it ties up capital that could
otherwise be used to make acquisitions, we expect this reduction to be
manageable. There can be no assurance, however, that the NRTC will not in the
future seek to institute other policies, or to change this policy, in ways that
would be material to us.

Broadcast

         FCC Licensing. The broadcast television industry is subject to
regulation by the FCC pursuant to the Communications Act of 1934, as amended
(the "Communications Act"). Approval by the FCC is required for the issuance,
renewal, transfer and assignment of broadcast station operating licenses.
Television license terms are generally eight years. While in the vast majority
of cases such licenses are renewed by the FCC, there can be no assurance that
our licenses or the licenses for the TV stations that we program pursuant to
LMAs will be renewed at their expiration dates or that such renewals will be for
full terms. The licenses with respect to TV stations 


                                       12
<PAGE>

WOLF/WILF, WPXT, WDSI and WTLH are scheduled to expire on August 1, 1999, April
1, 1999, August 1, 2005, and April 1, 2005, respectively. The licenses with
respect to TV station WDBD were scheduled to expire on June 1, 1997. An
application for renewal of the WDBD license was timely filed with the FCC and
the station has continuing authority to operate pending FCC action on such
application. An application for the renewal of the license of WPXT was filed
with the FCC on December 1, 1998 and is pending. The license with respect to
WSWB, a station we program pursuant to an LMA, expires on August 1, 1999. The
other TV stations we program, WPME, WFXU and WGFL have license applications
pending at the FCC. There can be no assurance these license applications will be
granted.

         Fox Affiliation Agreement. Our network affiliation agreements with the
Fox Broadcasting Company formally expired on January 30, 1999 (other than the
affiliation agreement for television station WTLH, which is scheduled to expire
on December 31, 2000). Except in the case of WTLH, we currently broadcast Fox
programming under arrangements between Pegasus and Fox which have generally
conformed in practice to such affiliation agreements. We have been informed by
Fox that it is revising its form affiliation agreement. Pending completion of
its revised form agreement, Fox has proposed entering into new agreements based
on its current form subject to termination by Fox or Pegasus upon 90 days prior
written notice to the other party. Negotiations with Fox are continuing, and we
believe that we will enter into new affiliation agreements on satisfactory terms
with no disruption in programming. If we are mistaken in this belief, the loss
of the ability to carry Fox programming could have a material and adverse effect
on us.

         The station affiliation agreement with Fox for WTLH (as amended, the
"Fox Affiliation Agreement") provides WTLH with the right to broadcast
programming which Fox and Fox Children's Network, Inc. make available for
broadcasting in Tallahassee, Florida, the community to which WTLH is licensed by
the FCC. Fox has committed to supply approximately six hours of programming each
weekday, although, from time to time, some Fox time periods have been available
to the station for programming. On weekends, Fox generally supplies more
programming than during the week, including sports programming such as National
Football Conference games and pre-game shows. WTLH has agreed to broadcast all
such Fox programs in their entirety, including all commercial announcements. In
each Fox program, WTLH may sell the advertising time generally made available by
Fox in such program to its affiliates on a national basis, and, generally, may
retain the revenues from such sales. Fox retains the right to sell the remaining
advertising time in each Fox program. WOLF, WPXT, WDSI and WDBD have also
operated under substantially the same terms and conditions.

         Under the Fox Affiliation Agreement, WTLH is entitled to receive
payments from Fox Kids Worldwide, Inc. as compensation for relinquishing its
former interests in the profits of Fox Children's Network and for continuing to
carry Fox Children's Network programming on the station. Those payments,
together with certain revenues from commercials and from retransmission
arrangements with Fox, will be returned to Fox to defray the costs of providing
NFL programming to the station. Under specified circumstances, however, Fox or
WTLH may cancel the arrangements for broadcast of NFL programming, in which case
the Fox Children's Network-related compensation would thereafter be paid to the
station. In the event that WTLH ceases to carry Fox Children's Network
programming prior to June 30, 2008, after having receiving NFL programming, Fox
may have a claim for amounts under the terms of the Fox Affiliation Agreement.

         The Fox Affiliation Agreement for WTLH expires December 31, 2000, but
is renewable for two successive two-year periods, at the discretion of Fox and
upon acceptance by Pegasus. The Fox Affiliation Agreement may be terminated
generally (a) by Fox upon (i) a change in any material aspect of the station's
operation, including its transmitter location, power, frequency, programming
format or hours of operation, with 30 days written notice, (ii) acquisition by
Fox, directly or indirectly, of a significant ownership and/or controlling
interest in any television station in the same 


                                       13
<PAGE>

market, with 60 days written notice, (iii) assignment or attempted assignment by
Pegasus of the Fox Affiliation Agreement, with 30 days written notice, (iv)
three or more unauthorized preemptions of Fox programming within a 12-month
period, with 30 days written notice, or (v) WTLH deciding not to accept a change
in Fox operations applicable to Fox affiliates generally, or (b) by either Fox
or WTLH upon occurrence of a force majeure event which substantially interrupts
Fox's ability to provide programming or the station's ability to broadcast the
programming.

         UPN Affiliation Agreement. The Portland TV station programmed by
Pegasus pursuant to an LMA, WPME, is affiliated with UPN pursuant to a station
affiliation agreement. Under the UPN Affiliation Agreement, UPN grants Pegasus
an exclusive license to broadcast all programming, including commercial
announcements, network identifications, promotions and credits, which UPN makes
available to serve the community of Lewiston, Maine. UPN has committed to supply
approximately four hours of programming during specified time periods. The UPN
Affiliation Agreement allots to each party a specified amount of advertising
time during each hour of programming, and each party is entitled to the revenue
realized from its sale of advertising time.

         The term of the UPN Affiliation Agreement expires January 15, 2001, and
automatically renews for a three-year period unless either party has given
written notice to the other party of its election not to renew. The UPN
Affiliation Agreement may be terminated (a) by UPN, upon prior written notice,
in the event of (i) a material reduction or modification of WPME's transmitter
location, power, frequency, programming format or hours of operation, (ii) any
assignment or transfer of control of the station's license, (iii) three or more
unauthorized preemptions of UPN programming by the station during any 12-month
period, which have actually occurred or which UPN reasonably believes will
occur, or (b) by either UPN or Pegasus upon the occurrence of a force majeure
event that causes UPN substantially to fail to provide programming or Pegasus
substantially to fail to broadcast UPN's programming, for either (i) four
consecutive weeks or (ii) an aggregate of six weeks in any 12-month period.

         WB Affiliation Agreements. We program TV stations WSWB and WGFL as
affiliates of WB and are in the process of negotiating affiliation agreements
with respect to these stations.

         LMAs. Current FCC rules preclude the ownership of more than one
television station in a market, unless such stations are operated as a satellite
of a primary station. In recent years, in a number of markets across the
country, certain television owners have entered into agreements to provide the
bulk of the broadcast programming on stations owned by other licensees, and to
retain the advertising revenues generated from such programming. Such agreements
are commonly referred to as Local Marketing Agreements, or LMAs.

         When operating pursuant to an LMA, while the bulk of the programming is
provided by someone other than the licensee of the station, the station licensee
must retain control of the station for FCC purposes. Thus, the licensee has the
ultimate responsibility for the programming broadcast on the station and for the
station's compliance with all FCC rules, regulations, and policies. The licensee
must retain the right to preempt programming supplied pursuant to the LMA where
the licensee determines, in its sole discretion, that the programming does not
promote the public interest or where the licensee believes that the substitution
of other programming would better serve the public interest. The licensee must
also have the primary operational control over the transmission facilities of
the station.

         Pegasus programs WPME (Portland, Maine), WGFL (Gainesville, Florida),
WSWB (Northeastern Pennsylvania), and WFXU (Tallahassee, Florida) and expects to
program other television stations, through the use of LMAs, but there can be no
assurance that the licensees of such stations will not unreasonably exercise
their right to preempt the programming of Pegasus, or that the licensees of such
stations will continue to maintain the transmission facilities of the stations
in a manner sufficient to broadcast a high quality signal over the station. As
the licensee must also maintain all of the qualifications necessary to be a
licensee of the FCC, and as the principals of the licensee are not under the
control of Pegasus, there can be no assurances that these licenses will be
maintained by the entities which currently hold them. The FCC is currently
reviewing its LMA 

                                       14
<PAGE>

policy, and while Congress, pursuant to the Telecommunications Act of 1996 (the
"1996 Act"), indicated that the continued performance of then existing LMAs
should be generally grandfathered, we cannot predict whether any of our LMAs
will be grandfathered.

         Currently, television LMAs are not considered attributable interests
under the FCC's multiple ownership rules. However, the FCC is considering
proposals which would make LMAs attributable, as they generally are in the radio
broadcasting industry. If the FCC were to adopt an order that makes such
interests attributable, without modifying its current prohibitions against the
ownership of more than one television station in a market, Pegasus could be
prohibited from entering into such arrangements with other stations in markets
in which it owns television stations and could be required to modify or
terminate existing LMA arrangements. Such a change in the FCC rules could affect
the LMAs with the owners of WSWB, WGFL, WFXU and WPME.

Cable Franchises

         Cable systems are generally constructed and operated under
non-exclusive franchises granted by state or local governmental authorities. The
franchise agreements may contain many conditions, such as the payment of
franchise fees; time limitations on commencement and completion of construction;
conditions of service, including the number of channels, the carriage of public,
educational and governmental access channels, the carriage of broad categories
of programming agreed to by the cable operator, and the provision of free
service to schools and certain other public institutions; and the maintenance of
insurance and indemnity bonds. Certain provisions of local franchises are
subject to limitations under the Cable Television Consumer Protection and
Competition Act of 1992 (the "1992 Cable Act").

         After giving effect to the Aguadilla acquisition, Pegasus will hold
four cable franchises, all of which are non-exclusive. Our cable franchises have
terms that expire in 2003, 2004, 2008 and 2009. We have never had a franchise
revoked. All of the franchises of the systems eligible for renewal have been
renewed or extended at or prior to their stated expirations.

         The 1992 Cable Act provides, among other things, for an orderly
franchise renewal process in which renewal will not be unreasonably withheld. In
addition, the 1992 Cable Act establishes comprehensive renewal procedures which
require that an incumbent franchisee's renewal application be assessed on its
own merit and not as part of a comparative process with competing applications.
We believe that we have good relations with our franchising authorities. The
Cable Communications Policy Act of 1984 (the "1984 Cable Act") prohibits
franchising authorities from imposing annual franchise fees in excess of 5% of
gross revenues and permits the cable system operator to seek renegotiation and
modification of franchise requirements if warranted by changed circumstances.

Legislation and Regulation

         In February 1996, Congress passed the 1996 Act. This law has altered
and will continue to alter federal, state and local laws and regulations
regarding telecommunications providers and services, including Pegasus and the
cable television and other telecommunications services provided by Pegasus.

DBS

         Unlike a common carrier, such as a telephone company, or a cable
operator, DBS operators such as DIRECTV are free to set prices and serve
customers according to their business judgment, without rate of return or other
regulation or the obligation not to discriminate among customers. However, there
are laws and regulations that affect DIRECTV and, therefore, affect Pegasus. As
an operator of a privately owned United States satellite system, DIRECTV is
subject to the regulatory jurisdiction of the FCC, primarily with respect to (i)
the licensing of individual satellites (i.e., the requirement that DIRECTV meet
minimum financial, legal and technical standards), (ii) avoidance of
interference with radio stations and (iii) compliance with rules that the FCC
has established 

                                       15
<PAGE>

specifically for DBS satellite licenses. As a distributor of television
programming, DIRECTV is also affected by numerous other laws and regulations.
The 1996 Act clarifies that the FCC has exclusive jurisdiction over
direct-to-home satellite services and that criminal penalties may be imposed for
piracy of DTH satellite services. The 1996 Act also offers DTH operators relief
from private and local government-imposed restrictions on the placement of
receiving antennae. In some instances, DTH operators have been unable to serve
areas due to laws, zoning ordinances, homeowner association rules, or
restrictive property covenants banning the installation of antennae on or near
homes. The FCC recently promulgated rules designed to implement Congress' intent
by prohibiting any restriction, including zoning, land use or building
regulation, or any private covenant, homeowners' association rule, or similar
restriction on property within the exclusive use or control of the antenna user
where the user has a direct or indirect ownership interest in the property, to
the extent it impairs the installation, maintenance or use of a DBS receiving
antenna that is one meter or less in diameter or diagonal measurement, except
where such restriction is necessary to accomplish a clearly defined safety
objective or to preserve a recognized historic district. Local governments and
associations may apply to the FCC for a waiver of this rule based on local
concerns of a highly specialized or unusual nature. The FCC also issued a
further order giving renters the right to install antennas in areas of their
rental property in which they have exclusive use, e.g. balconies or patios. The
1996 Act also preempted local (but not state) governments from imposing taxes or
fees on DTH services, including DBS. Finally, the 1996 Act required that
multichannel video programming distributors such as DTH operators fully scramble
or block channels providing indecent or sexually explicit adult programming. If
a multichannel video programming distributor could not fully scramble or block
such programming, it was required to restrict transmission to those hours of the
day when children are unlikely to view the programming (as determined by the
FCC). On March 24, 1997, the U.S. Supreme Court let stand a lower court ruling 
that allowed enforcement of this provision pending a constitutional challenge.
In response to this ruling, the FCC declared that its rules implementing the
scrambling provision would become effective on May 18, 1997. On December 28,
1998, the requirement to scramble sexually explicit programming was ruled
unconstitutional by the U.S. District Court in Wilmington, Delaware, and the FCC
was directed to stop enforcing the requirement.

         In addition to regulating pricing practices and competition within the
franchise cable television industry, the 1992 Cable Act was intended to
establish and support existing and new multi-channel video services, such as
wireless cable and DTH, to provide subscription television services. DIRECTV and
Pegasus have benefited from the programming access provisions of the 1992 Cable
Act and implementing rules in that DIRECTV has been able to gain access to
previously unavailable programming services and, in some circumstances, has
obtained certain programming services at reduced cost. Any amendment to, or
interpretation of, the 1992 Cable Act or the FCC's rules that would permit cable
companies or entities affiliated with cable companies to discriminate against
competitors such as DIRECTV in making programming available (or to discriminate
in the terms and conditions of such programming) could adversely affect
DIRECTV's ability to acquire programming on a cost-effective basis, which would
have an adverse impact on Pegasus. Certain of the restrictions on
cable-affiliated programmers will expire in 2002 unless the FCC extends such
restrictions.

         The FCC recently completed a rulemaking imposing public interest
requirements for providing video programming on DTH licensees, including, at a
minimum, reasonable and non-discriminatory access by qualified federal
candidates for office at the lowest unit rates and the obligation to set aside
four percent of the licensee's channel capacity for non-commercial programming
of an educational or informational nature. Within this set-aside requirement,
DTH providers must make capacity available to "national educational programming
suppliers" at rates not exceeding 50% of the DTH provider's direct costs of
making the capacity available to the programmer.

         While DTH operators like DIRECTV currently are not subject to the "must
carry" requirements of the 1992 Cable Act, the broadcast and cable industry has
argued that DTH operators should be subject to these requirements if they
deliver local television signals to local markets. In the event the "must
carry" requirements of the 1992 Cable Act are revised to include DTH operators, 
or to the extent that new legislation of a similar nature is enacted, DIRECTV's 
future plans to provide 

                                       16
<PAGE>

local programming will be adversely affected, and such must-carry requirements
could cause the displacement of possibly more attractive programming.

         The Satellite Home Viewer Act (the "SHVA") establishes a "compulsory"
copyright license that allows a DTH operator, for a statutorily-established fee,
to retransmit network programming to subscribers for private home viewing so
long as that retransmission is limited to those persons in "unserved
households." In general, an "unserved household" is one that cannot receive,
through the use of a conventional outdoor rooftop antenna, a sufficient
over-the-air network signal, and has not, within 90 days prior to subscribing to
the DTH service, subscribed to a cable service that provides that network
signal. In recent lawsuits, the networks have persuaded the courts to define
"unserved subscriber" much more narrowly than has been our practice and that of
others in the direct broadcast satellite industry. Under the court's order in
two of these lawsuits, we are required to cut off CBS and Fox programming to
ineligible subscribers in two stages between February 28, 1999 and April 30,
1999. The first stage cut-offs affect approximately 64,000 subscribers. We do
not know how many of our other subscribers will be affected by the second stage
cut-offs. These cut-offs will result in a reduction of revenues and the possible
loss of subscribers. Since we are using the court's narrower definition of
unserved subscriber to determine whether new subscribers are eligible to receive
any of the four networks, we do not know how many potential customers we have
lost or will lose because of this. In addition to the lawsuits, the FCC just
completed an emergency rulemaking proceeding in which it provided some
regulatory guidance on issues related to the determination of "unserved
subscriber." However, the FCC deferred to Congress on the most important issues
raised in the lawsuits, as well as some related policy matters. The SHVA expires
in December 1999, and Congress has begun considering some of the issues raised
by the FCC as well as an extension of SHVA. Pending Congressional action, the
inability of DIRECTV and Pegasus to provide network programming to certain
subscribers in DIRECTV service territories could adversely affect Pegasus'
average programming revenue per subscriber and subscriber growth.

         The foregoing does not purport to describe all present and proposed
federal regulations and legislation relating to the DBS industry.

Broadcast Television

         The ownership, operation and sale of television stations, including
those licensed to our subsidiaries, are subject to the jurisdiction of the FCC
under authority granted it pursuant to the Communications Act. Matters subject
to FCC oversight include, but are not limited to, the assignment of frequency
bands for broadcast television; the approval of a television station's
frequency, location and operating power; the issuance, renewal, revocation or
modification of a television station's FCC license; the approval of changes in
the ownership or control of a television station's licensee; the regulation of
equipment used by television stations; and the adoption and implementation of
regulations and policies concerning the ownership, operation and employment
practices of television stations. The FCC has the power to impose penalties,
including fines or license revocations, upon a licensee of a television station
for violations of the FCC's rules and regulations. The following is a brief
summary of certain provisions of the Communications Act and of specific FCC
regulations and policies affecting broadcast television. Reference should be
made to the Communications Act, FCC rules and the public notices and rulings of
the FCC for further information concerning the nature and extent of FCC
regulation of broadcast television stations.

         License Renewal. Under law in effect prior to the 1996 Act, television
station licenses were granted for a maximum allowable period of five years and
were renewable thereafter for additional five year periods. The 1996 Act,
however, authorized the FCC to grant television broadcast licenses, and renewals
thereof, for terms of up to eight years. The FCC has extended television license
terms to the eight-year maximum provided in the 1996 Act, reserving the right to
renew licenses for shorter terms. The FCC may revoke or deny licenses, after a
hearing, for serious violations of its regulations, and it may impose fines on
licensees for less serious infractions. Petitions to deny renewal of a license
may be filed on or before the first day of the last month of a license term.
Generally, however, in the absence of serious violations of FCC rules or
policies, license renewal is 


                                       17
<PAGE>

expected in the ordinary course. The 1996 Act prohibits the FCC from considering
competing applications for the frequency used by the renewal applicant if the
FCC finds that the station seeking renewal has served the public interest,
convenience and necessity, that there have been no serious violations by the
licensee of the Communications Act or the rules and regulations of the FCC, and
that there have been no other violations by the licensee of the Communications
Act or the rules and regulations of the FCC that, when taken together, would
constitute a pattern of abuse. The licenses with respect to TV stations
WOLF/WILF, WPXT, WDSI, WTLH and WDBD are scheduled to expire on August 1, 1999,
April 1, 1999, August 1, 2005, April 1, 2005 and June 1, 1997, respectively. An
application for renewal of the WDBD license was timely filed with the FCC and
the station has continuing authority to operate pending FCC action on such
application. See Item 3: Legal Proceedings - Television Station WDBD. The
license with respect to WSWB, a station Pegasus programs pursuant to an LMA,
expires on August 1, 1999. The other TV Stations Pegasus programs, WPME, WFXU
and WGFL, have license applications pending at the FCC.

         Ownership Matters. The Communications Act contains a number of
restrictions on the ownership and control of broadcast licenses. The
Communications Act prohibits the assignment of a broadcast license or the
transfer of control of a broadcast licensee without the prior approval of the
FCC. The Communications Act and the FCC's rules also place limitations on alien
ownership; common ownership of broadcast, cable and newspaper properties;
ownership by those not having the requisite "character" qualifications and those
persons holding "attributable" interests in the licensee.

         Attribution Rules. The FCC generally applies its ownership limits to
"attributable" interests held by an individual, corporation, partnership or
other association. In the case of corporations holding (or through subsidiaries
controlling) broadcast licenses, the interests of officers, directors and those
who, directly or indirectly, have the right to vote 5% or more of the
corporation's stock (or 10% or more of such stock in the case of insurance
companies, investment companies and bank trust departments that are passive
investors) are generally attributable, except that, in general, no minority
voting stock interest will be attributable if there is a single holder of more
than 50% of the outstanding voting power of the corporation. The FCC has
outstanding a notice of proposed rulemaking that, among other things, seeks
comment on whether the FCC should modify its attribution rules by (i)
restricting the availability of the single majority shareholder exemption and
(ii) attributing under certain circumstances certain interests such as
non-voting stock or debt. We cannot predict the outcome of this proceeding or
how it will affect our business.

         Alien Ownership Restrictions. The Communications Act restricts the
ability of foreign entities to own or hold interests in broadcast licenses.
Foreign governments, representatives of foreign governments, non-citizens and
representatives of non-citizens, corporations and partnerships organized under
the laws of a foreign nation are barred from holding broadcast licenses.
Non-citizens, foreign governments, foreign corporations and representatives of
any of the foregoing, collectively, may directly or indirectly own or vote up to
20% of the capital stock of a broadcast licensee. In addition, a broadcast
license may not be granted to or held by any corporation that is controlled,
directly or indirectly, by any other corporation more than one-fourth of whose
capital stock is owned or voted by non-citizens or their representatives, by
foreign governments or their representatives, or by non-U.S. corporations, if
the FCC finds that the public interest will be served by the refusal or the
revocation of such license. The FCC has interpreted this provision of the
Communications Act to require an affirmative public interest finding before a
broadcast license may be granted to or held by any such corporation. Because of
these provisions, we may be prohibited from having more than one-fourth of our
stock owned or voted directly or indirectly by non-citizens, foreign
governments, foreign corporations or representatives of any of the foregoing.

         Multiple Ownership Rules. FCC rules limit the number of television
stations any one entity can acquire or own. The FCC's television national
multiple ownership rule limits the combined audience of television stations in
which an entity may hold an attributable interest to 35% of total U.S. audience
reach. The FCC's television multiple ownership local contour overlap rule
generally prohibits ownership of attributable interests by a single entity in
two or more television stations with 

                                       18
<PAGE>

certain overlapping contours; however, changes in these rules are under
consideration, but we cannot predict the outcome of the proceeding in which such
changes are being considered.

         Cross-Ownership Rules. FCC rules have generally prohibited or
restricted the cross-ownership, operation or control of a radio station and a
television station serving the same geographic market, of a television station
and a cable system serving the same geographic market, and of a television
station and a daily newspaper serving the same geographic market. As required by
the 1996 Act, the FCC has amended its rules to allow a person or entity to own
or control a network of broadcast stations and a cable system. In addition, the
1996 Act eliminates the statutory prohibition against the ownership of
television stations and cable systems in the same geographic market, although
FCC rules prohibiting such ownership are still in place. The 1996 Act also
directs the FCC to presumptively waive, in the top 50 markets, its prohibition
on ownership of a television and one AM or one FM station in the same geographic
market. Under these rules, absent waivers, we would not be permitted to acquire
any daily newspaper, radio broadcast station or cable system in a geographic
market in which we now own or control any TV properties. The FCC is currently
considering a rulemaking to change the radio/television cross-ownership
restrictions. We cannot predict the outcome of that rulemaking.

         Programming and Operation. The Communications Act requires broadcasters
to serve the "public interest." Since the late 1970s, the FCC gradually has
relaxed or eliminated many of the formal procedures it had developed to promote
the broadcast of certain types of programming responsive to the needs of a
station's community of license. However, broadcast station licensees continue to
be required to present programming that is responsive to local community
problems, needs and interests and to maintain certain records demonstrating such
responsiveness. Complaints from viewers concerning a station's programming often
will be considered by the FCC when it evaluates license renewal applications,
although such complaints may be filed at any time and generally may be
considered by the FCC at any time. It has been reported that the FCC may
initiate a proceeding to clarify the public interest obligations of
broadcasters, although we cannot predict the outcome of any such proceeding.
Stations also must follow various rules promulgated under the Communications Act
that regulate, among other things, political advertising, sponsorship
identifications, the advertisements of contests and lotteries, programming
directed to children, obscene and indecent broadcasts and technical operations,
including limits on radio frequency radiation. In August 1996, the FCC adopted
new children's television rules mandating, among other things, that stations
must now identify and provide information concerning children's programming to
publishers of program guides and listings and must broadcast three hours each
week of educational and informational programming directed to children. The 1996
Act contains a number of provisions relating to television violence, which,
among other things, direct the television industry or the FCC to develop a
television ratings system and require commercial television stations to report
on complaints concerning violent programming in their license renewal
applications. Certain of the FCC's rules which required broadcast licensees to
develop and implement affirmative action programs designed to promote equal
employment opportunities and to submit reports to the FCC with respect to these
matters on an annual basis and in connection with license renewal applications
were found unconstitutional by the U.S. Court of Appeals. The FCC has initiated
a rulemaking proceeding to revise these rules. The 1996 Act also directs the FCC
to adopt rules requiring closed captioning of all broadcast television
programming, except where captioning would be "economically burdensome." The FCC
has recently adopted such rules. The rules require generally that (i) 100% of
all new programming first published or exhibited on or after January 1, 1998
must be closed captioned within eight years, and (ii) 75% of "old" programming
which first aired prior to January 1, 1998 must be closed captioned within ten
years, subject to certain exemptions. In connection with the transition to
digital operations, a governmental commission has been appointed to consider
whether additional public service obligations should be imposed on television
broadcasters. The FCC issued its report in December 1998 making several
non-binding recommendations, including that broadcasters voluntarily provide
five minutes of free air time per evening to political candidates for the thirty
days prior to an election. We cannot predict the impact of such recommendations.

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<PAGE>

         Must Carry and Retransmission Consent. The 1992 Cable Act requires each
television broadcaster to make an election to exercise either certain "must
carry" or, alternatively, "retransmission consent" rights in connection with its
carriage by cable systems in the station's local market. If a broadcaster
chooses to exercise its must carry rights, it may demand carriage on a specified
channel on cable systems within its defined market. Must carry rights are not
absolute, and their exercise is dependent on variables such as the number of
activated channels on, and the location and size of, the cable system and the
amount of duplicative programming on a broadcast station. Under certain
circumstances, a cable system may decline carriage of a given station. If a
broadcaster chooses to exercise its retransmission consent rights, it may
prohibit cable systems from carrying its signal, or permit carriage under a
negotiated compensation arrangement. The FCC's must carry requirements took
effect in June 1993. Under our Fox affiliation agreements, we have appointed Fox
as our irrevocable agent to negotiate such retransmission consents with the
major cable operators in our respective markets. Pegasus' stations exercised
retransmission consent rights in 1993 and 1996. Television stations must make a
new election between must carry and retransmission consent rights every three
years. The next required election date is October 1, 1999. Certain of Pegasus'
retransmission consent agreements expire in May 1999, and we are currently
renegotiating such agreements. Although we expect the current retransmission
consent agreements to be renewed upon their expiration, there can be no
assurance that such renewals will be obtained.

         The FCC has initiated a rulemaking proceeding to consider whether to
apply the must-carry rules to require cable companies to carry both the analog
and the digital signals of local broadcasters when television stations will be
broadcasting both signals, during the digital television ("DTV") transition
period between 2002 (at the latest) and 2006. If the FCC does not require DTV
must-carry, cable customers in our broadcast markets may not receive the
station's digital signal, which could adversely affect us.

         Digital Television. The FCC has taken a number of steps to implement
DTV broadcasting service in the U.S. In December 1996, the FCC adopted a DTV
broadcast standard and has since adopted decisions in several pending rulemaking
proceedings that establish service rules and a plan for implementing DTV. The
FCC adopted a DTV Table of Allotments that provides all television stations
authorized as of April 1997 with a second channel on which to broadcast a DTV
signal. The FCC has attempted to provide DTV coverage areas that are comparable
to stations' existing service areas. The FCC has ruled that television broadcast
licensees may use their digital channels for a wide variety of services such as
high-definition television, multiple standard definition television programming,
audio, data, and other types of communications, subject to the requirement that
each broadcaster provide at least one free video channel equal in quality to the
current technical standard and further subject to the requirement that broadcast
licensees pay a fee of 5% of gross revenues on all DTV subscription services.

         The FCC is requiring that affiliates of ABC, CBS, Fox and NBC in the
top ten television markets begin digital broadcasting by May 1, 1999, and that
affiliates of these networks in markets 11 through 30 begin digital broadcasting
by November 1999, and that all other stations begin digital broadcasting by May
1, 2002. The FCC's plan calls for the DTV transition period to end in the year
2006 at which time the FCC expects that television broadcasters will have ceased
broadcasting on their non-digital channels, allowing that spectrum to be
recovered by the government for other uses. Under the Balanced Budget Act signed
into law by President Clinton, however, the FCC is authorized to extend the
December 31, 2006 deadline for reclamation of a television station's non-digital
channel if, in any given case: (a) one or more television stations affiliated
with one of the four major networks in a market are not broadcasting digitally,
and the FCC determines that the station(s) has (have) "exercised due diligence"
in attempting to convert to digital broadcasting; (b) less than 85% of the
television households in the station's market subscribe to a multichannel video
service (cable, wireless cable or DBS) that carries at least one digital channel
from each of the local stations in that market; or (c) less than 85% of the
television households in the station's market can receive digital signals off
the air using either a set-top converter box for an analog television set or a
new digital television set. The Balanced Budget Act also directs the FCC to
auction the non-digital channels by September 30, 2002 even though they are not
to be reclaimed by the government until at 

                                       20
<PAGE>

least December 31, 2006. The Balanced Budget Act also permits broadcasters to
bid on the non-digital channels in cities with populations greater than 400,000
provided the channels are used for DTV. Thus it is possible a broadcaster could
own two channels in a market. The FCC has opened separate proceedings to
consider the surrender of existing television channels and how those frequencies
will be used after they are eventually recovered from television broadcasters
and to what extent the cable must-carry requirements will apply to DTV signals.

         In addition, the digital order restricts current stations' abilities to
relocate transmitter sites and otherwise change technical facilities in any
manner which could impact proposed digital television stations. This may
preclude the improvement of the facilities of certain stations owned or
programmed by Pegasus. The order also allotted digital television stations at
the current analog transmitter sites. Changes in the location of digital
stations are dependent on the lack of interference to other digital and analog
stations. Pegasus has filed applications with the FCC for DTV construction
permits for all of its stations.

         Implementation of digital television will improve the technical quality
of television signals receivable by viewers. Under certain circumstances,
however, conversion to digital operation may reduce a station's geographic
coverage area or result in some increased interference. The FCC's DTV allotment
plan also results in current UHF stations having considerably less signal power
within their service areas than present VHF stations that move to DTV channels.
While the 1998 orders of the FCC present current UHF stations with some options
to overcome this power disparity, it is unknown at this time whether Pegasus
will be able to benefit from these options. Implementation of digital television
will also impose substantial additional costs on television stations because of
the need to replace equipment and because some stations will need to operate at
higher utility costs. The FCC is also considering imposing new public interest
requirements on television licensees in exchange for their receipt of DTV
channels. We cannot predict what future actions the FCC might take with respect
to DTV, nor can it predict the effect of the FCC's present DTV implementation
plan or such future actions on our business.

         Pending or Proposed Legislation and FCC Rulemakings. The FCC is now
conducting a rulemaking proceeding to consider changes to the multiple ownership
rules that could, under certain limited circumstances, permit common ownership
of television stations with overlapping service areas, and/or impose
restrictions on television LMAs. Certain of these changes, if adopted, could
allow owners of television stations who currently cannot buy a television
station or an additional television station in Pegasus' markets to acquire
television properties in such markets. This may increase competition in such
markets, but may also work to Pegasus' advantage by permitting it to acquire
additional stations in its present markets and by enhancing the value of
Pegasus' stations by increasing the number of potential buyers. Alternatively,
if no changes are made in the multiple ownership rules relating to local
ownership, and LMAs are made attributable, Pegasus may be prohibited from
entering into LMAs, and could be required to terminate existing LMAs, in markets
in which it owns a station. Proposed changes in the FCC's "attribution" rules
may also limit the ability of certain investors to invest in Pegasus. The FCC
also has adopted more restrictive standards for the exposure of the public and
workers to potentially harmful radio frequency radiation emitted by broadcast
station transmitting facilities. Other matters which could affect our broadcast
properties include technological innovations affecting the mass communications
industry and technical allocation matters, including assignment by the FCC of
channels for additional broadcast stations, low-power television stations and
wireless cable systems and their relationship to and competition with full power
television service, as well as possible spectrum fees or other changes imposed
on broadcasters for the use of their channels. The ultimate outcome of these
pending proceedings cannot be predicted at this time.

         The FCC has initiated a Notice of Inquiry proceeding seeking comment on
whether the public interest would be served by establishing limits on the amount
of commercial matter broadcast by television stations. No prediction can be made
at this time as to whether the FCC will impose any commercial limits at the
conclusion of its deliberations. We are unable to determine what effect, if 

                                       21
<PAGE>

any, the imposition of limits on the commercial matter broadcast by television
stations would have upon Pegasus' operations.

         The Congress and the FCC have considered in the past and may consider
and adopt in the future, (i) other changes to existing laws, regulations and
policies or (ii) new laws, regulations and policies regarding a wide variety of
matters that could affect, directly or indirectly, the operation, ownership, and
profitability of Pegasus' broadcast stations, result in the loss of audience
share and advertising revenues for these stations or affect the ability of
Pegasus to acquire additional broadcast stations or finance such acquisitions.

         Additionally, irrespective of the FCC rules, the Department of Justice
and the Federal Trade Commission have the authority to determine that a
particular transaction presents antitrust concerns. These federal agencies have
recently increased their scrutiny of the television and radio industries, and
have indicated their intention to review matters related to the concentration of
ownership within markets (including LMAs) even when the ownership or LMA in
question is permitted under the regulations of the FCC. There can be no
assurance that future policy and rulemaking activities of these agencies will
not impact Pegasus' operations (including existing stations or markets) or
expansion strategy.

Cable Television

         1984 Cable Act, 1992 Cable Act and 1996 Act. The 1984 Cable Act created
uniform national standards and guidelines for the regulation of cable systems.
Among other things, the 1984 Cable Act generally preempted local control over
cable rates in most areas. In addition, the 1984 Cable Act affirmed the right of
franchising authorities (state or local, depending on the practice in individual
states) to award one or more franchises within their jurisdictions. It also
prohibited non-grandfathered cable systems from operating without a franchise in
such jurisdictions.

         The 1992 Cable Act amended the 1984 Cable Act in many respects and
significantly changed the legislative and regulatory environment in which the
cable industry operates. The 1992 Cable Act allows for a greater degree of
regulation with respect to, among other things, cable system rates for both
basic and certain nonbasic services; programming access and exclusivity
arrangements; access to cable channels by unaffiliated programming services;
leased access terms and conditions; horizontal and vertical ownership of cable
systems; customer service requirements; franchise renewals; television broadcast
signal carriage and retransmission consent; technical standards; subscriber
privacy; consumer protection issues; cable equipment compatibility; obscene or
indecent programming; and cable system requirements that subscribers subscribe
to tiers of service other than basic service as a condition of purchasing
premium services. Additionally, the legislation encourages competition with
existing cable systems by allowing municipalities to own and operate their own
cable systems without having to obtain a franchise; preventing franchising
authorities from granting exclusive franchises or unreasonably refusing to award
additional franchises covering an existing cable system's service area; and
prohibiting the common ownership of cable systems and co-located wireless
systems known as MMDS and SMATV. The 1992 Cable Act also precludes video
programmers affiliated with cable television companies from favoring those
operators over competitors and requires such programmers to sell their
programming to other multichannel video distributors. This provision limits the
ability of cable program suppliers to offer exclusive programming arrangements
to cable television companies. The FCC, the principal federal regulatory agency
with jurisdiction over cable television, has adopted many regulations to
implement the provisions of the 1992 Cable Act.

         The FCC has the authority to enforce these regulations through the
imposition of substantial fines, the issuance of cease and desist orders and/or
the imposition of other administrative sanctions, such as the revocation of FCC
licenses needed to operate transmission facilities often used in connection with
cable operations.

                                       22
<PAGE>

         On February 8, 1996, the President signed into law the 1996 Act. This
law alters the regulatory structure governing the nation's telecommunications
providers. It removes barriers to competition in both the cable television
market and the local telephone market. Among other things, it reduces the scope
of cable rate regulation.

         The 1996 Act requires the FCC to implement numerous rulemakings, the
final outcome of which cannot yet be determined. Moreover, Congress and the FCC
have frequently revisited the subject of cable television regulation and may do
so again. Future legislative and regulatory changes could adversely affect
Pegasus' operations.

         The 1996 Act also sunsets FCC regulation of cable program service tier
("CPST") rates for all systems (regardless of size) on March 31, 1999. However,
certain members of Congress and FCC officials have called for the delay of this
regulatory sunset and further have urged more rigorous rate regulation
(including limits on programming cost pass-through to cable customers) until a
greater degree of competition to incumbent cable operators has developed.

         Cable Rate Regulation. In June 1995, the FCC adopted rules which
provide significant rate relief for small cable operators, which include
operators the size of Pegasus. Pegasus' current rates are below the maximum
presumed reasonable under the FCC's rules for small operators, and Pegasus may
use this rate relief to justify current rates, rates already subject to pending
rate proceedings and new rates. Although the 1996 Act eliminates CPST rate
regulation effective March 31, 1999 for all cable operators, in the interim,
CPST rate regulation can be triggered only by a local unit of government
(commonly referred to as local franchising authorities or "LFA") complaint to
the FCC. Since Pegasus is a small cable operator within the meaning of the 1996
Act, CPST rate regulation for Pegasus ended upon the enactment of the 1996 Act.
Pegasus' status as a small cable operator may be affected by future
acquisitions. The 1996 Act does not disturb existing rate determinations of the
FCC. Pegasus' basic tier of cable service ("BST") rates remain subject to LFA
regulation under the 1996 Act.

         Under the 1992 Cable Act, rate regulation is precluded wherever a cable
operator faces "effective competition." The 1996 Act further expanded the
definition of effective competition to include any franchise area where a local
exchange carrier ("LEC") (or affiliate) provides video programming services to
subscribers by any means other than through DBS. There is no penetration minimum
for the local exchange carrier to qualify as an effective competitor, but it
must provide "comparable" programming services in the franchise area. The FCC
has found that all of the Pegasus' cable television systems, including the
pending Aguadilla acquisition, are subject to effective competition and
therefore are not subject to rate regulation.

         Under the 1996 Act, Pegasus is allowed to aggregate, on a franchise,
system, regional or company level, its equipment costs into broad categories,
such as converter boxes, regardless of the varying levels of functionality of
the equipment within each such broad category. The 1996 Act allows Pegasus to
average together costs of different types of converters (including
non-addressable, addressable, and digital). The statutory changes will also
facilitate the rationalizing of equipment rates across jurisdictional
boundaries. These favorable cost-aggregation rules do not apply to the limited
equipment used by "BST-only" subscribers.

         Anti-Buy Through Provisions. In March 1993, the FCC adopted regulations
pursuant to the 1992 Cable Act which require cable systems to permit customers
to purchase video programming on a per channel or a per program basis without
the necessity of subscribing to any tier of service, other than the basic
service tier, unless the cable system is technically incapable of doing so.
Generally, this exemption from compliance with the statute for cable systems
that do not have such technical capability is available until a cable system
obtains the capability, but not later than December 2002. Pegasus' systems have
the necessary technical capability and have complied with this regulation.

         Indecent Programming on Leased Access Channels. FCC regulations
pursuant to the 1992 Cable Act permit cable operators to restrict or refuse the
carriage of indecent programming on 

                                       23
<PAGE>

so-called "leased access" channels, i.e., channels the operator must set aside
for commercial use by persons unaffiliated with the operator. Operators were
also permitted to prohibit indecent programming on public access channels. In
June 1996, the Supreme Court ruled unconstitutional the indecency prohibitions
on public access programming as well as the "segregate and block" restriction on
indecent leased access programming.

         Scrambling. The 1996 Act requires that upon the request of a cable
subscriber, the cable operator must, free of charge, fully scramble or otherwise
fully block the audio and video programming of any channel the subscriber does
not want to receive.

         Cable operators were also required by the 1996 Act to fully scramble or
otherwise fully block the video and audio portion of sexually explicit or other
programming that is indecent on any programming channel that is primarily
dedicated to sexually oriented programming so that a non-subscriber to such
channel may not receive it. Until full scrambling or blocking occurred, cable
operators were required to limit the carriage of such programming to hours when
a significant number of children are not likely to view the programming
("safe-harbor period"). On December 28, 1998, this requirement to scramble
sexually explicit programming was ruled unconstitutional by the U.S. District
court in Wilmington, Delaware, and the FCC was directed to stop enforcing this
requirement. Pegasus' systems do not presently have the necessary technical
capability to comply with the scrambling requirement; however, prior to the
December 28, 1998 ruling, such programming was only carried during the
safe-harbor period.

         Cable Entry Into Telecommunications. The 1996 Act declares that no
state or local laws or regulations may prohibit or have the effect of
prohibiting the ability of any entity to provide any interstate or intrastate
telecommunications service. States are authorized to impose "competitively
neutral" requirements regarding universal service, public safety and welfare,
service quality, and consumer protection. The 1996 Act further provides that
cable operators and affiliates providing telecommunications services are not
required to obtain a separate franchise from LFAs for such services. The FCC has
held that LFAs may not place telecommunications conditions in their grants of
cable construction permits. The 1996 Act prohibits LFAs from requiring cable
operators to provide telecommunications service or facilities as a condition of
a grant of a franchise, franchise renewal, or franchise transfer, except that
LFAs can seek "institutional networks" as part of franchise negotiations.

         The 1996 Act clarifies that traditional cable franchise fees may only
be based on revenues related to the provision of cable television services.
However, when cable operators provide telecommunications services, LFAs may
require reasonable, competitively neutral compensation for management of the
public rights-of-way.

         Interconnection and Other Telecommunications Carrier Obligations. To
facilitate the entry of new telecommunications providers including cable
operators, the 1996 Act imposes interconnection obligations on all
telecommunications carriers. All carriers must interconnect their networks with
other carriers and may not deploy network features and functions that interfere
with interoperability. On August 8, 1996, the FCC released its First Report and
Order to implement the interconnection provisions of the 1996 Act. While the
U.S. Court of Appeals for the Eighth Circuit invalidated significant aspects of
the First Report and Order, on January 25, 1999, the U.S. Supreme Court upheld 
most of the FCC's interconnection order.

         Telephone Company Entry Into Cable Television. The 1996 Act allows
telephone companies to compete directly with cable operators by repealing the
telephone company-cable cross-ownership ban and the FCC's video dialtone
regulations. This will allow LECs, including the Bell Operating Companies, to
compete with cable both inside and outside their telephone service areas.

         The 1996 Act replaces the FCC's video dialtone rules with an "open
video system" ("OVS") plan by which LECs can provide cable service in their
telephone service area. LECs complying with FCC OVS regulations will receive
relaxed oversight. Only the program access, negative option billing prohibition,
subscriber privacy, Equal Employment Opportunity, PEG, must-carry and

                                       24
<PAGE>

retransmission consent provisions of the Communications Act will apply to LECs
providing OVS. Rate regulation, consumer service provisions, leased access and
equipment compatibility will not apply. Cable copyright provisions will apply to
programmers using OVS. LFAs may require OVS operators to pay "franchise fees"
only to the extent that the OVS provider or its affiliates provide cable
services over the OVS. Such fees may not exceed the franchise fees charged to
cable operators in the area, and the OVS provider may pass through the fees as a
separate subscriber bill item. OVS operators will be subject to LFA general
right-of-way management regulations, and LFAs may require the OVS operator to
obtain a franchise.

         As required by the 1996 Act, the FCC has adopted regulations
prohibiting an OVS operator from discriminating among programmers, and ensuring
that OVS rates, terms, and conditions for service are reasonable and
nondiscriminatory. Further, the FCC has adopted regulations prohibiting a
LEC-OVS operator, or its affiliates, from occupying more than one-third of a
system's activated channels when demand for channels exceeds supply, although
there are no numeric limits.

         The FCC also has adopted OVS regulations governing channel sharing;
extending the FCC's sports exclusivity, network nonduplication, and syndex
regulations; and controlling the positioning of programmers on menus and program
guides. The 1996 Act does not require LECs to use separate subsidiaries to
provide incidental inter Local Access and Transport Area ("interLATA") video or
audio programming services to subscribers or for their own programming ventures.
Most of the FCC's OVS rules were affirmed by the Fifth Circuit U.S. Court of
Appeals on January 19, 1999.

         Cable and Broadcast Television Cross-Ownership. As required by the 1996
Act, the FCC has amended its rules to allow a person or entity to own or control
a network of broadcast stations and a cable system. In addition, the 1996 Act
eliminates the statutory prohibition against the ownership of cable systems and
television stations in the same geographic market, although FCC rules
prohibiting such ownership are still in place.

         Regulation of Signal Carriage. The 1992 Cable Act granted broadcasters
a choice of must carry right or retransmission consent rights. The rules adopted
by the FCC generally provided for mandatory carriage by cable systems of all
local full powered commercial television broadcast signals selecting must carry
rights and, depending on a cable system's channel capacity, non-commercial
television broadcast signals. Such statutorily mandated carriage of broadcast
stations coupled with the provisions of the 1984 Cable Act, which requires cable
television systems of 36 or more "activated" channels to reserve a percentage of
such channels for commercial use by unaffiliated third parties and permit
franchise authorities to require the cable operator to provide channel capacity,
equipment and facilities for public, educational, and governmental access
channels, could adversely affect some of Pegasus' cable systems by limiting the
programming services they can offer. The FCC recently initiated a proceeding to
determine the extent to which cable operators must carry all digital signals
transmitted by broadcasters. The imposition of such additional must carry
regulations could further limit the amount of satellite delivered programming
Pegasus could carry on its cable television systems.

         Closed Captioning Regulation. The 1992 Cable Act also required the FCC
to establish rules and an implementation schedule to ensure that video
programming is fully accessible to the hearing impaired through closed
captioning. The rules adopted by the FCC will require substantial closed
captioning over an eight or ten year phase-in period with only limited
exceptions.

         Emergency Alert System. In September 1997, the FCC released its rules
establishing the deadlines by which cable operators must comply with the new
Emergency Alert System ("EAS"). These deadlines vary depending on how many
subscribers are served by the particular cable system. Pegasus, like all other
cable operators, is responsible for compliance with the EAS rules.

         Copyright Licensing. Cable systems are subject to federal copyright
licensing covering carriage of broadcast signals. In exchange for making
semi-annual payments to a federal copyright 

                                       25
<PAGE>

royalty pool and meeting certain other obligations, cable operators obtain a
blanket license to retransmit broadcast signals. Bills have been introduced in
Congress over the past several years that would eliminate or modify the cable
compulsory license. The 1992 Cable Act's retransmission consent provisions
expressly provide that retransmission consent agreements between television
stations and cable operators do not obviate the need for cable operators to
obtain a copyright license for the programming carried on each broadcaster's
signal.

         Electric Utility Entry Into Telecommunications. The 1996 Act provides
that registered utility holding companies and subsidiaries may provide
telecommunications services (including cable) notwithstanding the Public Utility
Holding Company Act. Electric utilities must establish separate subsidiaries,
known as "exempt telecommunications companies" and must apply to the FCC for
operating authority. It is anticipated that large utility holding companies will
become significant competitors to both cable television and other
telecommunications providers.

         State and Local Regulation. Because a cable system uses streets and
rights-of-way, cable systems are subject to state and local regulation,
typically imposed through the franchising process. State and/or local officials
are usually involved in franchisee selection, system design and construction,
safety, consumer relations, billing practices and community-related programming
and services among other matters. Cable systems generally are operated pursuant
to nonexclusive franchises, permits or licenses granted by a municipality or
other state or local government entity. Franchises generally are granted for
fixed terms and in many cases are terminable if the franchise operator fails to
comply with material provisions. The 1992 Cable Act prohibits the award of
exclusive franchises and allows franchising authorities to exercise greater
control over the operation of franchised cable systems, especially in the area
of customer service and rate regulation. The 1992 Cable Act also allows
franchising authorities to operate their own multichannel video distribution
system without having to obtain a franchise and permits states or LFAs to adopt
certain restrictions on the ownership of cable systems. Moreover, franchising
authorities are immunized from monetary damage awards arising from regulation of
cable systems or decisions made on franchise grants, renewals, transfers and
amendments. Under certain circumstances, LFAs may become certified to regulate
basic cable service rates.

         The specific terms and conditions of a franchise and the laws and
regulations under which it was granted directly affect the profitability of the
cable system. Cable franchises generally contain provisions governing fees to be
paid to the franchising authority, length of the franchise term, renewal, sale
or transfer of the franchise, territory of the franchise, design and technical
performance of the system, use and occupancy of public streets and number and
types of cable services provided.

         Although federal law has established certain procedural safeguards to
protect incumbent cable television franchisees against arbitrary denials of
renewal, the renewal of a franchise cannot be assured unless the franchisee has
met certain statutory standards. Moreover, even if a franchise is renewed, a
franchising authority may impose new and stricter requirements, such as the
upgrading of facilities and equipment or higher franchise fees (subject,
however, to limits set by federal law). To date, however, no request of Pegasus
for franchise renewals or extensions has been denied. Despite favorable
legislation and good relationships with its franchising authorities, there can
be no assurance that franchises will be renewed or extended.

         Various proposals have been introduced at the state and local levels
with regard to the regulation of cable systems, and several states have adopted
legislation subjecting cable systems to the jurisdiction of centralized state
governmental agencies, some that impose regulation similar to that of a public
utility. Attempts in other states to regulate cable systems are continuing and
can be expected to increase. Such proposals and legislation may be preempted by
federal statute and/or FCC regulation. Puerto Rico has recently adopted new
state level regulations.

         The foregoing does not purport to describe all present and proposed
federal, state and local regulations and legislation relating to the cable
industry. Other existing federal regulations, copyright licensing and, in many
jurisdictions, state and local franchise requirements currently are the subject


                                       26
<PAGE>

of a variety of judicial proceedings, legislative hearings and administrative
and legislative proposals which could change, in varying degrees, the manner in
which cable systems operate. Neither the outcome of these proceedings nor the
impact upon the cable industry or Pegasus' cable systems can be predicted at
this time.

ITEM 2: PROPERTIES

         Our corporate headquarters are located in Radnor, Pennsylvania. Due to
the need for greater space, we will be moving to leased space in Bala Cynwyd,
Pennsylvania in March 1999. Our new office lease will expire in 2004 and should
be adequate for our needs in the foreseeable future.

         Our DBS operations are headquartered in Marlborough, Massachusetts and
we operate call centers out of leased space in San Luis Obispo, California,
Marlborough, Massachusetts, and Louisville, Kentucky. These leases expire on
various dates through 2002. In connection with our TV operations, we own or
lease various transmitting equipment, television stations, and office space. Our
cable operations include office, headend, and warehouse space in Puerto Rico.
The property that we do not own in Puerto Rico is operated under various leases
expiring at various dates through 2004.

ITEM 3: LEGAL PROCEEDINGS

DBS Late Fee Litigation

         In November 1998 we were sued in Indiana for allegedly charging DBS
subscribers excessive fees for late payments. The plaintiffs, who claim to
represent a class consisting of residential DIRECTV customers in Indiana, seek
unspecified damages for the purported class and modification of our late-fee
policy. We are in the process of evaluating our response and are unable to
estimate the amount involved or to determine whether this suit is material to
us. Similar suits have been brought against DIRECTV and various cable operators
in other parts of the United States.

Television Station WDBD

         In connection with the pending license renewal application of
television station WDBD, we have learned that there were a substantial number of
violations at that station of the FCC's rule establishing limits on the amount
of commercial material in programs directed to children. The FCC has options
available to address violations of its rules ranging from a letter of
admonishment to the revocation of a station license. We expect that the
violations at television station WDBD will result in a monetary fine but not in
revocation or nonrenewal of the station license. The FCC has not yet completed
its review of the matter, however, so the outcome cannot be assured.

Other 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. In our
opinion, the ultimate liability with respect to these claims will not have a
material adverse effect on our consolidated operations, cash flows or financial
position.

ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         No matters were submitted to a vote of our stockholders during the
fourth quarter of 1998.

                                       27
<PAGE>
                                     PART II

ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

         Our Class A Common Stock is traded on the Nasdaq National Market under
the symbol "PGTV." The following table sets forth the high and low bids per
share of Class A Common Stock, as reported by Nasdaq for the periods since
January 1, 1997. The quotations reflect inter-dealer prices, without retail
mark-ups, mark-downs or commissions, and may not necessarily represent actual
transactions.
<TABLE>
<CAPTION>
                                                                          High           Low
                                                                          ------         ------
1997
<S>                                                                   <C>               <C> <C>
First Quarter .....................................................       $14            $10 3/4
Second Quarter ....................................................       $11 3/8        $ 8 1/8
Third Quarter .....................................................       $21 1/2        $10 1/2
Fourth Quarter ....................................................       $25 1/2        $19

1998
First Quarter .....................................................       $26 3/8        $19 7/8
Second Quarter ....................................................       $26 5/8        $20 7/8
Third Quarter .....................................................       $25            $15 7/8
Fourth Quarter ....................................................       $25 1/2        $10 5/8
</TABLE>

         As of March 1, 1999, we had approximately 165 holders of Class A Common
Stock (excluding holders whose securities were held in street or nominee name).

         No established public trading market exists for shares of our Class B
Common Stock. Each share of Class B Common Stock is convertible at the option of
the holder into one share of Class A Common Stock. All of the Class B Common
Stock is owned beneficially by Marshall W. Pagon, Pegasus' President and Chief
Executive Officer. Further information on the Class B Common Stock is provided
in Item 12: Security Ownership of Certain Beneficial Owners and Management.

Calculation of Aggregate Market Value of Nonaffiliate Shares

         For the purposes of calculating the aggregate market value of the
shares of Class A Common Stock of Pegasus held by nonaffiliates, as shown on the
cover page of this Report, it has been assumed that all the outstanding shares
were held by nonaffiliates except for the shares held by directors, including
Marshall W. Pagon, Pegasus' President and Chief Executive Officer. However, this
should not be deemed to constitute an admission that all directors of Pegasus
are, in fact, affiliates of Pegasus, or that there are not other persons who may
be deemed to be affiliates of Pegasus. Further information concerning
shareholdings of officers, directors and principal stockholders is included in
Item 12: Security Ownership of Certain Beneficial Owners and Management.

Dividend Policy

         Common Stock: Pegasus has not paid any cash dividends on its Class A
Common Stock and does not anticipate paying cash dividends on its common stock
in the foreseeable future. Our policy is to retain cash for operations and
expansion. Payment of cash dividends on the common stock is restricted by
Pegasus' publicly held debt securities and preferred stock.

         Preferred Stock: Until July 1, 2002, we are allowed to pay dividends on
our Series A Preferred Stock by issuing more shares of that stock instead of
paying cash. We expect to do this, and in any event our publicly held debt
securities require us to.

         Pegasus' ability to obtain cash from its subsidiaries with which to pay
cash dividends is also restricted by the subsidiaries' publicly held debt
securities and bank agreements.

Recent Sales of Unregistered Securities

         All sales for the period covered by this Report have been previously
reported by Pegasus on its Quarterly Report on Form 10-Q for the quarters ended
June 30, 1998 and September 30, 1998.


                                       28
<PAGE>

ITEM 6: SELECTED FINANCIAL DATA


         The selected historical consolidated financial data have been derived
from Pegasus' audited consolidated financial statements which have been audited
by PricewaterhouseCoopers LLP. The information should be read in conjunction
with the consolidated financial statements and the notes to the statements and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" which are included elsewhere herein. The paragraphs following the
table provide an explanation of certain portions of it.

<TABLE>
<CAPTION>
                                                                         Years Ended December 31,
                                                                  --------------------------------------
Statement of Operating Data:                                          1994         1995         1996
                                                                  (Dollars in thousands, except per share
                                                                                  data)
<S>                                                               <C>          <C>          <C>
Net revenues:
 DBS ...........................................................    $   174     $  1,469      $  5,829
 Broadcast and cable ...........................................     28,017       30,679        42,100
                                                                    -------     --------      --------
  Total net revenues ...........................................     28,191       32,148        47,929
Operating expenses:
 DBS
  Programming, technical and general and administrative ........        161        1,379         4,312
  Marketing and selling ........................................         50           --           646
  Incentive compensation .......................................         --            9           146
  Depreciation and amortization ................................         --          640         1,786
 Broadcast and cable
  Programming, technical and general and administrative ........     14,856       15,823        21,006
  Marketing and selling ........................................      3,086        3,939         4,940
  Incentive compensation .......................................        432          519           839
  Depreciation and amortization ................................      6,536        7,619         9,287
 Corporate expenses ............................................      1,506        1,364         1,429
 Corporate depreciation and amortization .......................        404          492           988
                                                                    -------     --------      --------
  Income (loss) from operations ................................      1,160          364         2,550
Interest expense ...............................................     (5,973)      (8,817)      (12,455)
Interest income ................................................         --          370           232
Other expenses, net ............................................        (65)         (44)         (171)
Gain on sale of cable systems ..................................         --           --            --
                                                                    -------     --------      --------
  Loss before income taxes .....................................     (4,878)      (8,127)       (9,844)
Provision (benefit) for income taxes ...........................        140           30          (120)
                                                                    -------     --------      --------
 Loss before extraordinary items ...............................     (5,018)      (8,157)       (9,724)
Extraordinary gain (loss) from extinguishment of debt, net .....       (633)      10,211          (250)
                                                                    -------     --------      --------
  Net income (loss) ............................................     (5,651)       2,054        (9,974)
  Preferred stock dividends ....................................         --           --            --
                                                                    -------     --------      --------
  Net income (loss) applicable to common shares ................   ($ 5,651)    $  2,054     ($  9,974)
                                                                    =======     ========      ========
Loss per common share:
  Loss before extraordinary items ..............................                             ($   1.56)
  Extraordinary item ...........................................                                ( 0.04)
                                                                                              --------
  Loss per common share ........................................                             ($   1.60)
                                                                                              ========
  Weighted average shares outstanding (000's) ..................                                 6,240
                                                                                              ========
Other Data:
Pre-marketing cash flow:
 DBS ...........................................................    $    13     $     90      $  1,517
 Broadcast and cable ...........................................     10,075       10,917        16,154
                                                                    -------     --------      --------
 Total pre-marketing cash flow .................................    $10,088     $ 11,007      $ 17,671
                                                                    =======     ========      ========
Location cash flow .............................................    $10,038     $ 11,007      $ 17,025
Operating cash flow ............................................      8,100        9,287        15,596
Capital expenditures ...........................................      1,264        2,640         6,294
Net cash provided by (used for):
 Operating activities ..........................................      4,103        5,783         3,059
 Investing activities ..........................................     (3,571)      (6,047)      (81,179)
 Financing activities ..........................................       (658)      10,859        74,727

</TABLE>
<PAGE>

<TABLE>
<CAPTION>
                                                                     Years Ended December 31,
                                                                  ---------------------------
                                                                                                  
Statement of Operating Data:                                          1997           1998         
                                                                    (Dollars in thousands, 
                                                                    except per share data)
<S>                                                               <C>           <C>            
Net revenues:
 DBS ...........................................................    $  38,254     $ 147,142    
 Broadcast and cable ...........................................       48,564        48,079    
                                                                    ---------     ---------    
  Total net revenues ...........................................       86,818       195,221    
Operating expenses:
 DBS
  Programming, technical and general and administrative ........       26,042       102,420    
  Marketing and selling ........................................        5,973        45,706    
  Incentive compensation .......................................          795         1,159    
  Depreciation and amortization ................................       17,042        59,077    
 Broadcast and cable
  Programming, technical and general and administrative ........       24,099        25,613    
  Marketing and selling ........................................        5,971         6,334    
  Incentive compensation .......................................          479           292    
  Depreciation and amortization ................................        9,397         9,550    
 Corporate expenses ............................................        2,256         3,614    
 Corporate depreciation and amortization .......................        1,352         2,105    
                                                                    ---------     ---------    
  Income (loss) from operations ................................       (6,588)      (60,649)   
Interest expense ...............................................      (16,094)      (44,604)   
Interest income ................................................        1,539         2,036    
Other expenses, net ............................................         (724)       (1,523)   
Gain on sale of cable systems ..................................        4,451        24,726    
                                                                    ---------     ---------    
  Loss before income taxes .....................................      (17,416)      (80,014)   
Provision (benefit) for income taxes ...........................          200          (896)   
                                                                    ---------     ---------    
 Loss before extraordinary items ...............................      (17,616)      (79,118)   
Extraordinary gain (loss) from extinguishment of debt, net .....       (1,656)           --    
                                                                    ---------     ---------    
  Net income (loss) ............................................      (19,272)      (79,118)   
  Preferred stock dividends ....................................       12,215        14,763    
                                                                    ---------     ---------    
  Net income (loss) applicable to common shares ................   ($  31,487)   ($  93,881)   
                                                                    =========     =========    
Loss per common share:
  Loss before extraordinary items ..............................   ($    3.02)   ($    6.64)   
  Extraordinary item ...........................................       ( 0.17)           --    
                                                                    ---------     ---------    
  Loss per common share ........................................   ($    3.19)   ($    6.64)   
                                                                    =========     =========    
  Weighted average shares outstanding (000's) ..................        9,858        14,130    
                                                                    =========     =========    
Other Data:
Pre-marketing cash flow:
 DBS ...........................................................    $   12,212    $  44,722    
 Broadcast and cable ...........................................       18,494        16,132    
                                                                    ---------     ---------    
 Total pre-marketing cash flow .................................    $  30,706     $  60,854    
                                                                    =========     =========    
Location cash flow .............................................    $  24,733     $  15,148    
Operating cash flow ............................................       22,477        11,534    
Capital expenditures ...........................................        9,929        12,400    
Net cash provided by (used for):
 Operating activities ..........................................        8,478       (21,962)
 Investing activities ..........................................     (142,109)     (101,373)
 Financing activities ..........................................      169,098       133,791
</TABLE>


                                       29
<PAGE>


<TABLE>
<CAPTION>
                                                                            As of December 31,
                                              ------------------------------------------------------------------
                                                  1994          1995         1996         1997         1998     
                                                                                                                
<S>                                           <C>            <C>          <C>          <C>          <C>         
Balance Sheet Data:
Cash and cash equivalents .................    $   1,380      $21,856      $  8,582     $ 45,269     $ 75,985   
Working capital (deficiency) ..............      (23,074)      17,566         6,430       32,347       37,889   
Total assets ..............................       75,394       95,770       173,680      380,862      886,310   
Total debt (including current) ............       61,629       82,896       115,575      208,355      559,029   
Total liabilities .........................       68,452       95,521       133,354      239,234      699,144   
Redeemable preferred stock ................           --           --            --      111,264      126,028   
Minority interest .........................           --           --            --        3,000        3,000   
Total common stockholders' equity .........        6,942          249        40,326       27,364       58,138   
</TABLE>


     In this section we use the terms pre-marketing cash flow and location cash
flow. Pre-marketing cash flow calculated by taking our earnings and adding back
the following expenses.

     o interest;

     o income taxes;

     o depreciation and amortization;

     o non-cash charges, such as incentive compensation under our restricted
       stock plan and 401(k) plans;

     o corporate overhead; and

     o DBS subscriber acquisition costs, which are sales and marketing expenses
       incurred to acquire new DBS subscribers.

     Location cash flow is pre-marketing cash flow less DBS subscriber
acquisition costs.

     Pre-marketing cash flow and location cash flow are not, and should not be
considered, alternatives to income from operations, net income, net cash
provided by operating activities or any other measure for determining our
operating performance or liquidity, as determined under generally accepted
accounting principles. Pre-marketing cash flow and location cash flow also do
not necessary indicate whether our cash flow will be sufficient to fund working
capital, capital expenditures, or to react to changes in Pegasus' industry or
the economy generally. We believe that pre-marketing cash flow and location
cash flow are important, however, for the following reasons:

   o people who follow our industry frequently use them as measures of
     financial performance and ability to pay debt service; and

   o they are measures that we, our lenders and investors use to monitor our
     financial performance and debt leverage.


                                       30
<PAGE>


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

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

General

         Pegasus Communications Corporation is:

         o        The largest independent provider of DIRECTV with 464,000
                  subscribers at January 31, 1999. We have the exclusive right
                  to distribute DIRECTV digital broadcast satellite services to
                  over 4.8 million rural households in 36 states. We distribute
                  DIRECTV through the Pegasus retail network, a network of
                  approximately 2,000 independent retailers.

         o        The owner or programmer of nine TV stations affiliated with
                  either Fox, UPN or the WB and the owner of a large cable
                  system in Puerto Rico serving approximately 50,000
                  subscribers.

         o        We have increased our revenues at a compound growth rate of
                  100% per annum since our inception in 1991.

         DBS revenues are principally derived from monthly customer
subscriptions and pay-per-view services. Broadcast revenues are derived from the
sale of broadcast airtime to local and national advertisers. Cable revenues are
derived from monthly customer subscriptions, pay-per-view services, subscriber
equipment rentals and installation charges.

         In this section we use the terms pre-marketing cash flow and location
cash flow. Pre-marketing cash flow is calculated by taking our earnings and
adding back the following expenses:

         o        interest;

         o        income taxes;

         o        depreciation and amortization;

         o        non-cash charges;

         o        corporate overhead; and

         o        DBS subscriber acquisition costs, which are sales and
                  marketing expenses incurred to acquire new DBS subscribers.

         Location cash flow is pre-marketing cash flow less DBS subscriber
acquisition costs.
                                       31
<PAGE>

         Pre-marketing cash flow and location cash flow are not, and should not
be considered, alternatives to income from operations, net income, net cash
provided by operating activities or any other measure for determining our
operating performance or liquidity, as determined under generally accepted
accounting principles. Pre-marketing cash flow and location cash flow also do
not necessarily indicate whether our cash flow will be sufficient to fund
working capital, capital expenditures, or to react to changes in Pegasus'
industry or the economy generally. We believe that pre-marketing cash flow and
location cash flow are important, however, for the following reasons:

         o        people who follow our industry frequently use them as measures
                  of financial performance and ability to pay debt service; and

         o        they are measures that we, our lenders and investors use to
                  monitor our financial performance and debt leverage.

         Pegasus generally does not require new DBS customers to sign
programming contracts and, as a result, subscriber acquisition costs are
currently being charged to operations in the period incurred.

Results of Operations

Year ended December 31, 1998 compared to the year ended December 31, 1997

         Total net revenues in 1998 were $195.2 million, an increase of $108.4
million, or 125%, compared to total net revenues of $86.8 million in 1997. The
increase in total net revenues in 1998 was primarily due to an increase in DBS
revenues of $109.0 million attributable to acquisitions and to internal growth
in Pegasus' DBS subscriber base. Total operating expenses in 1998 were $255.9
million, an increase of $162.5 million, or 174%, compared to total operating
expenses of $93.4 million in 1997. The increase was primarily due to an increase
of $158.5 million in operating expenses attributable to the growth in Pegasus'
DBS business.

         Total corporate expenses, including corporate depreciation and
amortization, were $5.7 million in 1998, an increase of $2.1 million, or 58%,
compared to $3.6 million in 1997. The increase in corporate expenses is
primarily attributable to the growth in Pegasus' business. The increase in
corporate depreciation and amortization is due to amortization of deferred
financing costs associated with the issuance of $100.0 million of preferred
stock in January 1997, $115.0 million of senior notes in October 1997 and $100.0
million of senior notes in November 1998.

         Interest expense was $44.6 million in 1998, an increase of $28.5
million, or 177%, compared to interest expense of $16.1 million in 1997. The
increase in interest expense is primarily due to a full year's interest on
Pegasus' $115.0 million senior notes and an increase in bank borrowings and
seller notes associated with Pegasus' DBS acquisitions. Interest income was $2.0
million in 1998, an increase of $497,000, or 32%, compared to interest income of
$1.5 million in 1997. The increase in interest income is due to greater average
cash balances in 1998 compared to 1997.

         Other expenses were $1.5 million in 1998, an increase of $800,000, or
110%, compared to other expenses of $723,000 in 1997. The increase is primarily
due to increased investor relations activities and other board related costs.

         The gain on sale of the cable systems was $24.7 million in 1998
compared to $4.5 million in 1997. In 1997, Pegasus sold its New Hampshire cable
system for $6.9 million resulting in a gain of $4.5 million. In 1998, Pegasus
sold its remaining New England cable systems for $30.1 million resulting in a
gain of $24.7 million.

         The provision for income taxes declined by approximately $1.1 million
primarily as a result of the amortization of the deferred tax liability that
originated from the acquisition of Digital Television Services, Inc.

                                       32
<PAGE>

         Extraordinary loss from the extinguishment of debt decreased $1.7
million in 1998. In 1997, Pegasus refinanced its existing $130.0 million credit
facility with a new $180.0 million credit facility and accordingly, the deferred
financing costs associated with the $130.0 million credit facility were written
off. No such refinancing occurred in 1998.

         Preferred stock dividends were $14.8 million in 1998, an increase of
$2.6 million, or 21%, compared to $12.2 million in preferred stock dividends in
1997. The increase is attributable to a greater number of shares of Pegasus'
preferred stock outstanding in 1998 compared to 1997 as the result of payment of
dividends in preferred stock and to the preferred stock being outstanding for a
full year.

DBS

         Pegasus' DBS business experienced significant growth in 1998. During
1998, Pegasus acquired approximately 217,000 subscribers and the exclusive
DIRECTV distribution rights to approximately 2.4 million households in rural
areas of the United States. At December 31, 1998, Pegasus had exclusive DIRECTV
distribution rights to 4.6 million households and 435,000 subscribers as
compared to 2.2 million households and 132,000 subscribers at December 31, 1997.
Pegasus had 4.8 million households and 455,000 subscribers at December 31, 1998,
including pending acquisitions. At December 31, 1997, subscribers would have
been 344,000, including pending and completed acquisitions. Subscriber
penetration increased from 7.1% at December 31, 1997 to 9.4% at December 31,
1998, including pending and completed acquisitions.

         Total DBS net revenues were $147.1 million in 1998, an increase of
$109.0 million, or 286%, compared to DBS net revenues of $38.2 million in 1997.
The increase is primarily due to an increase in the average number of
subscribers in 1998 compared to 1997. Pegasus' 1998 DBS acquisitions represented
$70.4 million, or 65%, of the $109.0 million increase in DBS net revenues. The
average monthly revenue per subscriber was $41.63 in 1998 compared to $40.72 in
1997. Pro forma DBS net revenues, including pending acquisitions at December 31,
1998, were $197.8 million, an increase of $57.9 million, or 41%, compared to pro
forma DBS net revenues of $139.9 million in 1997.

         Programming, technical, and general and administrative expenses were
$102.4 million in 1998, an increase of $76.4 million, or 294%, compared to $26.0
million in 1997. The increase is attributable to significant growth in
subscribers and territory in 1998. Pegasus' 1998 DBS acquisitions represented
$45.7 million, or 60%, of the $76.4 million increase in programming, technical,
and general and administrative expenses. As a percentage of revenue,
programming, technical, and general and administrative expenses were 69.3% in
1998 compared to 68.1% in 1997.

         Subscriber acquisition costs were $45.7 million, an increase of $35.2
million compared to $10.5 million in 1997. In 1997, $4.5 million in subscriber
acquisition costs were capitalized as a significant number of subscribers
entered into extended programming contracts. Pegasus generally did not require
new subscribers to sign programming contracts in 1998. The total subscriber
acquisition costs per gross subscriber addition were $344 in 1998 compared to
$281 in 1997. The increase is attributable to increases in sales commissions
paid to Pegasus' dealers, promotional programming and advertising. Pegasus
expects subscriber acquisition costs per gross subscriber addition to increase
in 1999.

         Incentive compensation, which is calculated based on increases in pro
forma location cash flow, was $1.2 million in 1998, an increase of $364,000, or
46%, compared to $795,000 in 1997. The increase resulted from a larger gain in
pro forma location cash flow during 1998 as compared to 1997.

         Depreciation and amortization was $59.1 million in 1998, an increase of
$42.0 million, or 247%, compared to $17.0 million in 1997. The increase in
depreciation and amortization is primarily due to an increase in the fixed and
intangible asset base as the result of DBS acquisitions that occurred in 1997
and 1998.

                                       33
<PAGE>
Broadcast

         In 1998, Pegasus owned or programmed nine broadcast television stations
in six markets. Two new stations were launched during the second half of 1998.
Total net broadcast revenues in 1998 were $34.3 million, an increase of $2.4
million, or 7%, compared to net broadcast revenues of $31.9 million in 1997. The
increase was primarily attributable to an increase of $1.3 million in net
broadcast revenues from stations that began operations in 1997 and a $558,000
increase in barter revenue. Net broadcast revenues from the two stations
launched in 1998 were minimal.

         Programming, technical, and general and administrative expenses were
$18.1 million in 1998, an increase of $2.4 million, or 15%, compared to $15.7
million in 1997. The increase is primarily due to a full year's expenses from
the two stations launched in 1997 and higher programming costs in 1998.

         Marketing and selling expenses were $6.0 million in 1998, an increase
of $289,000, or 5%, compared to $5.7 million in 1997. The increase in marketing
and selling expenses was due to an increase in promotional costs associated with
the launch of the new stations and news programs.

         Incentive compensation, which is calculated based on increases in pro
forma location cash flow, was $177,000 in 1998, a decrease of $121,000, or 40%,
compared to $298,000 in 1997. The decrease resulted from a lower gain in pro
forma location cash flow during 1998 as compared to 1997.

         Depreciation and amortization was $4.6 million in 1998, an increase of
$802,000, or 21%, compared to $3.8 million in 1997. The increase in depreciation
and amortization is due to an increase in fixed assets associated with the
construction of the new stations in 1997 and 1998.

Cable

         Total net cable revenues were $13.8 million in 1998, a decrease of $2.9
million, or 18%, compared to net cable revenues of $16.7 million in 1997. The
decrease is primarily due to the sale of Pegasus' remaining New England cable
systems effective July 1, 1998. Net cable revenues from the New England Cable
systems were $3.3 million in 1998 compared to $6.1 million in 1997. The net
revenues derived from Pegasus' Puerto Rico cable system were $10.5 million in
1998 compared to $10.4 million in 1997. The average monthly revenue per
subscriber was $33.48 in 1998 compared to $32.46 in 1997. On September 22, 1998,
Hurricane Georges swept through Puerto Rico damaging Pegasus' cable system.
Prior to the hurricane, Pegasus had approximately 29,000 subscribers. As of
December 31, 1998, there were 28,800 subscribers compared to 27,300 at December
31, 1997. Pegasus estimates that it lost approximately $1.4 million in net cable
revenues as a result of the hurricane.

         Programming, technical, and general and administrative expenses were
$7.6 million in 1998, a decrease of $870,000, or 10%, compared to $8.4 million
in 1997. The decrease is primarily attributable to the sale of Pegasus' New
England cable systems.

         Marketing and selling expenses were $341,000 in 1998, an increase of
$74,000, or 27%, compared to $267,000 in 1997. The increase is primarily due to
an increase in Puerto Rico's promotional expenses in connection with
post-hurricane activities partially offset by the sale of Pegasus' New England
cable systems.

         Incentive compensation, which is calculated based on increases in pro
forma location cash flow, was $115,000 in 1998, a decrease of $66,000, or 36%,
compared to $181,000 in 1997. The decrease resulted from a lower gain in pro
forma location cash flow during 1998 as compared to 1997.

         Depreciation and amortization was $5.0 million in 1998, a decrease of
$650,000, or 11%, compared to $5.6 million in 1997. The decrease in depreciation
and amortization is primarily due to the sale of Pegasus' New England cable
systems.

Year ended December 31, 1997 compared to the year ended December 31, 1996

                                       34
<PAGE>

         Total net revenues in 1997 were $86.8 million, an increase of $38.9
million, or 81%, compared to total net revenues of $47.9 million in 1996. The
increase in total net revenue in 1997 was primarily due to an increase in DBS
revenues of $32.3 million attributable to internal growth in Pegasus' DBS
subscriber base and through acquisitions. Total operating expenses in 1997 were
$93.4 million, an increase of $48.0 million, or 106%, compared to total
operating expenses of $45.4 million in 1996. The increase was primarily due to
an increase of $43.0 million in operating expenses attributable to the growth in
Pegasus' DBS business.

         Total corporate expenses, including corporate depreciation and
amortization, were $3.6 million in 1997, an increase of $1.2 million, or 49%,
compared to $2.4 million in 1996. The increase in corporate expenses is due to
internal and acquisition related growth.

         Interest expense was $16.1 million in 1997, an increase of $3.6
million, or 29%, compared to interest expense of $12.5 million in 1996. The
increase in interest expense is primarily due to an increase in debt associated
with Pegasus' acquisitions. Interest income was $1.5 million in 1997, an
increase of $1.3 million, or 562%, compared to interest income of $232,000 in
1996. The increase in interest income is due to greater average cash balances in
1997 compared to 1996.

         Other expenses were $723,000 in 1997, an increase of $552,000, or 322%,
compared to other expenses of $171,000 in 1996. The increase is due to increased
board fees, investor relations and other costs associated with operating a
public company.

         In 1997, Pegasus sold its New Hampshire cable system for $6.9 million
resulting in a gain of $4.5 million.

         Extraordinary loss from the extinguishment of debt was $1.7 million in
1997 compared to $251,000 in 1996. In 1997, Pegasus refinanced its existing
$130.0 million credit facility with a new $180.0 million credit facility and
accordingly, the deferred financing costs associated with the $130.0 million
credit facility were written off. In 1996, Pegasus refinanced its existing $10.0
million credit facility with a new $50.0 million credit facility and
accordingly, the deferred financing costs associated with the $10.0 million
credit facility were written off.

         Preferred stock dividends were $12.2 million in 1997 and represent
preferred stock dividends payable under Pegasus' preferred stock issued in
January 1997.

DBS

         During 1997, Pegasus acquired approximately 79,000 subscribers and the
exclusive DIRECTV distribution rights to approximately 1.2 million households in
rural areas of the United States. At December 31, 1997, Pegasus had exclusive
DIRECTV distribution rights to 2.2 million households and 132,000 subscribers as
compared to 1.0 million households and 30,000 subscribers at December 31, 1996.
Subscriber penetration increased from 5.3% at December 31, 1996 to 7.1% at
December 31, 1997, including pending and completed acquisitions.

         Total DBS net revenues were $38.3 million in 1997, an increase of $32.4
million, or 559%, compared to DBS net revenues of $5.8 million in 1996. The
increase is primarily due to an increase in the actual number of subscribers in
1997 compared to 1996. Pegasus' 1997 DBS acquisitions represented $20.7 million,
or 64%, of the $32.4 million increase in DBS net revenues. The average monthly
revenue per subscriber was $40.72 in 1997 compared to $37.26 in 1996.

         Programming, technical, and general and administrative expenses were
$26.0 million in 1997, an increase of $21.7 million, or 504%, compared to $4.3
million in 1996. The increase is attributable to significant growth in
subscribers and territory in 1997. Pegasus' 1997 DBS acquisitions represented
$15.0 million, or 69%, of the $21.7 million increase in programming, technical
and general and administrative expenses. As a percentage of revenue,
programming, technical, and general and administrative expenses were 68.1% in
1997 compared to 74.0% in 1996.

         Subscriber acquisition costs were $10.5 million in 1997, an increase of
$8.6 million compared to $1.9 million in 1996. In 1997 and 1996, $4.5 million
and $1.3 million, respectively, in 

                                       35
<PAGE>

subscriber acquisition costs were capitalized, as a significant number of the 
related subscribers entered into extended programming contracts. Total
subscriber acquisition costs per gross subscriber addition were $281 in 1997 
compared to $211 in 1996.

         Incentive compensation, which is calculated based on increases in pro
forma location cash flow, was $795,000 in 1997, an increase of $649,000, or
445%, compared to $146,000 in 1996. The increase resulted from a larger gain in
pro forma location cash flow during 1997 as compared to 1996.

         Depreciation and amortization was $17.0 million in 1997, an increase of
$15.2 million, or 844%, compared to $1.8 million in 1996. The increase in
depreciation and amortization is primarily due to an increase in the fixed and
intangible asset base as the result of acquisitions that occurred in 1996 and
1997.

Broadcast

         In 1997, Pegasus owned or programmed seven broadcast television
stations in six markets. Two of these stations were launched during the second
half of 1997. Total net broadcast revenues in 1997 were $32.0 million, an
increase of $3.4 million, or 12%, compared to net broadcast revenues of $28.6
million in 1996. The increase was primarily attributable to an increase of $1.9
million in net broadcast revenues from ratings increases that Pegasus was able
to convert into higher revenues and a $1.2 million increase in barter revenue.
Net broadcast revenues from the two stations launched in 1997 were $289,000.

         Programming, technical, and general and administrative expenses were
$15.7 million in 1997, an increase of $1.8 million, or 13%, compared to $13.9
million in 1996. The increase is primarily due to an increase in barter
programming expense of $1.2 million and start-up costs associated with the
launch of two new stations in 1997.

         Marketing and selling expenses were $5.7 million in 1997, an increase
of $853,000, or 18%, compared to $4.8 million in 1996. The increase in marketing
and selling expenses was due to an increase in promotional costs associated with
the launch of the new stations.

         Incentive compensation, which is calculated based on increases in pro
forma location cash flow, was $298,000 in 1997, a decrease of $393,000, or 57%,
compared to $691,000 in 1996. The decrease resulted from a lower gain in pro
forma location cash flow during 1997 as compared to 1996.

         Depreciation and amortization was $3.8 million in 1997, a decrease of
$287,000, or 7%, compared to $4.1 million in 1996.

Cable

         Total net cable revenues were $16.7 million in 1997, an increase of
$3.2 million, or 24%, compared to net cable revenues of $13.5 million in 1996.
The increase is primarily due to a full year of operations of a Puerto Rico
cable system acquired in August 1996. This increase was partially offset by the
sale of Pegasus' New Hampshire cable system in January 1997. The average monthly
revenue per subscriber was $32.46 in 1997 compared to $32.45 in 1996.

         Programming, technical, and general and administrative expenses were
$8.4 million in 1997, an increase of $1.3 million, or 19%, compared to $7.1
million in 1996. The increase is primarily attributable to a full year of
operations of a Puerto Rico cable system acquired in August 1996.

         Marketing and selling expenses were $267,000 in 1997, an increase of
$177,000, or 197%, compared to $90,000 in 1996. The increase is primarily due to
an increase in Puerto Rico's promotional expenses.

                                       36
<PAGE>

         Incentive compensation, which is calculated based on increases in pro
forma location cash flow, was $181,000 in 1997, an increase of $33,000, or 22%,
compared to $148,000 in 1996. The increase resulted from a larger gain in pro
forma location cash flow during 1997 as compared to 1996.

         Depreciation and amortization was $5.6 million in 1997, an increase of
$398,000, or 8%, compared to $5.2 million in 1996. The increase in depreciation
and amortization is primarily due an increase in the fixed and intangible asset
base as the result of a Puerto Rico cable system acquired in August 1996.

Liquidity and Capital Resources

         Pegasus' primary sources of liquidity have been the net cash provided
by its DBS, broadcast and cable operations, credit available under its credit
facilities and proceeds from public and private offerings. Pegasus' principal
use of its cash has been to fund acquisitions, to meet debt service obligations,
to fund DBS subscriber acquisition costs and to fund investments in its
broadcast and cable technical facilities.

         Pre-marketing cash flow increased by approximately $30.1 million, or
98%, for the year ended December 31, 1998 as compared to the same period in
1997. Pre-marketing cash flow increased as a result of:

         o        a $32.5 million, or 266%, increase in DBS pre-marketing cash
                  flow of which $3.8 million, or 12%, was due to an increase in
                  same territory pre-marketing cash flow and $28.7 million or
                  88% was attributable to territories acquired in 1997 and 1998;

         o        a $249,000, or 2%, decrease in broadcast location cash flow as
                  the result of a $121,000, or 1%, decrease in same station
                  location cash flow and a $128,000 decrease attributable to the
                  four new stations launched in August 1997, October 1997, July
                  1998 and November 1998; and

         o        a $2.1 million, or 27%, decrease in cable location cash flow.
                  This decrease was the result of a $610,000, or 13%, decrease
                  in Puerto Rico same system location cash flow, a $67,000
                  reduction due to the sale of Pegasus' New Hampshire cable
                  system effective January 31, 1997 and a $1.4 million reduction
                  due to the sale of Pegasus' remaining New England cable
                  systems effective July 1, 1998.

         During the year ended December 31, 1998, proceeds from the sale of
Pegasus' remaining New England cable systems amounted to $30.1 million, which
together with $10.5 million of cash on hand at the beginning of the year, $3.3
million of cash acquired from acquisitions and $133.8 million of net cash
provided by Pegasus' financing activities, was used to fund operating activities
of approximately $22.0 million and other investing activities of $134.8 million.
Investing activities, net of cash acquired from acquisitions and proceeds from
the sale of the New England cable systems, consisted of:

         o        the acquisition of DBS assets, excluding Digital Television
                  Services, Inc., from 26 independent DIRECTV providers during
                  1998 for approximately $109.3 million;

         o        approximately $6.8 million of broadcast expenditures for
                  broadcast television transmitter, tower and facility
                  constructions and upgrades. Pegasus commenced the programming
                  of four new broadcast stations over the last two years, WPME
                  in August 1997, WGFL in October 1997, WFXU in July 1998 and
                  WSWB in November 1998, and plans to commence programming of an
                  additional station by the year 2000;

         o        DBS facility upgrades of approximately $1.2 million;

         o        the expansion and enhancements of the Puerto Rico cable system
                  amounting to approximately $2.0 million;

                                       37
<PAGE>

         o        payments of programming rights amounting to $2.6 million;

         o        capitalized costs relating to Pegasus' financing of $4.4
                  million;

         o        capitalized costs relating to the acquisition of Digital
                  Television Services, Inc. of $4.3 million; and

         o        maintenance and other capital expenditures and intangibles
                  totaling approximately $4.2 million.

         Financing activities consisted of:

         o        the $100.0 million 9 3/4% senior notes offering resulting in
                  proceeds to Pegasus of approximately $96.8 million;

         o        net borrowings on bank credit facilities totaling $44.4
                  million;

         o        the repayment of approximately $15.0 million of long-term
                  debt, primarily sellers' notes and capital leases; and

         o        net restricted cash draws of approximately $7.5 million for
                  interest payments.

         As of December 31, 1998, cash on hand amounted to $54.5 million plus
restricted cash of $21.5 million. Pegasus had $27.5 million drawn and standby
letters of credit amounting to $49.6 million under the $180.0 million Pegasus
Media & Communications credit facility. Additionally, there was $46.4 million
drawn and standby letters of credit of $18.5 million outstanding under the $90.0
million Digital Television Services credit facility.

         Pre-marketing cash flow increased by $13.0 million or 74% for the year
ended December 31, 1997, as compared to the same period in 1996. Pre-marketing
cash flow increased as a result of:

         o        a $10.7 million, or 705%, increase in DBS pre-marketing cash
                  flow. Of this amount, $1.0 million, or 10%, was due to an
                  increase in same territory pre-marketing cash flow and $9.7
                  million, or 90%, was attributable to territories acquired
                  subsequent to the third quarter of 1996;

         o        a $649,000, or 6%, increase in broadcast location cash flow.
                  The increase was the net result of a $1.4 million, or 17%,
                  increase in same station location cash flow, a $343,000
                  decrease attributable to stations acquired in the first
                  quarter of 1996, and a $361,000 decrease attributable to the
                  two new stations launched in August 1997 and October 1997; and

         o        a $1.7 million, or 27%, increase in cable location cash flow.
                  This increase was the net result of a $646,000, or 14%,
                  increase in same system location cash flow, a $1.7 million
                  increase due to the system acquired in August 1996, and a
                  $703,000 reduction due to the sale of Pegasus' New Hampshire
                  cable system effective January 31, 1997.

         During the year ended December 31, 1997, net cash provided by operating
activities was approximately $8.5 million. This amount, together with $8.6
million of cash on hand, $6.9 million of net proceeds from the sale of the New
Hampshire cable system and $169.1 million of net cash provided by Pegasus'
financing activities was used to fund other investing activities totaling $149.1
million. Financing activities consisted of:

         o        raising $95.8 million in net proceeds from Pegasus' preferred
                  stock offering in January 1997 and $111.0 million in net
                  proceeds from Pegasus' offering of senior notes in October
                  1997,

         o        borrowing $94.2 million under a former bank credit facility,

                                       38
<PAGE>

         o        repayment of all $94.2 million of that indebtedness and $29.6
                  million of indebtedness under a still earlier credit facility,

         o        net repayment of approximately $657,000 of other long-term
                  debt,

         o        designating $1.2 million as restricted cash to collateralize a
                  letter of credit, and

         o        the incurrence of approximately $6.2 million in debt issuance
                  costs associated with various credit facilities.

         Investing activities, net of the proceeds from the sale of the New
Hampshire cable system, consisted of:

         o        the acquisition of DBS assets from 25 independent DIRECTV
                  providers during 1997, for approximately $133.9 million;

         o        broadcast television transmitter, tower and facility
                  constructions and upgrades totaling approximately $5.8
                  million;

         o        the interconnection and expansion of the Puerto Rico cable
                  systems amounting to approximately $1.8 million;

         o        payments of programming rights amounting to $2.6 million; and

         o        maintenance and other capital expenditures and intangibles
                  totaling approximately $5.4 million.

         During the year ended December 31, 1996, net cash provided by operating
activities was approximately $3.1 million. This amount, together with $12.0
million of cash on hand, $9.9 million of restricted cash and $74.7 million of
net cash from Pegasus' financing activities was used to fund investing
activities totaling $81.2 million. Investing activities consisted of:

         o        the Portland, Maine and Tallahassee, Florida broadcast
                  acquisitions for approximately $16.6 million;

         o        the San German, Puerto Rico cable acquisition for
                  approximately $26.0 million;

         o        the acquisition of DBS assets from two independent DIRECTV
                  providers during the fourth quarter of 1996 for approximately
                  $29.9 million;

         o        the purchase of a New England cable office facility and
                  headend facility for $201,000;

         o        the fiber upgrade in a cable system amounting to $323,000;

         o        the purchase of DIRECTV system units used as rental and lease
                  units amounting to $832,000;

         o        payments of programming rights amounting to $1.8 million; and

         o        maintenance and other capital expenditures and intangibles
                  totaling approximately $6.7 million.

         As defined in the Certificate of Designation governing Pegasus' Series
A Preferred Stock and the indentures governing Pegasus' senior notes, Pegasus is
required to provide Adjusted Operating Cash Flow data for Pegasus and its
Restricted Subsidiaries on a consolidated basis where Adjusted Operating Cash
Flow is defined as "for the four most recent fiscal quarters for which internal
financial statements are available, Operating Cash Flow of such Person and its
Restricted Subsidiaries less DBS Cash Flow for the most recent four-quarter
period plus DBS Cash Flow for 

                                       39
<PAGE>

the most recent quarterly period, multiplied by four." Operating Cash Flow is
income from operations before income taxes, depreciation and amortization,
interest expense, extraordinary items and non-cash charges. Although Adjusted
Operating Cash Flow is not a measure of performance under generally accepted
accounting principles, we believe that Location Cash Flow, Operating Cash Flow
and Adjusted Operating Cash Flow are accepted within our business segments as
generally recognized measures of performance and are used by analysts who report
publicly on the performance of companies operating in such segments. Restricted
Subsidiaries carries the same meaning as in the Certificate of Designation.
Digital Television Services, Inc., among certain other of Pegasus' subsidiaries,
are not included in the definition of Restricted Subsidiaries and, accordingly,
their operating results are not included in the Adjusted Operating Cash Flow
data provided below. Pro forma for the 26 completed DBS acquisitions occurring
in 1998 and the sale of our remaining New England cable systems, as if such
acquisitions/disposition occurred on January 1, 1998, Adjusted Operating Cash
Flow would have been approximately $47.6 million as follows:

<TABLE>
<CAPTION>
                                                                                  Four Quarters Ended
                                (in thousands)                                     December 31,1998
                                                                                   ----------------
<S>                                                                                  <C>     
Revenues .....................................................................       $176,963
Direct operating expenses, excluding depreciation, amortization and other
non-cash charges .............................................................        125,710
Income from operations before incentive compensation corporate  expenses,
depreciation and amortization and other non-cash charges .....................         51,253
Corporate expenses ...........................................................          3,614
                                                                                     --------
Adjusted operating cash flow .................................................       $ 47,639
                                                                                     ========
</TABLE>
Financings

         Pegasus Media & Communications, Inc. completed an $85.0 million notes
offering on July 7, 1995. The notes were sold at a $4.0 million discount. The
proceeds from the notes offering, together with cash on hand, were used to:

         o        repay approximately $38.6 million in loans and other
                  obligations,

         o        repurchase $25.6 million of notes for approximately $13.0
                  million, which resulted in a $10.2 million extraordinary gain
                  net of expenses,

         o        make a $12.5 million distribution to Pegasus Communications
                  Holdings, Inc.,

         o        escrow $9.7 million for the purpose of paying interest on the
                  notes,

         o        pay $3.3 million in fees and expenses, and

         o        fund $8.8 million of the cash portion of the purchase price of
                  the WPXT acquisition.

         During July 1995, Pegasus Media & Communications entered into a credit
facility in the amount of $10.0 million. This credit facility was retired in
August 1996 from borrowings under the 1996 Pegasus Media & Communications credit
facility.

         In 1996, Pegasus Media & Communications entered into a credit facility
which provided for borrowings up to $50.0 million. This credit facility was
retired in December 1997 from borrowings under the 1997 Pegasus Media &
Communications credit facility.

         In 1996, Digital Television Services, Inc. entered into a credit
facility which provides for borrowings up to $90.0 million. Approximately $50.4
million was outstanding as of March 1, 1999. The credit facility expires in
July 2003.

         On October 8, 1996, Pegasus completed its initial public offering in
which it sold 3.0 million shares of its Class A Common Stock to the public at a
price of $14.00 per share resulting in 

                                       40
<PAGE>

net proceeds to Pegasus of approximately $38.1 million. Pegasus applied the net
proceeds from the initial public offering as follows:

         o        $29.9 million for the payment of the cash portion of the
                  purchase price for the acquisition of DBS assets from two 
                  independent providers of DIRECTV services during the fourth
                  quarter of 1996, and

         o        other payments in connection with certain other acquisitions
                  and the repayment of indebtedness.

         On January 27, 1997, Pegasus completed an offering in which it sold
100,000 units, consisting of 100,000 shares of preferred stock and 100,000
warrants to purchase 193,600 shares of Class A Common Stock. This offering
resulted in net proceeds to Pegasus of $95.8 million. Pegasus applied the net
proceeds from the offering as follows:

         o        $30.1 million to the repayment of all outstanding indebtedness
                  under the 1996 Pegasus Media & Communications credit facility
                  and expenses related to it, and

         o        $56.5 million for the payment of the cash portion of the
                  purchase price for the acquisition of DBS assets from various
                  independent DIRECTV providers. The remaining net proceeds were
                  used for working capital, general corporate purposes and to
                  finance other acquisitions.

         On July 9, 1997, Pegasus Satellite Holdings, Inc. entered into a $130.0
million credit facility, which was collateralized by substantially all of the
assets of Pegasus Satellite Holdings and its subsidiaries. The facility
consisted of a $40.0 million seven-year senior term loan and a $90.0 million
six-year senior revolving credit facility. On October 21, 1997, outstanding
balances under the credit facility were repaid from the proceeds of the offering
of senior notes discussed below and commitments under the Pegasus Satellite
Holdings credit facility were terminated. Deferred financing fees relating to
the $130.0 million revolving credit facility were written off, resulting in an
extraordinary loss of $1.7 million on the refinancing transaction.

         On October 21, 1997, Pegasus completed an offering in which it sold
$115.0 million of its 9.625% senior notes, resulting in net proceeds to Pegasus
of approximately $111.0 million. Pegasus applied the net proceeds from the
offering as follows:

         o        $94.2 million to the repayment of all outstanding indebtedness
                  under the Pegasus Satellite Holdings credit facility, and

         o        $16.8 million for the payment of the cash portion of the
                  purchase price for the acquisition of DBS assets from various
                  independent DIRECTV providers.

         On December 10, 1997, Pegasus Media & Communications entered into a
credit facility. The credit facility is a $180.0 million six-year,
collateralized, reducing revolving credit facility. Borrowings under the credit
facility are available for acquisitions, subject to the approval of the lenders
in certain circumstances, working capital, capital expenditures and for general
corporate purposes. Approximately $35.0 million was outstanding as of March 1,
1999. The credit facility expires in December 2003.

         On November 30, 1998, Pegasus completed an offering of $100.0 million 9
3/4% senior notes due 2006, resulting in net proceeds to Pegasus of
approximately $96.8 million. Pegasus applied $64.0 million of the net proceeds
to pay down indebtedness under the Pegasus Media & Communications credit
facility and $32.8 million to the cash portion of certain completed DBS
acquisitions.

         Pegasus believes that it has adequate resources to meet its working
capital, maintenance capital expenditure and debt service obligations for at
least the next twelve months. However, Pegasus is highly leveraged and our
ability in the future to repay our existing indebtedness will depend upon the
success of our business strategy, prevailing economic conditions, regulatory


                                       41
<PAGE>

matters, levels of interest rates and financial, business and other factors that
are beyond our control. We cannot assure you that we will be able to generate
the substantial increases in cash flow from operations that we will need to meet
the obligations under our indebtedness. Furthermore, our agreements with respect
to our indebtedness contain numerous covenants that, among other things:

         o        restrict our ability to pay dividends and make certain other
                  payments and investments;

         o        borrow additional funds;

         o        create liens; and

         o        to sell our assets.

Failing to make debt payments or comply with our covenants could result in an
event of default which if not cured or waived could have a material adverse
effect on us.

         Pegasus closely monitors conditions in the capital markets to identify
opportunities for the effective use of financial leverage. In financing its
future expansion and acquisition requirements, Pegasus would expect to avail
itself of such opportunities and thereby increase its indebtedness. This could
result in increased debt service requirements. We cannot assure you that such
debt financing can be completed on terms satisfactory to Pegasus or at all.
Pegasus may also issue additional equity to fund its future expansion and
acquisition requirements.

Year 2000

         The year 2000 issue is a general term used to describe the various
problems that may result from the improper processing of dates and
date-sensitive calculations by computers and other equipment as the year 2000
approaches and is reached. These problems generally arise from the fact that
most computer hardware and software have historically used only two digits to
identify the year in a date, often resulting in the computer failing to
distinguish dates in the 2000's from dates in the 1900's. These problems may
also arise from additional sources, such as the use of special codes and
conventions in software utilizing the date field.

         Pegasus has reviewed all of its systems as to the year 2000 issue.
Pegasus' primary focus has been on its own internal systems. Pegasus has in the
past three years replaced or upgraded, or is in the process of replacing or
upgrading, all of its TV traffic systems, cable billing systems and corporate
accounting systems. All of these new systems are expected to be in place by
May 31, 1999. However, if any necessary changes are not made or completed in a
timely fashion or unanticipated problems arise, the year 2000 issue may take
longer for Pegasus to address and may have a material adverse impact on Pegasus'
financial condition and its results of operations.

         Pegasus relies on outside vendors for the operation of its DBS
satellite control and billing systems, including DIRECTV, the National Rural
Telecommunications Cooperative and their respective vendors. Pegasus has
established a policy to ensure that these vendors are currently in compliance
with the year 2000 issue or have a plan in place to be in compliance with the
year 2000 issue by the first quarter of 1999. In addition, Pegasus has had
initial communications with certain of its other significant suppliers,
distributors, financial institutions, lessors and parties with which it conducts
business to evaluate their year 2000 compliance plans and state of readiness and
to determine the extent to which Pegasus' systems may be affected by the failure
of others to remediate their own year 2000 issues. To date, however, Pegasus has
received only preliminary feedback from such parties and has not independently
confirmed any information received from other parties with respect to the year
2000 issue. As such, we cannot assure you that these other parties will complete
their year 2000 conversion in a timely fashion or will not suffer a year 2000
business disruption that may adversely affect Pegasus' financial condition and
its results of operations.

         Because Pegasus' year 2000 conversion is expected to be completed prior
to any potential disruption to Pegasus' business, Pegasus has not yet completed
the development of a comprehensive year 2000-specific contingency plan. However,
as part of its year 2000 contingency planning effort, Pegasus examines
information received from external sources for date integrity before bringing it

                                       42
<PAGE>

into its internal systems. If Pegasus determines that its business or a segment
thereof is at material risk of disruption due to the year 2000 issue or
anticipates that its year 2000 conversion will not be completed in a timely
fashion, it will work to enhance its contingency plan. Costs to date relating to
the year 2000 issue amounted to approximately $150,000. Costs to be incurred
beyond December 31, 1998, relating to the year 2000 issue are expected to be
approximately $200,000.

Dividend Policy

         As a holding company, Pegasus' ability to pay dividends is dependent
upon the receipt of dividends from its direct and indirect subsidiaries. Credit
facilities and publicly held debt securities of Pegasus' principal subsidiaries
restrict them from paying dividends to Pegasus. In addition, Pegasus' ability to
pay dividends and Pegasus' and its subsidiaries' ability to incur indebtedness
are subject to certain restrictions contained in Pegasus' and its subsidiaries'
credit facilities and publicly held debt securities and in the terms of Pegasus'
Series A preferred stock.

Seasonality

         Pegasus' revenues vary throughout the year. As is typical in the
broadcast television industry, Pegasus' first quarter generally produces the
lowest revenues for the year and the fourth quarter generally produces the
highest revenues for the year. Pegasus' operating results in any period may be
affected by the incurrence of advertising and promotion expenses that do not
necessarily produce commensurate revenues in the short-term until the impact of
such advertising and promotion is realized in future periods.

Inflation

         Pegasus believes that inflation has not been a material factor
affecting its business. In general, Pegasus' revenues and expenses are impacted
to the same extent by inflation. A majority of Pegasus' indebtedness bears
interest at a fixed rate.


ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         Not Applicable

ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         The information required by this item is set forth on pages F-1 through
F-22.

ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND 
        FINANCIAL DISCLOSURE

         None.

                                    PART III

ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         Set forth below is certain information concerning the executive
officers and directors of Pegasus.


                                       43
<PAGE>

<TABLE>
<CAPTION>
                Name                 Age   Position
                ----                 ---   --------
<S>                                   <C>  <C>               
Marshall W. Pagon (1) ..............  43   Chairman of the Board, President and Chief Executive Officer
Robert N. Verdecchio ...............  42   Senior Vice President, Chief Financial Officer, Treasurer, 
                                           Assistant Secretary and Director
Ted S. Lodge .......................  42   Senior Vice President, Chief Administrative Officer, General
                                           Counsel and Secretary
Howard E. Verlin ...................  37   Vice President and Assistant Secretary
Nicholas A. Pagon ..................  42   Vice President
Michael C. Brooks (1) ..............  54   Director
Harry F. Hopper III (2) ............  45   Director
James J. McEntee, III (2) ..........  41   Director
Mary C. Metzger (1)(3) .............  53   Director
William P. Phoenix .................  41   Director
Riordon B. Smith (3) ...............  37   Director
Donald W. Weber (2)(3) .............  62   Director
</TABLE>

------------
(1) Member of Nominating Committee.
(2) Member of Compensation Committee.
(3) Member of Audit Committee.

         Marshall W. Pagon has served as President, Chief Executive Officer and
Chairman of the Board of Pegasus since its incorporation, and served as
Treasurer of Pegasus from its incorporation to June 1997. From 1991 to October
1994, when the assets of various affiliates of Pegasus Media & Communications,
Inc., principally limited partnerships that owned and operated Pegasus'
broadcast and cable operations, were transferred to Pegasus Media &
Communication's subsidiaries, entities controlled by Mr. Pagon served as the
general partners of these partnerships and conducted the business of Pegasus.
Mr. Pagon's background includes over 18 years of experience in the media and
communications industry. Mr. Pagon is the brother of Nicholas A. Pagon.

         Robert N. Verdecchio has served as Pegasus' Senior Vice President,
Chief Financial Officer and Assistant Secretary since its inception and as
Pegasus' Treasurer since June 1997. He has also served similar functions for
Pegasus Media & Communication's affiliates and predecessors in interest since
1990. Mr. Verdecchio has been a director of Pegasus and Pegasus Media &
Communications since December 18, 1997. Mr. Verdecchio is a certified public
accountant and has over 13 years of experience in the media and communications
industry. Mr. Verdecchio is serving as a director of Pegasus as Marshall W.
Pagon's designee to the board of directors.

         Ted S. Lodge has served as Senior Vice President, Chief Administrative
Officer, General Counsel and Assistant Secretary of Pegasus since July 1, 1996.
In June 1997, Mr. Lodge became Pegasus' Secretary. From June 1992 through June
1996, Mr. Lodge practiced law with the law firm of Lodge & Company. During that
period, Mr. Lodge was engaged by Pegasus as its outside legal counsel in
connection with various matters.

         Howard E. Verlin is a Vice President and Assistant Secretary of Pegasus
and is responsible for operating activities of Pegasus' DBS and cable
subsidiaries, including supervision of their general managers. Mr. Verlin has
served similar functions with respect to Pegasus' predecessors in interest and
affiliates since 1987 and has over 15 years of experience in the media and
communications industry.

         Nicholas A. Pagon has served as a Vice President of Pegasus and Chief
Executive Officer of its broadcast subsidiaries since November 1998 and is
responsible for all broadcast television activities of Pegasus. From January to
November 1998, Mr. Pagon served as President of Pegasus Development Corporation,
a subsidiary of Pegasus. From 1990 through December 1998, Mr. Pagon was
President of Wellspring Consulting, Inc., a telecommunications consulting
business. Mr. Pagon is the brother of Marshall W.
Pagon.

         Michael C. Brooks has been a director of Pegasus since April 27, 1998.
From February 1997 until April 27, 1997, Mr. Brooks had been a director of
Digital Television Services, Inc. He has been a general partner of J.H. Whitney
& Co., a venture capital firm, since January 1985 

                                       44
<PAGE>
and currently serves as Senior Partner. Mr. Brooks is also a director of SunGard
Data Systems Inc., Nitinol Medical Technologies, Inc. and several private
companies. Mr. Brooks is serving as a director of Pegasus as Whitney's designee
to the board of directors.

         Harry F. Hopper III has been a director of Pegasus since April 27,
1998. From June 1996 until April 27, 1998, Mr. Hopper had been a director of
Digital Television Services, Inc., or a manager of its predecessor, Digital
Television Services, LLC. Mr. Hopper is a Managing Director of Columbia Capital
Corporation which he joined in January 1994. Columbia Capital is a venture
capital firm with an investment focus on communications services, and
information and communication technologies. Mr. Hopper is serving as a director
of Pegasus as Columbia's designee to the board of directors.

         James J. McEntee, III has been a director of Pegasus since October 8,
1996. Mr. McEntee has been a member of the law firm of Lamb, Windle & McErlane,
P.C. for the past six years and a principal of that law firm for the past five
years.

         Mary C. Metzger has been a director of Pegasus since November 14, 1996.
Ms. Metzger has been Chairman of Personalized Media Communications LLC and its
predecessor company, Personalized Media Communications Corp. since February
1989. Ms. Metzger has also been Managing Director of Video Technologies
International, Inc. since June 1986.

         William P. Phoenix has been a director of Pegasus since June 17, 1998.
He is a Managing Director of CIBC Oppenheimer Corp. and co-head of its Credit
Capital Markets Group. Mr. Phoenix is also a member of CIBC Oppenheimer Corp.'s
credit investment and risk committees. Prior to joining CIBC Oppenheimer Corp.
in 1995, Mr. Phoenix had been a Managing Director of Canadian Imperial Bank of
Commerce with management responsibilities for the bank's acquisition finance,
mezzanine finance and loan workout and restructuring businesses. Mr. Phoenix
joined Canadian Imperial Bank of Commerce in 1982. Mr. Phoenix is one of
Marshall W. Pagon's designees to the board of directors pursuant to a voting
agreement.

         Riordon B. Smith has been a director of Pegasus since April 27, 1998.
From February 1997 until April 27, 1998, Mr. Smith had been a director of
Digital Television Services, Inc., or a manager of its predecessor, Digital
Television Services, LLC. Mr. Smith is a Senior Vice President of Fleet Private
Equity Co., Inc., which he joined in 1990. Fleet Private Equity Co., Inc. is a
private equity fund with an investment focus in media and information,
telecommunications services, healthcare services, industrial manufacturing
business services and consumer products and services. Mr. Smith is serving as a
director of Pegasus as Chisholm Partners, III, L.P.'s designee to the board of
directors.

         Donald W. Weber has been a director of Pegasus since its incorporation
and a director of Pegasus Media & Communications since November 1995. Until its
acquisition by Pegasus in November 1997, Mr. Weber had been the President and
Chief Executive Officer of ViewStar Entertainment Services, Inc., an NRTC
associate that distributed DIRECTV services in North Georgia, since August 1993.
From November 1991 through August 1993, Mr. Weber was a private investor and
consultant to various communication companies. Prior to that time, Mr. Weber was
President and Chief Executive Officer of Contel Corporation until its merger
with GTE Corporation in 1991. Mr. Weber is currently a member of the boards of
directors of Powertel, Inc. and Healthdyne Information Enterprises, Inc., which
are publicly-traded companies.

         In connection with the acquisition of DIRECTV rights and related assets
from Harron Communications Corp., Pegasus Communications Holdings, Inc.,
Pegasus' parent corporation, agreed to nominate a designee of Harron as a member
of Pegasus' board of directors. Effective October 8, 1996, James J. McEntee,
III, was appointed to Pegasus' board of directors as Harron's designee.
Harron's right to designate a board member terminated on October 8, 1998.

Section 16(a) Beneficial Ownership Reporting Compliance

         Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires Pegasus' executive officers and directors and persons
who own more than ten percent of a 

                                       45
<PAGE>

registered class of Pegasus' equity securities (collectively, the "reporting
persons") to file reports of ownership and changes in ownership with the
Securities and Exchange Commission and to furnish Pegasus with copies of these
reports. Based on Pegasus' review of the copies of these reports received by it,
and written representations, if any, received from reporting persons with
respect to the filing of reports on Form 3, 4 and 5, Pegasus believes that all
filings required to be made by the reporting persons for 1998 were made on a
timely basis for 1998.

ITEM 11: EXECUTIVE COMPENSATION

         The following table sets forth certain information for Pegasus' last
three fiscal years concerning the compensation paid to the Chief Executive
Officer and to each of Pegasus' most highly compensated officers. The most
highly compensated officers are those whose total annual salary and bonus for
the fiscal year ended December 31, 1998 exceeded $100,000.

         Prior to the consummation of Pegasus' initial public offering of common
stock in October 1996, Pegasus' executive officers never received any salary or
bonus compensation from Pegasus. The salary amounts presented below under
"Annual Compensation" for January 1, 1996 through October 8, 1996 were paid by
an affiliate of Pegasus. After October 8, 1996, Pegasus' executive officers'
salaries were paid by Pegasus. There are no employment agreements between
Pegasus and its executive officers.

         Upon Pegasus' initial public offering in October 1996, certain shares
of Class B Common Stock were exchanged for shares of Class A Common Stock and
distributed to certain members of management, including 38,807 shares of Class A
Common Stock that were distributed to Mr. Verdecchio. This information is set
forth under the column "Restricted Stock Award" below.

         Unless otherwise indicated, the amounts listed under the column "All
Other Compensation" represent Pegasus' contributions under its 401(k) plans.
<TABLE>
<CAPTION>
                                                                            Long Term Compensation                                 
                                                                       --------------------------------
                                               Annual Compensation                  Awards
                                               -------------------     --------------------------------               
                                                                        Restricted       Securities        All Other
     Name             Principal Position        Year       Salary      Stock Award   Underlying Options  Compensation
     ----             ------------------        ----       ------      -----------   ------------------  ------------
<S>                                             <C>       <C>            <C>               <C>            <C>       
Marshall W.      President and Chief            1998      $200,000       $77,161           85,000         $67,274(1)
Pagon            Executive                      1997      $200,000       $100,558          85,000         $63,228(1)
                 Officer                        1996      $150,000          --               --           $62,253(1) 
                                                

Robert N.        Senior Vice President and      1998      $150,000       $38,580           40,000           $12,720
Verdecchio       Chief                          1997      $150,000       $50,279           40,000           $9,500 
                 Financial Officer              1996      $125,000       $555,940            --             $6,875 
                                                

Ted S.           Senior Vice President,         1998      $150,000       $30,864           60,000           $9,263
Lodge(2)         Chief                          1997      $150,000       $40,223           40,000           $1,800
                 Administrative Officer and     1996     $75,000(2)         --               --               --  
                 General Counsel                

Howard E.        Vice President, Satellite      1998      $135,000       $110,125          40,000           $5,480
Verlin           and                            1997      $135,000       $100,558          40,000           $1,685
                 Cable Television               1996      $100,000          --               --             $1,100
                                                
</TABLE>

----------------------
(1)   Of the amounts listed for Mr. Pagon for 1998, 1997 and 1996, $53,728,
      $53,728 and $53,728, respectively, represent the actuarial benefit to Mr.
      Pagon of premiums paid by Pegasus in connection with the split dollar
      agreement entered into by Pegasus with the trustees of insurance trust
      established by Mr. Pagon. See Item 13: Certain Relationships and Related
      Transactions -- Split Dollar Agreement. The remainder represents Pegasus'
      contributions under its 401(k) plans.

(2)   Mr. Lodge became an employee of Pegasus on July 1, 1996.

         Pegasus granted options to employees to purchase a total of 336,800
shares during 1998. The amounts set forth below in the columns entitled "5%" and
"10%" represent hypothetical gains that could be achieved for the respective
options if exercised at the end of the option term. These 

                                       46
<PAGE>

gains are based on assumed rates of stock appreciation of 5% and 10% compounded
annually from the date the respective options were granted to their expiration
date.

                              Option Grants in 1998
                           Potential Realizable Value
<TABLE>
<CAPTION>
                                          % of Total
                                        Options Granted    Exercise
                           Options      to Employees in      Price      Expiration
       Name                Granted        Fiscal Year      Per Share       Date            5%             10%
       ----                -------        -----------      ---------       ----            --             ---

<S>                        <C>              <C>             <C>           <C>            <C>            <C> 
Marshall W. Pagon          85,000           25.24%          $21.375       2-16-08      $1,142,623       $2,895,631

Robert N. Verdecchio       40,000           11.88%          $21.375       2-16-08        $537,705       $1,362,650

Ted S. Lodge               60,000           17.81%          $21.375       2-16-08        $806,557       $2,043,975

Howard E. Verlin           40,000           11.88%          $21.375       2-16-08        $537,705       $1,362,650

</TABLE>
         The table below shows aggregated stock option exercises by the named
executive officers in 1998, and 1998 year-end values. In-the-money options,
which are listed in the last two columns, are those in which the fair market
value of the underlying securities exceeds the exercise price of the option. The
closing price of Pegasus' Class A Common Stock on December 31, 1998 was $25.06
per share.

                     Aggregated Option Exercises in 1998 and
                           1998 Year End Option Values
<TABLE>
<CAPTION>

                                                       Number of Unexercised             Value of Unexercised
                                                         Options at Fiscal               In-the-Money Options
                                                              Year End                    at Fiscal Year End
                                                   -----------------------------     -----------------------------
                       Shares Acquired    Value
        Name             on Exercise    Realized   Exercisable     Unexercisable     Exercisable     Unexercisable
        ----             -----------    --------   -----------     -------------     -----------     -------------
<S>                                                   <C>             <C>              <C>            <C>       
Marshall W. Pagon            --            --         17,000          153,000          $239,020       $1,259,305

Robert N. Verdecchio         --            --         9,090            70,910          $127,805         $581,995

Ted S. Lodge                 --            --         9,090            90,910          $127,805         $655,695

Howard E. Verlin             --            --         9,090            70,910          $127,805         $581,995
</TABLE>

Compensation of Directors

         Under Pegasus' by-laws, each director is entitled to receive such
compensation, if any, as may from time to time be fixed by the board of
directors. Pegasus currently pays its directors who are not employees or
officers of Pegasus an annual retainer of $10,000 plus $750 for each board
meeting attended in person, $350 for each meeting of a committee of the board
and $375 for each board meeting held by telephone. Pegasus also reimburses each
director for all reasonable expenses incurred in traveling to and from the place
of each meeting of the board or committee of the board.

         On February 17, 1998, James J. McEntee, III, Mary C. Metzger, and
Donald W. Weber, who were then all of Pegasus' nonemployee directors, each
received options to purchase 5,000 shares of Class A Common Stock under the
Pegasus Communications 1996 Stock Option Plan. Each option vests in annual
installments of 2,500 shares, was issued at an exercise price of $21.375 per
share (the closing price of the Class A Common Stock at the time of the grant),
and is exercisable until the tenth anniversary from the date of grant.

Compensation Committee Interlocks and Insider Participation

         During 1998, the board of directors generally made decisions concerning
executive compensation of executive officers. The board included Marshall W.
Pagon, the President and Chief Executive Officer of Pegasus, and Robert N.
Verdecchio, Pegasus' Senior Vice President and Chief 

                                       47
<PAGE>

Financial Officer. A special stock option committee, however, made certain
decisions regarding option grants under the stock option plan. Both the stock
option plan and restricted stock plan are discussed below.

Incentive Program


General

         The incentive program, which includes the restricted stock plan, the
401(k) plans and the stock option plan, is designed to promote growth in
stockholder value by providing employees with restricted stock awards in the
form of Class A Common Stock and grants of options to purchase Class A Common
Stock. Awards under the restricted stock plan, other than excess and
discretionary awards, and the 401(k) plans, other than matching contributions,
are in proportion to annual increases in location cash flow. For this purpose we
automatically adjust location cash flow for acquisitions. As a result, for the
purpose of calculating the annual increase in location cash flow, the location
cash flow of the acquired properties is included as if it had been a part of
Pegasus' financial results for the comparable period of the prior year.

         Pegasus believes that the restricted stock plan and 401(k) plans result
in greater increases in stockholder value than result from a conventional stock
option program. The basis of this belief is that these plans create a clear
cause and effect relationship between initiatives taken to increase location
cash flow and the amount of incentive compensation that results from these
initiatives.

         Although the restricted stock plan and 401(k) plans like conventional
stock option programs provide compensation to employees as a function of growth
in stockholder value, the tax and accounting treatments of these programs are
different. For tax purposes, incentive compensation awarded under the restricted
stock plan generally and the 401(k) plans is fully tax deductible as compared to
conventional stock option grants which generally are only partially tax
deductible upon exercise. For accounting purposes, conventional stock option
programs generally do not result in a charge to earnings while compensation
under the restricted stock plan generally and the 401(k) plans do result in a
charge to earnings. Pegasus believes that these differences result in a lack of
comparability between the EBITDA of companies that utilize conventional stock
option programs and Pegasus' EBITDA. The table below lists the specific maximum
components of the restricted stock plan and the 401(k) plans in terms of a $1
increase in annual location cash flow. The table does not list excess and
discretionary awards under the restricted stock plan or matching contributions
under the 401(k) plans.


                                       48
<PAGE>

<TABLE>
<CAPTION>
                                     Component                                            Amount
                                    -----------                                         -----------
<S>                                                                                     <C> 
Restricted stock grants to general managers based on the increase in annual
location cash flow of individual business units .......................................   6 Cents

Restricted stock grants to department managers based on the increase in annual
location cash flow of individual business units .......................................   6 Cents

Restricted stock grants to corporate managers (other than executive officers)
based on the company-wide increase in annual location cash flow .......................   3 Cents

Restricted stock grants to employees selected for special recognition .................   5 Cents

Restricted stock grants under the 401(k) plans for the benefit of all eligible
employees and allocated pro-rata based on wages .......................................  10 Cents
                                                                                         ---------
Total ................................................................................   30 Cents
</TABLE>

         Executive officers and non-employee directors are not eligible to
receive profit sharing awards under the restricted stock plan. Executive
officers are eligible to receive awards under the restricted stock plan
consisting of:

         o        special recognition awards.

         o        excess awards made to the extent that an employee does not
                  receive a matching contribution under the 401(k) plans because
                  of restrictions of the Internal Revenue Code or the Puerto
                  Rico Internal Revenue Code.

         o        discretionary restricted stock awards determined by a board
                  committee, or the full board.

         Executive officers, non-employee directors and, effective December 18,
1998, all employees are eligible to receive options under the stock option plan.

Restricted Stock Plan

         The Pegasus restricted stock plan became effective in September 1996
and will terminate in September 2006. Under the restricted stock plan, 350,000
shares of Class A Common Stock are available for granting restricted stock
awards to eligible employees of Pegasus. The restricted stock plan provides for
four types of restricted stock awards that are made in the form of Class A
Common Stock as shown in the table above:

         o        profit sharing awards to general managers, department managers
                  and corporate managers (other than executive officers).

         o        special recognition awards for consistency, initiative,
                  problem solving and individual excellence.

         o        excess awards that are made to the extent that an employee
                  does not receive a matching contribution under the U.S. 401(k)
                  plan or Puerto Rico 401(k) plan because of restrictions of the
                  Internal Revenue Code or the Puerto Rico Internal Revenue
                  Code.

         o        discretionary restricted stock awards.

         Restricted stock awards other than special recognition awards vest 34%
after two years of service with Pegasus, 67% after three years of service and
100% after four years of service. Special recognition awards are fully vested on
the date of the grant. Effective December 18, 1998, grantees 

                                       49
<PAGE>

may elect to receive certain types of awards under the restricted stock plan in
the form of an option rather than stock subject to a vesting schedule.

Stock Option Plan

         The Pegasus Communications 1996 Stock Option Plan became effective in
September 1996 and terminates in September 2006. Under the stock option plan, up
to 970,000 shares of Class A Common Stock are available for the granting of
nonqualified stock options and options qualifying as incentive stock options
under Section 422 of the Internal Revenue Code. Effective December 18, 1998, all
Pegasus employees are eligible to receive non-qualified stock options and
incentive stock options under the stock option plan. No employee, however, may
be granted options covering more than 550,000 shares of Class A Common Stock
under the stock option plan. Directors of Pegasus who are not employees of
Pegasus are eligible to receive non-qualified stock options under the stock
option plan. Currently, seven non-employee directors are eligible to receive
options under the stock option plan. The stock option plan provides for
discretionary option grants made by a board committee or the full board. In
addition, as of December 18, 1998 each full time employee of Pegasus who is not
an executive officer is eligible to receive a grant of an option to purchase 100
shares of Class A Common Stock under the stock option plan.

401(k) Plans

         Effective January 1, 1996, Pegasus Media & Communications, Inc. adopted
the Pegasus Communications Savings Plan for eligible employees of that company
and its domestic subsidiaries. Effective October 1, 1996, the Pegasus' Puerto
Rico subsidiary adopted the Pegasus Communications Puerto Rico Savings Plan for
eligible employees of the Pegasus' Puerto Rico subsidiaries. Substantially all
Pegasus employees who, as of the enrollment date under the 401(k) plans, have
completed at least one year of service with Pegasus are eligible to participate
in one of the 401(k) plans. Participants may make salary deferral contributions
of 2% to 6% of salary to the 401(k) plans. Pegasus may make three types of
contributions to the 401(k) plans, each allocable to a participant's account if
the participant completes at least 1,000 hours of service in the applicable plan
year, and is employed on the last day of the applicable plan year.

         o        Pegasus matches 100% of a participant's salary deferral
                  contributions to the extent the participant invested his or
                  her salary deferral contributions in Class A Common Stock at
                  the time of his or her initial contribution to the 401(k)
                  Plans.

         o        Pegasus, in its discretion, may contribute an amount that
                  equals up to 10% of the annual increase in company-wide
                  location cash flow. These company discretionary contributions,
                  if any, are allocated to eligible participants' accounts based
                  on each participant's salary for the plan year.

         o        Pegasus also matches a participant's rollover contribution, if
                  any, to the 401(k) plans, to the extent the participant
                  invests his or her rollover contribution in Class A Common
                  Stock at the time of his or her initial contribution to the
                  401(k) plans.

         Pegasus makes discretionary company contributions and company matches
of employee salary deferral contributions and rollover contributions in the form
of Class A Common Stock, or in cash used to purchase Class A Common Stock.
Pegasus has authorized and reserved for issuance up to 205,000 shares of Class A
Common Stock in connection with the 401(k) plans. Company contributions to the
401(k) plans are subject to limitations under applicable laws and regulations.

         All employee contributions to the 401(k) Plans are fully vested at all
times and all company contributions, if any, vest 34% after two years of service
with Pegasus, including years before the 401(k) plans were established; 67%
after three years of service; and 100% after four years of service. A
participant also becomes fully vested in company contributions to the 401(k)
plans upon attaining age 65 or upon his or her death or disability.

                                       50
<PAGE>

ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The following table sets forth certain information as of February 28,
1999, regarding the beneficial ownership of the Class A Common Stock and Class B
Common Stock:

         o        each stockholder known to Pegasus to be the beneficial owner,
                  as defined in Rule 13d-3 under the Exchange Act of more than
                  5% of the Class A Common Stock and Class B Common Stock, based
                  upon Pegasus' records or the records of the SEC;

         o        each director of Pegasus;

         o        each of the most highly compensated officers whose total
                  annual salary and bonus or the fiscal year ended December 31,
                  1998 exceeded $100,000;

         o        all executive officers and directors of Pegasus as a group.

         The Class B Common Stock is currently convertible at the discretion of
the holders into an equal amount of shares of Class A Common Stock. Each of the
stockholders named below has sole voting power and sole investment power with
respect to the shares shown as beneficially owned, unless otherwise stated.
<TABLE>
<CAPTION>
                                                           
                                             
                                            Pegasus Class A Common Stock          Pegasus Class B Common Stock
                                      --------------------------------------- ------------------------------------
<S>                                     <C>                        <C>           <C>                   <C>  
                                               Shares                %               Shares               %
                                        ------------------          ----          ------------          -----
Marshall W. Pagon(1)(2)                 6,769,840 (3)(4)(5)         42.4          4,581,900(4)          100.0
Robert N. Verdecchio                    291,296(5)(6)(7)(8)         2.8                --                 --
Howard E. Verlin                            73,243(6)(7)             *                 --                 --
Ted S. Lodge                                 63,849(9)               *                 --                 --
James J. McEntee, III                        8,000(10)               *                 --                 --
Mary C. Metzger                              8,000(10)               *                 --                 --
Donald W. Weber                            295,920(8)(11)           2.6                --                 --
Harron Communications Corp.                   852,110               7.5                --                 --
Columbia Capital Corporation(12)         6,769,840(3)(4)(8)         42.4          4,581,900(4)          100.0
Columbia DBS, Inc.(12)                   6,769,840(3)(4)(8)         42.4          4,581,900(4)          100.0
Whitney Equity Partners, LP(13)           6,769,840(3)(4)           42.4          4,581,900(4)          100.0
 Fleet Entities(14)                       6,769,840(3)(4)           42.4          4,581,900(4)          100.0
Riordon B. Smith(15)                      6,769,840(3)(4)           42.4          4,581,900(4)          100.0
Michael C. Brooks(16)                     6,769,840(3)(4)           42.4          4,581,900(4)          100.0
Harry F. Hopper III(17)                      237,998(8)             2.1                --                 --
William P. Phoenix                               --                  --                --                 --
T. Rowe Price Associates, Inc.(18)            750,200               6.6                --                 --
PAR  Capital   Management,   Inc.  and
related entities (19)                         650,200               5.7                --                 --
Directors and Executive  Officers as a
Group (12 persons)(20)                       7,651,374              47.5            4,581,900           100.0
</TABLE>

--------------
* Represents less than 1% of the outstanding shares of Class A Common Stock.

(1)  The address of this person is c/o Pegasus Communications Management 
     Company, 5 Radnor Corporate Center, Suite 454, 100 Matsonford Road,
     Radnor, Pennsylvania 19087.

(2)  Pegasus Capital, L.P. holds 1,217,348 shares of Class B Common Stock. Mr.
     Pagon is the sole shareholder of the general partner of Pegasus Capital,
     L.P. and is deemed to be the beneficial owner of these shares. All 

                                       51
<PAGE>

     of the 3,364,552 remaining shares of Class B Common Stock are owned by
     Pegasus Communications Holdings, Inc. and two of its subsidiaries. All the
     capital stock of Pegasus Communications Holdings, Inc. are held by Pegasus
     Communications Limited Partnership. Mr. Pagon controls Pegasus
     Communications Limited Partnership by reason of his ownership of all the
     outstanding voting stock of the sole general partner of a limited
     partnership that is, in turn, the sole general partner in Pegasus
     Communications Limited Partnership. Therefore, apart from the voting
     agreement described in note 4 below, Mr. Pagon is the beneficial owner of
     100% of Class B Common Stock with sole voting and investment power over all
     such shares.

(3)  Includes 4,581,900 shares of Class B Common Stock, which are convertible
     into shares of Class A Common Stock on a one-for-one basis and 59,500
     shares of Class A Common Stock which are issuable upon the exercise of the
     vested portion of outstanding stock options, and 17,000 shares of Class A
     Common Stock which are issuable upon the exercise of the portion of an
     outstanding stock option which vests on March 21, 1999.

(4)  Mr. Pagon, Pegasus, Pegasus Capital, L.P., the Parent, Pegasus Northwest
     Offer Corp, Pegasus Scranton Offer Corp, Columbia Capital Corporation and
     Columbia DBS, Inc., which are discussed in note 12 below, and Whitney
     Equity Partners, L.P. and the Fleet entities, which are discussed in note
     14 below, have entered into the voting agreement, which provides that these
     parties vote all shares held by them in the manner specified in the voting
     agreement. As a consequence of being parties to the voting agreement, each
     of these parties is deemed to have shared voting power over certain shares
     beneficially owned by them in the aggregate for the purposes specified in
     the voting agreement. Therefore, the parties to the voting agreement are
     each deemed to be the beneficial owner with respect to 4,581,900 shares of
     Class B Common Stock and 6,769,840 shares of Class A Common Stock,
     including 4,581,900 shares of Class A Common Stock issuable upon conversion
     of the all outstanding shares of Class B Common Stock. See Item 13: Certain
     Relationships and Related Transactions -- Voting Agreement.

(5)  Includes 96,772 shares of Class A Common Stock held in Pegasus' 401(k)
     plan, over which Messrs. Pagon and Verdecchio share voting power in their
     capacities as co-trustees.

(6)  On March 26, 1997, the SEC declared effective a registration statement
     filed by Pegasus which would permit Messrs. Verdecchio and Verlin to sell
     shares of Class A Common Stock subject to certain vesting and other
     restrictions. As of the date of this Report, Mr. Verdecchio, a director of
     Pegasus, is permitted to sell 150,000 shares and Mr. Verlin 29,321 shares
     of Class A Common Stock pursuant to the registration statement. Messrs.
     Verdecchio and Verlin have sole voting and investment power over their
     shares, subject to certain vesting restrictions.

(7)  Includes 29,090 shares of Class A Common Stock which are issuable upon the
     exercises of the vested portion of outstanding stock options, and 9,090
     shares of Class A Common Stock which are issuable upon the exercise of an
     outstanding stock option which vests on March 21, 1999.

(8)  In connection with Pegasus' equity offering, Robert N. Verdecchio, Donald
     W. Weber, Columbia Capital Corporation, Columbia DBS, Inc., and Harry F.
     Hopper III are selling 10,000, 100,000, 285,884, 18,316 and 50,000 shares
     of Class A Common Stock, respectively. The information presented in the
     table does not reflect any sales of stock by these individuals.

(9)  Includes 1,500 shares of Class A Common Stock owned by Mr. Lodge's wife, of
     which Mr. Lodge disclaims beneficial ownership, 5,079 shares of Class A
     Common Stock issued to Mr. Lodge and his wife, subject to certain vesting
     restrictions, 39,090 shares of Class A Common Stock which are issuable upon
     the exercise of the vested portion of outstanding stock options and 9,090
     shares of Class A Common Stock which are issuable upon the exercise of the
     portion of an outstanding stock option which vests on March 21, 1999.

(10) Includes 5,000 shares of Class A Common Stock which are issuable upon the
     exercise of the vested portion of outstanding stock options, and 2,500
     shares of Class A Common Stock which are issuable upon the exercise of the
     portion of an outstanding stock option which vests on March 21, 1999.

(11) Includes 8,385 shares of Class A Common Stock issuable upon the exercise of
     the vested portion of outstanding stock options, and 2,500 shares of Class
     A Common Stock which are issuable upon the exercise of the portion of an
     outstanding stock option which vests on March 21, 1999. Mr. Weber is a
     director of Pegasus.

                                       52
<PAGE>

(12) Columbia Capital Corporation directly holds 285,884 shares of Class A
     Common Stock and Columbia DBS, Inc. directly holds 18,316 shares of Class A
     Common Stock. Columbia Capital Corporation has directors who also serve as
     directors of Columbia DBS, Inc. Columbia Capital Corporation and Columbia
     DBS, Inc. each disclaim beneficial ownership of all shares of Class A
     Common Stock held by the other entity. Columbia Capital Corporation has
     certain rights under the voting agreement described in note 4. The address
     of each of the Columbia entities is 201 N. Union Street, Suite 300,
     Alexandria, Virginia 22314-2642.

(13) Includes 959,473 shares of Class A Common Stock held directly by Whitney
     over which it has, with the exception of matters covered by the voting
     agreement, sole voting and investment power. The shares of Class A Common
     Stock held directly by Whitney represent 8.5% of the shares of Class A
     Common Stock. The address of Whitney is 177 Broad Street, Stamford,
     Connecticut 06901.

(14) The Fleet entities consist of Fleet Venture Resources, Inc., Fleet Equity
     Partners VI, L.P., Chisholm Partners III, L.P. and Kennedy Plaza Partners.
     Each Fleet entity holds the following number of shares of Class A Common
     Stock: Fleet Venture Resources (406,186); Fleet Equity Partners (174,079);
     Chisholm (147,611); and Kennedy Plaza Partners (10,179). The address of
     each of the Fleet entities is 50 Kennedy Plaza, RI MO F12C, Providence,
     Rhode Island 02903.

(15) The information for Mr. Smith includes the shares of Class A Common Stock
     held by the Fleet entities. Mr. Smith is a Senior Vice President of each of
     the managing general partners of Fleet Equity Partners VI, a Senior Vice
     President of Fleet Venture Resources, a Senior Vice President of the
     corporation that is the general partner of the partnership that is the
     general partner of Chisholm Partners III, L.P. and a partner of Kennedy
     Plaza Partners. He is a Senior Vice President of Fleet Growth Resources II,
     Inc. and Silverado IV Corp., the two general partners of Fleet Equity
     Partners, and Senior Vice President of Fleet Venture Resources and
     Silverado III Corp., the general partner of the partnership Silverado III,
     L.P., which is the general partner of Chisholm Partners III, L.P. Mr. Smith
     disclaims beneficial ownership for all shares held directly by Fleet
     Venture Resources and all shares held directly by Fleet Equity Partners,
     Chisholm Partners III, L.P. and Kennedy Plaza Partners, except for his
     pecuniary interest therein. The address of this person is 50 Kennedy Plaza,
     RI MO F12C, Providence, Rhode Island 02903.

(16) The information for Mr. Brooks includes 959,473 shares of Class A Common
     Stock held by Whitney Equity Partners, L.P. Mr. Brooks has shared voting
     and investment power over such shares of Class A Common Stock with the
     managing members of the general partner of Whitney Equity Partners, L.P.
     and disclaims beneficial ownership of such shares of Class A Common Stock.
     The address of this person is 177 Broad Street, Stamford, Connecticut
     06901.

(17) Mr. Hopper is a shareholder of Columbia Capital Corporation and Columbia
     DBS, Inc. Mr. Hopper disclaims beneficial ownership of the shares of common
     stock held by both of these entities.

(18) These shares are owned by various individual and institutional investors
     which T. Rowe Price Associates, Inc. ("Price Associates") serves as
     investment adviser. Price Associates has sole investment power with respect
     to all of these shares and sole voting power with respect to 57,400 shares.
     Price Associates disclaims beneficial of these shares. The address of Price
     Associates is 100 East Pratt Street, Baltimore, Maryland 21202.

(19) PAR Investment Partners, L.P. has sole voting and investment power with
     respect to all of these shares. The sole general partner of PAR Investment
     Partners, L.P. is PAR Group, L.P., whole sole general partner is PAR
     Capital Management, Inc. As a consequence, each of PAR Group, L.P. and PAR
     Capital Management, Inc. may be deemed to be the beneficial owner of the
     shares held by PAR Investment Partners, L.P. with sole voting and
     investment power with respect to such shares. The address of PAR Investment
     Partners, L.P. is One Financial Center, Suite 1600, Boston, Massachusetts
     02111.

(20) See the notes above for information about the holdings of the directors and
     named executive officers.


ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Split Dollar Agreement

         In December 1996, Pegasus entered into a split dollar agreement with
the trustees of an insurance trust established by Marshall W. Pagon. Under the
split dollar agreement, Pegasus agreed 

                                       53
<PAGE>

to pay a portion of the premiums for certain life insurance policies covering
Mr. Pagon owned by the insurance trust. The agreement provides that Pegasus will
be repaid for all amounts it expends for such premiums, either from the cash
surrender value or the proceeds of the insurance policies. The actuarial benefit
to Mr. Pagon of premiums paid by Pegasus amounted to $53,728 in 1996, $53,728 in
1997 and $53,728 in 1998.

Relationship with W.W. Keen Butcher and Affiliated Entities

         Pegasus entered into an arrangement in 1998 with W.W. Keen Butcher, the
stepfather of Marshall W. Pagon and Nicholas A. Pagon, certain entities
controlled by him and the owner of a minority interest in one of the entities.
Under this agreement, Pegasus agreed to provide and maintain collateral for up
to $4.0 million in principal amount of bank loans to Mr. Butcher and the
minority owner. Mr. Butcher and the minority owner must lend or contribute the
proceeds of those bank loans to one or more of the entities owned by Mr. Butcher
for the acquisition of television broadcast stations to be programmed by Pegasus
pursuant to local marketing agreements.

         Under this arrangement, on November 10, 1998, Pegasus sold to one of
the Butcher companies the FCC license for the television station then known as
WOLF for $500,000 and leased certain related assets to the Butcher company,
including leases and subleases for studio, office, tower and transmitter space
and equipment, for ongoing rental payments of approximately $18,000 per year 
plus operating expenses. WOLF is now known as WSWB and is one of the television
stations serving the northeastern Pennsylvania designated television market area
that is programmed by Pegasus. Mr. Butcher and the minority owner borrowed the
$500,000 under the loan collateral arrangement described above. Concurrently
with the closing under the agreement described above, one of the Butcher
companies assumed a local marketing agreement, under which Pegasus provides
programming to WSWB and retains all revenues generated from advertising in
exchange for payments to the Butcher company of $4,000 per month plus
reimbursement of certain expenses. The term of the local marketing agreement is
three years, with two three-year automatic renewals. The Butcher company also
granted Pegasus an option to purchase the station license and assets if it
becomes legal to do so for the costs incurred by the Butcher company relating to
the station, plus compound interest at 12% per year.

         On July 2, 1998, Pegasus assigned to one of the Butcher companies its
option to acquire the FCC authorization for television station WFXU, which
rebroadcasts WTLH pursuant to a local marketing agreement. The Butcher company
will pay to Pegasus $50,000 for the option upon the FCC's approval of the
authorization's transfer to the Butcher company, and will assume the obligations
of the authorization's former owner under the local marketing agreement with
Pegasus. The Butcher company will borrow the $50,000 under the loan collateral
arrangement, and the company will grant to Pegasus an option to purchase the
station on essentially the same terms described above for WOLF. The local
marketing agreement provides for a reimbursement of expenses by Pegasus and a
term of five years, with one automatic five-year renewal.

         Pegasus believes that the WOLF and WFXU transactions were done at fair
value and that any future transactions that may be entered into with the Butcher
companies or similar entities will also be done at fair value.

Acquisition of Digital Television Services, Inc.

         On April 27, 1998, Pegasus acquired Digital Television Services, Inc.
through the merger of a subsidiary of Pegasus into Digital Television Services.
Prior to the merger, Digital Television Services was the second largest
independent distributor of DIRECTV services serving 140,000 subscribers in 11
states.

         In connection with the merger, Pegasus issued approximately 5.5 million
shares of its Class A Common Stock to the stockholders of Digital Television
Services and assumed approximately $159 million of liabilities. Pegasus also
granted registration rights to certain of Digital Television Service's
stockholders, including Columbia Capital Corporation, Columbia DBS, Inc.,
Whitney Equity Partners, L.P. and Fleet Venture Resources, Inc. and its
affiliates and Harry F. Hopper III. Mr. Hopper received shares of Class A Common
Stock in the Digital Television Services

                                       54
<PAGE>

merger and has an ownership interest in Columbia Capital Corporation, which
received 429,812 shares. As a result of the Digital Television Services merger
and the voting agreement described below, Michael C. Brooks, Harry F. Hopper,
III and Riordon B. Smith were elected to Pegasus' board of directors.

Voting Agreement

         On April 27, 1998, in connection with the Digital Television Services
merger, Pegasus, Marshall W. Pagon and a number of partnerships and corporations
controlled by him, and Fleet Venture Resources, Fleet Equity Partners, Chisholm
Partners III, L.P., Kennedy Plaza Partners, Whitney Equity Partners, Columbia
Capital Corporation and Columbia DBS, Inc. entered into a voting agreement. The
voting agreement covers all shares of Class B Common Stock and other voting
securities of Pegasus held at any time by Mr. Pagon and his controlled entities
and shares of Class A Common Stock received in the Digital Television Services
merger by Chisholm, Columbia, Whitney and the other former stockholders of
Digital Television Services. It provides that holders of such shares vote their
respective shares in the manner specified in the voting agreement. In
particular, the voting agreement establishes that the board of directors of
Pegasus will consist initially of nine members: three independent directors,
three directors designated by Mr. Pagon and one director to be designated by
each of Chisholm Partners III, L.P., Columbia Capital Corporation and Whitney
Equity Partners. The voting agreement also provides that the committees of the
board of directors will consist of an audit committee, a compensation committee
and a nominating committee. Each committee shall consist of one independent
director, one director designated by Mr. Pagon and one director designated by a
majority of the directors designated by Chisholm Partners III, L.P., Columbia
Capital Corporation and Whitney Equity Partners. As a result of the voting
agreement, the parties to the agreement have sufficient voting power without the
need for the vote of any other shareholder, to elect the entire board of
directors. James J. McEntee, III, Mary C. Metzger and Donald W. Weber are
serving as independent directors of Pegasus. Marshall W. Pagon, Robert N.
Verdecchio and William P. Phoenix are serving as directors of Pegasus as
designees of Mr. Pagon. Harry F. Hopper, III is serving as a director of Pegasus
as a designee of Columbia Capital Corporation; Michael C. Brooks is serving as a
director of Pegasus as a designee of Whitney Equity Partners; and Riordon B.
Smith is serving as a director of Pegasus as a designee of Chisholm Partners
III, L.P.

         The voting agreement terminates with respect to any covered share upon
the sale or transfer of any such share to any person other than a permitted
transferee. In addition, the right of Chisholm Partners III, L.P., Columbia
Capital Corporation and Whitney Equity Partners to designate a director
terminates when the Fleet entities, Columbia Capital Corporation and Whitney
Equity Partners cease owning one-half of the shares originally received by each
of them in the Digital Television Services merger or in certain other
circumstances.

Communications License Re-Auction

         PCS Partners, a company owned and controlled by Marshall W. Pagon,
currently holds a personal communications system license in Puerto Rico and is
qualified to participate in the FCC's upcoming re-auction of certain other PCS
licenses. Pegasus itself does not meet the qualification criteria for this
re-auction. We have advanced approximately $3.4 million, with interest at 10%
per year, to PCS Partners for the purpose of funding its participation in this
re-auction. We are separately evaluating an investment in or contractual
relationship with PCS Partners.

CIBC Oppenheimer and Affiliates

         William P. Phoenix is a managing director of CIBC Oppenheimer Corp.
CIBC Oppenheimer and its affiliates have provided various services to Pegasus
and its subsidiaries, including Digital Television Services, since the beginning
of 1997. Services to Digital Television Services described below include
services provided prior to that company becoming a subsidiary of Pegasus on
April 27, 1998.

         CIBC Oppenheimer Corp. has historically performed a number of services
for Pegasus, including serving as one of the initial purchasers in Pegasus'
November 1998 Rule 144A senior 

                                       55
<PAGE>

notes offering. In this capacity, CIBC Oppenheimer received customary
underwriting discounts and commissions.

         CIBC Oppenheimer has also performed the following services for Pegasus:

         o        provided a fair market value appraisal in connection with the
                  contribution to Pegasus of certain assets between related
                  parties.

         o        provided fairness opinions to Pegasus and/or its affiliates in
                  connection with certain intercompany loans and other
                  intercompany transactions.

         o        provided fairness opinions to Pegasus in connection with the
                  acquisition of ViewStar Entertainment Services, Inc. from
                  Donald W. Weber, a director of Pegasus.

         o        acted as a standby purchaser in connection with Digital
                  Television Service's offer to repurchase its senior
                  subordinated notes as a result of the change in control
                  arising by Pegasus' acquisition of the company.

         In 1998, for services rendered, Pegasus or its subsidiaries, including
Digital Television Services, paid or will pay to CIBC Oppenheimer an aggregate
of $3.3 million in fees. Pegasus believes that all fees paid to CIBC Oppenheimer
in connection with the transactions described above were customary. Pegasus
anticipates that it or its subsidiaries may engage the services of CIBC
Oppenheimer in the future, although no such engagement is currently
contemplated.

Other Transactions

         In December 1998, Pegasus agreed to lend $199,999 to Nicholas A. Pagon,
Pegasus' Vice President of Broadcast Operations, bearing interest at the rate of
6% per annum, with the principal amount due on the fifth anniversary of the date
of the promissory note. Mr. Pagon is required to use half of the proceeds of the
loan to purchase shares of Class A Common Stock, and the loan will be
collateralized by those shares. The balance of the loan proceeds may be used at
Mr. Pagon's discretion.


                                       56
<PAGE>




                                     PART IV


ITEM 14: 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 Financial Statements on page F-1.

                  (2) Financial Statement Schedules

                                                         Page
                                                         ----
   Report of PricewaterhouseCoopers LLP ..................S-1
   Schedule II - Valuation and Qualifying Accounts .......S-2

         All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes thereto.

                  (3) Exhibits


                                       57
<PAGE>

Exhibit
Number             Description of Document


2.1      Agreement and Plan of Merger dated January 8, 1998 among Pegasus
         Communications Corporation and certain of its shareholders, Pegasus DTS
         Merger Sub, Inc., and Digital Television Services, Inc. and certain of
         its shareholders, including forms of Registration Rights Agreement and
         Voting Agreement as exhibits (which is incorporated by reference herein
         to Exhibit 2.1 to Pegasus's Form 8-K dated December 10, 1997).

2.2      Asset Purchase Agreement dated as of January 16, 1998 between Avalon
         Cable of New England, LLC and Pegasus Cable Television, Inc. and
         Pegasus Cable Television of Connecticut, Inc. (which is incorporated by
         reference herein to Pegasus' Form 8-K dated January 16, 1998).


2.3      Asset Purchase Agreement dated as of July 23, 1998 among Pegasus Cable
         Television, Inc., Cable Systems USA, Partners, J&J Cable Partners, Inc.
         and PS&G Cable Partners, Inc. (which is incorporated by reference
         herein to Pegasus' Form 10-Q dated August 13, 1998).

3.1      Certificate of Incorporation of Pegasus, as amended (which is
         incorporated by reference to Exhibit 3.1 to Pegasus' Registration
         Statement on Form S-1 (File No. 333-05057)).

3.2      By-Laws of Pegasus (which is incorporated by reference to Exhibit 3.2
         to Pegasus' Registration Statement on Form S-3 (File No. 333-70949)).

3.3      Certificate of Designation, Preferences and Relative, Participating,
         Optional and Other Special Rights of Preferred Stock and
         Qualifications, Limitations and Restrictions Thereof which is
         incorporated by reference to Exhibit 3.3 to Pegasus' Registration
         Statement on Form S-1 (File No. 333-23595).

4.1      Indenture, dated as of July 7, 1995, by and among Pegasus Media &
         Communications, Inc., the Guarantors (as this term is defined in the
         Indenture), and First Fidelity Bank, National Association, as Trustee,
         relating to the 12 1/2% Series B Senior Subordinated Notes due 2005
         (including the form of Notes and Subsidiary Guarantee) (which is
         incorporated herein by reference to Exhibit 4.1 to Pegasus Media &
         Communications, Inc.'s Registration Statement on Form S-4 (File No.
         33-95042)).

4.2      Form of 12 1/2% Series B Senior Subordinated Notes due 2005 (included
         in Exhibit 4.1 above).

4.3      Form of Subsidiary Guarantee with respect to the 12 1/2% Series B
         Senior Subordinated Notes due 2005 (included in Exhibit 4.1 above).

4.4      Indenture by and between Pegasus and First Union National Bank, as
         trustee, relating to the Exchange Notes (included in Exhibit 3.3
         above).

4.5      Indenture, dated as of October 21, 1997, by and between Pegasus
         Communications Corporation and First Union National Bank, as trustee,
         relating to the Senior Notes (which is incorporated by reference herein
         to Exhibit 4.1 to Amendment No. 1 to Pegasus' Form 8-K dated September
         8, 1997).

4.6      Indenture, dated as of November 30, 1998, by and between Pegasus
         Communications Corporation and First Union National Bank, as trustee,
         relating to the 1998 Senior Notes (which is incorporated by reference
         to Exhibit 4.6 to Pegasus' Registration Statement on Form S-3 (File No.
         333-70949)).

                                       58
<PAGE>

4.7      Indenture, dated as of July 30, 1997 among Digital Television Services,
         Inc., certain of its subsidiaries, and The Bank of New York, as trustee
         (the "DTS Indenture") (which is incorporated by reference to Exhibit
         4.1 of Digital Television Services' Registration Statement of Form S-4
         (File No. 333-36217)).

4.8      Supplemental Indenture to the DTS Indenture, dated October 10, 1997
         (which is incorporated by reference to Exhibit 4.6 of Digital
         Television Services' Registration Statement on Form S-4 (File No.
         333-36217)).

10.1     Station Affiliation Agreement, dated March 30, 1992, between Fox
         Broadcasting Company and D. & K. Broadcast Properties L.P. relating to
         television station WDBD (which is incorporated herein by reference to
         Exhibit 10.5 to Pegasus Media & Communications, Inc.'s Registration
         Statement on Form S-4 (File No. 33-95042)).

10.2     Agreement and Amendment to Station Affiliation Agreement, dated as of
         June 11, 1993, between Fox Broadcasting Company and Donatelli & Klein
         Broadcast relating to television station WDBD (which is incorporated
         herein by reference to Exhibit 10.6 to Pegasus Media & Communications,
         Inc.'s Registration Statement on Form S-4 (File No. 33-95042)).

10.3     Station Affiliation Agreement, dated March 30, 1992, between Fox
         Broadcast Company and Scranton TV Partners Ltd. relating to television
         station WOLF (which is incorporated herein by reference to Exhibit 10.8
         to Pegasus Media & Communications, Inc.'s Registration Statement on
         Form S-4 (File No. 33-95042)).

10.4     Agreement and Amendment to Station Affiliation Agreement, dated June
         11, 1993, between Fox Broadcasting Company and Scranton TV Partners,
         Ltd. relating to television station WOLF (which is incorporated herein
         by reference to Exhibit 10.9 to Pegasus Media & Communications, Inc.'s
         Registration Statement on Form S-4 (File No. 33-95042)).

10.5     Amendment to Fox Broadcasting Company Station Affiliation Agreement
         Regarding Network Nonduplication Protection, dated December 2, 1993,
         between Fox Broadcasting Company and Pegasus Broadcast Television, L.P.
         relating to television stations WOLF, WWLF, and WILF (which is
         incorporated herein by reference to Exhibit 10.10 to Pegasus Media &
         Communications, Inc.'s Registration Statement on Form S-4 (File No.
         33-95042)).

10.6     Consent to Assignment, dated May 1, 1993, between Fox Broadcasting
         Company and Pegasus Broadcast Television, L.P. relating to television
         station WOLF (which is incorporated herein by reference to Exhibit
         10.11 to Pegasus Media & Communications, Inc.'s Registration Statement
         on Form S-4 (File No. 33-95042)).

10.7     Station Affiliation Agreement, dated March 30, 1992, between Fox
         Broadcasting Company and WDSI Ltd. relating to television station WDSI
         (which is incorporated herein by reference to Exhibit 10.12 to Pegasus
         Media & Communications, Inc.'s Registration Statement on Form S-4 (File
         No. 33-95042)).

10.8     Agreement and Amendment to Station Affiliation Agreement, dated June
         11, 1993, between Fox Broadcasting Company and Pegasus Broadcast
         Television, L.P. relating to television station WDSI (which is
         incorporated herein by reference to Exhibit 10.13 to Pegasus Media &
         Communications, Inc.'s Registration Statement on Form S-4 (File No.
         33-95042)).

10.9     Franchise Agreement for Mayaguez, Puerto Rico (which is incorporated
         herein by reference to Exhibit 10.14 to Pegasus Media & Communications,
         Inc.'s Registration Statement on Form S-4 (File No. 33-95042)).

                                       59
<PAGE>

10.10    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 Pegasus Media & Communications,
         Inc.'s Registration Statement on Form S-4 (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)).

10.11    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 Pegasus
         Media & Communications, Inc.'s Registration Statement on Form S-4 (File
         No. 33-95042)).

10.12    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 Pegasus Media & Communications, Inc.'s
         Registration Statement on Form S-4 (File No. 33-95042)).

10.13    Franchise Agreement granted to Dom's Tele-Cable, Inc., to build and
         operate cable television systems for the municipalities of Cabo Rojo,
         San German, Lajas, Hormigueros, Guanica, Sabana Grande and Maricao
         (which is incorporated herein by reference to Exhibit 2 to Pegasus
         Media & Communications, Inc.'s Form 8-K dated March 21, 1996).

10.14    Franchise Agreement granted to Dom's Tele-Cable, Inc. to build and
         operate cable television systems for the municipalities of Anasco,
         Rincon and Las Marias (which is incorporated herein by reference to
         Exhibit 3 to Pegasus Media & Communications, Inc.'s Form 8-K dated
         March 21, 1996).

10.15    Credit Agreement dated as of December 10, 1997 by and among Pegasus
         Media & Communications, Inc., the lenders thereto, and Bankers Trust
         Company, as agent for the lenders (which is incorporated by reference
         herein to Exhibit 10.1 to Pegasus' Form 8-K dated December 10, 1997).

10.16+   Pegasus Restricted Stock Plan (which is incorporated by reference to
         Exhibit 10.28 to Pegasus' Registration Statement on Form S-1 (File No.
         333-05057)).

10.17+   Option Agreement for Donald W. Weber (which is incorporated by
         reference to Exhibit 10.29 Pegasus' Registration Statement on Form S-1
         (File No. 333-05057)).

10.18+   Pegasus Communications 1996 Stock Option Plan (as amended and restated
         effective as of December 18, 1998) (which is incorporated by reference
         to Exhibit 10.18 to Pegasus' Registration Statement on Form S-3 (File
         No. 333-70949)).

10.19+   Amendment to Option Agreement for Donald W. Weber, dated December 19,
         1996 (which is incorporated by reference to Exhibit 10.31 to Pegasus'
         Registration Statement on Form S-1 (File No. 333-18739)).

10.20    Warrant Agreement between Pegasus and First Union National Bank, as
         Warrant Agent relating to the Warrants (which is incorporated by
         reference to Exhibit 10.32 to Pegasus' Registration Statement on Form
         S-1 (File No. 333-23595)).

10.21    Amendment to Credit Agreement executed as of March 10, 1998, by and
         among Pegasus Media & Communications, Inc., the lenders thereto, and
         Bankers Trust Company, as agent for the lenders (which is incorporated
         by reference to Exhibit 10.21 to Pegasus' Registration Statement on
         Form S-4 (File No. 333-44929)).

10.22    Second Amendment to Credit Agreement executed as of August 3, 1998, by
         and among Pegasus Media & Communications, Inc., the lenders thereto,
         and Bankers Trust Company, as agent for the lenders (which is
         incorporated by reference to Exhibit 10.22 to Pegasus' Registration
         Statement on Form S-3 (File No. 333-70949)).

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<PAGE>

10.23    Third Amendment to Credit Agreement executed as of December 31, 1998,
         by and among Pegasus Media & Communications, Inc., the lenders thereto,
         and Bankers Trust Company, as agent for the lenders (which is
         incorporated by reference to Exhibit 10.23 to Pegasus' Registration
         Statement on Form S-3 (File No. 333-70949)).

10.24    Second Amended and Restated Credit Agreement dated as of July 30, 1997
         among Digital Television Services, LLC, and several lenders, CIBC Wood
         Gundy Securities Corp., as arranger, Morgan Guaranty Trust Company of
         New York, Fleet National Bank, and Canadian Imperial Bank of Commerce
         (which is incorporated by reference to Exhibit 10.1 of Digital
         Television Services' Registration Statement on Form S-4 (File No.
         333-36217)).

21.1     Subsidiaries of Pegasus (which is incorporated by reference to Exhibit
         21.1 to Pegasus' Registration Statement on Form S-3 (File No.
         333-70949).

23.1*    Consent of PricewaterhouseCoopers LLP.

24.1*    Powers of Attorney (included in Signatures and Powers of Attorney).

27.1     Financial Data Schedules (which is incorporated by reference to Exhibit
         27.1 to Pegasus' Registration Statement on Form S-3 (File No.
         333-70949).

---------------------
*     Filed herewith.
+     Indicates a management contract or compensatory plan.

                  (b) Reports on Form 8-K.

                  No reports on Form 8-K were filed during the quarter ended
                  December 31, 1998.


                                       61
<PAGE>
                        SIGNATURES AND POWERS OF ATTORNEY

         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,
                           Chief Executive Officer and President

Date: March 10, 1999


         Know all men by these presents, that each person whose signature
appears below hereby constitutes and appoints Marshall W. Pagon, Robert N.
Verdecchio and Ted S. Lodge and each of them, his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign any
or all amendments to this Annual Report, and to file the same, with all exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto each of such attorneys-in-fact and agents,
and each of them, full power and authority to do and perform each and every act
and thing requisite and necessary in connection with such matters and hereby
ratifying and confirming all that each of such attorneys-in-fact and agents or
his substitutes may do or cause to be done by virtue hereof.

         Pursuant to the requirements of the Securities 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>
<CAPTION>

<S>                                                     <C>                                   <C>
                  Signature                                        Title                           Date
                  ---------                                        -----                           ----
          /s/ Marshall W. Pagon                         Chairman of the Board, Chief             March 10, 1999
-----------------------------------------------
              Marshall W. Pagon                         Executive Officer and President
        (Principal Executive Officer)


         /s/ Robert N. Verdecchio                       Senior Vice President, Chief             March 10, 1999
-----------------------------------------------
             Robert N. Verdecchio                       Financial Officer, Assistant
 (Principal Financial and Accounting Officer)           Secretary, and Director

                                                        Director                                 March 10, 1999
-----------------------------------------------
              Michael C. Brooks

         /s/ Harry F. Hopper III                        Director                                 March 10, 1999
-----------------------------------------------
             Harry F. Hopper III

        /s/ James J. McEntee, III                       Director                                 March 10, 1999
-----------------------------------------------
            James J. McEntee, III
</TABLE>

                                       62
<PAGE>
<TABLE>
<CAPTION>

<S>                                                     <C>                                   <C>

           /s/ Mary C. Metzger                          Director                                 March 10, 1999
-----------------------------------------------
               Mary C. Metzger

                                                        Director                                 March 10, 1999
-----------------------------------------------
              William P. Phoenix

           /s/ Riordon B. Smith                         Director                                 March 10, 1999
-----------------------------------------------
               Riordon B. Smith

           /s/ Donald W. Weber                          Director                                 March 10, 1999
-----------------------------------------------
               Donald W. Weber

</TABLE>




                                       63







<PAGE>

                      Pegasus Communications Corporation
                         Index to Financial Statements


<TABLE>
<S>                                                                                          <C>
                                                                                             Page
                                                                                             ----
Pegasus Communications Corporation

Report of PricewaterhouseCoopers LLP .....................................................    F-2

Consolidated Balance Sheets as of December 31, 1997 and 1998 .............................    F-3

Consolidated Statements of Operations for the years ended December 31, 1996, 1997 and         F-4
  1998

Consolidated Statements of Changes in Total Equity for the years ended December 31, 1996,
1997 and 1998 ............................................................................    F-5

Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1997 and 1998    F-6
 
Notes to Consolidated Financial Statements ...............................................    F-7
</TABLE>

      

                                      F-1
<PAGE>
                    [PricewaterhouseCoopers LLP letterhead]

                         REPORT OF INDEPENDENT ACCOUNTS

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

In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations and retained earnings and of cash flows
present fairly, in all material respects, the financial position of Pegasus
Communications Corporation and its subsidiaries at December 31, 1997 and 1998,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which 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 the opinion expressed above.


PRICEWATERHOUSECOOPERS LLP

February 12, 1999









                                      F-2
<PAGE>

                      Pegasus Communications Corporation
                          Consolidated Balance Sheets



<TABLE>
<CAPTION>
                                                                                              December 31,
                                                                                  ------------------------------------
                                                                                        1997                1998
                                                                                  ----------------   -----------------
<S>                                                                               <C>                <C>
                                    ASSETS
Current assets:
   Cash and cash equivalents ..................................................    $  44,049,097      $   54,505,473
   Restricted cash ............................................................        1,220,056          21,479,305
   Accounts receivable, less allowance for doubtful accounts of $319,000
    and $567,000, respectively ................................................       13,819,571          20,882,260
   Inventory ..................................................................          974,920           5,426,348
   Program rights .............................................................        2,059,346           3,156,715
   Deferred taxes .............................................................        2,602,453           2,602,453
   Prepaid expenses and other .................................................          788,669           1,207,312
                                                                                   -------------      --------------
      Total current assets ....................................................       65,514,112         109,259,866
Property and equipment, net ...................................................       27,686,646          34,066,502
Intangible assets, net ........................................................      284,774,027         729,405,657
Program rights ................................................................        2,262,299           3,428,382
Deferred taxes ................................................................               --           9,277,280
Deposits and other ............................................................          624,629             872,386
                                                                                   -------------      --------------
      Total assets ............................................................    $ 380,861,713      $  886,310,073
                                                                                   =============      ==============
                              LIABILITIES AND TOTAL EQUITY
Current liabilities:
   Current portion of long-term debt ..........................................    $   6,357,320      $   14,399,046
   Accounts payable ...........................................................        4,151,226           4,794,809
   Accrued interest ...........................................................        8,177,261          17,465,493
   Accrued satellite programming and fees .....................................        6,089,389          19,352,780
   Accrued expenses ...........................................................        6,973,297          12,926,864
   Current portion of program rights payable ..................................        1,418,581           2,431,515
                                                                                   -------------      --------------
      Total current liabilities ...............................................       33,167,074          71,370,507
Long-term debt ................................................................      201,997,811         544,629,706
Program rights payable ........................................................        1,416,446           2,472,367
Deferred taxes ................................................................        2,652,454          80,671,714
                                                                                   -------------      --------------
      Total liabilities .......................................................      239,233,785         699,144,294
                                                                                   -------------      --------------
Commitments and contingent liabilities ........................................               --                  --
Minority interest .............................................................        3,000,000           3,000,000
Preferred Stock; $0.01 par value; 5.0 million shares authorized ...............               --                  --
Series A Preferred Stock; $0.01 par value; 112,215 and 126,978 shares autho-
 rized; 105,490 and 119,369 issued and outstanding ............................      111,264,424         126,027,871
Common stockholders' equity:
   Class A Common Stock; $0.01 par value; 30.0 million shares autho-
    rized; 5,739,842 and 11,315,809 issued and outstanding ....................           57,399             113,158
   Class B Common Stock; $0.01 par value; 15.0 million shares autho-
    rized; 4,581,900 issued and outstanding ...................................           45,819              45,819
   Additional paid-in capital .................................................       64,034,687         173,870,633
   Deficit ....................................................................      (36,774,401)       (115,891,702)
                                                                                   -------------      --------------
      Total common stockholders' equity .......................................       27,363,504          58,137,908
                                                                                   -------------      --------------
   Total liabilities and stockholders' equity .................................    $ 380,861,713      $  886,310,073
                                                                                   =============      ==============
</TABLE>

          See accompanying notes to consolidated financial statements

                                      F-3
<PAGE>

                      Pegasus Communications Corporation

                     Consolidated Statements of Operations





<TABLE>
<CAPTION>
                                                                               Years Ended December 31,
                                                                -------------------------------------------------------
                                                                      1996               1997                1998
                                                                ----------------   ----------------   -----------------
<S>                                                             <C>                <C>                <C>
Net revenues:
 DBS ........................................................     $  5,829,097       $ 38,254,186        $147,142,347
 Broadcast ..................................................       28,603,516         31,875,744          34,310,898
 Cable ......................................................       13,496,019         16,688,496          13,767,400
                                                                  ------------       ------------        ------------
   Total net revenues .......................................       47,928,632         86,818,426         195,220,645
Operating expenses:
 DBS
   Programming, technical, general and administrative........        4,311,604         26,042,185         102,419,612
   Marketing and selling ....................................          646,073          5,973,013          45,706,233
   Incentive compensation ...................................          145,757            794,838           1,158,919
   Depreciation and amortization ............................        1,786,181         17,042,149          59,076,759
 Broadcast
   Programming, technical, general and administrative               13,902,769         15,672,405          18,056,173
   Marketing and selling ....................................        4,850,597          5,703,858           5,992,751
   Incentive compensation ...................................          691,436            297,734             177,345
   Depreciation and amortization ............................        4,040,905          3,754,400           4,556,654
 Cable
   Programming, technical, general and administrative                7,102,573          8,426,755           7,556,548
   Marketing and selling ....................................           89,625            266,588             340,591
   Incentive compensation ...................................          148,172            181,300             115,430
   Depreciation and amortization ............................        5,245,255          5,642,901           4,992,833
 Corporate expenses .........................................        1,429,252          2,256,233           3,613,858
 Corporate depreciation and amortization ....................          988,157          1,352,453           2,105,249
                                                                  ------------       ------------        ------------
 Income (loss) from operations ..............................        2,550,276         (6,588,386)        (60,648,310)
Interest expense ............................................      (12,454,891)       (16,094,037)        (44,604,055)
Interest income .............................................          232,361          1,538,569           2,036,061
Other expenses, net .........................................         (171,289)          (723,439)         (1,523,074)
Gain on sale of cable systems ...............................               --          4,451,320          24,726,432
                                                                  ------------       ------------        ------------
 Loss before income taxes ...................................       (9,843,543)       (17,415,973)        (80,012,946)
Provision (benefit) for income taxes ........................         (120,000)           200,000            (895,645)
                                                                  ------------       ------------        ------------
 Loss before extraordinary items ............................       (9,723,543)       (17,615,973)        (79,117,301)
Extraordinary loss from extinguishment of debt, net .........         (250,603)        (1,656,164)                 --
                                                                  ------------       ------------        ------------
 Net loss ...................................................       (9,974,146)       (19,272,137)        (79,117,301)
 Preferred stock dividends ..................................               --         12,215,000          14,763,447
                                                                  ------------       ------------        ------------
 Net loss applicable to common shares .......................    ($  9,974,146)     ($ 31,487,137)      ($ 93,880,748)
                                                                  ============       ============        ============
Basic and diluted earnings per common share:
 Loss before extraordinary items ............................     ($      1.56)      ($      3.02)       ($      6.64)
 Extraordinary loss .........................................           ( 0.04)            ( 0.17)                 --
                                                                  ------------       ------------        ------------
 Net loss ...................................................     ($      1.60)      ($      3.19)       ($      6.64)
                                                                  ============       ============        ============
 Weighted average shares outstanding ........................        6,239,646          9,858,244          14,129,602
                                                                  ============       ============        ============
</TABLE>

          See accompanying notes to consolidated financial statements

                                      F-4
<PAGE>

                      Pegasus Communications Corporation
              Consolidated Statements of Changes in Total Equity



<TABLE>
<CAPTION>
                                                            Common Stock
                                        Series A     --------------------------
                                       Preferred         Number         Par
                                         Stock         of Shares       Value
                                    ---------------  -------------  -----------
<S>                                 <C>              <C>            <C>
Balances at January 1, 1996 ......                       170,000     $  1,700
Net loss .........................
Contributions by Parent ..........
Distributions to Parent ..........
Issuance of Class A common
 stock due to: ...................
  Initial Public Offering ........                     3,000,000       30,000
  Acquisitions ...................                       934,253        9,342
  Awards .........................                         3,614           36
Issuance of Class B
 common stock due to:
  Acquisition ....................                        71,429          714
Conversions of partnerships ......
Exchange of PM&C Class B .........                       183,275        1,833
Exchange of PM&C Class A .........                     4,882,541       48,826
                                    ------------       ---------     --------

Balances at December 31, 1996 ....                     9,245,112       92,451
Net loss .........................
Issuance of Class A common
 stock due to:
  Acquisitions ...................                       957,860        9,579
  Incentive compensation
   and awards ....................                       118,770        1,188
Issuance of Class A preferred
 stock due to:
  Unit Offering ..................   $100,000,000
  Paid and accrued
   dividends .....................     12,215,000
Issuance of warrants due to:
 Acquisition .....................
 Unit Offering ...................       (950,576)
                                     ------------     ----------     --------
Balances at December 31, 1997 ....    111,264,424     10,321,742      103,218
Net loss .........................
Issuance of Class A common
 stock due to:
  Acquisitions ...................                     5,508,600       55,086
  Incentive compensation
   and awards ....................                        67,367          673
Issuance of Class A preferred
 stock due to:
  Paid and accrued
   dividends .....................     14,763,447
Issuance of warrants and
 options due to:
  Acquisitions ...................
                                     ------------     ----------     --------
Balances at December 31, 1998 ....   $126,027,871     15,897,709     $158,977
                                     ============     ==========     ========

</TABLE>
<PAGE>

<TABLE>
<CAPTION>
                                                                                                 Total
                                       Additional         Retained           Partners'          Common
                                        Paid-In           Earnings            Capital        Stockholders'
                                        Capital           (Deficit)          (Deficit)          Equity
                                    ---------------  ------------------  ----------------  ----------------
<S>                                 <C>              <C>                 <C>               <C>
Balances at January 1, 1996 ......   $   7,880,848      $   1,825,283      ($ 9,458,814)    $      249,017
Net loss .........................                         (5,934,261)       (4,039,885)        (9,974,146)
Contributions by Parent ..........         579,152                              105,413            684,565
Distributions to Parent ..........      (2,946,379)                                             (2,946,379)
Issuance of Class A common
 stock due to: ...................
  Initial Public Offering ........      38,153,000                                              38,183,000
  Acquisitions ...................      13,070,204                                              13,079,546
  Awards .........................          50,559                                                  50,595
Issuance of Class B
 common stock due to:
  Acquisition ....................         999,286                                               1,000,000
Conversions of partnerships ......                        (13,393,286)       13,393,286
Exchange of PM&C Class B .........          (1,833)
Exchange of PM&C Class A .........         (48,826)
                                    ---------------       -----------        ----------         ---------- 
Balances at December 31, 1996 ....      57,736,011        (17,502,264)               --         40,326,198
Net loss .........................                        (19,272,137)                         (19,272,137)
Issuance of Class A common
 stock due to:
  Acquisitions ...................      15,187,924                                              15,197,503
  Incentive compensation
   and awards ....................       1,307,453                                               1,308,641
Issuance of Class A preferred
 stock due to:
  Unit Offering ..................
  Paid and accrued
   dividends .....................     (12,215,000)                                            (12,215,000)
Issuance of warrants due to:
 Acquisition .....................       1,067,723                                               1,067,723
 Unit Offering ...................         950,576                                                 950,576
                                    ---------------       -----------        ----------         ---------- 

Balances at December 31, 1997 ....      64,034,687        (36,774,401)               --         27,363,504
Net loss .........................                        (79,117,301)                         (79,117,301)
Issuance of Class A common
 stock due to:
  Acquisitions ...................     119,640,387                                             119,695,473
  Incentive compensation
   and awards ....................       1,413,670                                               1,414,343
Issuance of Class A preferred
 stock due to:
  Paid and accrued
   dividends .....................     (14,763,447)                                            (14,763,447)
Issuance of warrants and
 options due to:
  Acquisitions ...................       3,545,336                                               3,545,336
                                    ---------------       -----------        ----------         ---------- 

Balances at December 31, 1998 ....   $ 173,870,633     ($ 115,891,702)               --     $   58,137,908
                                     =============      =============       ===========     ==============
</TABLE>

          See accompanying notes to consolidated financial statements

                                      F-5
<PAGE>

                      Pegasus Communications Corporation
                     Consolidated Statements of Cash Flows




<TABLE>
<CAPTION>
                                                                              Years Ended December 31,
                                                              --------------------------------------------------------
                                                                    1996                1997                1998
                                                              ----------------   -----------------   -----------------
<S>                                                           <C>                <C>                 <C>
Cash flows from operating activities:
 Net loss .................................................    ($  9,974,146)     ($  19,272,137)     ($  79,117,301)
 Adjustments to reconcile net loss to net cash provided
   (used) by operating activities:
   Extraordinary loss on extinguishment of debt, net ......          250,603           1,656,164                  --
   Depreciation and amortization ..........................       12,060,498          27,791,903          70,731,495
   Program rights amortization ............................        1,514,122           1,715,556           2,366,429
   Accretion on discount of bonds and seller notes ........          392,324             394,219           1,319,520
   Stock incentive compensation ...........................          985,365           1,273,872           1,451,694
   Gain on sale of cable systems ..........................               --          (4,451,320)        (24,726,432)
   Bad debt expense .......................................          335,956           1,141,913           2,850,666
   Change in assets and liabilities:
    Accounts receivable ...................................       (4,607,356)         (5,608,113)         (6,463,976)
    Inventory .............................................          402,942            (115,800)         (3,105,260)
    Prepaid expenses and other ............................         (521,697)            305,066            (243,818)
    Accounts payable and accrued expenses .................        3,617,863           6,034,149           8,850,741
    Advances payable -- related party .....................         (468,327)                 --                  --
    Accrued interest ......................................          418,338           2,585,178           4,371,950
    Capitalized subscriber acquisition costs ..............       (1,272,383)         (4,514,874)                 --
    Deposits and other ....................................          (74,173)           (458,131)           (247,757)
                                                                ------------       -------------       -------------
 Net cash provided (used) by operating activities .........        3,059,929           8,477,645         (21,962,049)
                                                                ------------       -------------       -------------
Cash flows from investing activities:
   Acquisitions ...........................................      (72,567,216)       (133,886,247)       (109,339,673)
   Cash acquired from acquisitions ........................               --             379,044           3,284,382
   Capital expenditures ...................................       (6,294,352)         (9,929,181)        (12,399,650)
   Purchase of intangible assets ..........................         (486,444)         (3,033,471)        (10,489,397)
   Payments for programming rights ........................       (1,830,903)         (2,584,241)         (2,561,026)
   Proceeds from sale of cable systems ....................               --           6,945,270          30,132,826
                                                                ------------       -------------       -------------
 Net cash used for investing activities ...................      (81,178,915)       (142,108,826)       (101,372,538)
                                                                ------------       -------------       -------------
Cash flows from financing activities:
   Proceeds from long-term debt ...........................               --         115,000,000         100,000,000
   Repayments of long-term debt ...........................         (103,639)           (320,612)        (14,572,446)
   Borrowings on bank credit facilities ...................       41,400,000          94,726,250         108,800,000
   Repayments of bank credit facilities ...................      (11,800,000)       (124,326,250)        (64,400,000)
   Restricted cash ........................................        9,881,198          (1,220,056)          7,541,140
   Debt issuance costs ....................................         (304,237)        (10,236,823)         (3,178,634)
   Capital lease repayments ...............................         (267,900)           (336,680)           (399,097)
   Contributions by Parent ................................          684,565                  --                  --
   Distributions to Parent ................................       (2,946,379)                 --                  --
   Proceeds from issuance of common stock .................       42,000,000                  --                  --
   Underwriting and IPO costs .............................       (3,817,000)                 --                  --
   Proceeds from issuance of Series A preferred stock .....               --         100,000,000                  --
   Underwriting and preferred offering costs ..............               --          (4,187,920)                 --
                                                                ------------       -------------       -------------
 Net cash provided by financing activities ................       74,726,608         169,097,909         133,790,963
                                                                ------------       -------------       -------------
Net increase (decrease) in cash and cash equivalents ......       (3,392,378)         35,466,728          10,456,376
Cash and cash equivalents, beginning of year ..............       11,974,747           8,582,369          44,049,097
                                                                ------------       -------------       -------------
Cash and cash equivalents, end of year ....................     $  8,582,369       $  44,049,097       $  54,505,473
                                                                ============       =============       =============
</TABLE>

          See accompanying notes to consolidated financial statements

                                      F-6
<PAGE>

                       PEGASUS COMMUNICATIONS CORPORATION

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1. The Company:


     Pegasus Communications Corporation ("Pegasus" or together with its
subsidiaries stated below, the "Company") operates in growing segments of the
media industry and is a direct subsidiary of Pegasus Communications Holdings,
Inc. ("PCH" or the "Parent"). Pegasus' significant direct operating
subsidiaries are Pegasus Media & Communications, Inc. ("PM&C") and Digital
Television Services, Inc. ("DTS").


     PM&C's subsidiaries provide direct broadcast satellite television ("DBS")
services to customers in certain rural areas of the United States; own and/or
program broadcast television ("Broadcast" or "TV") stations affiliated with the
Fox Broadcasting Company ("Fox"), United Paramount Network ("UPN") and The WB
Television Network ("WB"); and own and operate a cable television ("Cable")
system that provides service to individual and commercial subscribers in Puerto
Rico. DTS and its subsidiaries, which were acquired by the Company on April 27,
1998, provide DBS services to customers in certain rural areas of the United
States.


2. Summary of Significant Accounting Policies:


Basis of Presentation:


     The accompanying consolidated financial statements include the accounts of
Pegasus and all of its subsidiaries. All intercompany transactions and balances
have been eliminated. Certain amounts for 1996 and 1997 have been reclassified
for comparative purposes.


Use of Estimates in the Preparation of Financial Statements:


     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of revenues, expenses, assets and
liabilities and the disclosure of contingencies. Actual results could differ
from those estimates. Significant estimates relate to barter transactions and
the useful lives and recoverability of intangible assets.


Cash and Cash Equivalents:


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


Restricted Cash:


     The Company has restricted cash held in escrow of approximately $21.5
million at December 31, 1998 of which $18.9 million is to fund interest
payments on the DTS Notes, $1.6 million is to collateralize certain outstanding
letters of credit and $1.0 million is held in escrow in connection with the
pending purchase of a cable system serving Aguadilla, Puerto Rico.


Inventories:


     Inventories consist of equipment held for resale to customers and
installation supplies. Inventories are stated at the lower of cost or market on
a first-in, first-out basis.


Long-Lived Assets:


     The Company's assets are reviewed for impairment whenever events or
circumstances provide evidence which suggest the carrying amounts may not be
recoverable. The Company assesses the recoverability of its assets by
determining whether the depreciation or amortization of the respective asset
balance can be recovered through projected undiscounted future cash flows. To
date, no such impairments have occurred.


                                      F-7
<PAGE>

                      PEGASUS COMMUNICATIONS CORPORATION
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  -- (Continued)
 
 
2. Summary of Significant Accounting Policies:  -- (Continued)
 
Property and Equipment:

     Property and equipment are stated at cost. The cost and related
accumulated depreciation of assets fully depreciated, sold, retired or
otherwise disposed of are removed from the respective accounts and any
resulting gains or losses are included in the statement of operations. For
cable television systems, initial subscriber installation costs including
material, labor and overhead costs of the hookup are capitalized as part of the
distribution facilities. The costs of disconnection and reconnection are
charged to expense. Satellite equipment that is leased to customers is stated
at cost.

     Depreciation is computed for financial reporting purposes using the
straight-line method based upon the following lives:


            Reception and distribution facilities .........    7 to 11 years
            Transmitter equipment .........................    5 to 10 years
            Equipment, furniture and fixtures .............    5 to 10 years
            Building and improvements .....................   12 to 39 years
            Vehicles ......................................     3 to 5 years
 
Intangible Assets:

     Intangible assets are stated at cost. The cost and related accumulated
amortization of assets fully amortized, sold, retired or otherwise disposed of
are removed from the respective accounts and any resulting gains or losses are
included in the statement of operations. Costs of successful franchise
applications are capitalized and amortized over the lives of the related
franchise agreements, while unsuccessful franchise applications and abandoned
franchises are charged to expense. Financing costs incurred in obtaining
long-term financing are amortized over the term of the applicable loan.

     The Company's policy is to capitalize subscriber acquisition costs, such
as commissions and equipment subsidies, directly related to new subscribers who
sign a programming contract. These costs are amortized over the life of the
contract. The Company expenses its subscriber acquisition costs when no
contract is obtained. Subsequent to September 30, 1997, the Company does not
require new DBS customers to sign programming contracts and as a result
subscriber acquisition costs are charged to operations in the period incurred.

     Amortization of intangible assets is computed for financial reporting
purposes using the straight-line method based upon the following lives:



            Broadcast licenses .....................        40 years
            Network affiliation agreements .........        40 years
            Goodwill ...............................        40 years
            DBS rights .............................        10 years
            Subscriber acquisition costs ...........          1 year
            Other intangibles ......................   2 to 14 years
 

Revenue:


     The Company operates in growing segments of the media industry: DBS,
Broadcast and Cable. The Company recognizes revenue in its DBS and Cable
operations when video and audio services are provided. The Company recognizes
revenue in its Broadcast operations when advertising spots are broadcast.

     The Company obtains a portion of its TV programming through its network
affiliations with Fox, UPN and WB and also through independent producers. The
Company does not make any direct payments for this


                                      F-8
<PAGE>

                      PEGASUS COMMUNICATIONS CORPORATION
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  -- (Continued)
 
 
2. Summary of Significant Accounting Policies:  -- (Continued)
 
programming. Instead, the Company retains a portion of the available
advertisement spots to sell on its own account. Barter programming revenue and
the related expense are recognized when the advertisements sold by the networks
or independent producers are broadcast. Gross barter amounts of $6.3 million,
$7.5 million and $8.1 million for 1996, 1997 and 1998, respectively, are
included in Broadcast revenue and programming expense in the accompanying
consolidated statements of operations.

Advertising Costs:

     Advertising costs are charged to operations in the period incurred and
totaled approximately $1.1 million, $3.6 million and $14.0 million for the
years ended December 31, 1996, 1997 and 1998, respectively.

Program Rights:

     The Company enters into agreements to show motion pictures and syndicated
programs on television. The Company records the right and associated
liabilities for those films and programs when they are currently available for
showing. These rights are recorded at the lower of unamortized cost or
estimated net realizable value and are amortized on the straight-line method
over the license period, which approximates amortization based on the estimated
number of showings during the contract period. Amortization of $1.5 million,
$1.7 million and $2.4 million is included in Broadcast programming expense for
the years ended December 31, 1996, 1997 and 1998, respectively. The obligations
arising from the acquisition of film rights are recorded at the gross amount.
Payments for the contracts are made pursuant to the contractual terms over
periods which are generally shorter than the license periods.

Income Taxes:

     The Company accounts for income taxes utilizing the asset and liability
approach, whereby deferred 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. A valuation allowance is recorded for deferred
taxes where it appears more likely than not that the Company will not be able
to recover the deferred tax asset. MCT Cablevision, L.P., a subsidiary of the
Company, is treated as a partnership for federal and state income tax purposes
but taxed as a corporation for Puerto Rico income tax purposes.

Concentration of Credit Risk:

     Financial instruments which potentially subject the Company 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 number of customers comprising the Company's customer
base and their dispersion across different businesses and geographic regions.
As of December 31, 1997 and 1998, the Company had no significant concentrations
of credit risk.

Reliance on DIRECTV;

     A substantial portion of the Company's business is derived from providing
DBS services as an independent DIRECTV(R) ("DIRECTV") provider. Because the
Company is a distributor of DIRECTV services, the Company would be adversely
affected by any material adverse changes in the assets, financial condition,
programming, technological capabilities or services of DIRECTV or its parent,
Hughes Electronics Corporation.

New Accounting Pronouncements:

     In April 1998, the Accounting Standards Executive Committee issued
Statement of Position 98-5 "Reporting on the Costs of Start-Up Activities"
("SOP 98-5"), which is effective for fiscal years beginning after December 15,
1998. In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement


                                      F-9
<PAGE>

                      PEGASUS COMMUNICATIONS CORPORATION
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  -- (Continued)
 
 
2. Summary of Significant Accounting Policies:  -- (Continued)
 
of Financial Accounting Standards ("SFAS") No. 133 "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"), which is effective for fiscal
quarters of fiscal years beginning after June 15, 1999. Management has reviewed
the provisions of SOP 98-5 and SFAS No. 133 and the implementation of these
standards is not expected to have any significant impact on its consolidated
financial statements.


3. Property and Equipment:


     Property and equipment consist of the following:

<TABLE>
<CAPTION>
                                                         December 31,       December 31,
                                                             1997               1998
                                                       ----------------   ----------------
<S>                                                    <C>                <C>
     Reception and distribution facilities .........    $  27,012,297      $  20,712,511
     Transmitter equipment .........................       15,306,589         17,728,338
     Equipment, furniture and fixtures .............        3,091,363          8,530,100
     Building and improvements .....................        2,293,755          3,410,466
     Land ..........................................          947,712          1,229,163
     Vehicles ......................................          983,256          1,111,665
     Other equipment ...............................        2,612,332          5,893,561
                                                        -------------      -------------
                                                           52,247,304         58,615,804
     Accumulated depreciation ......................      (24,560,658)       (24,549,302)
                                                        -------------      -------------
     Net property and equipment ....................    $  27,686,646      $  34,066,502
                                                        =============      =============
 
</TABLE>

     Depreciation expense amounted to $5.2 million, $5.7 million and $6.2
million for the years ended December 31, 1996, 1997 and 1998, respectively.


4. Intangibles:


     Intangible assets consist of the following:

<TABLE>
<CAPTION>
                                                           December 31,        December 31,
                                                               1997                1998
                                                         ----------------   -----------------
<S>                                                      <C>                <C>
     DBS rights ......................................    $ 203,379,952      $  712,231,669
     Deferred financing costs ........................       16,654,186          33,762,651
     Franchise costs .................................       35,332,755          31,157,958
     Goodwill ........................................       28,490,035          28,033,368
     Broadcast licenses and affiliation agreements . .       19,094,212          19,062,241
     Consultancy and non-compete agreements ..........        6,010,838           7,022,688
     Subscriber acquisition costs ....................        5,787,156                  --
     Other deferred costs ............................        8,571,281          13,121,413
                                                          -------------      --------------
                                                            323,320,415         844,391,988
     Accumulated amortization ........................      (38,546,388)       (114,986,331)
                                                          -------------      --------------
     Net intangible assets ...........................    $ 284,774,027      $  729,405,657
                                                          =============      ==============
 
</TABLE>

     Amortization expense amounted to $6.9 million, $22.1 million and $64.5
million for the years ended December 31, 1996, 1997 and 1998, respectively.


5. Common Stock:


     In October 1996, Pegasus completed an initial public offering in which it
sold 3.0 million shares of its Class A Common Stock to the public at a price of
$14 per share, resulting in net proceeds to the Company of $38.1 million.


                                      F-10
<PAGE>

                      PEGASUS COMMUNICATIONS CORPORATION
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  -- (Continued)
 
 
5. Common Stock:  -- (Continued)
 
     As of December 31, 1997 and 1998, the Company had two classes of Common
Stock: Class A Common Stock and Class B Common Stock. Holders of Class A Common
Stock and Class B Common Stock are entitled to one vote per share and ten votes
per share, respectively.


     The Company's ability to pay dividends on its Common Stock is subject to
certain restrictions.


6. Preferred Stock:


     As of December 31, 1997 and 1998, the Company had 5.0 million shares of
Preferred Stock authorized of which 112,215 and 126,978 shares have been
designated as Series A Preferred Stock, respectively.


     In January 1997, Pegasus completed a unit offering (the "Unit Offering")
in which it sold 100,000 shares of 12.75% Series A Cumulative Exchangeable
Preferred Stock (the "Series A Preferred Stock") and warrants to purchase
193,600 shares of Class A Common Stock, at an exercise price of $15 per share,
to the public at a price of $1,000 per unit, resulting in net proceeds to the
Company of $95.8 million.


     As a result of the Unit Offering and dividends subsequently paid on the
Series A Preferred Stock, the Company had approximately 105,490 and 119,369
shares of Series A Preferred Stock issued and outstanding at December 31, 1997
and 1998, respectively. On December 18, 1998 the Board of Directors declared a
dividend on the Series A Preferred Stock in the aggregate of approximately
7,610 shares of Series A Preferred Stock, payable on January 1, 1999 to
shareholders of record on December 15, 1998. Each whole share of Series A
Preferred Stock has a liquidation preference of $1,000 per share (the
"Liquidation Preference"). Cumulative dividends, at a rate of 12.75% are
payable semi-annually on January 1 and July 1. Dividends may be paid, occurring
on or prior to January 1, 2002, at the option of the Company, either in cash or
by the issuance of additional shares of Series A Preferred Stock. Subject to
certain conditions, the Series A Preferred Stock is exchangeable in whole, but
not in part, at the option of the Company, for Pegasus' 12.75% Senior
Subordinated Exchange Notes due 2007 (the "Exchange Notes"). The Exchange Notes
would contain substantially the same redemption provisions, restrictions and
other terms as the Series A Preferred Stock. Pegasus is required to redeem all
of the Series A Preferred Stock outstanding on January 1, 2007 at a redemption
price equal to the Liquidation Preference thereof, plus accrued dividends.


     The carrying amount of the Series A Preferred Stock is periodically
increased by amounts representing dividends not currently declared or paid but
which will be payable under the mandatory redemption features. The increase in
carrying amount is effected by charges against retained earnings, or in the
absence of retained earnings, by charges against paid-in capital.


     Under the terms of the Series A Preferred Stock, Pegasus' ability to pay
dividends on its Common Stock is subject to certain restrictions.


                                      F-11
<PAGE>

                      PEGASUS COMMUNICATIONS CORPORATION
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  -- (Continued)
 
 
7. Long-Term Debt:

     Long-term debt consists of the following:


<TABLE>
<CAPTION>
                                                                       December 31,      December 31,
                                                                           1997              1998
                                                                      --------------   ---------------
<S>                                                                   <C>              <C>
Series B Senior Notes payable by Pegasus, due 2005, interest at
 9.625%, payable semi-annually in arrears on April 15 and
 October 15 .......................................................   $115,000,000      $115,000,000
Series A Senior Notes payable by Pegasus, due 2006, interest at
 9.75%, payable semi-annually in arrears on June 1 and
 December 1, commencing on June 1, 1999 ...........................             --       100,000,000
Senior six-year $180.0 million revolving credit facility, payable
 by PM&C, interest at PM&C's option at either the bank's base
 rate plus an applicable margin or LIBOR plus an applicable
 margin (7.8125% at December 31, 1998) ............................             --        27,500,000
Senior six-year $70.0 million revolving credit facility, payable by
 DTS, interest at DTS' option at either the bank's base rate or
 the Eurodollar Rate (8.94% at December 31, 1998) .................             --        26,800,000
Senior six-year $20.0 million term loan facility, payable by DTS,
 interest at DTS' option at either the bank's base rate or the
 Eurodollar Rate (9.03% at December 31, 1998) .....................             --        19,600,000
Series B Notes payable by PM&C, due 2005, interest at 12.5%,
 payable semi-annually in arrears on January 1 and July 1, net
 of unamortized discount of $3,018,003 and $2,621,878 as of
 December 31, 1997 and 1998, respectively .........................     81,981,997        82,378,122
Series B Notes payable by DTS, due 2007, interest at 12.5%,
 payable semi-annually in arrears on February 1 and August 1,
 net of unamortized discount of $1,784,844 as of December 31,
 1998 .............................................................             --       153,215,156
Mortgage payable, due 2000, interest at 8.75% .....................        477,664           454,965
Note payable, due 1998, interest at 10% ...........................      3,050,000                --
Sellers' notes, due 1999 to 2005, interest at 3% to 8% ............      7,171,621        33,537,788
Capital leases and other ..........................................        673,849           542,721
                                                                      ------------      ------------
                                                                       208,355,131       559,028,752
Less current maturities ...........................................      6,357,320        14,399,046
                                                                      ------------      ------------
Long-term debt ....................................................   $201,997,811      $544,629,706
                                                                      ============      ============
</TABLE>

     Certain of the Company's sellers' notes are collateralized by stand-by 
letters of credit issued pursuant to the PM&C Credit Facility and the DTS 
Credit Facility.
 

     DTS maintains a $70.0 million senior revolving credit facility and a $20.0
million senior term credit facility (collectively, the "DTS Credit Facility")
which expires in 2003 and is collateralized by substantially all of the assets
of DTS and its subsidiaries. The DTS Credit Facility is subject to certain
financial covenants as defined in the loan agreement, including a debt to
adjusted cash flow covenant. As of December 31, 1998, $18.5 million of stand-by
letters of credit were issued pursuant to the DTS Credit Facility.

     Prior to being acquired by Pegasus, DTS completed a senior subordinated
notes offering (the "DTS Notes Offering") in which it sold $155.0 million of
its 12.5% Series A Senior Subordinated Notes due 2007 (the "DTS Series A
Notes"). A portion of the net proceeds from the DTS Notes Offering was used to
fund an interest escrow account, which is included in restricted cash on the
Company's consolidated balance sheets, for the first four semi-annual interest
payments on the DTS Series A Notes. DTS exchanged its DTS Series A


                                      F-12
<PAGE>

                      PEGASUS COMMUNICATIONS CORPORATION
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  -- (Continued)
 
 
7. Long-Term Debt:  -- (Continued)
 
Notes for its 12.5% Series B Senior Subordinated Notes due 2007 (the "DTS
Series B Notes" and, together with the DTS Series A Notes, the "DTS Notes").
The DTS Series B Notes have substantially the same terms and provisions as the
DTS Series A Notes. The DTS Series B Notes are guaranteed on a full,
unconditional, senior subordinated basis, jointly and severally by all direct
and indirect subsidiaries of DTS, except DTS Capital, which is a co-issuer of
the DTS Notes and has nominal assets and does not conduct any operations.

     In October 1997, Pegasus completed an offering of senior notes (the
"9.625% Senior Notes Offering") in which it sold $115.0 million of its 9.625%
Series A Senior Notes due 2005 (the "9.625% Series A Notes"), resulting in net
proceeds to the Company of approximately $111.0 million. A portion of the net
proceeds from the 9.625% Senior Notes Offering was used to retire an existing
$130.0 million credit facility (the "PSH Credit Facility"). The PSH Credit
Facility was refinanced with the PM&C Credit Facility. Deferred financing fees
relating to the PSH Credit Facility were written off, resulting in an
extraordinary loss of approximately $1.7 million on the refinancing
transaction. Pegasus exchanged its 9.625% Series A Notes for its 9.625% Series
B Senior Notes due 2005 (the "9.625% Series B Notes" and, together with the
9.625% Series A Notes, the "9.625% Senior Notes"). The 9.625% Series B Notes
have substantially the same terms and provisions as the 9.625% Series A Notes.

     In December 1997, PM&C entered into a $180.0 million senior revolving
credit facility (the "PM&C Credit Facility") which expires in 2003 and is
collateralized by substantially all of the assets of PM&C and its subsidiaries.
The PM&C Credit Facility is subject to certain financial covenants as defined
in the loan agreement, including a debt to adjusted cash flow covenant. As of
December 31, 1998, $49.6 million of stand-by letters of credit were issued
pursuant to the PM&C Credit Facility.

     In November 1998, Pegasus completed an offering of senior notes (the
"9.75% Senior Notes Offering") in which it sold $100.0 million of its 9.75%
Series A Senior Notes due 2006 (the "9.75% Series A Notes"), resulting in net
proceeds to the Company of approximately $96.8 million. $64.0 million of the
net proceeds from the 9.75% Senior Notes Offering were used to repay a portion
of the outstanding indebtedness under the PM&C Credit Facility.

     Certain of the Company's notes may be redeemed, at the option of the
Company, in whole or in part, at various points in time after July 1, 2000 at
the redemption prices specified in the indentures governing the respective
notes, plus accrued and unpaid interest thereon.

     The Company's indebtedness contain certain financial and operating
covenants, including restrictions on the Company to incur additional
indebtedness, create liens and to pay dividends.

     At December 31, 1998, maturities of long-term debt and capital leases are
as follows:



  1999 .........................   $ 14,399,046
  2000 .........................     11,318,785
  2001 .........................      8,108,254
  2002 .........................      3,105,629
  2003 .........................     71,003,760
  Thereafter ...................    451,093,278
                                   ------------
                                   $559,028,752
                                   ============
 

      

                                      F-13
<PAGE>

                      PEGASUS COMMUNICATIONS CORPORATION
     
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  -- (Continued)
     
     
8. Earnings Per Common Share:


Calculation of basic and diluted earnings per common share:


     The following table sets forth the computation of the number of shares
used in the computation of basic and diluted earnings per common share (in
thousands):




<TABLE>
<CAPTION>
                                                                1996                1997                1998
                                                          ----------------   -----------------   -----------------
<S>                                                       <C>                <C>                 <C>
Net loss applicable to common shares ..................     ($ 9,974,146)      ($ 31,487,137)      ($ 93,880,748)
                                                             ===========        ============        ============
Weighted average common shares outstanding ............        6,239,646           9,858,244          14,129,602
                                                             ===========        ============        ============
Total shares used for calculation of basic earnings per
 common share .........................................        6,239,646           9,858,244          14,129,602
Stock options .........................................               --                  --                  --
                                                             -----------        ------------        ------------
Total shares used for calculation of diluted earnings
 per common share .....................................        6,239,646           9,858,244          14,129,602
                                                             ===========        ============        ============
</TABLE>

     Basic earnings per share amounts are based on net income after deducting
preferred stock dividend requirements divided by the weighted average number of
Class A and Class B Common Shares outstanding during the year.


     For the years ended December 31, 1997 and 1998, net loss per common share
was determined by dividing net loss, as adjusted by the aggregate amount of
dividends on the Company's Series A Preferred Stock, approximately $12.2
million and $14.8 million, respectively, by applicable shares outstanding.


     Securities that have not been issued and are antidilutive amounted to
2,539 shares in 1996, 582,493 shares in 1997 and 1,299,863 shares in 1998.


9. Leases:


     The Company leases certain studios, towers, utility pole attachments, and
occupancy of underground conduits and headend sites under operating leases. The
Company also leases office space, vehicles and various types of equipment
through separate operating lease agreements. The operating leases expire at
various dates through 2004. Rent expense for the years ended December 31, 1996,
1997 and 1998 was $712,000, $1.1 million and $1.6 million, respectively. The
Company leases equipment under long-term leases and has the option to purchase
the equipment for a nominal cost at the termination of the leases. The related
obligations are included in long-term debt. Property and equipment at December
31 include the following amounts for leases that have been capitalized:




<TABLE>
<CAPTION>
                                                             1997            1998
                                                        -------------   -------------
<S>                                                     <C>             <C>
         Equipment, furniture and fixtures ..........    $  700,807      $  662,276
         Vehicles ...................................       516,642         541,068
                                                         ----------      ----------
                                                          1,217,449       1,203,344
         Accumulated depreciation ...................      (512,307)       (562,403)
                                                         ----------      ----------
         Total ......................................    $  705,142      $  640,941
                                                         ==========      ==========
</TABLE>

                                        

                                      F-14
<PAGE>

                      PEGASUS COMMUNICATIONS CORPORATION
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  -- (Continued)
 
 
9. Leases:  -- (Continued)
 
     Future minimum lease payments on noncancellable operating and capital
leases at December 31, 1998 are as follows:

<TABLE>
<CAPTION>
                                                                 Operating       Capital
                                                                   Leases         Leases
                                                               -------------   -----------
<S>                                                            <C>             <C>
         1999 ..............................................    $1,887,217      $216,795
         2000 ..............................................     1,651,919       207,635
         2001 ..............................................     1,521,132       157,286
         2002 ..............................................     1,075,957        57,902
         2003 ..............................................       630,623         1,560
         Thereafter ........................................       393,013            --
                                                                ----------      --------
         Total minimum payments ............................    $7,159,861       641,178
                                                                ==========
         Less: amount representing interest ................                      98,457
                                                                                --------
         Present value of net minimum lease payments
          including current maturities of $168,117 .........                    $542,721
                                                                                ========
 
</TABLE>

10. Income Taxes:

     The following is a summary of the components of income taxes from
operations:




<TABLE>
<CAPTION>
                                                        1996            1997            1998
                                                   --------------   -----------   ----------------
<S>                                                <C>              <C>           <C>
Federal -- deferred ............................     ($ 169,000)                    ($ 1,070,645)
State and local -- current .....................         49,000      $200,000            175,000
                                                      ---------      --------        -----------
 Provision (benefit) for income taxes ..........     ($ 120,000)     $200,000       ($   895,645)
                                                      =========      ========        ===========
 
</TABLE>
<PAGE>

     The deferred income tax assets and liabilities recorded in the
consolidated balance sheets at December 31, 1997 and 1998 are as follows:




<TABLE>
<CAPTION>
                                                                               1997               1998
                                                                         ----------------   ----------------
<S>                                                                      <C>                <C>
Assets:
 Receivables .........................................................     $     73,547       $    215,451
 Excess of tax basis over book basis from tax gain recognized upon
   incorporation of subsidiaries .....................................        1,890,025          2,112,381
 Loss carryforwards ..................................................       18,046,889         56,700,200
 Other ...............................................................          870,305            972,694
                                                                           ------------       ------------
   Total deferred tax assets .........................................       20,880,766         60,000,726
                                                                           ------------       ------------
Liabilities:
 Excess of book basis over tax basis of property, plant and equipment         1,938,899          1,906,903
 Excess of book basis over tax basis of amortizable intangible assets.        5,695,313         78,764,811
                                                                           ------------       ------------
   Total deferred tax liabilities ....................................        7,634,212         80,671,714
                                                                           ------------       ------------
 Net deferred tax assets (liabilities) ...............................       13,246,554        (20,670,988)
   Valuation allowance ...............................................      (13,296,554)       (48,120,993)
                                                                           ------------       ------------
 Net deferred tax liabilities ........................................    ($     50,000)     ($ 68,791,981)
                                                                           ============       ============
 
</TABLE>

     The Company has recorded a valuation allowance to reflect the estimated
amount of deferred tax assets which may not be realized due to the expiration
of the Company's net operating loss carryforwards and portions of other
deferred tax assets related to prior acquisitions. The valuation allowance
increased primarily as the result of net operating loss carryforwards generated
during 1998, which may not be utilized.


                                      F-15
<PAGE>

                      PEGASUS COMMUNICATIONS CORPORATION
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  -- (Continued)
 
 
10. Income Taxes:  -- (Continued)
 
     At December 31, 1998, the Company has net operating loss carryforwards of
approximately $149.2 million which are available to offset future taxable
income and expire through 2018.

A reconciliation of the Federal statutory rate to the effective tax rate is as
follows:




<TABLE>
<CAPTION>
                                                                  1996           1997          1998
                                                             -------------   -----------   -----------
<S>                                                          <C>             <C>           <C>
         U.S. statutory federal income tax rate ..........        34.00%         34.00%        35.00%
         Foreign net operating loss ......................         1.73             --            --
         Valuation allowance .............................       (36.92)        (34.38)       (34.40)
         Other ...........................................           --           1.43          0.70
                                                                 -------        ------        ------
         Effective tax rate ..............................       ( 1.19%)         1.05%         1.30%
                                                                 =======        ======        ======
 
</TABLE>

11. Supplemental Cash Flow Information:


Significant noncash investing and financing activities are as follows:




<TABLE>
<CAPTION>
                                                                       Years ended December 31,
                                                            ----------------------------------------------
                                                                 1996            1997            1998
                                                            -------------   -------------   --------------
<S>                                                         <C>             <C>             <C>
Barter revenue and related expense ......................   $6,337,220      $7,520,000      $ 8,078,000
Acquisition of program rights and assumption of
 related program payables ...............................    1,140,072       3,452,779        4,629,881
Acquisition of plant under capital leases ...............      312,578         529,072           36,500
Capital contribution and related acquisition of intan-
 gibles .................................................   14,079,546      15,197,503      119,695,473
Execution of license agreement option ...................    3,050,000              --               --
Minority interest and related acquisition of intan-
 gibles .................................................           --       3,000,000               --
Notes payable and related acquisition of intangibles.....           --       7,113,689      219,889,144
Series A Preferred Stock dividend and reduction of
 paid-in capital ........................................           --      12,215,000       14,763,447
Deferred taxes, net and related acquisition of intan-
 gibles .................................................           --              --       82,934,179
</TABLE>

     For the years ended December 31, 1996, 1997 and 1998, the Company paid
cash for interest in the amount of $12.0 million, $13.5 million and $35.3
million, respectively. The Company paid no federal income taxes for the years
ended December 31, 1996, 1997 and 1998.

12. Acquisitions and Dispositions:


     In 1997, the Company acquired, from 25 independent DIRECTV providers, the
rights to provide DIRECTV programming in certain rural areas of the United
States and the related assets in exchange for total consideration of
approximately $161.2 million, which consisted of $133.9 million in cash,
923,860 shares of the Company's Class A Common Stock (amounting to $14.9
million at the time of issuance), $3.0 million in preferred stock of a
subsidiary of Pegasus, warrants to purchase a total of 283,969 shares of the
Company's Class A Common Stock (amounting to $1.1 million at the time of
issuance), $7.1 million in promissory notes and $1.2 million in assumed net
liabilities.

     Effective January 31, 1997, the Company sold substantially all the assets
of its New Hampshire cable system to State Cable TV Corporation for
approximately $6.9 million in cash, net of certain selling costs. The Company
recognized a gain on the transaction of approximately $4.5 million.


                                      F-16
<PAGE>

                      PEGASUS COMMUNICATIONS CORPORATION
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  -- (Continued)
 
 
12. Acquisitions and Dispositions:  -- (Continued)
 
     In 1998, the Company acquired (exclusive of the acquisition of DTS), from
26 independent DIRECTV providers, the rights to provide DIRECTV programming in
certain rural areas of the United States and the related assets in exchange for
total consideration of approximately $132.1 million, which consisted of $109.3
million in cash, 37,304 shares of the Company's Class A Common Stock (amounting
to $900,000 at the time of issuance), warrants to purchase a total of 25,000
shares of the Company's Class A Common Stock (amounting to $222,000 at the time
of issuance), $20.4 million in promissory notes and $1.3 million in assumed net
liabilities.


     On April 27, 1998, the Company acquired DTS, which holds the rights to
provide DIRECTV programming in certain rural areas of California, Colorado,
Georgia, Indiana, Kansas, Kentucky, New Hampshire, New Mexico, New York, South
Carolina and Vermont, in exchange for total consideration of approximately
$363.9 million, which consisted of approximately 5.5 million shares of the
Company's Class A Common Stock (amounting to $118.8 million at a price of
$21.71 per share, the average closing price per share five days prior and
subsequent to the acquisition announcement), options and warrants to purchase a
total of 224,038 shares of the Company's Class A Common Stock (amounting to
$3.3 million at the time of issuance), approximately $158.9 million in assumed
net liabilities and approximately $82.9 million of a deferred tax liability.


     Effective July 1, 1998, the Company sold substantially all the assets of
its remaining New England cable systems to Avalon Cable of New England, LLC for
approximately $30.1 million in cash. The Company recognized a gain on the
transaction of approximately $24.7 million.


     Unless otherwise noted, the value assigned to the Class A Common Stock was
computed by multiplying the number of shares issued by the closing price per
share on the day prior to the date of consummation of the acquisition.


     The following unaudited summary, prepared on a pro forma basis, combines
the results of operations as if the above DBS territories and cable systems had
been acquired or sold as of the beginning of the periods presented, after
including the impact of certain adjustments, such as the amortization of
intangibles, interest expense, preferred stock dividends and related income tax
effects. The pro forma information does not purport to be indicative of what
would have occurred had the acquisitions/dispositions been made on those dates
or of results which may occur in the future. This pro forma information does
not include any acquisitions that occurred subsequent to December 31, 1998.

<TABLE>
<CAPTION>
                                                                 Years Ended December 31,
                                                               -----------------------------
          (in thousands, except earnings per share)                     (unaudited)
                                                                    1997            1998
                                                               -------------   -------------
<S>                                                            <C>             <C>
         Net revenues ......................................     $ 178,769       $ 236,293
                                                                 =========       =========
         Operating loss ....................................    ($  64,304)     ($  78,798)
                                                                 =========       =========
         Net loss ..........................................    ($ 120,873)     ($ 133,988)
         Less: Preferred stock dividends ...................       (13,156)        (14,763)
                                                                 ---------       ---------
         Net loss available to common stockholders .........    ($ 134,029)     ($ 148,751)
                                                                 =========       =========
         Net loss per common share .........................    ($    8.50)     ($    9.37)
                                                                 =========       ========= 
</TABLE>

     On July 23, 1998, the Company entered into an agreement to purchase a
cable system serving Aguadilla, Puerto Rico and neighboring communities for a
purchase price of approximately $42.0 million in cash. The Aguadilla cable
system serves approximately 21,500 subscribers and passes approximately 81,000
of the 90,000 homes in the franchise area. The Aguadilla cable system is
contiguous to the Company's existing


                                      F-17
<PAGE>

                      PEGASUS COMMUNICATIONS CORPORATION
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  -- (Continued)
 
 
12. Acquisitions and Dispositions:  -- (Continued)
 
Puerto Rico cable system and, upon completion of the purchase, the Company
intends to consolidate the Aguadilla cable system with its existing cable
system. The closing of this acquisition is subject to regulatory and other
approvals, as well as customary conditions, and the Company expects this
transaction to close in the first half of 1999.

13. Financial Instruments:

     The carrying values and fair values of the Company's financial instruments
at December 31 consisted of:

<TABLE>
<CAPTION>
                                                                1997                       1998
                                                      ------------------------   ------------------------
                                                       Carrying        Fair       Carrying        Fair
                                                         Value        Value         Value        Value
                                                      ----------   -----------   ----------   -----------
                                                                        (in thousands)
<S>                                                   <C>          <C>           <C>          <C>
Long-term debt, including current portion .........    $208,355     $240,086      $559,029     $583,460
Series A Preferred Stock ..........................     111,264      114,750       126,028      126,978
</TABLE>

     Long-term debt: The fair value of long-term debt is estimated based on the
quoted market price for the same or similar instruments.

     Series A Preferred Stock: The fair value of Series A Preferred Stock is
estimated based on the quoted market price for the same or similar instruments.
 

     All other financial instruments are stated at cost which approximates fair
market value.

14. Warrants:

     In January 1997, in connection with the Unit Offering, the Company issued
warrants to purchase 193,600 shares of Class A Common Stock at an exercise
price of $15 per share. These warrants are exercisable through January 1, 2007.
At December 31, 1998, none of these warrants have been exercised. The fair
value of these warrants was estimated using the Black-Scholes pricing model and
was approximately $951,000. The value assigned to these warrants reduced the
carrying amount of the Series A Preferred Stock and was effected by an increase
in paid-in-capital.

     In March 1997, in connection with the acquisition of DBS properties, the
Company issued warrants to purchase 283,969 shares of Class A Common Stock at
an exercise price of $11.81 per share. These warrants are exercisable through
March 10, 2006. At December 31, 1998, none of these warrants had been
exercised. The fair value of these warrants was estimated using the
Black-Scholes pricing model and was approximately $1.1 million. The value
assigned to these warrants increased the carrying amount of the DBS rights
acquired and was effected by an increase in paid-in-capital.

     In 1998, in connection with the acquisition of DBS properties, the Company
issued warrants to purchase 181,996 shares of Class A Common Stock at exercise
prices between $14.64 and $24.26 per share. These warrants are exercisable
through October 10, 2007. At December 31, 1998, warrants to purchase 1,929
shares of Class A Common Stock have been exercised. The fair value of the
warrants issued was estimated using the Black-Scholes pricing model and was
approximately $2.7 million. The value assigned to these warrants increased the
carrying amount of the DBS rights acquired and was effected by an increase in
paid-in-capital.

15. Employee Benefit Plans:

     The Company has two active stock plans available to grant stock options
(the "Stock Option Plan") and restricted stock awards (the "Restricted Stock
Plan") to eligible employees, executive officers and non-employee directors of
the Company. The Company applies Accounting Principles Board Opinion No. 25
"Accounting for Stock Issued to Employees" ("APB 25") in accounting for its
stock plans. The Company has adopted the disclosure-only provisions of SFAS No.
123 "Accounting for Stock-Based Compensation" ("SFAS 123").


                                      F-18
<PAGE>

                      PEGASUS COMMUNICATIONS CORPORATION
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  -- (Continued)
 
 
15. Employee Benefit Plans:  -- (Continued)
 
Stock Option Plan

     The Stock Option Plan provides for the granting of nonqualified and
qualified options to purchase a maximum of 970,000 shares (subject to
adjustment to reflect stock dividends, stock splits, recapitalizations and
similar changes in the capitalization of Pegasus) of Class A Common Stock of
the Company. The Stock Option Plan terminates in September 2006. As of December
31, 1998, options to purchase an aggregate of 642,227 shares of Class A Common
Stock at exercise prices between $11.00 and $25.13 were outstanding, including
638,842 options outstanding under the Stock Option Plan, of which 67,042 were
issued in connection with the acquisition of DTS. All options granted under the
Stock Option Plan have been granted at fair market value at the time of grant.

     Under SFAS 123, companies can either continue to account for stock
compensation plans pursuant to existing accounting standards or elect to
expense the value derived from using an option pricing model. The Company is
continuing to apply existing accounting standards. However, SFAS 123 requires
disclosures of pro forma net income and earnings per share as if the Company
had adopted the expensing provisions of SFAS 123.

     The fair value of options was estimated using the Black-Scholes option
pricing model with the following weighted average assumptions for 1996, 1997
and 1998:


<TABLE>
<CAPTION>
                                                        1996         1997         1998
                                                     ----------   ----------   ----------
<S>                                                  <C>          <C>          <C>
         Risk-free interest rate .................   5.56%         6.35%        5.11%
         Dividend Yield ..........................   0.00%         0.00%        0.00%
         Volatility Factor .......................   0.00          0.403        0.479
         Weighted average expected life ..........   5 years      5 years      4.5 years
</TABLE>

     Pro forma net losses for 1996, 1997 and 1998 would have been $10.0
million, $31.7 million and $94.7 million, respectively; pro forma net losses
per common share for 1996, 1997 and 1998 would have been $1.60, $3.22 and
$6.70, respectively. The weighted average fair value of options granted were
$3.40, $4.99 and $11.19 for 1996, 1997 and 1998, respectively.

     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, 1996 ...................          --             --
   Granted ..........................................       3,385         $14.00
   Exercised ........................................          --             --
   Canceled or expired ..............................          --             --
                                                            -----         ------
   Outstanding at December 31, 1996 .................       3,385          14.00
   Granted ..........................................     220,000          11.00
   Exercised ........................................          --             --
   Canceled or expired ..............................          --             --
                                                          -------         ------
   Outstanding at December 31, 1997 .................     223,385          11.05
   Granted ..........................................     418,842          21.23
   Exercised ........................................          --             --
   Canceled or expired ..............................          --             --
                                                          =======         ======
   Outstanding at December 31, 1998 .................     642,227         $17.69
                                                          =======         ======
   Options exercisable at December 31, 1996 .........       3,385         $14.00
   Options exercisable at December 31, 1997 .........       3,385          14.00
   Options exercisable at December 31, 1998 .........     143,728          15.09
                                                                   
</TABLE>

                                      F-19
<PAGE>

                      PEGASUS COMMUNICATIONS CORPORATION
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  -- (Continued)
 
 
15. Employee Benefit Plans:  -- (Continued)
 
Restricted Stock Plan

     The Restricted Stock Plan provides for the granting of four types of
restricted stock awards representing a maximum of 350,000 shares (subject to
adjustment to reflect stock dividends, stock splits, recapitalizations and
similar changes in the capitalization of Pegasus) of Class A Common Stock of
the Company to eligible employees who have completed at least one year of
service. Restricted stock received under the Restricted Stock Plan vests based
on years of service with the Company and are fully vested for employees who
have four years of service with the Company with the exception of special
recognition awards which are fully vested on the date of grant. The Restricted
Stock Plan terminates in September 2006. As of December 31, 1998, 138,379
shares of Class A Common Stock had been granted under the Restricted Stock
Plan. The expense for this plan amounted to $501,139, $800,768 and $1.0 million
in 1996, 1997 and 1998, respectively.

401(k) Plans

     Effective January 1, 1996, PM&C adopted the Pegasus Communications Savings
Plan (the "US 401(k) Plan") for eligible employees of PM&C and its domestic
subsidiaries. Effective October 1, 1996, the Company's Puerto Rico subsidiary
adopted the Pegasus Communications Puerto Rico Savings Plan (the "Puerto Rico
401(k) Plan" and, together with the US 401(k) Plan, the "401(k) Plans") for
eligible employees of the Company's Puerto Rico subsidiaries. Substantially all
Company employees who, as of the enrollment date under the 401(k) Plans, have
completed at least one year of service with the Company are eligible to
participate in one of the 401(k) Plans. Participants may make salary deferral
contributions of 2% to 6% of their salary to the 401(k) Plans. The expense for
this plan amounted to $484,226, $473,104 and $450,883 in 1996, 1997 and 1998,
respectively.

     The Company may make three types of contributions to the 401(k) Plans,
each allocable to a participant's account if the participant completes at least
1,000 hours of service in the applicable plan year, and is employed on the last
day of the applicable plan year. Discretionary Company contributions and
Company matches of employee salary deferral contributions and rollover
contributions are made in the form of Class A Common Stock, or in cash used to
purchase Class A Common Stock. The Company has authorized and reserved for
issuance up to 205,000 shares of Class A Common Stock in connection with the
401(k) Plans. Company contributions to the 401(k) Plans are subject to
limitations under applicable laws and regulations. All employee contributions
to the 401(k) Plans are fully vested at all times and all Company
contributions, if any, vest based on years of service with the Company and are
fully vested for employees who have four years of service with the Company. A
participant also becomes fully vested in Company contributions to the 401(k)
Plans upon attaining age 65 or upon his or her death or disability.

16. Commitments and Contingent Liabilities:

Legal Matters:

     In connection with the pending license renewal application of one of the
Company's television stations, it has come to the attention of the Company
that, at that station, there were violations of the FCC's rules establishing
limits on the amount of commercial material in programs directed to children.

     The Company was notified that is has been sued in Indiana for allegedly
charging DBS subscribers excessive fees for late payments. The plaintiffs, who
purport to represent a class consisting of residential DIRECTV customers in
Indiana, seek unspecified damages for the purported class and modification of
the Company's late-fee policy. The Company is advised that similar suits have
been brought against DIRECTV and various cable operators in other parts of the
United States.

     From time to time the Company is involved with claims that arise in the
normal course of business.

                                      F-20
<PAGE>

                      PEGASUS COMMUNICATIONS CORPORATION
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  -- (Continued)
 
 
16. Commitments and Contingent Liabilities:  -- (Continued)
 
     In the opinion of management, the ultimate liability with respect to the
aforementioned claims and matters will not have a material adverse effect on
the consolidated operations, liquidity, cash flows or financial position of the
Company.

Program Rights:

     The Company has entered into agreements totaling $6.9 million as of
December 31, 1998 for film rights and programs that are not yet available for
showing at December 31, 1998, and accordingly, are not recorded by the Company.
At December 31, 1998, the Company has commitments for future program rights of
approximately $3.1 million, $3.6 million, $3.1 million, $1.3 million, $214,000
and $428,000 in 1999, 2000, 2001, 2002, 2003 and thereafter, respectively.

17. Related Party Transactions:

     Effective October 31, 1997, the Company acquired DIRECTV distribution
rights for certain rural areas of Georgia and the related assets (the "ViewStar
DBS Acquisition") from ViewStar Entertainment Services, Inc. ("ViewStar").
Prior to the acquisition, Donald W. Weber, a director of Pegasus, was the
President and Chief Executive Officer of ViewStar and together with his son
owned approximately 73% of the outstanding stock of ViewStar. The ViewStar DBS
Acquisition was effected through a merger of ViewStar into a subsidiary of
Pegasus. The purchase price of the ViewStar DBS Acquisition consisted of
approximately $6.4 million in cash and 397,035 shares of Class A Common Stock.
The acquisition involved the execution of noncompetition agreements by Mr.
Weber and his son and the execution of a shareholders agreement (which included
the granting of certain registration rights on the shares of Class A Common
Stock issued in connection with the acquisition).

     The Company entered into an arrangement in 1998 with W.W. Keen Butcher
(the stepfather of Marshall W. Pagon, the Company's President and Chief
Executive Officer, and Nicholas A. Pagon, a Vice President of Pegasus), certain
entities controlled by him (the "KB Companies") and the owner of a minority
interest in one of the KB Companies, under which the Company agreed to provide
and maintain collateral for up to $4.0 million in principal amount of bank
loans to Mr. Butcher and the minority owner. Mr. Butcher and the minority owner
must lend or contribute the proceeds of those bank loans to one or more of the
KB Companies for the acquisition of television broadcast stations to be
operated by the Company pursuant to local marketing agreements. As of December
31, 1998, the Company had provided collateral of $1.6 million pursuant to this
arrangement, which is included as restricted cash on the Company's consolidated
balance sheets.

     William P. Phoenix, a director of Pegasus since June 1998, is a managing
director of CIBC Oppenheimer Corporation ("CIBC"). CIBC and its affiliates have
provided financial services to the Company, including serving as one of the
initial purchasers in the 9.75% Senior Notes Offering, providing a fair market
value appraisal in connection with the contribution to Pegasus of certain assets
between related parties, providing fairness opinions in connection with the
ViewStar DBS Acquisition and certain intercompany transactions and acting as a
standby purchaser in connection with DTS offer to repurchase the DTS notes as a
result of the change of control arising by Pegasus' acquisition of DTS. Total
fees and expenses were approximately $3.3 million for the year ended December
31, 1998.

18. Industry Segments:

     The Company operates in growing segments of the media industry: DBS,
Broadcast and Cable. DBS consists of providing direct broadcast satellite
television services to customers in certain rural areas of 36 states. Broadcast
consists of nine television stations affiliated with Fox, UPN and the WB and two
transmitting towers, all located in the eastern United States. Cable consists of
providing cable television services to individual and commercial subscribers in
Puerto Rico.


                                      F-21
<PAGE>

                      PEGASUS COMMUNICATIONS CORPORATION
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  -- (Continued)
 
 
18. Industry Segments:  -- (Continued)
 
     All of the Company's revenues are derived from external customers. Capital
expenditures for the Company's DBS segment were $855,000, $506,000 and $2.0 for
1996, 1997 and 1998, respectively. Capital expenditures for the Company's
Broadcast segment were $2.3 million, $6.4 million and $6.8 million for 1996,
1997 and 1998, respectively. Capital expenditures for the Company's Cable
segment were $3.1 million, $2.9 million and $2.0 million for 1996, 1997 and
1998, respectively. Identifiable total assets for the Company's DBS segment
were $209.5 million and $715.6 million as of December 31, 1997 and 1998,
respectively. Identifiable total assets for the Company's Broadcast segment
were $63.0 million and $67.1 million as of December 31, 1997 and 1998,
respectively. Identifiable total assets for the Company's Cable segment were
$51.7 million and $47.0 million as of December 31, 1997 and 1998, respectively.
 

19. Subsequent Events:

     As of February 12, 1999, the Company acquired, from five independent
DIRECTV providers, the rights to provide DIRECTV programming in certain rural
areas of Colorado, Illinois, Indiana, Minnesota and Texas and the related
assets in exchange for total consideration of approximately $22.6 million,
which consisted of $21.5 million in cash and a $1.3 million promissory note,
payable over one year.

20. Quarterly Information (unaudited):




<TABLE>
<CAPTION>
                                                                          Quarter Ended
                                                  --------------------------------------------------------------
     (in thousands, except per share data)          March 31,       June 30,      September 30,     December 31,
                                                       1998           1998             1998             1998
                                                  -------------   ------------   ---------------   -------------
<S>                                               <C>             <C>            <C>               <C>
1998
 Net revenues .................................      $ 28,784       $ 46,739         $ 55,507         $ 64,190
 Operating loss ...............................        (6,302)        (8,877)         (18,590)         (26,879)
 Loss before extraordinary items ..............       (15,936)       (22,804)         (10,751)         (44,389)
 Net loss applicable to common shares .........     ($ 15,936)     ($ 22,804)       ($ 10,751)       ($ 44,389)
Basic and diluted earnings per share:
 Operating loss ...............................     ($   0.61)     ($   0.62)       ($   1.17)       ($   1.69)
 Loss before extraordinary items ..............         (1.54)         (1.59)           (0.68)           (2.79)
 Net loss .....................................     ($   1.54)     ($   1.59)       ($   0.68)       ($   2.79)
 
</TABLE>

The Company had no extraordinary gains or losses for the year ended December 31,
1998.




<TABLE>
<CAPTION>
                                                                         Quarter Ended
                                                  ------------------------------------------------------------
     (in thousands, except per share data)         March 31,      June 30,      September 30,     December 31,
                                                      1997          1997             1997             1997
                                                  -----------   ------------   ---------------   -------------
<S>                                               <C>           <C>            <C>               <C>
1997
 Net revenues .................................      $15,897       $19,778         $21,927          $ 29,216
 Operating loss ...............................        (366)          (113)         (1,308)           (4,801)
 Loss before extraordinary items ..............        (692)        (6,270)         (9,015)          (13,854)
 Net loss applicable to common shares .........     ($  692)      ($ 6,270)       ($ 9,015)        ($ 15,510)
Basic and diluted earnings per share:
 Operating loss ...............................     ($ 0.04)       ($ 0.01)        ($ 0.13)         ($  0.47)
 Loss before extraordinary items ..............       (0.07)         (0.64)          (0.91)            (1.36)
 Net loss .....................................     ($ 0.07)       ($ 0.64)        ($ 0.91)         ($  1.53)
 
</TABLE>

     For the fourth quarter of 1997, the Company had an extraordinary loss of
approximately $1.7 million or $0.16 per share in connection with the
refinancing of certain credit facilities.


                                      F-22

<PAGE>


                     [PricewaterhouseCooper LLP letterhead]


                       REPORT OF INDEPENDENT ACCOUNTANTS

Our report on the consolidated financial statements of Pegasus Communications
Corporation and its subsidiaries is included on page F-2 of this Form 10-K. In
connection with our audits of such financial statements, we have also audited
the related financial statement schedule on page S-2 of this Form 10-K.

In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.



/s/ PricewaterhouseCoopers LLP


February 12, 1999



                                      S-1



<PAGE>


                       PEGASUS COMMUNICATIONS CORPORATION
                SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
              For the Years Ended December 31, 1996, 1997 and 1998
                             (Dollars in thousands)

<TABLE>
<CAPTION>
                             Balance at      Additions     Additions                        Balance at
                             Beginning       Charged To    Charged To                       End of
 Description                 of Period       Expenses      Other Accounts    Deductions     Period
 -----------                 ----------      ----------    --------------    ----------     -----------
 <S>                         <C>             <C>           <C>               <C>            <C>
Allowance for Uncollectible
Accounts Receivable
  Year 1996                   $   238         $   336        $    --           $  331(b)       $   243
  Year 1997                   $   243         $   371        $    --           $  295(b)       $   319
  Year 1998                   $   319         $   797        $  183(a)         $  732(b)       $   567

Valuation Allowance for
Deferred Tax Assets
  Year 1996                   $ 6,954         $ 7,032        $    --           $3,302          $10,684
  Year 1997                   $10,684         $ 7,584        $    --           $4,971          $13,297
  Year 1998                   $13,297         $41,070        $    --           $6,246          $48,121

</TABLE>

(a) Amount acquired as a result of the merger with Digital Television Services,
    Inc.
(b) Amounts written off, net of recoveries.


                                      S-2

<PAGE>

                                 EXHIBIT INDEX

Exhibit
Number                  Document Name
-------                 -------------

23.1                    Consent of PricewaterhouseCoopers LLP