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                                  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, 2001

                                       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 SATELLITE COMMUNICATIONS, INC.
                                 ---------------
             (Exact name of registrant as specified in its charter)

                 Delaware                                      51-0374669
                 --------                                      ----------
      (State of other jurisdiction of                      (I.R.S. Employer
      incorporation of organization)                    Identification Number)

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

       Registrant's telephone number, including area code: (888) 438-7488

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

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

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

         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/

         As of the close of business on March 15, 2002, all of the Registrant's
outstanding voting stock was held by the parent of the Registrant, and
therefore, the aggregate market value of the voting stock held by non-affiliates
of the Registrant was $0.0.

         Number of shares of each class of Pegasus Satellite Communications,
Inc.'s common stock outstanding as of March 15, 2002:

           Class B, Common Stock, $0.01 par value             200

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                                TABLE OF CONTENTS

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                                                  PART I
ITEM 1:      BUSINESS.................................................................................1
ITEM 2:      PROPERTIES..............................................................................21
ITEM 3:      LEGAL PROCEEDINGS.......................................................................21
ITEM 4:      SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.....................................24

                                                 PART II

ITEM 5:      MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
             MATTERS.................................................................................25
ITEM 6:      SELECTED FINANCIAL DATA.................................................................26
ITEM 7:      MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
             RESULTS OF OPERATIONS...................................................................27
ITEM 7A:     QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK..............................39
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......................................44
ITEM 11:     EXECUTIVE COMPENSATION..................................................................47
ITEM 12:     SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT..........................52
ITEM 13:     CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..........................................55

                                                 PART IV

ITEM 14:     EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.........................59
</TABLE>
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                                     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 Pegasus Satellite 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," "hope," "intend," "expect" and similar expressions are
intended to identify forward looking statements, although not all forward
looking statements contain these identifying words. 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 the risks described in ITEM 1: BUSINESS -Risk Factors and
elsewhere in this Report and, among others, the following: general economic and
business conditions, both nationally, internationally and in the regions in
which we operate; catastrophic events, including acts of terrorism;
relationships with and events affecting third parties like DirecTV, Inc. and the
National Rural Telecommunications Cooperative; litigation with DirecTV, Inc.;
the proposed merger of Hughes Electronics Corporation with EchoStar
Communications Corporation; 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; the cost of pursuing new
business initiatives; an expansion of land based communications systems;
technological developments and difficulties; an inability to obtain intellectual
property licenses and to avoid committing intellectual property infringement;
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. Readers are cautioned
not to place undue reliance on these forward looking statements, which speak
only as of the date hereof. We do not undertake any obligation to publicly
release any revisions to these forward looking statements to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.


         Unless the context otherwise requires, all references to "Pegasus
Satellite," "we" or "us" or "our company" refer to Pegasus Satellite
Communications, Inc., together with its direct and indirect subsidiaries. All
references to "Pegasus" or "Pegasus Communications" refer to our parent company,
Pegasus Communications Corporation.

ITEM 1: BUSINESS

General

         Pegasus Satellite is:

         o  a satellite TV company primarily focused on providing services to
            rural and underserved areas of the United States;

         o  one of the fastest growing media companies in the United States in
            terms of compound revenue growth rate;

         o  the tenth largest multichannel video provider in the United States
            and the third largest direct broadcast satellite ("DBS") provider;

                                       1
<PAGE>

         o  the largest independent distributor of DIRECTV programming  with
            approximately 1.5 million subscribers at December 31, 2001, the
            exclusive right to distribute DIRECTV digital broadcast satellite
            services to approximately 7.5 million rural households in 41 states
            and a retail network of over 3,000 independent retailers;

         o  the owner or programmer of eleven TV stations affiliated with either
            Fox, UPN or the WB.

         We have changed the way in which we report the number of our
subscribers, effective with the first quarter of 2002. If we had done this in
2001, we would have reported approximately 1.4 million subscribers at December
31, 2001. See ITEM 7: Management's Discussion and Analysis of Financial
Condition and Results of Operations- Results of Operations - Comparison of 2001
to 2000 - Direct Broadcast Satellite Business - Revenues.

Corporate Reorganization

         On February 22, 2001, we adopted a new holding company structure. In
the reorganization, all of our common and preferred stock became the common and
preferred stock of the new holding company, which assumed the name Pegasus
Communications Corporation. In the reorganization, we became a direct subsidiary
of the new holding company and adopted our current name. Our publicly held debt
securities remained with us, and, as a result of an exchange offer, the 12-3/4%
Series A cumulative exchangeable preferred stock of the new holding company was
exchanged for our 12-3/4% Series A cumulative exchangeable preferred stock.
Today, we, together with our subsidiary, Pegasus Media & Communications, Inc.,
own all of the public and bank debt of Pegasus Communications, whose Class A
common stock trades on the Nasdaq National Market under the symbol "PGTV."

Holding Company

         Pegasus Communications is a holding company and conducts substantially
all of its operations through its subsidiaries, including us.

         We, through our direct and indirect subsidiaries, distribute DIRECTV
programming using the name "Pegasus Satellite Television" and conduct most of
our broadcast television business.

Corporate Mission

         Our mission is to provide digital services to consumers in rural and
underserved areas of the United States. We are the only major digital services
provider focused exclusively on serving America's rural and underserved areas.
In the future, we hope to expand the scope of services that we can offer to
consumers and believe that the infrastructure of dealers and customer relations
that we have built and continue to refine will assist us in accomplishing our
mission.

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 approximately 11
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 and other wireline distribution systems
in rural areas.

         There are approximately 90 million people, 34 million households and
three million businesses located in rural areas of the United States. Rural
areas therefore represent a large and attractive market for DBS and other
digital satellite services. Approximately 55% of all U.S. DBS subscribers reside
in rural areas. It is our belief that future digital satellite services, such as
digital audio services and satellite broadband multimedia services, will also
achieve disproportionate success in rural areas as compared to metropolitan
areas.

                                       2
<PAGE>

         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.

         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 Satellite.

Pegasus Rural Focus and Strategy

         DBS services have achieved a penetration of more than 32% in rural
areas of the United States, as compared to approximately 11% in metropolitan
areas. We believe that other digital satellite services will achieve
disproportionately greater consumer acceptance in rural and underserved areas
than in metropolitan areas.

         Our long term goal is to become an integrated provider of DBS and other
digital satellite services for 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 and Obtaining Long Term, Higher Revenue Generating
            Subscribers, and to Reduce Our Subscriber Acquisition Costs.
            Although we still focus on expanding our subscriber base, our
            marketing efforts and sales approaches are increasingly geared to
            obtaining better quality subscribers: subscribers who are less
            likely to churn in the future and who are likely to be interested in
            more expansive and higher revenue generating programming packages.
            We also focus on reducing the costs we incur in obtaining new
            subscribers.

         o  Continue to Develop the Pegasus Retail Network and New Sales
            Channels. We have established our 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 our retail network to over 3,000 independent retailers in 41
            states. We believe that our 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 our retail network in order to increase the penetration of
            DIRECTV in rural areas while making our retail network more
            effective and valuable to us by continuing to eliminate dealers
            associated with high churn subscribers, developing incentives that
            reward dealers for obtaining longer term, better revenue generating
            subscribers, and selectively limiting dealer participation in
            certain sales programs. We are also expanding our marketing of
            DIRECTV beyond our traditional retail network channels. For
            instance, we are increasing the size and utilization of our own
            inside sales force and have or intend to enter into affinity
            programs and arrangements like certificate programs where we can
            generate sales through sales only arrangements in which retailers
            receive compensation for sales but will not be responsible for
            equipment delivery and installation.

                                       3
<PAGE>

         o  Generate Future Growth By Bundling Additional Digital Satellite
            Services with Our Distribution of DIRECTV Programming. New digital
            satellite services, such as digital audio services, broadband
            multimedia services and mobile satellite services are or will be
            increasingly introduced to consumers and businesses in the next five
            years. We believe that 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 our retail network and our other sales channels will
            enable us to establish relationships with digital satellite service
            providers that will position us to capitalize on these new
            opportunities. For more information on these new digital satellite
            services see -Other Digital Broadband Satellite Services.

Direct Broadcast Satellite Television

         There are currently two nationally branded DBS programming services:
DIRECTV, which is a service of DirecTV, Inc., a subsidiary of Hughes Electronic
Corporation, and The DISH Network, which is owned by EchoStar Communications
Corporation. Hughes and EchoStar have agreed to merge, which merger if
consummated would combine these services.

         Both 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 DISH require a satellite dish of
approximately 18 inches in diameter that may be installed by the consumer
without professional assistance. As of December 31, 2001, the market shares of
DIRECTV and DISH among all DBS subscribers nationally were approximately 61% and
39%, respectively.

DIRECTV

         DIRECTV offers in excess of 225 entertainment channels of near laser
disc quality video and compact disc quality audio programming. DIRECTV currently
transmits via six high power Ku band satellites. We believe that DIRECTV's
extensive line up of 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 programming in the future. DIRECTV reported
1.2 million net subscriber additions in 2001.

DIRECTV Rural Affiliates

         Prior to the launch of DIRECTV's programming service, Hughes
Electronics, which was succeeded by its subsidiary DirecTV, Inc., entered into
an agreement with the National Rural Telecommunications Cooperative authorizing
the National Rural Telecommunications Cooperative to offer its members and
affiliates the opportunity to acquire exclusive rights to distribute DIRECTV
programming services in rural areas of the United States. The National Rural
Telecommunications Cooperative is a cooperative organization whose members and
affiliates are engaged in the distribution of telecommunications and other
services in predominantly rural areas of the United States. Approximately 250
National Rural Telecommunications Cooperative members and affiliates initially
acquired such exclusive rights, thereby becoming DIRECTV rural affiliates. The
DIRECTV exclusive territories acquired by DIRECTV's rural affiliates initially
included approximately 9.0 million rural households.

                                       4
<PAGE>

Consolidation of DIRECTV Rural Affiliates

         When DIRECTV was launched in 1994, we were the largest of the original
DIRECTV rural affiliates, with a DIRECTV exclusive territory of approximately
500,000 homes in four New England states. In October 1996, we first acquired
exclusive distribution rights from another DIRECTV rural affiliate, thereby
beginning a process of consolidation that has significantly changed the
composition of DIRECTV's rural affiliates. Since October 1996, we have acquired
directly and indirectly through the April 1998 acquisition of Digital Television
Services, Inc. and the May 2000 acquisition of Golden Sky Holdings, Inc.,
exclusive distribution rights from approximately 166 DIRECTV rural affiliates.
Today, we represent approximately 83% of the DIRECTV exclusive territories held
by DIRECTV's rural affiliates, which includes approximately 7.5 million homes.
There are less than 100 remaining rural affiliates with exclusive DIRECTV
territories representing approximately 1.5 million homes. In 2001, we acquired
distribution rights from one other DIRECTV rural affiliate. In connection with
our ongoing litigation with DirecTV, our ability to consummate acquisitions has
been affected by DirecTV's refusal to approve assignments of National Rural
Telecommunications Cooperative member agreements for marketing and distribution
of DBS services without the imposition of conditions unacceptable to us.

Proposed Merger of EchoStar Communications Corporation into Hughes Electronics
Corporation

         On October 28, 2001, General Motors Corporation and its subsidiary
Hughes Electronics Corporation, together with EchoStar, announced that they had
signed definitive agreements that provide for the spin-offs of Hughes
Electronics from General Motors and the merger of EchoStar into Hughes
Electronics. The companies have stated that the merged entity would use the
EchoStar name and adopt the DIRECTV brand name for its services and retail
products. As reported, at December 31, 2001 the merged entity would have had
15.8 million customers, with another approximately 1.9 million customers being
served by the National Rural Telecommunications Cooperative and its affiliates,
including us. The spin-off and merger are subject to a number of conditions,
including shareholders approval, regulatory clearance under the Hart-Scott
Rodino Antitrust Act of 1976, and approval by the Federal Communications
Commission. The companies have stated that they expect the transaction to close
in the second half of 2002.

         We are still in the process of evaluating the impacts of the pending
merger on our business.

Programming

         DIRECTV programming includes (i) cable networks, broadcast networks
(including, where available, local into local channels) and audio services
available for purchase in tiers for a monthly subscription, (ii) premium
services available a la carte for a monthly subscription, (iii) sports
programming (including regional sports networks and seasonal college and major
professional league sports packages) available for a yearly, seasonal or monthly
subscription and (iv) movies and events available for purchase on a pay-per-view
basis.

         Our core programming packages consist of Select Choice, Total Choice
and Total Choice Plus. The following is a summary of these programming packages:

         o  Select Choice. Package of over 45 popular channels of news, sports
            and entertainment programming which retails for $24.99 per month.

         o  Total Choice. Over 105 channels of entertainment, including 31
            commercial free Music ChoiceSM digital audio channels, which retails
            for $34.99 per month.

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<PAGE>

         o  Total Choice Plus. All the programs included in Total Choice and 12
            channels of family oriented programming and 5 additional Music
            ChoiceSM channels, which retails for $38.99 per month.

In addition to our core programming packages, in designated market areas where
local channels are available, subscribers may obtain local network programming
for $6.00 per month.

         Pay-per-view movies are generally $3.99 per movie. Movies recently
released for pay-per-view are available for viewing on multiple channels at
staggered starting times so that a viewer generally would not have to wait more
than 30 minutes to view a particular pay-per-view movie.

         Subscribers may also subscribe to various premium services: STARZ!,
HBO, Showtime, Cinemax and Sports Pack. Effective February 2002, premium
services became available to subscribers at prices based upon the number instead
of the type of premium service selected. Prior to this time, pricing was based
upon the particular premium selected. As a consequence, under the new pricing
methodology, the monthly fees for premium services are $12 for one premium, $22
for two premiums, $31 for three premiums, $39 for four premiums and $46 for five
premiums.

Sales and Marketing

         In order to be competitive and generate long term, higher revenue
generating subscribers, we are increasingly developing flexibility and variety
in our sales programs.

         We offer programs whereby subscribers can purchase equipment from
our retail network or national retailers. As an alternative to subscribers
purchasing a DIRECTV system, under our Pegasus Digital One Plan, subscribers are
provided with equipment, consisting of one or more receivers, obtain DIRECTV
programming for a monthly programming fee, enter into an initial 12 month
commitment secured by credit card, and enjoy the benefits of free service
repair. Under this plan, we have title to and own the receivers and remote
controls provided to subscribers. Subscribers who terminate service but do not
return equipment and access cards are assessed equipment and access card
non-return fees.

         Beginning February 1, 2002, we require all of our new subscribers to
make an initial 12 month programming commitment. Failure to comply with the 12
month commitment, including, in some instances, suspension, discontinuance or
downgrading service, can result in the imposition of cancellation fees intended
to reimburse us in part for our cost of special introductory promotional offers,
equipment and installation subsidies and dealer commissions.

         In connection with the sale of DIRECTV programming, we from time to
time offer special free or reduced price programming offers. We provide these
offers in connection with acquisition of new subscribers or to encourage
existing subscribers to try additional programming.

         We also give dealers incentives to sell program offers depending upon
the mix of sales offers that we hope to achieve. Dealer incentives include the
availability of installation and equipment subsidies, commissions and the
payment of flex payments, which can be changed from time to time in accordance
with certain business rules that we establish to reward particular dealer
behavior.

         Beginning in the second quarter of 2002, we will be instituting a
certificate program whereby purchasers can purchase certificates and be entitled
to receive certain equipment, including, in some cases equipment at no cost, and
programming fee credits based upon the subscriber's credit score at the time of
activation. This initiative is intended to minimize our financial exposure to
subscribers who are more likely to churn for financial reasons while at the same
time providing incentives to attract new subscribers who meet certain credit
scoring criteria.

                                       6
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         Many of the markets that we serve are not passed by cable or are passed
by older cable systems with limited numbers of channels. We actively market our
DIRECTV programming to potential subscribers in this market segment as their
primary source of television programming. It is our belief that this market
segment will continue to be a source for new Pegasus Satellite subscribers in
the future.

Our Retail Network

         Our retail network is a network of over 3,000 independent satellite,
consumer electronics and other retailers serving rural areas. We began the
development of our retail network in 1995 in order to distribute DIRECTV in our
original DIRECTV exclusive territories in New England. We have expanded this
network into 41 states as a result of our acquisitions of DIRECTV rural
affiliates since 1996. Today, our retail network is one of the few sales and
distribution channels available to digital satellite service providers seeking
broad and effective distribution in rural areas throughout the continental
United States.

         We believe that the national reach of the Pegasus retail network has
positioned us to:

         o  improve the penetration of DIRECTV in the DIRECTV exclusive
            territories that we now own;

         o  assist DIRECTV in improving DIRECTV's DBS market share in rural
            areas outside of the DIRECTV exclusive territories held by the other
            DIRECTV rural affiliates; and

         o  offer providers of new digital satellite services, such as the
            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. For more
            information regarding our new digital satellite services, see -Other
            Digital Broadband Satellite Services.

         We have developed and are continuing to develop programs to make our
retail network more effective and valuable to us by eliminating dealers
associated with high churn subscribers, establishing eligibility requirements
for the sale of certain sales programs, and providing dealer incentive
compensation programs that reward dealers for the sales of particular sales
programs and the acquisition of better Pegasus Satellite Television subscribers.

         In order to facilitate the acquisition of subscribers by our retail
network, we have entered into certain distribution arrangements with national
distributors whereby our dealers can obtain DIRECTV equipment systems with, in
some cases, certain equipment subsidies provided by Pegasus.

Other Digital Broadband Satellite Services

         Our research tends to show that there is a significant and growing
market for broadband access to the Internet among both consumers and businesses.
In metropolitan areas, we believe that satellite broadband services will compete
with cable modem and telephone company DSL broadband services. However, in many
rural and underserved areas, cable modem or DSL broadband access services are
not currently available and broadband Internet access will likely be available
only via satellite and terrestrial wireless broadband access for the foreseeable
future. Because of our previous success in introducing DBS services to rural and
underserved areas, we believe that we will be well situated to introduce
satellite based broadband Internet access to rural and underserved areas, though
we cannot assure you that we will be successful.

                                       7
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         In May 2001, Pegasus Communications introduced Pegasus Express, a new
high speed satellite broadband Internet access service to consumers. The first
Pegasus Express service launched was "Pegasus Express powered by DirecWay"
pursuant to a July 19, 2000 agreement with Hughes Network Systems, a unit of
Hughes Electronics Corporation, which also owns DirecTV. The service requires
users to install a two way satellite dish and USB connected satellite modem and
offers users 400 kilobits-per-second downstream Internet access speeds via
satellite, as opposed to a maximum of 56 kilobits-per-second currently available
through dial-up modems. Our ability to offer Pegasus Express powered by DirecWay
is not limited to the territories in which we offer DIRECTV. As of December 31,
2001, we had approximately 5,100 "Pegasus Express powered by DirecWay"
subscribers. Aside from offering "Pegasus Express powered by DirecWay," we
anticipate delivering Internet services through technology not based on DirecWay
and offering services to businesses.

Broadcast Television

         We own or operate eleven TV stations affiliated with Fox, UPN, or the
WB located in the Jackson, Mississippi; Chattanooga, Tennessee; Gainesville,
Florida; Tallahassee, Florida; Wilkes-Barre/Scranton, Pennsylvania; Portland,
Maine; and Mobile, Alabama/Pensacola, Florida markets. We have purchased or
launched TV stations affiliated with the "emerging networks" of Fox, UPN and the
WB, 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 accordingly afford us greater
opportunities for increasing their revenue share. In addition, we have entered
into "local marketing agreements" in markets where we already own a station.
These agreements, which allow us to program the broadcast hours of a station we
do not own and to sell the advertising for that time, provide additional
opportunities for increasing revenue share with limited additional operating
expenses. However, the FCC has adopted changes to its ownership rules which in
most instances would prohibit us from expanding in our existing markets through
local marketing agreements and may require us to modify or terminate our
existing agreements. We have entered into local marketing agreements 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.

Competition

         Our DBS business competes with a number of different sources which
provide news, information and entertainment programming to consumers, including:

         o  EchoStar;

         o  internet companies;

         o  local television broadcast stations that provide off-air programming
            which can be received using a roof top antenna and television set;

         o  satellite master antenna television systems, commonly known as
            SMATV, which generally serve condominiums, apartment and office
            complexes and residential developments;

         o  cable television systems;

                                       8
<PAGE>

         o  wireless program distribution services, commonly called wireless
            cable systems, which use low power microwave frequencies to transmit
            video programming over the air to subscribers;

         o  other operators who build and operate communications systems in the
            same communities that we serve;

         o  movie theaters; and

         o  home video products.

Each of these 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 our direct
satellite business.

         Our TV stations compete for audience share, programming and advertising
revenue with other television stations in their respective markets and with
cable operators and other advertising media. 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.

         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 its businesses. For more potential
risks related to competition, see -Risk Factors --Other Risks of Our
Business--We Face Significant Competition; the Competitive Landscape Changes
Constantly.

Employees

         As of December 31, 2001, we had 1,022 full time and 426 part time
employees. We are not a party to any collective bargaining agreements and we
consider our relations with our employees to be good.

Direct Broadcast Satellite 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 United States Satellite
Broadcasting Company, Inc. for the sale of five transponders on the first
satellite. In an agreement concluded in 1994, Hughes offered members and
affiliates of the National Rural Telecommunications Cooperative the opportunity
to become the exclusive providers of certain DBS services using the DIRECTV
satellites at the 101(degree) W orbital location, generally including DIRECTV
programming, to specified residences and commercial subscribers in rural areas
of the U.S. The National Rural Telecommunications Cooperative is a cooperative
organization whose members and affiliates are engaged in the distribution of
telecommunications and other services in predominantly rural areas of the U.S.
National Rural Telecommunications Cooperative members and affiliates that
participated in its DBS program acquired the rights to provide the DBS services
described above in their service areas. The service areas purchased by
participating National Rural Telecommunications Cooperative members and
affiliates comprise approximately nine million television households and were
initially acquired for aggregate commitment payments exceeding $100 million.

                                       9
<PAGE>

         We are an affiliate of the National Rural Telecommunications
Cooperative, participating through agreements in its DBS program. The agreement
between Hughes (and DirecTV as its successor) and the National Rural
Telecommunications Cooperative, and related agreements between the National
Rural Telecommunications Cooperative and its participating members and
affiliates, provide those members and affiliates with substantial rights and
benefits from distribution in their service areas of the DBS services, including
the right to set pricing, to retain all subscription remittances and to appoint
sales agents. In exchange for such rights and benefits, the participating
members and affiliates made substantial commitment payments to DirectTV. In
addition, the participating members and affiliates are required to reimburse
DirecTV for their allocable shares 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% fee on subscription
revenues.

         DirecTV has disputed the extent of the rights held by the participating
National Rural Telecommunications Cooperative members and affiliates. See -Legal
Proceedings--DirecTV Litigation. Those disputes include the rights asserted by
participating members and affiliates:

         o  to provide all services offered by DirecTV that are transmitted over
            27 frequencies that the FCC has authorized for DirecTV's use for a
            term running through the life of satellites at the 101(degree) W
            orbital location;

         o  to provide certain other services over the satellites; and

         o  to have the National Rural Telecommunications Cooperative exercise a
            right of first refusal to acquire comparable rights in the event
            that DirecTV elects to launch successor satellites upon the removal
            of the satellites from their orbital location at the end of their
            lives.

         Even if we and the National Rural Telecommunications Cooperative
prevail on our claims relating to right of first refusal, the financial terms of
the right of first refusal are likely to be the subject of negotiation and we
are unable to predict whether substantial additional expenditures by the
National Rural Telecommunications Cooperative will be required in connection
with the exercise of such right of first refusal.

         The agreements between the National Rural Telecommunications
Cooperative and participating National Rural Telecommunications Cooperative
members and affiliates terminate when the DIRECTV satellites are removed from
their orbital location at the end of their lives. Our agreements with the
National Rural Telecommunications Cooperative may also be terminated as follows:

         o  If the agreement between DirecTV and the National Rural
            Telecommunications Cooperative is terminated because of a breach by
            DirecTV, the National Rural Telecommunications Cooperative may
            terminate its agreements with us, but the National Rural
            Telecommunications Cooperative will be responsible for paying to us
            our pro rata portion of any refunds that the National Rural
            Telecommunications Cooperative receives from DirecTV.

         o  If we fail to make any payment due to the National Rural
            Telecommunications Cooperative or otherwise breach a material
            obligation of our agreements with the National Rural
            Telecommunications Cooperative, the National Rural
            Telecommunications Cooperative may terminate our agreement with the
            National Rural Telecommunications Cooperative in addition to
            exercising other rights and remedies against us.

                                       10
<PAGE>

         o  If the National Rural Telecommunications Cooperative's agreement
            with DirecTV is terminated because of a breach by the National Rural
            Telecommunications Cooperative, DirecTV is obligated to continue to
            provide DIRECTV programming to us by assuming the National Rural
            Telecommunications Cooperative's rights and obligations under the
            National Rural Telecommunications Cooperative's agreement with
            DirecTV or under a new agreement containing substantially the same
            terms and conditions as the National Rural Telecommunications
            Cooperative's agreement with DirecTV.

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

         The National Rural Telecommunications Cooperative has adopted a policy
requiring any party acquiring DIRECTV distribution rights from a National Rural
Telecommunications Cooperative member or affiliate to post a letter of credit to
secure payment of National Rural Telecommunications Cooperative's billings when
acquisitions occur and when monthly payments to the National Rural
Telecommunications Cooperative exceeds a specified amount. Pursuant to this
policy, we or our subsidiaries have posted at December 31, 2001 letters of
credit of approximately $59.0 million. Although this requirement can be expected
to reduce borrowing capacity available to us under our revolving credit
facility, we expect this reduction to be manageable. There can be no assurance,
however, that the National Rural Telecommunications Cooperative will not in the
future seek to institute other policies, or to change this policy, in ways that
would be material to us.

         On August 9, 2000, two of our subsidiaries, Pegasus Satellite
Television, Inc. and Golden Sky Systems, Inc. entered into agreements with
DirecTV to provide seamless marketing and sales for DIRECTV retailers and
distributors and to provide seamless customer service to all of our existing and
prospective customers pursuant to a seamless marketing program agreement and a
seamless consumer program agreement, respectively. Under the terms of the
seamless marketing program agreement, the parties agreed to reimburse each other
the costs incurred in the activation of new customers in their respective
territories and dealers receive compensation regardless of where a customer
activates service. The seamless marketing agreement has become the subject of
litigation between us and DirecTV and we exercised our rights to terminate the
agreement on July 13, 2001. For more information concerning the on going
litigation pertaining to the seamless marketing agreement, see ITEM 3: Legal
Proceedings--DirecTV Litigation--Pegasus Satellite Television and Golden Sky
Systems.

         The seamless consumer program agreement allows us to provide customers
more expansive service selection during activation and a simplified and
consolidated billing process. In particular, we have the right to provide our
customers with video services currently distributed by DirecTV from certain
frequencies, including the right to provide the premium services HBO, Showtime,
Cinemax and The Movie Channel, which are the subject of litigation between
DirecTV and Pegasus Satellite, as well as sports programming and local TV
stations. Under the seamless consumer program agreement, we retain 10% to 20% of
the revenues associated with these additional programming services. The
agreement is terminable by DirecTV on 90 days notice.

                                       11
<PAGE>

Legislation and Regulation

         In February 1996, Congress passed the Telecommunications Act, which
substantially amended the Communications Act. This legislation has altered and
will continue to alter federal, state and local laws and regulations affecting
the communications industry, including us and certain of the services we
provide.

         On November 29, 1999, Congress enacted the Satellite Home Viewer
Improvement Act of 1999 ("SHVIA"), which amended the Satellite Home Viewer Act.
This Act, for the first time, permits DBS operators to transmit local television
signals into local markets. In other important statutory amendments of
significance to satellite carriers and television broadcasters, the law
generally seeks to place satellite operators on an equal footing with cable
television operators in regards to the availability of television broadcast
programming.

         Unlike a cable operator or a common carrier (such as a telephone
company), 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 us. As an
operator of a privately owned U.S. satellite system, DirecTV is subject to the
regulatory jurisdiction of the FCC, primarily with respect to:

         o  the licensing of individual satellites (i.e., the requirement that
            DirecTV meet minimum financial, legal and technical standards);

         o  avoidance of interference with radio stations; and

         o  compliance with rules that the FCC has established specifically for
            DBS licenses, including rules that the FCC is in the process of
            adopting to govern the retransmission of television broadcast
            stations by DBS operators.

         As a distributor of television programming, DirecTV is also affected by
numerous other laws and regulations. The Telecommunications Act clarifies that
the FCC has exclusive jurisdiction over direct-to-home satellite services and
that criminal penalties may be imposed for piracy of direct-to-home satellite
services. The Telecommunications Act also offers direct-to-home operators relief
from private and local government imposed restrictions on the placement of
receiving antennae. In some instances, direct-to-home 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 has 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 Telecommunications Act
also preempted local (but not state) governments from imposing taxes or fees on
direct-to-home services, including DBS.

                                       12
<PAGE>

         In addition to regulating pricing practices and competition within the
franchise cable television industry, the Communications Act is intended to
establish and support existing and new multi-channel video services, such as
wireless cable and direct-to-home, and to provide subscription television
services. We and DirecTV have benefited from the programming access provisions
of the Communications 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 Communications 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 us. The prohibition on exclusive
programming contracts between cable affiliated programmers and cable operators
will expire in October 2002 unless the FCC extends such restrictions.

         The FCC has adopted rules imposing public interest requirements for
providing video programming on direct-to-home 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,
direct-to-home providers must make capacity available to "national educational
programming suppliers" at rates not exceeding 50% of the direct-to-home
provider's direct costs of making the capacity available to the programmer.

         SHVIA amends the Copyright Act and the Communications Act in order to
clarify the terms and conditions under which a DBS operator may retransmit local
and distant broadcast television stations to subscribers. The new law was
intended to promote the ability of satellite services to compete with cable
television systems and to resolve disputes that had arisen between broadcasters
and satellite carriers regarding the delivery of broadcast television station
programming to satellite service subscribers. As a result of SHVIA, our
television stations are generally entitled to seek carriage on any DBS
operator's system providing local-into-local service in their respective
markets.

         SHVIA creates a new statutory copyright license applicable to the
retransmission of broadcast television stations to DBS subscribers located in
their markets. Although there is no royalty payment obligation associated with
this new license, eligibility for the license is conditioned on the satellite
carrier's compliance with the applicable Communications Act provisions and FCC
rules governing the retransmission of such "local" broadcast television stations
to satellite service subscribers. Noncompliance with the Communications Act
and/or FCC requirements could subject a satellite carrier to liability for
copyright infringement.

         The amendments to the Communications Act contained in SHVIA provide
that, until May 29, 2000, a DBS operator was permitted to retransmit a broadcast
television station to satellite subscribers in the station's local market
without the station's consent. Beginning May 29, 2000 and continuing until
December 31, 2001, satellite carriers were able to carry local television
stations on a station by station basis if a retransmission consent agreement has
been reached. As of January 1, 2002, a satellite carrier that relies on the
statutory copyright license to retransmit a broadcast station to subscribers in
the station's local market is required to retransmit any other broadcast station
in that market that has elected to assert its right to mandatory carriage and
has so notified the satellite carrier. Broadcast stations in markets where a
satellite carrier is retransmitting a local signal were required to make their
election by July 1, 2001; carriers receiving such notice have 30 days to
respond. The initial election remains in effect until December 31, 2005;
thereafter, broadcasters will make new elections every three years. In December
2001, the U.S. Court of Appeals for the 4th Circuit rendered a decision
upholding the carry-one, carry-all provisions of SHVIA; however, that decision
has been appealed to the Supreme Court.

                                       13
<PAGE>

         Other provisions contained in SHVIA address the retransmission by a
satellite service provider of a broadcast television station to subscribers who
reside outside the local market of the station being retransmitted. A DBS
provider may retransmit such "distant" broadcast stations affiliated with the
national broadcast television networks to those subscribers meeting certain
specified eligibility criteria which the FCC is directed to implement. The
primary determinant of a subscriber's eligibility to receive a distant affiliate
of a particular network is whether the subscriber is able to receive a "Grade B"
strength signal from an affiliate of that network using a conventional rooftop
broadcast television antenna. As required by SHVIA, the FCC also has adopted
rules subjecting the satellite retransmission of certain distant stations to
program "blackout" rules. These rules are similar to rules currently applicable
to the retransmission of distant broadcast television stations by cable systems.
The FCC has commenced a proceeding to consider the application of these rules to
the carriage of digital signals.

         SHVIA also makes a number of revisions to the statutory copyright
license provisions applicable to the retransmission of distant broadcast
television stations to satellite service subscribers. These changes include
reducing the monthly per subscriber royalty rate payable under the distant
signal compulsory copyright license and creating a new compulsory copyright
license applicable to the retransmission of a national PBS programming feed. The
compulsory copyright license applicable to the retransmission of distant
broadcast signals to satellite service subscribers will expire on January 1,
2005, unless it is extended by Congress. If the license expires, DBS operators
will be required to negotiate in the marketplace to obtain the copyright
clearances necessary for the retransmission of distant broadcast signals to
satellite service subscribers.

         The final outcome of ongoing and future FCC rulemakings, and of any
litigation pertaining thereto, cannot yet be determined. Any regulatory changes
could adversely affect our operations. Must carry requirements could cause the
displacement of possibly more attractive programming.

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

Risk Factors

         We Have a History of Substantial Losses; We Expect Them to Continue;
         Losses Could Adversely Affect Our Access to Capital Markets

         We have never made a profit, except in 1995, when we had a $10.2
million extraordinary gain. In 2001, 2000 and 1999, we incurred losses from
continuing operations of $283.4 million, $213.7 million and $184.2 million,
respectively. We do not expect to have net income for the foreseeable future
because of interest expense on our debt and because of amortization associated
with intangible assets. Our interest and amortization expenses were $136.2
million and $245.4 million, respectively, for 2001, $122.1 million and $187.1
million, respectively, for 2000 and $64.9 million and $84.2 million,
respectively, for 1999.

         We Have a Substantial Amount of Indebtedness; Our Indebtedness Could
         Adversely Affect Our Business, Operating Results and Financial
         Condition

         We have a significant amount of indebtedness. Our indebtedness could
have important consequences for you. For example, it could:

         o  increase our vulnerability to generally adverse economic and
            industry conditions;
         o  require us to dedicate a substantial portion of our cash to pay
            indebtedness, thereby reducing the availability of cash for working
            capital, capital expenditures, acquisitions and other activities;

                                       14
<PAGE>

         o  limit our flexibility in planning for, or reacting to, changes in
            our business and the industries in which we operate; and
         o  place us at a competitive disadvantage compared to our competitors
            that have less debt.

         The following shows certain important information about us.
<TABLE>
<CAPTION>
                                                                       Actual
         (dollars in thousands)                                at December 31, 2001
                                                               --------------------
<S>                                                            <C>
         Total long term debt, including current portion               $1,338,651
         Total common stockholder's equity                               $359,516
         Debt to equity ratio                                                 3.7
</TABLE>

         Our earnings were inadequate to cover our combined fixed charges and
preferred stock dividends by $443.8 million, $375.9 million and $200.3 million
for the years ended December 31, 2001, 2000 and 1999, respectively.

         We and Our Subsidiaries May Still Be Able to Incur Substantially More
         Debt Which Could Exacerbate the Risks Described Above

         We and our subsidiaries may be able to incur substantial additional
indebtedness. If new debt is added to our current debt levels, the risks
described above that we now face could intensify. At December 31, 2001, the
revolving credit facility of Pegasus Media & Communications would permit
additional borrowings of up to $59.1 million.

         We May Not Be Able to Generate Enough Cash to Service Our Debt

         Our ability to make payments on and to refinance our indebtedness and
to fund planned capital expenditures and other activities will depend on our
ability to generate cash in the future. This, to a certain extent, is subject to
general economic, financial, competitive, legislative, regulatory and other
facts, including the other risks described below, that are beyond our control.
Accordingly, we cannot assure you that our business will generate sufficient
cash flow to service our debt. Net cash used by our operating activities was
$128.8 million, $58.6 million and $84.3 million for 2001, 2000, and 1999,
respectively.

         At December 31, 2001, our total long term debt was $1.3 billion, of
which $8.7 million was due within 12 months. As of December 31, 2001, we believe
available cash on hand and availability under our credit facilities will be
adequate to meet our future liquidity needs for at least the next 12 months. See
ITEM 7: Management's Discussion and Analysis of Financial Condition and Results
of Operations--Liquidity and Capital Resources.

         We cannot assure you that:

         o  our business will generate sufficient cash flow from operations; or

         o  future borrowings will be available to us in amounts sufficient to
            pay our indebtedness, or to fund other liquidity needs.

                                       15
<PAGE>

         We May Lose Customers if Satellite and Direct Broadcast Satellite
         Technology Fails or is Impaired

         If any of the DIRECTV satellites are damaged or stop working partially
or completely, DirecTV may not be able to continue to provide its customers with
programming services. We would in turn likely lose customers, which could
materially and adversely affect our operations, financial performance and our
ability to pay our debt obligations or pay dividends on our preferred stock.

         DBS technology is highly complex and is still evolving. As with any
high technology product or system, it may not function as expected. For example,
the satellites at the 101(degree) W orbital location may not last for their
expected lives. In July 1998, DirecTV reported that the primary spacecraft
control processor failed on one of their satellites, DBS-1. As it was designed
to do, the satellite automatically switched to its on-board spare processor with
no interruption of service to DIRECTV subscribers. A more substantial failure of
the DIRECTV DBS system could occur in the future.

         Events at DirecTV Could Adversely Affect Us

         Although we are engaged in other digital broadband satellite services
and broadcast television services, our primary source of revenue is derived from
our distribution of DirecTV's DBS programming. For the years ended December 31,
2001, 2000 and 1999, approximately 96%, 94% and 89%, respectively, of our total
revenue resulted from our distribution of DIRECTV or activities substantially
related to this distribution.

         Because we are an intermediary for DirecTV, events we do not control at
DirecTV could adversely affect us. One of the most important of these is
DirecTV's ability to provide programming that appeals to mass audiences. DirecTV
generally does not produce its own programming; it purchases programming from
third parties. DirecTV's success - and accordingly ours - depends in large part
on its ability to select popular programming sources and acquire access to this
programming on favorable terms. We have no control or influence over this. If
DirecTV is unable to retain access to its current programming, we cannot assure
you that DirecTV would be able to obtain substitute programming, or that such
substitute programming would be comparable in quality or cost to its existing
programming. If DirecTV is unable to continue to provide desirable programming,
we would be placed at a competitive disadvantage and may lose customers and
revenues.

         Because DirecTV is a subsidiary of Hughes Electronics Corporation,
which in turn is a subsidiary of General Motors Corporation, events at General
Motors and Hughes Electronics may impact DirecTV and could adversely affect us.
On October 28, 2001, General Motors and Hughes Electronics together with
EchoStar Communications Corporation announced that they had signed definitive
agreements that provide for the spin-off of Hughes Electronics from General
Motors and the merger of EchoStar into Hughes Electronics. The spin-off and
merger are subject to a number of conditions, including shareholder approval,
regulatory clearance under the Hart-Scott-Rodino Antitrust Act of 1976, and
approval by the Federal Communications Commission. The companies have stated
that they expect the transaction to close in the second half of 2002. We are
evaluating the effects of this transaction upon our business, but are unable to
predict the full scope and nature of the effect of the transaction at this time.

         For further information regarding events at DirecTV, see -Proposed
Merger Between EchoStar Communications Corporation and Hughes Electronic
Corporation.

                                       16
<PAGE>

         Programming Costs May Increase, Which Could Adversely Affect Our Direct
         Broadcast Satellite Business

         Program suppliers could increase the rates they charge DirecTV for
programming, increasing our costs. Increases in programming costs could cause us
to increase the rates we charge customers and, as a result, we could lose
customers.

         FCC regulations require programming suppliers affiliated with cable
companies to provide programming to all multi-channel distributors - including
DirecTV - on nondiscriminatory terms. Some of the rules implementing this law
are scheduled to expire on October 5, 2002. If these rules are not extended,
DirecTV could lose its access to programming, including prime-time programming.
If a significant amount of programming becomes unavailable, we may lose
customers and our revenues and financial performance could be adversely
affected.

         Our Ability to Provide DIRECTV Products May Be Limited by the Outcome
         of Litigation with DirecTV

         Our ability to offer DIRECTV may be affected by the outcome of
litigation between DirecTV and the National Rural Telecommunications Cooperative
and between DirecTV and us. DirecTV has filed counterclaims in this litigation
in which it is contesting the term of our and the National Rural
Telecommunications Cooperative's agreements. DirecTV is contending that the term
of its agreement with the National Rural Telecommunications Cooperative and the
National Rural Telecommunications Cooperative's agreement with us is measured
only by the orbital life of DBS-1, the first DIRECTV satellite launched, while
it is our position that the term is measured by the orbital lives of other
DIRECTV satellites at the 101(Degree)W orbital location. In addition, in its
counterclaim, DirecTV is also contesting the scope and term of a right of first
refusal provided to the National Rural Telecommunications Cooperative in its
agreement with DirecTV, and whether we have any right of first refusal in our
agreements with the National Rural Telecommunications Cooperative.

         If DirecTV were to succeed in its counterclaims, the initial term of
the agreements could be significantly shorter than we believe is provided for in
the agreements. Exactly how much shorter is not possible to predict because it
depends on the orbital lives of the respective satellites. In addition, we may
not have a right of first refusal to distribute DIRECTV services after this
initial term.

         Based upon the outcome of this litigation, we may or may not be able to
continue offering DIRECTV products after the initial term of our agreement with
the National Rural Telecommunications Cooperative. As a result, the outcome of
this litigation could have a material adverse effect on our DBS business.
Furthermore, if we can continue to offer DIRECTV products after the initial term
of our agreement with the National Rural Telecommunications Cooperative, we
cannot predict what it will cost us to do so.

         The outcome of this litigation may also be impacted by the pending
merger of EchoStar into Hughes Electronics. For further information regarding
this pending transaction, see - Proposed Merger of EchoStar Communications
Corporation into Hughes Electronics Corporation.

         The Effect of Federal Satellite Television Legislation on Our Business
         Is Unclear

         On November 29, 1999, The Satellite Home Viewer Improvement Act of 1999
("SHVIA") became law. SHVIA addresses many of the issues between the broadcast
television networks and the DBS industry regarding retransmission of network
programming to DBS subscribers. Generally, SHVIA permits the DBS industry to
retransmit the signal of a broadcast television station to subscribers in the
station's local market, subject to certain conditions. To that end, SHVIA grants
DBS providers a compulsory copyright license to retransmit a local television
station's signal back into the station's local market. In return for this
compulsory license, if a DBS provider retransmits the signal of one local
station it must also retransmit every other local television station in the
market that requests carriage. This requirement is often referred to as
"carry-one, carry-all." In addition, SHVIA also extends, through December 31,
2004, the industry's statutory copyright license to retransmit distant broadcast
television programming and establishes the royalty rate applicable to such
retransmissions. In the case of the retransmission of distant network
programming, SHVIA preserves and clarifies the limitation that such
retransmissions be made only to subscribers in "unserved" areas. SHVIA also
directs the FCC to adopt regulations implementing various conditions and
requirements applicable to the retransmission of broadcast television signals by
a satellite carrier.

                                       17
<PAGE>

         Several entities, including DirecTV and EchoStar, have challenged the
"carry-one, carry-all" aspect of SHVIA. Proceedings relating to this legislation
currently are pending at the FCC and in the federal courts, arguing that the
must carry provisions of SHVIA rules are unconstitutional. In December 2001, the
U.S. Court of Appeals for the 4th Circuit rendered a decision upholding the
carry-one, carry-all provisions of the rules; however, this decision has been
appealed to the Supreme Court. The effect on our business of these FCC actions
and other studies and rulemakings that the FCC will undertake cannot be
predicted at this time.

         We Could Lose Money Because of Signal Theft

         If signal theft becomes widespread, our revenues would suffer. Signal
theft has long been a problem in the cable and DBS industries, and, while
DirecTV uses encryption technology in an attempt to prevent people from
receiving programming without paying for it, the technology is not foolproof and
even as the technology has changed, it may be compromised.

         We Could Lose Revenues if We Have Out of Territory Subscribers

         While we have exclusive rights to distribute DIRECTV products in our
territories, our agreements with the National Rural Telecommunications
Cooperative, and its agreement with DirecTV, do not allow us to have customers
outside our territories. If it turns out that large numbers of our subscribers
are not in our territories, we would lose substantial revenues when we
disconnect them, we could owe DirecTV revenue we previously collected from them,
and it might be grounds for DirecTV to terminate our distribution rights. We
could also face legal consequences for having subscribers in Canada, where
DIRECTV reception is illegal.

         Direct Broadcast Satellite Services Face Competition from Cable
         Operators

         One of the competitive advantages of DBS systems is their ability to
provide customers with more channels and a better quality digital signal than
traditional analog cable television systems. Many cable television operators
have made significant investments to upgrade their systems from analog to
digital, significantly increasing the number and variety of channels and the
quality of the transmission they can provide to their customers. As a result of
these upgrades, cable television operators have begun to compete on a more
extensive basis with DBS providers. Nationwide, DBS served approximately 17.6
million households in 2001, compared to approximately 13.7 million households
served by digital cable television operators. We anticipate that near term
projections for DBS subscriptions will remain ahead of those projections for
cable television operators, however, we cannot be certain that DBS services will
continue to surpass digital cable services in the long term. Cable television
operators have a large, established customer base, and many cable operators have
significant investments in, and access to, programming. If competition from
cable television operators should increase in the future, we could experience a
decrease in our number of subscribers or increased difficulty in landing new
subscriptions.

                                       18
<PAGE>

         Direct Broadcast Satellite Equipment Shortages Could Adversely Affect
         Our Direct Broadcast Business

         There have been periodic shortages of DBS equipment and there may be
shortages in the future. During such shortages, we may be unable to accept new
subscribers and, as a result, potential revenue could be lost. If we are unable
to obtain DBS equipment, or if we cannot obtain such equipment on favorable
terms, our subscriber base and revenues could be adversely affected.

         The Outcome of Proceedings to Implement Industry Regulations and to
         Approve and Maintain FCC Licenses Could Adversely Affect Our Business

         The DBS industry is subject to regulation by the FCC and, to a certain
extent, by international, state and local authorities. The Federal
Communications Act of 1934 ("Communications Act") established the FCC and gave
the agency the broad authority to regulate the use of the radio spectrum. Based
on the Communications Act, as amended, the FCC has general authority to
promulgate rules and regulations in order to ensure that the spectrum is used in
an efficient manner, consistent with the public interest, convenience and
necessity. In addition, in response to technological, economic, social and
political changes in the past seventy years, Congress has continued to shape the
Commission's role in spectrum management by amending the Communications Act
through numerous subsequent statutes. In addition, FCC proceedings to implement
the Communications Act are ongoing, and we cannot predict the outcomes of these
proceedings or their effect on our business. DirecTV depends on FCC licenses to
operate its digital broadcast satellite service. If the FCC cancels, revokes,
suspends, or fails to renew any of these licenses it could have a harmful effect
on us.

         We Face Significant Competition; the Competitive Landscape Changes
         Constantly

         Our DBS business faces competition from other multi-channel programming
distributors, including other DBS operators, direct to home distributors, cable
operators, wireless cable operators, Internet and local and long distance
telephone companies, which may be able to offer more competitive programming
packages or pricing than we or DirecTV can provide. We believe competition may
increase as cable operators continue to upgrade their systems to offer digital
signals and high speed internet access to customers. For more information
related to competition from cable operators, see - Risk Factors - Risks of Our
Direct Broadcast Satellite Business - Direct Broadcast Satellite Services Face
Competition from Cable Operators above. In addition, the DBS industry and the
multi-channel programming distribution industry are in a constant state of
technological, economic and regulatory change and 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.

         Competition may also be affected by consolidation among communications
providers. In particular, we are unable to predict the effect on us of the
pending merger of EchoStar into Hughes Electronics. For further information
regarding this pending transaction, see - Proposed Merger of EchoStar
Communications Corporation into Hughes Electronics Corporation.

                                       19
<PAGE>

         We may not be able to make Strategic Acquisitions; Acquisitions Could
         Disrupt Our Business and Affect Our Results of Operations

         We cannot assure you that we will continue to be able to identify
suitable acquisitions or investment opportunities. Even if we do, we may not be
able to make acquisitions or investments on commercially acceptable terms, if at
all.

         If we acquire a company, we may have difficulty assimilating its
businesses, products, services, technologies and personnel into our operations.
These difficulties could disrupt our ongoing business, distract our management
and workforce, increase our expenses and adversely affect our results of
operations. In addition, we may incur additional debt or be required to issue
equity securities to pay for future acquisitions or investments. If we finance
an acquisition by borrowing, we would increase our already high leverage and
interest expense, and if Pegasus issues securities in connection with future
acquisitions, the issuance could be dilutive to Pegasus' stockholders.

         We May Incur Significant Costs in Pursuing New Business Initiatives
         Which May Not Be Successful

         The telecommunications industry is characterized by rapid technological
change. In our industry, we face evolving industry and regulatory standards,
changing market conditions and frequent new product and service introductions
and enhancements. The introduction of products using new technologies or the
adoption of new regulatory standards can make existing products or products
under development obsolete or unmarketable. In order to grow and remain
competitive, we will need to adapt to these rapidly changing technologies,
enhance our existing products, and introduce new products to address our
customers' changing demands.

         A number of factors could prevent or inhibit us from providing these
products, including technological issues, our ability to obtain favorable FCC
approval and our ability to obtain the financing necessary to complete the
development of these products. In addition, these new products must meet the
requirements of our current and prospective customers and must achieve
significant market acceptability. If we fail to anticipate or respond on a cost
effective and timely basis to technological developments, changes in industry
and regulatory standards or custom requirements, or if we have any significant
delays in product development or introduction, our business, operating results
and financial condition could be affected in a material adverse way.

         Recent Terrorist Activities and Resulting Military and Other Actions
         Could Adversely Affect Our Business

         Terrorist attacks in New York and Washington, D.C. in September 2001
disrupted commerce throughout the United States and Europe. The continued threat
of terrorism within the United States and Europe or new acts of terrorism may
cause significant disruption to commerce throughout the world. To the extent
that such disruptions result in (1) delays or cancellations of customer orders,
(2) a general decrease in consumer spending on satellite broadcast and
information technology, (3) our inability to effectively market and distribute
our products, or (4) our inability to access capital markets, our business and
results of operations could be materially and adversely affected. We are unable
to predict whether the threat of terrorism or the responses thereto will result
in any long term commercial disruptions or if such activities or responses will
have any long term material adverse effect on our business, results of
operations or financial condition.

                                       20
<PAGE>

ITEM 2: PROPERTIES

         We own our corporate headquarters in Bala Cynwyd, Pennsylvania.

         Our DBS operations are headquartered in leased space in Marlborough,
Massachusetts, and we operate call centers out of this space and other leased
space in Louisville, Kentucky and Lenexa, Kansas. These leases expire on various
dates through 2007. Our Marlborough, Massachusetts facility provides for an
option to purchase the building for approximately $10.7 million. We have
exercised this option to purchase and are currently completing certain due
diligence and negotiating an agreement of sale relating to the purchase of this
property. In connection with our broadcast TV operations, we own or lease
various transmitting equipment and towers, television stations and office space.

ITEM 3: LEGAL PROCEEDINGS

DirecTV Litigation

         National Rural Telecommunications Cooperative

         On June 3, 1999, the National Rural Telecommunications Cooperative
filed a lawsuit in federal court against DirecTV seeking a court order to
enforce the National Rural Telecommunications Cooperative's contractual rights
to obtain from DirecTV certain premium programming formerly distributed by
United States Satellite Broadcasting Company, Inc. for exclusive distribution by
the National Rural Telecommunications Cooperative's members and affiliates in
their rural markets. The National Rural Telecommunications Cooperative also
sought a temporary restraining order preventing DirecTV from marketing the
premium programming in such markets and requiring DirecTV to provide the
National Rural Telecommunications Cooperative with the premium programming for
exclusive distribution in those areas. The court, in an order dated June 17,
1999, denied the National Rural Telecommunications Cooperative a preliminary
injunction on such matters, without deciding the underlying claims.

         On July 22, 1999, DirecTV responded to the National Rural
Telecommunications Cooperative's continuing lawsuit by rejecting the National
Rural Telecommunications Cooperative's claims to exclusive distribution rights
and by filing a counterclaim seeking judicial clarification of certain
provisions of DirecTV's contract with the National Rural Telecommunications
Cooperative. As part of the counterclaim, DirecTV is seeking a declaratory
judgment that the term of the National Rural Telecommunications Cooperative's
agreement with DirecTV is measured only by the orbital life of DBS-1, the first
DIRECTV satellite launched, and not by the orbital lives of other DIRECTV
satellites at the 101(degree)W orbital location. According to DirecTV, DBS-1
suffered a failure of its primary control processor in July 1998 and since that
time has been operating normally using a spare control processor. While the
National Rural Telecommunications Cooperative has a right of first refusal to
receive certain services from any successor DIRECTV satellite, the scope and
terms of this right of first refusal are also being disputed in the litigation,
as discussed below. This right is not expressly provided for in our agreements
with the National Rural Telecommunications Cooperative.

         If DirecTV were to prevail on its counterclaim, any failure of DBS-1
could have a material adverse effect on our DIRECTV rights, see ITEM 1: BUSINESS
-Risk Factors--Risks of Our Direct Broadcast Satellite Business--Our Ability to
Provide DIRECTV Products May Be Limited by the Outcome of Litigation with
DirecTV.

                                       21
<PAGE>

         On September 9, 1999, the National Rural Telecommunications Cooperative
filed a response to DirecTV's counterclaim contesting DirecTV's interpretations
of the end of term and right of first refusal provisions. On December 29, 1999,
DirecTV filed a motion for partial summary judgment. The motion sought a court
order that the National Rural Telecommunications Cooperative's right of first
refusal, effective at the termination of DirecTV's contract with the National
Rural Telecommunications Cooperative, does not include programming services and
is limited to 20 program channels of transponder capacity. On January 31, 2001,
the court issued an order denying DirecTV's motion in its entirety for partial
summary judgment relating to the right of first refusal.

         On August 26, 1999, the National Rural Telecommunications Cooperative
filed a separate lawsuit in federal court against DirecTV claiming that DirecTV
had failed to provide to the National Rural Telecommunications Cooperative its
share of launch fees and other benefits that DirecTV and its affiliates have
received relating to programming and other services. On November 15, 1999, the
court granted a motion by DirecTV and dismissed the portion of this lawsuit
asserting tort claims, but left in place the remaining claims asserted by the
National Rural Telecommunications Cooperative.

         Both of the National Rural Telecommunications Cooperative's lawsuits
against DirecTV have been consolidated for discovery and pre-trial purposes. A
trial date of December 2, 2002 has been set, although at this stage it is not
clear which of the lawsuits will be tried on that date.

         The National Rural Telecommunications Cooperative and DirecTV have also
filed indemnity claims against one another which pertain to the alleged
obligation, if any, of the National Rural Telecommunications Cooperative to
indemnify DirecTV for costs incurred in various lawsuits described herein. These
claims have been severed from the other claims in the case and will be tried
separately. Each side has filed a summary judgement motion relating to the
claims.

         Pegasus Satellite Television and Golden Sky Systems

         On January 10, 2000, our subsidiary, Pegasus Satellite Television, Inc.
and Golden Sky Systems, Inc., another affiliate of the NRTC which we acquired in
May 2000 to become one of our subsidiaries, filed a class action lawsuit in
federal court in Los Angeles against DirecTV as representatives of a proposed
class that would include all members and affiliates of the National Rural
Telecommunications Cooperative that are distributors of DIRECTV. The complaint
contained causes of action for various torts, common counts and declaratory
relief based on DirecTV's failure to provide the National Rural
Telecommunications Cooperative with certain premium programming, and on
DirecTV's position with respect to launch fees and other benefits, term and
right of first refusal. The complaint sought monetary damages and a court order
regarding the rights of the National Rural Telecommunications Cooperative and
its members and affiliates.

         On February 10, 2000, Pegasus Satellite Television and Golden Sky
Systems filed an amended complaint which added new tort claims against DirecTV
for interference with their relationships with manufacturers, distributors and
dealers of DBS equipment. The class action allegations they previously filed
were withdrawn to allow a new class action to be filed on behalf of the members
and affiliates of the National Rural Telecommunications Cooperative. The new
class action was filed on February 9, 2000.

         On December 10, 2000, the court rejected in its entirety DirecTV's
motion to dismiss certain of the claims asserted by Pegasus Satellite
Television, Golden Sky Systems and the putative class. On January 31, 2001, the
court denied in its entirety a motion for summary judgment filed by DirecTV
relating to the right of first refusal. The court also certified the plaintiff's
class on December 28, 2000.

                                       22
<PAGE>

         On March 9, 2001, DirecTV filed a counterclaim against Pegasus
Satellite Television, Golden Sky Systems and the class members. In the
counterclaim, DirecTV seeks two claims for relief: (i) a declaratory judgement
that Pegasus Satellite Television and Golden Sky Systems have no right of first
refusal in their agreements with the National Rural Telecommunications
Cooperative to have DirecTV provide any services after the expiration of the
term of these agreements, and (ii) an order that DBS-1 is the satellite (and the
only satellite) that measures the term of their agreements with the National
Rural Telecommunications Cooperative. Pegasus Satellite Television and Golden
Sky Systems' motion to dismiss the counterclaims was denied on May 8, 2001, and
on June 4, 2001, Pegasus Satellite Television, Golden Sky Systems and the class
filed a response denying DirecTV's counterclaims. On July 2, 2001, DirecTV filed
under seal a summary judgment motion on its term claim, but the Court denied the
motion on October 31, 2001.

         On May 21, 2001, Pegasus Satellite Television, Golden Sky Systems and
the class members moved to amend their complaints to add certain additional
claims against DirecTV relating to, among other things, DirecTV's provision of
advanced services. The court granted our motion on June 19, 2001. DirecTV filed
its answer to our second amended complaint on July 20, 2001.

         On June 22, 2001, DirecTV brought suit against Pegasus Satellite
Television and Golden Sky Systems in Los Angeles County Superior Court for
breach of contract and common counts. The lawsuit pertains to the seamless
marketing agreement dated August 9, 2000, as amended, between DirecTV, on the
one hand, and Pegasus Satellite Television and Golden Sky Systems, on the other
hand. On July 13, 2001, Pegasus Satellite Television and Golden Sky Systems
terminated the seamless marketing agreement. On July 16, 2001, Pegasus Satellite
Television and Golden Sky Systems filed a cross-complaint against DirecTV
alleging, among other things, that (i) DirecTV has breached the seamless
marketing agreement, and (ii) DirecTV has engaged in unlawful and/or unfair
business practices, as defined in Section 17200, et seq. of the California
Business and Professions Code. On July 19, 2001, Pegasus Satellite Television
and Golden Sky Systems removed the case from state to federal court. DirecTV
moved to remand the case back to state court but, on September 19, 2001, the
court denied DirecTV's motion. For more information regarding Pegasus'
agreements with DirecTV, see ITEM 1: Business--Direct Broadcast Satellite
Agreements.

         All five lawsuits discussed above, including both lawsuits brought by
the National Rural Telecommunications Cooperative, the class action and Pegasus
Satellite Television and Golden Sky System's lawsuit, are pending before the
same judge. The court has set a trial date of December 2, 2002, although, as
noted above, it is not clear whether all the lawsuits will be tried together.
For potential risks we face as a result of the outcome of this litigation, see
ITEM 1: Business--Risk Factors--Risks of Our Direct Broadcast Satellite
Business--Our Ability to Provide DIRECTV Products May Be Limited by the Outcome
of Litigation with DirecTV.

Patent Infringement Lawsuits

         Recent Patent Infringement Litigation. In December 2001, one of our
subsidiaries was served with a complaint in a patent infringement lawsuit (along
with DirecTV, Hughes Electronics, EchoStar Communications and others) by
Broadcast Innovations, L.L.C. The nature of the plaintiff's claims is not clear
from the complaint. We are in the process of evaluating the matter in order to
determine whether it is material to our business.

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.

                                       23
<PAGE>

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 2001.





                                       24
<PAGE>

                                     PART II

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

Market Information and Holders

          Our outstanding common stock currently consists of 200 shares of Class
B common stock, par value $0.01 per share, all of which is held by our parent
company, Pegasus Communications. There is no established public trading market
for any class of our common stock.

Dividend Policy

         We have not paid any cash dividends on our common stock within the two
most recent fiscal years. Payments of cash dividends on our common stock cannot
be made until all accrued dividends on our preferred stock have been paid. Our
ability to obtain cash with which to pay cash dividends is also limited by our
publicly held debt securities and bank agreements. We do not anticipate paying
cash dividends on our common stock in the foreseeable future. Our policy is to
retain cash for operations and expansion.

Recent Sales of Unregistered Securities

         On December 19, 2001, Pegasus Satellite completed a private offering of
$175 million in aggregate principal amount of senior notes that will mature on
January 15, 2010 and accrue interest at a rate of 11-1/4%. The 11-1/4% senior
notes due 2010 were offered and issued to CIBC World Markets Corp. and Bear,
Stearns & Co. Inc., as initial purchases and qualified institutional buyers
under Rule 144A of the Securities Act of 1933, as amended. A discount of 2-3/4%
of the offering was paid to the initial purchasers in connection with the
issuance of the 11-1/4% senior notes due 2010.

         All other sales for the period covered by this Report have been
previously reported by Pegasus Satellite on its Quarterly Reports on Form 10-Q
for the quarters ended March 31, 2001, June 30, 2001 and September 30, 2001.




                                       25
<PAGE>

ITEM 6: SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
In thousands                               1997           1998            1999           2000            2001
                                         --------       --------        --------       --------       ----------
<S>                                     <C>            <C>             <C>            <C>            <C>
Net revenues:
   DBS                                   $ 38,254       $147,142        $286,353       $582,075       $  838,208
   Other businesses                        31,876         34,311          36,415         35,433           34,281
                                         --------       --------        --------       --------       ----------
Total net revenues                       $ 70,130       $181,453        $322,768       $617,508       $  872,489
                                         ========       ========        ========       ========       ==========
Operating expenses:
   DBS                                   $ 49,057       $203,263        $395,767       $762,597       $1,003,374
   Other businesses                        25,130         28,606          34,260         37,138           56,237
Loss from continuing operations           (22,324)       (64,802)       (184,242)      (213,660)        (234,404)
Total assets                              380,862        890,634         881,838      2,605,386        2,149,036
Total long term debt (including
  current portion)                        208,355        559,029         684,414      1,182,858        1,338,651
Redeemable preferred stocks               111,264        126,028         142,734        491,843          183,503
DBS premarketing cash flow                 12,212         44,723          85,195        174,898          237,077
DBS EBITDA                                  6,239           (983)        (32,579)         4,900           92,007
Cash provided (used) by operating
   activities                               8,478        (21,962)        (84,291)       (58,614)        (128,794)
Cash used by investing activities        (142,109)       (97,001)       (138,569)      (162,863)         (60,192)
Cash provided by financing
   activities                             169,098        129,419         208,808        395,385          118,975
</TABLE>
         Since Pegasus Satellite's common stock is wholly owned by its parent
company, computations of per common share amounts and cash dividends are not
required nor presented.

         Comparability between years has been affected due to the number of
acquisitions we have made in each of the years presented. Our acquisitions of
Digital Television Services in April 1998 and Golden Sky Holdings in May 2000
were individually significant transactions that materially affected amounts in
the year of and subsequent to each acquisition. The total consideration for
Digital Television Services and Golden Sky Holdings was $336.5 million and $1.2
billion, respectively. In addition to these acquisitions, we completed 26
acquisitions in 1998, 15 in 1999, and 19 in 2000. Total consideration for these
other acquisitions was $132.1 million, $79.5 million, and $232.6 million,
respectively.

         DBS premarketing cash flow is calculated by taking the revenues of the
direct broadcast satellite business and deducting programming expense (excluding
promotional programming), other subscriber related expenses, and general and
administrative expenses. DBS EBITDA is DBS premarketing cash flow less
promotional programming, promotions and incentives, and advertising and selling
expenses. We present the DBS premarketing cash flow and DBS EBITDA because the
direct broadcast satellite business is our only significant segment and this
business forms the principal portion of our results of operations and cash
flows. DBS premarketing cash flow and DBS EBITDA 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. DBS premarketing cash flow and DBS EBITDA also do not
necessarily indicate whether our cash flow will be sufficient to fund working
capital, capital expenditures or to react to changes in our industry or the
economy generally. We believe that DBS premarketing cash flow and DBS EBITDA are
important because people who follow our industry frequently use these as
measures of financial performance and ability to pay debt service, and they are
measures that we, our lenders, and investors use to monitor our financial
performance and debt leverage. Although EBITDA is a common measure used by other
companies, our calculation of EBITDA may not be comparable with that of others.


                                       26
<PAGE>

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

         The following discussion of our financial condition and results of
operations should be read in conjunction with the consolidated financial
statements and related notes which are included on pages F-1 through F-27
herein.

General

         We underwent a corporate reorganization in the first quarter of 2001.
In the reorganization, all of our common and preferred stock, except for our
12-3/4% Series preferred stock, were recapitalized into 200 shares of newly
issued Series B common stock. All of our common stock is owned by our parent
company Pegasus Communications Corporation. We continued to be obligated under
debt securities and agreements after the reorganization that we held at the date
of the reorganization. Also in the reorganization, we distributed to Pegasus
Communications our subsidiary Pegasus Development Corporation, which held
investments in affiliates.

         We have a history of losses, with net losses of $285.2 million, $159.0
million, and $188.3 million in 2001, 2000, and 1999, respectively. Our losses
have been principally due to the substantial amounts we incurred for subscriber
acquisition costs, interest expense, and noncash depreciation and amortization.
We expect that these amounts will continue to be substantial. As a result, we do
not expect to have net income for the foreseeable future.

         A substantial portion of our business is derived from providing
multichannel direct broadcast satellite services as an independent provider of
DIRECTV audio and video programming in exclusive territories primarily within
rural areas of 41 states. DIRECTV is a service of DirecTV, Inc. For 2001, 2000,
and 1999, revenues from our direct broadcast satellite business were 96%, 94%,
and 89%, respectively, of total consolidated revenues in each respective year,
and operating expenses for this business were 91%, 92%, and 89%, respectively,
of total consolidated operating expenses in each respective year. Total assets
of the direct broadcast satellite business were 94% and 86% of total
consolidated assets for 2001 and 2000, respectively. Because we are a
distributor of DIRECTV, we may be adversely affected by any material adverse
changes in the assets, financial condition, programming, technological
capabilities, or services of DirecTV. See Item 1: Business-Risk Factors.
Separately, we are in litigation against DirecTV (see Note 16 of the notes to
consolidated financial statements). Additionally, Hughes Electronics
Corporation, which is the parent company of DirecTV, has agreed to merge with
EchoStar Communications Corporation, which owns the only other nationally
branded direct broadcast satellite programming service in the United States. At
this time, we are unable to predict the effect of our litigation with DirecTV or
the merger of EchoStar Communications and Hughes Electronics, should it occur,
on our financial position, results of operations, cash flows, and future
operations.

         In May 2000, we acquired Golden Sky Holdings in a transaction accounted
for as a purchase. Golden Sky Holdings through its subsidiaries holds the rights
to provide DIRECTV programming in various rural areas of 24 states. During 2000,
we completed 19 other acquisitions of independent providers of DIRECTV. These
acquisitions principally consisted of the rights to provide DIRECTV programming
in various rural areas of the United States.

Overview of the Direct Broadcast Satellite Sales and Distribution Channel

         This overview focuses on our direct broadcast satellite business, as
this is our only significant business segment. We believe this will assist with
understanding our results of operations, liquidity, and capital resources.

                                       27
<PAGE>

         Our primary means to obtain subscribers is through an independent
retail network channel. To a lesser extent, we also obtain subscribers through
our inside sales channel. In both channels, we create and launch the promotions
for our DIRECTV programming, equipment, and installations. In addition, we
specify the retail prices for our programming and establish the suggested retail
prices at which dealers sell or provide and install equipment. We also obtain
subscribers to our DIRECTV programming through national retail chains selling
DIRECTV under arrangements directly with DirecTV.

         Our independent retail network consists of dealer and distributor
relationships. Distributors purchase directly from manufacturers and maintain in
their inventory the equipment needed by subscribers to access our DIRECTV
programming. Distributors sell this equipment to dealers who in turn provide the
equipment to subscribers. Distributors directly charge the dealers for the
equipment they sell to them. Dealers enroll subscribers to our DIRECTV
programming, provide them with equipment, and arrange for installation of the
equipment. Dealers directly charge new subscribers for equipment, installation,
and set up at the point of enrollment. We also directly enroll subscribers,
provide equipment to them, and arrange for installation of the equipment through
our inside sales channel. In this channel, we charge new subscribers at the
point of enrollment for equipment, installation, and set up. Once subscribers
have been enrolled under either channel, they contact us directly to activate
programming.

         We offer a variety of incentives to our subscribers and to our
distributors and dealers. Incentives to subscribers consist of free or
discounted prices for our DIRECTV programming, equipment needed to access our
DIRECTV programming, and installation of equipment that accesses our DIRECTV
programming. We pay incentives directly to dealers and distributors in the form
of equipment subsidies, installation subsidies, and commissions.

          We incur subscriber acquisition costs when we add new subscribers for
our DIRECTV programming. These costs consist of the portion of programming costs
associated with promotional programming provided to subscribers; equipment costs
and related subsidies paid to distributors; installation costs and related
subsidies paid to dealers; dealer commissions; advertising and marketing costs;
and selling costs. Promotional programming costs, which are included in
programming expense on the statements of operations and comprehensive loss, are
charged to expense when incurred. Equipment costs and related subsidies and
installation costs and related subsidies, which are included in promotions and
incentives on the statements of operations and comprehensive loss, are charged
to expense when the equipment is delivered and the installation occurs,
respectively. Dealer commissions, advertising and marketing costs, and selling
costs, which are included in advertising and selling on the statements of
operations and comprehensive loss, are charged to expense when incurred.

         Certain subscriber acquisition costs are capitalized or deferred. Under
certain of our subscription plans for DIRECTV programming, we retain or take
title to equipment delivered to subscribers. The equipment costs and subsidies
related to this equipment are capitalized as fixed assets and depreciated. We
also have subscription plans for DIRECTV programming that contain commitment
periods and early termination fees for subscribers. Direct and incremental
subscriber acquisition costs associated with these plans are deferred in the
aggregate not to exceed the amounts of applicable termination fees, which are
less than the contractual revenue over the commitment period. These costs are
amortized over the period of the arrangement for which early termination fees
apply and are charged to amortization expense. Direct and incremental subscriber
acquisition costs consist of equipment costs and related subsidies not
capitalized as fixed assets, installation costs and related subsidies, and
dealer commissions. Direct and incremental subscriber acquisition costs in
excess of termination fee amounts are expensed immediately and charged to
promotion and incentives or advertising and selling, as applicable, in the
statements of operations and comprehensive loss.

         Principal revenue of our direct broadcast satellite business is earned
by providing DIRECTV programming on a subscription or on demand basis. Standard
subscriptions are recognized as revenue monthly at the amount earned by us and
billed based on the level of programming content subscribed to during the month.
Promotional programming provided to subscribers at discounted prices is
recognized as revenue monthly at the promotional amount earned and billed.
Revenue for on demand viewing is recognized at the amount billed in the month
when the programming is viewed and earned. Fees that we charge new subscribers
for set up upon initiation of service are deferred as unearned revenue and are
recognized as revenue over our expected subscriber life of five years. Equipment
used by our subscribers is an integral component of our service. Accordingly,
amounts we charge for equipment sold and installations are deferred as unearned
revenue and are recognized as revenue over our expected subscriber life. We do
not recognize revenue for equipment, installations, and promotional programming
provided free of charge.

                                       28
<PAGE>

         We believe that the accounting policies concerning subscriber
acquisition costs and revenues discussed above are critical to our DBS business
and our results of operations. Another accounting policy we consider to be
critical to our DBS business is the way we account for patronage from the
National Rural Telecommunications Cooperative ("NRTC") of which we are an
affiliate. The NRTC bills its members and affiliates the costs incurred by the
NRTC under its agreement with DirecTV, certain other costs incurred by the NRTC
relating to associated direct broadcast satellite projects, and margin on the
costs of providing direct broadcast satellite services pursuant to the NRTC
member agreement for marketing and distribution of direct broadcast satellite
services. The most notable service that the NRTC provides to us is programming
related to the DIRECTV programming we provide. We record as expenses the amounts
we pay to the NRTC. Members and affiliates that participate in the NRTC's
projects may be eligible to receive an allocation of the NRTC's net savings
(generally, amounts collected from NRTC members and affiliates in excess of the
NRTC's costs) in the form of a patronage distribution. Generally, each patron
who does business with the NRTC receives an annual distribution. The amount of
the distribution is based on the ratio of business a patron conducts with the
NRTC during a given fiscal year of the NRTC times the NRTC's net savings
available for patronage distribution for that year. Throughout each year, we
accrue a receivable from the NRTC based on our best estimate of our share of the
patronage distribution for that year, with an offsetting reduction to the
expenses that we recorded for the payments we made to the NRTC during the year.
The offsetting reduction can be significant. We adjust our accrual of the
estimated patronage distribution in the year that the distribution is received
and, accordingly, adjust the related expenses in and for the year the
distribution is received. Based on past experience, we expect that a majority of
the patronage distribution for 2001 to be made in 2002 will be tendered by the
NRTC in the form of patronage capital certificates that represent equity
interests in the NRTC. Also, we make significant estimates relating to the
useful lives and recoverability of our long lived assets. At December 31, 2001,
the net combined unamortized balance of our property and equipment and
intangibles was $1.8 billion, of which $1.6 billion was for our direct broadcast
satellite rights assets. In assessing the recoverability of our intangible
assets, we must make assumptions regarding estimated future cash flows and other
factors to determine the fair value of the respective assets. If these estimates
or their related assumptions change in the future, we may be required to record
impairment charges for these assets. Adjustments to the useful lives of or
impairment of the carrying amount of our direct broadcast satellite rights
assets could be significant to the results of our operations. Refer to "Summary
of Significant Accounting Policies" in the notes to consolidated financial
statements elsewhere herein for a description of other accounting policies
applicable to all of our businesses.

Results of Operations

Comparison of 2001 to 2000

         In this section, amounts and changes specified are for the year ended
December 31, 2001 compared to the year ended December 31, 2000, unless indicated
otherwise

         Direct Broadcast Satellite Business

         Revenues

         Revenues increased $256.1 million to $838.2 million. This increase was
due to an increase in the number of subscribers and to a lesser extent higher
average revenue per subscriber. The current year includes 12 months of the
revenues of Golden Sky Holdings that we acquired in May 2000 as well as 12
months of the revenues of the 19 other entities that we acquired in 2000. The
number of subscribers at December 31, 2001 was 1,519,000 compared to 1,403,000
at December 31, 2000, and the average number of subscribers during 2001 and 2000
was 1.5 million and 1.1 million, respectively. This increase was substantially
due to internal growth. At December 31, 2001, we had exclusive DIRECTV
distribution rights to approximately 7.5 million households. Our sales and
marketing efforts have increased our penetration within our territories to
approximately 20.2% at December 31, 2001 from 18.9% at December 31, 2000.
Average monthly revenue per subscriber was $47.86 and $44.80 for 2001 and 2000,
respectively. The increase in 2001 was primarily due to the impact from the
seamless consumer agreement in effect for 12 months in 2001 versus only three
months in 2000 and the rate increase for our core packages effected in the
fourth quarter 2001, partially offset by unfavorable buy rate trends in our pay
per view and a la carte revenue categories and the unfavorable migration of
subscribers to lower retail priced core packages. The seamless consumer
agreement with DirecTV became effective in the fourth quarter 2000. This
agreement gives us the right to provide our subscribers with additional DIRECTV
audio and video programming distributed by DirecTV from certain frequencies and
to retain a portion of the revenues associated with this programming. We believe
that the unfavorable buy rate and migration trends were reflective of our
subscribers' attempts to reduce demands on their disposable incomes in response
to the effects on them of the general economic slow down within the United
States. We have revenue enhancement initiatives underway to reverse or mitigate
the decrease in pay per view and a la carte viewing and the shift to lower price
programming packages. These enhancements include: (1) enrolling more subscribers
to plans with minimum commitment periods, (2) subscriber evaluation techniques
to better direct subscribers to suitable promotions and plans, and (3)
refinement and expansion of our offers and promotions to consumers. We cannot
make any assurances about the success of these initiatives.

                                       29
<PAGE>


         The number of subscribers we obtained through internal growth decreased
in 2001 from 2000 in part due to the success we had in 2000 in converting former
subscribers of the Primestar direct broadcast satellite system. Also, in 2001,
competition from digital cable providers and a competing direct broadcast
satellite provider in the territories we serve and the economic slow down
decelerated our growth. We anticipate that we will continue to face competition
from these other providers in 2002. Also in 2002, we anticipate that we will
experience a significant reduction in the number of new subscribers we obtain
from DirecTV's national retail chains. The reduction in the number of
subscribers from national retail chains under arrangements directly with DirecTV
will be the result of efforts by DirecTV, already implemented in 2002, to
minimize certain subscriber acquisition costs that they have paid to national
retail chains for their enrollment of subscribers who reside in our exclusive
territories. Our efforts to increase our new subscribers in 2002 and beyond
will include: (1) the diversification of our sales and distribution channels,
(2) the alignment of channel economics more closely to expected quality and
longevity of subscribers, (3) the establishment of direct relationships with
large national retail chains that we do not presently have in our distribution
channel, and (4) the refinement and expansion of our offers and promotions to
consumers. Because of the number of households available to us within our
territories that are not yet our subscribers, we believe that the prospects for
continued subscriber growth are present.

         We have recently undertaken a review of the method by which we publicly
report the number of our subscribers. Our publicly reported subscriber counts in
the past have included a number of accounts whose service has been suspended for
prolonged periods of time. Because we believe it would improve our public
reporting and internal analyses, we are changing our method of reporting
subscribers, beginning with the first quarter of 2002 so as to exclude these
accounts. We estimate that if we had instituted this change at December 31,
2001, we would have reported approximately 1.4 million subscribers. This change
would have had no effect on our 2001 consolidated financial statements if we had
implemented it during 2001, and will have no effect on our future consolidated
financial statements.

         In years prior to 2001, we had experienced large increases in our
number of subscribers as a result of the numerous acquisitions we made in those
years. In 2001, we acquired only one DIRECTV provider, which was not
significant. We cannot make any assurances that internal growth or growth
through acquisitions will occur and when or as to the rate of that growth.

         Operating Expenses

         Programming expenses increased $109.5 million to $362.2 million
primarily due to the incremental expenses incurred in providing service to an
increased subscriber base in place throughout 2001 compared to 2000. Our average
number of subscribers increased in 2001 by 34.8%. Additionally, 2001 had the
full effect of a 5-6% programming rate increase on our core programming packages
implemented by the National Rural Telecommunications Cooperative in mid 2000.

         Other subscriber related expenses increased $69.6 million to $205.1
million. Other subscriber related expenses include infrastructure costs billed
to us by the NRTC, expenses associated with call centers, bad debt expense,
franchise fees, and other costs that vary with changes in the number of
subscribers. The increase is principally due to the incremental expenses
incurred in serving the increased subscriber base in place throughout 2001
compared to 2000. Increased costs to service subscriber equipment and increased
bad debt expense as a result of higher non-pay churn experience, also
contributed to the increase. We also opened a new call center facility in 2001
that added additional personnel related and customer care costs.

         Promotions and incentives expensed increased $6.4 million to $38.1
million. Total promotions and incentives expensed and deferred or capitalized
were $74.4 million and $43.9 million in 2001 and 2000, respectively. Total
promotions and incentives incurred per new subscriber added in 2001 increased by
approximately 80.0% from that in 2000. The increases were due to a combination
of: (1) more subscribers enrolling in 2001 than in 2000 under subscription plans
that had greater subsidies for our independent retail network associated with
them than with our other subscription plans, (2) the longer amount of time in
2001 than in 2000 that our seamless marketing agreement with DirecTV was in
effect, and (3) a shift in 2001 towards compensation plans under which we
provided more subsidies and less commissions to our dealers. Under the seamless
marketing agreement, we reimbursed DirecTV for, among other items, subsidies
they incurred under their arrangements with national retail chains related to
our subscribers they enrolled in our exclusive territories. We entered into this
agreement in August 2000, and terminated it in July 2001. Promotions and
incentives deferred or capitalized were $36.3 million and $12.2 million in 2001
and 2000, respectively. The increase in the amount deferred or capitalized was
primarily due to a combination of: (1) an increase in 2001 in the number of
subscribers enrolling in plans under which we were able to capitalize equipment
provided to subscribers and (2) subscription plans in place in 2001 that were
not in place in 2000 under which we were able to defer direct and incremental
subscriber acquisition costs associated with the plans. The increase in the
number of subscribers enrolling in plans under which we could capitalize
equipment was due to the greater availability of such plans in 2001 than in 2000
and the amount of time that such plans were in place in 2001 than in 2000.



                                       30
<PAGE>


         Advertising and selling expenses decreased $28.0 million to $104.7
million. Total advertising and selling costs expensed and deferred were $108.6
million and $132.7 million in 2001 and 2000, respectively. Total advertising and
selling costs incurred per new subscriber added in 2001 decreased by 14.8% from
that in 2000. The decreases were due to a combination of: (1) a lesser amount of
new subscribers added through our independent retail network in 2001 than in
2000 resulting in less commission costs and (2) a shift in 2001 towards
compensation plans under which we paid more subsidies and less commissions to
our dealers. Advertising and selling costs deferred in 2001 were $3.9 million.
No advertising and selling costs were deferred in 2000. Subscription plans under
which we were able to defer direct and incremental subscriber acquisition costs
associated with the plans were in place in 2001 and not in 2000.

         General and administrative expenses increased $11.5 million to $36.1
million primarily due to the incremental internal support costs we incurred in
providing service to our increased subscriber base. We had a larger average
number of employees in 2001 than in 2000 with resultant higher employee related
expenses. Also, in 2001 we opened up a new operations office for our direct
broadcast satellite business that expanded our capabilities for that business
with a resultant increase in related internal support costs.

         Subscriber acquisition costs expensed decreased $24.9 million to $145.1
million. Per new subscriber added, these expenses were $360 and $404 for 2001
and 2000, respectively. The decreases were principally due to the deferral and
capitalization of costs of $40.2 million in 2001 compared to $12.2 million in
2000. The increase in the amount deferred or capitalized was primarily due to a
combination of: (1) an increase in 2001 in the number of subscribers enrolling
in plans under which we were able to capitalize equipment provided to
subscribers and (2) subscription plans in place in 2001 that were not in place
in 2000 under which we were able to defer direct and incremental subscriber
acquisition costs associated with the plans. The increase in the number of
subscribers enrolling in plans under which we could capitalize equipment was due
to the greater availability of such plans in 2001 than in 2000 and the amount of
time that such plans were in place in 2001 than in 2000.

         Total subscriber acquisition costs expensed and capitalized or deferred
were $185.3 million and $182.2 million for 2001 and 2000, respectively, or $459
and $433 per new subscriber added for 2001 and 2000, respectively. The increases
were due to a combination of: (1) more subscribers enrolling in 2001 than in
2000 under subscription plans that provided greater commissions and subsidies to
our independent retail network associated with them than with our other
subscription plans and (2) the longer amount of time in 2001 than in 2000 that
our seamless marketing agreement with DirecTV was in effect.

         Depreciation and amortization increased $72.1 million to $257.5 million
principally due to the amortization of direct broadcast satellite rights assets
we recorded in acquisitions we made in 2000. Approximately $33.0 million of the
increase was associated with amortization of the direct broadcast satellite
rights assets recorded in our acquisition of Golden Sky Holdings of $1.0
billion.

         Revenues and Operating Expenses of Other Businesses

         Net revenues of our other businesses were $34.3 million in 2001 and
$35.4 million in 2000. Net operating expenses of our other businesses were $56.2
million in 2001 and $37.1 million in 2000. In 2001, our other businesses
consisted of broadcast and broadband, which was a new business we launched. The
principal service of the broadband business is Internet access through its
Pegasus Express product. Other businesses for 2000 consisted solely of
broadcast. As we expected, the broadband business incurred an operating loss for
2001, which amounted to $15.7 million. This was the result of start up costs to
establish the business infrastructure, and marketing, selling, and customer care
network, as well as equipment subsidies to make the Pegasus Express equipment
more affordable and attractive to buyers and other subscriber acquisition costs
incurred for this new service. We have scaled back our scope for this business
as we focus on our direct broadcast satellite business. As a result, we expect
that the broadband business will not be a significant part of our business for
the foreseeable future. The broadcast business incurred operating losses of $6.2
million and $1.7 million for 2001 and 2000, respectively. The operating loss for
2001 was greater principally due to lower revenues in the year compared to the
prior year. The lower revenues were principally the result of the general
downturn in the United States' economy in 2001 that caused a reduction in
television advertising dollars available to our business and other broadcasters
generally. Indications are that the softness in advertising revenues will
continue as long as the economy continues to slump. We cannot predict the
further course of the economy and its impact on advertising revenues in general
and specifically to us.

                                       31
<PAGE>

         Other Statement of Operations and Comprehensive Loss Items

         The increase in corporate expenses of $3.5 million to approximately
$13.0 million was due to the growth of our overall operations. Other operating
expenses of $32.1 million include $21.2 million in expenses associated with our
ongoing DirecTV litigation compared to $3.2 million expended on this litigation
in 2000.

         Interest expense increased $14.1 million to $136.2 million principally
due to the amount of time that our 12-3/8% notes and 13-1/2% senior subordinated
discount notes were outstanding during 2001 versus 2000. These notes were
initially issued by subsidiaries of our subsidiary Golden Sky Holdings and came
to us when we acquired Golden Sky Holdings in May 2000, whereas the 12-3/8% and
13-1/2% notes were outstanding throughout all of 2001. The notes of the Golden
Sky Holdings' subsidiaries had been exchanged in 2001 for our like notes. The
interest on these notes was offset in part by a lower aggregate amount of
interest incurred on our combined term loan and revolving credit facilities this
year versus last year principally due to lower variable rates of interest on
this debt available to us in 2001 than in 2000. The combined weighted average
principal amount outstanding for term loans and revolving credit facilities for
2001 was $399.6 million compared to $309.7 million in 2000. However, the
combined weighted average variable interest rate on this debt in 2001 was 7.84%
compared to 10.49% in 2000, after factoring in the effect of our interest rate
hedging instruments in each year. Short term interest rates in general declined
throughout 2001 in response to the Federal Reserve's attempt to stimulate the
sluggish economy by reducing interest rates. Such interest rate reductions in
general meant continually declining market rates of interest were available to
us on our variable rate debt in 2001 relative to the market rates of interest
available to us for this debt in 2000.

         Interest income of $4.9 million was lower in 2001 than in 2000 by $10.3
million due to lower average cash amounts on hand during 2001 than in 2000.
Also, lower rates of interest were available to us on amounts outstanding during
2001 than in 2000 due to general lower market rates in 2001 than in 2000.

         In the third quarter 2001, we determined that our sole investment in
marketable securities had incurred an other than temporary decline in market
value. Accordingly, we wrote down the cost basis in this investment to its then
fair market value and charged earnings in the amount of $34.2 million for the
impairment loss realized. In connection with this write down, we made a
reclassification adjustment to other comprehensive income (loss) of $21.2
million, net of income taxes of $13.0 million, to remove all of the net
unrealized losses on this investment that had been accumulated at the date of
the write down.

         Other nonoperating expenses of $5.9 million included $4.2 million for
losses on the decrease in the fair market values of our interest rate
instruments. The benefit for income taxes on the loss from continuing operations
increased $20.4 million to $122.4 million due to a greater amount of pretax loss
in 2001 than in 2000. The extraordinary loss on the extinguishments of debt of
$1.8 million, net of income taxes of $1.1 million, represented our write offs of
unamortized deferred financing costs associated with debt repaid and credit
agreements terminated during the year.

Comparison of 2000 to 1999

         In this section, amounts and changes specified are for the year ended
December 31, 2000 compared to the year ended December 31, 1999, unless indicated
otherwise.

                                       32
<PAGE>

         Direct Broadcast Satellite Business

         Revenues

         Revenues increased $295.7 million to $582.1 million principally due to
the virtual doubling of our number of subscribers to 1,403,000 at December 31,
2000. Of this subscriber increase, 446,000 were from acquisitions, of which
345,000 resulted from our acquisition of Golden Sky Holdings. In 2000 we
acquired the exclusive DIRECTV distribution rights to an additional 2.6 million
households, of which 1.9 million came from the Golden Sky Holdings acquisition.
At December 31, 2000, we had exclusive DIRECTV distribution rights to 7.4
million households. In 2000, we added 255,000 net subscribers through internal
growth compared to net internal growth of 228,000 in 1999. Our growth increased
our subscriber penetration to 18.9% at December 31, 2000 from 14.4% at December
31, 1999.

         Operating Expenses

         Programming expenses increased $115.3 million to $252.7 million
primarily due to the incremental expenses incurred in providing service to an
increased subscriber base in place throughout 2000 compared to 1999. Our average
number of subscribers increased in 2000 by 78.4%. Additionally, the National
Rural Telecommunications Cooperative implemented in mid 2000 a 5-6% programming
rate increase with respect to our core programming packages.

         Other subscriber related expenses increased $70.7 million to $135.5
million. Other subscriber related expenses include infrastructure costs billed
to us by the NRTC, expenses associated with call centers, bad debt expense,
franchise fees, and other costs that vary with changes in the number of
subscribers. The increase is principally due to the incremental expenses
incurred in serving the increased subscriber base in place throughout 2000
compared to 1999. Our average number of subscribers increased in 2000 by 78.4%.

         Promotions and incentives expensed increased $8.8 million to $31.7
million. Total promotions and incentives expensed and capitalized were $43.9
million in 2000. We did not capitalize any promotions and incentives in 1999.
Total promotions and incentives incurred per new subscriber added in 2000
increased by 52.9% from that in 1999. The increases were primarily due to
increased subsidies to our independent retail network channel resulting from the
growth in the number of our subscribers and revisions to and expansion of our
subsidy plans. In 2000 we revised our subsidy plans to provide more incentives
to our dealers and distributors. Also, in August 2000 we entered into the
seamless marketing agreement with DirecTV, referred to earlier, under which we
reimbursed them for, among other items, subsidies they incurred related to
subscribers they enrolled in our exclusive territories. Promotions and
incentives capitalized in 2000 were $12.2 million. The increase in the amount
capitalized was due to subscription plans in place in 2000 that were not in
place in 1999 under which we were able to capitalize equipment provided to
subscribers under these plans.

         Advertising and selling expenses increased $52.4 million to $132.7
million. Total advertising and selling costs incurred per new subscriber added
in 2000 increased by 32.8% from that in 1999. The increases were primarily due
to increased commissions to our dealer network resulting from the growth in the
number of our subscribers and revisions to and expansion of our commission
plans. In 2000 we revised our commission plans to provide more compensation to
our dealers. Also, in August 2000 we entered into the seamless marketing
agreement with DirecTV, referred to earlier, under which we reimbursed them for,
among other items, commissions they incurred related to subscribers they
enrolled in our exclusive territories.

         General and administrative expenses increased $11.1 million to $24.6
million primarily due to the incremental internal support costs we incurred in
providing service to our increased subscriber base. We had a larger average
number of employees in 2001 than in 2000 with resultant higher employee related
expenses.

         Subscriber acquisition costs expensed increased $52.2 million to
approximately $170.0 million. Per new subscriber added, these expenses were $404
and $349 for 2000 and 1999, respectively. Total subscriber acquisition costs
expensed and capitalized or deferred, in 2000 were $182.2 million, or $433 per
new subscriber added. We did not defer or capitalize subscriber acquisition
costs in 1999. The increases were principally due to increased commissions and
subsidies to our independent retail network resulting from the growth in the
number of our subscribers and revisions to and expansion of our commission and
subsidy plans.

         Depreciation and amortization increased $108.6 million to $185.4
million. Of this increase, approximately $67.0 million was due to amortization
of the $1.0 billion in direct broadcast satellite rights assets we recorded in
the Golden Sky Holdings acquisition.

         Revenues and Operating Expenses of Other Businesses

         Net revenues of our other businesses were $35.4 million in 2000 and
$36.4 million in 1999. Net operating expenses of our other businesses were $37.1
million in 2000 and $34.3 million in 1999. In 2000 and 1999, our other
businesses consisted of broadcast. Reduced ratings in 2000 for our affiliated
Fox network stations combined with lower television advertising in general in
2000 contributed to this decrease. Also contributing to this decrease were
advertising revenues that we earned in 1999 associated with the National
Football League's Super Bowl game that was carried by the Fox network in 1999.
The increase in operating expenses principally reflects increased amortization
of additional programming costs we incurred commencing in July 1999 in the
purchase of new and additional programming. Some of this new and additional
programming was for premier shows that have a higher programming premium
associated with them.

                                       33
<PAGE>

         Other Statement of Operations and Comprehensive Loss Items

         The increase in corporate expenses of $3.8 million to $9.4 million
reflected growth in the corporate infrastructure in support of the growth of our
overall business. Development costs of $4.6 million represented the combined
expenses of corporate initiatives that during 2000 were in their infancy of
development and not yet individually of a significant, continuing nature to be
reported separately. Costs associated with our developing broadband business
were included in these costs. Other operating expenses of $11.1 million included
$3.3 million in expenses associated with our ongoing DirecTV and patent
infringement litigations.

         Interest expense increased $57.2 million to $122.1 million. This
increase was due to additional borrowings outstanding and higher rates of
interest incurred during 2000. Fixed rate borrowings increased $322.7 million at
a combined weighted average interest rate of 12.93% for debt of Golden Sky
Holdings' subsidiaries. Variable rate borrowings under revolving credit and term
loan facilities increased by $177.8 million. A portion of this increase was due
to amounts outstanding under revolving credit and term loan facilities of Golden
Sky Holdings' subsidiaries totaling $72.0 million. Amounts outstanding under our
subsidiary Pegasus Media & Communications' credit facilities increased by $105.8
million. The aggregate weighted average amount of principal and interest rates,
after factoring in the effects of our interest rate hedging instruments,
associated with all of our variable rate debt outstanding was $309.7 million and
10.49%, respectively, for 2000 compared to $112.6 million and 8.06%,
respectively, for 1999.

         Interest income increased $13.9 million to $15.2 million due to
significantly higher average cash balances available for short term investing.
The average month end cash balance was $275.5 million in 2000 compared to $23.0
million in 1999. These higher balances principally reflect incremental cash made
available in connection with the $290.4 million in net proceeds received in our
Series C preferred stock we issued in January 2000 and the $167.5 million in
proceeds associated with the sale of our Puerto Rico cable operations in
September 2000.

         Our income taxes on the loss from continuing operations was a benefit
of approximately $102.0 million in 2000 compared to an expense of $496,000 in
1999. This variance was due to the valuation allowances we had previously
established against deferred income tax assets during 1999 that were no longer
required in 2000, and the benefits of these deferred income tax assets were
recognized in 2000. We had established valuation allowances against deferred
income tax assets in 1999 in our belief at that time that we would not realize
the benefits of these tax assets. These valuation allowances negated the
benefits of these tax assets in 1999.

         Within discontinued operations, a gain of $59.4 million, net of Puerto
Rico capital gain and withholding taxes that were currently payable in the
amount of $28.0 million, was recognized on the sale of our Puerto Rico cable
operations in September 2000.

         An extraordinary loss from the extinguishment of debt in 2000 amounted
to $5.8 million, net of income taxes of $3.5 million. This reflected the write
off of unamortized balances of deferred financing costs connected with our debt
that was refinanced when Pegasus Media & Communications' credit agreement was
amended in January 2000.

                                       34
<PAGE>

         Other comprehensive loss, net of income taxes, represented the
adjustment of the carrying amount to the fair market value of the marketable
securities we owned at December 31, 2000.

Liquidity and Capital Resources

         We are highly leveraged, which makes us more vulnerable to adverse
economic and industry conditions. At December 31, 2001, we had a combined
carrying amount of long term debt and redeemable preferred stock outstanding of
$1.5 billion. In 2001, we paid cash interest of $113.2 million. Beginning in
July 2002, we are scheduled to pay cash dividends on our 12-3/4% series
preferred stock, amounting to $11.7 million in 2002 and $23.5 million annually
thereafter. Prior to 2002, we were able to pay the dividends on this series with
shares of the series. Our parent company Pegasus Communications' principal
operations are held by us and at the present time it relies on us as a source of
cash in meeting its cash obligations. For example, we funded the cash payment of
$5.7 million made by Pegasus Communications to redeem one of its series of
preferred stock in March 2002. Pegasus Communications has another $5.0 million
of preferred stock that is redeemable in 2002 at the election of holders of the
preferred stock. It is likely that our parent company will continue to rely on
us as its principal source of cash for the foreseeable future. Using cash for
the previous indicated purposes reduces the availability of funds to us for
working capital, capital expenditures, and other activities, and limits our
flexibility in planning for, or reacting to, changes in our business and the
industries in which we operate. Our ability to make payments on and to refinance
indebtedness and redeemable preferred stock outstanding and to fund planned
capital expenditures and other activities will depend on our ability to generate
cash in the future. Our ability to generate cash will depend upon the success of
our business strategy, prevailing economic conditions, regulatory risks, our
ability to integrate acquired assets successfully into our operations,
competitive activities by other parties, equipment strategies, technological
developments, level of programming costs, levels of interest rates and
financial, business, and other factors that are beyond our control. We cannot
assure that our business will generate sufficient cash flow from operations or
that alternative financing will be available to us in amounts sufficient to
service outstanding debt and redeemable preferred stock or to fund other
liquidity needs. Our indebtedness and preferred stock contain numerous covenants
that, among other things, generally limit the ability to incur additional
indebtedness and liens, issue other securities, make certain payments and
investments, pay dividends, transfer cash, dispose of assets, and enter into
other transactions, and impose limitations on the activities of subsidiaries.
Failure to make debt payments or comply with covenants could result in an event
of default that, if not cured or waived, could have a material adverse effect on
us.

         At December 31, 2001, we had a total of cash, excluding restricted
cash, and cash equivalents of $144.4 million, and availability of $59.1 million
to borrow funds under Pegasus Media & Communications' revolving credit facility.
Additionally, at December 31, 2001, we had an arrangement in place for an
uncommitted $200.0 million of additional financing that expires June 30, 2002.
We believe these resources in combination with amounts that we project will be
provided from our operations in 2002 will be sufficient to meet our operational
needs and expected capital expenditures, other investing, debt service, and
preferred stock requirements for all of 2002. However, we cannot provide any
assurance as to the amount or sufficiency of cash that will be provided by our
operations in 2002.

         We project that our capital expenditures for 2002 will be approximately
$32.0 million to $38.0 million, of which approximately $16.0 million to $18.0
million will be for direct broadcast satellite equipment capitalized. The total
projected capital expenditures amount includes $10.7 million for the option we
exercised in January 2002 to purchase an office building we have been renting.
Our combined annual minimum commitment for call center and communication
services in 2002 is $27.3 million. Based on amounts outstanding at December 31,
2001, in 2002 cash dividends payable will be $11.7 million, scheduled principal
repayments on Pegasus Media & Communications' term loan facility will be $2.8
million, and cash interest due on notes will be $86.3 million. Interest incurred
on the term loan facility with outstanding principal of $272.3 million at
December 31, 2001 is based on variable rates of interest. Assuming that the
variable interest rate of approximately 5.44% in effect on December 31, 2001 for
the term loan facility is in effect for all of 2002 for this debt less scheduled
principal repayments


                                       35
<PAGE>

during the year, our aggregate cash interest payments on this debt for 2002
would be approximately $14.7 million. Cash interest is payable on principal
amounts outstanding under Pegasus Media & Communications' revolving credit
facility. However, projections of interest to be incurred for this facility in
2002 are not provided because amounts that may be outstanding under the facility
vary with our additional cash needs, if any, that may be present throughout the
year, and the interest rate on principal outstanding varies with market rates
that will be available to us in 2002. We cannot project what market rates will
be available to us in 2002, for these rates are based on factors that we do not
control and cannot predict. For 2001, the weighted average principal amount
outstanding, interest rate, and cash interest incurred on the revolving facility
was $72.9 million, 6.74%, and $4.9 million, respectively. The amount outstanding
under the revolving credit facility at December 31, 2001 of $80.0 million was
repaid in early January 2002.

         Maturities of long term debt, repayment of principal under capital
leases, and scheduled repayments of principal on our term loans and revolving
credit facility based on principal amounts outstanding at December 31, 2001 are
$31.8 million in 2003, $192.7 million in 2004, $328.2 million in 2005, $295.2
million in 2006, and $531.0 million thereafter. Cash dividends of $23.5 million
are payable annually on the 12-3/4% Series preferred stock from 2003 until the
series is redeemed on January 1, 2007, at which time we are scheduled to redeem
for cash all of the shares of the series outstanding at that date. This would
amount to approximately $184.0 million, based on shares outstanding at December
31, 2001. In 2003, the combined annual commitment due for our call center and
communication services under contract at December 31, 2001 is $23.2 million, and
$20.3 million for the call center services in 2004. Additionally, Pegasus
Communications has $11.1 million in 2003 and $6.4 million in 2004 of preferred
stocks that are redeemable at the election of holders of the stock. We believe
that funding in meeting these future payments will be provided from a
combination of funds from operations and other financing arrangements we may
enter into in the future, and/or additional public issuances of our notes. At
this time, we cannot determine with any certainty the amount of funds that will
be generated by or available to us and from what sources the funds will be
provided in payment of these and operational, working capital, capital
expenditures, and any other cash requirements that may arise beyond 2002.

         Prior to our corporate reorganization, our common stock and options and
warrants to purchase our common stock were capital resources and a form of
liquidity to us. Now that we are a wholly owned subsidiary of our parent
company, we will no longer use these as a source of liquidity. However, Pegasus
Communications could issue such securities and provide the funds to us for our
cash needs. But there is no assurance that funds needed by us would be
sufficiently generated from this source or that Pegasus Communications would
find it desirable to provide us capital from this source.

         Prior to January 1, 2002, our preferred stock was a capital resource
and a form of liquidity to us. In lieu of cash, we issued 20,000 and 18,000
shares of 12-3/4% Series preferred stock in 2001 and 2000, respectively, in
payment of $20.1 million and $17.8 million, respectively of dividends on the
series in 2001. In January 2002, in lieu of cash we issued 11,000 shares of
12-3/4% Series preferred stock in payment of $11.0 million of dividends on the
series. However, as mentioned above, beginning July 2002, we are scheduled to
pay cash for the dividends for this series.

         Net cash used for operating activities was $128.8 million, $58.6
million, and $84.3 million for 2001, 2000, and 1999, respectively. Cash used for
operating activities in 2001 was primarily for interest payments of $113.2
million, $28.0 million for Puerto Rico capital gains and withholding taxes
associated with the sale of our cable operations in Puerto Rico in 2000, and
$12.4 million of expenses associated with our DirecTV litigation, offset in part
by net cash generated by operations. The greater amount of cash used for
operating activities in 2001 compared to 2000 is primarily due to an increase in
cash interest of $13.6 million, $28.0 million for the taxes associated with the
sale of our Puerto Rico cable operations, increased expenses associated with our
DirecTV litigation of $9.0 million, a reduction in interest income in 2001 of
$10.3 million, offset in part by a net increase in cash generated by operations
in 2001 compared to 2000. The increase in interest payments is primarily due to
the amount of time that our 12-3/8% notes were outstanding during 2001 versus
2000. These notes were initially those of subsidiaries of our subsidiary Golden
Sky Holdings that came to us when we acquired Golden Sky Holdings in May 2000.
We only had one scheduled semiannual interest payment to make on these notes in
2000 after we obtained them compared to the two semiannual interest payments we
made on these notes in 2001. We exchanged these notes of the Golden


                                       36
<PAGE>

Sky Holdings' subsidiaries for our like notes in 2001. The taxes associated with
our sale of our Puerto Rico cable operations in 2000 had been accrued in 2000
but were not payable until 2001. The increase in the litigation expenses is a
combination of the increased level of activity in 2001 associated with the
DirecTV litigation compared to the level of activity in 2000. Interest income
decreased in 2001 from 2000 due to the greater amounts of cash outstanding in
2000 than in 2001. Greater amounts of cash were outstanding in 2000 due to the
net proceeds of $290.4 million we received from the issuance of our then Series
C preferred stock in 2000 and the net proceeds of approximately $166.9 million
we received from the sale of our Puerto Rico cable operations in 2000. We
continued to use this cash for operating and investing purposes throughout 2000
and into 2001. Cash used for operating activities in 2000 was primarily for cash
interest of $99.6 million, offset in part by net cash generated by operations.
The lesser amount of cash used for operating activities in 2000 compared to 1999
is primarily due to increased cash from operations resulting from our growth
through acquisitions offset in part by increased interest payments in 2000 of
$24.7 million.

         Premarketing cash flow of our direct broadcast satellite ("DBS")
business was $237.1 million, $174.9 million, and $85.2 million for 2001, 2000,
and 1999, respectively. DBS EBITDA was $92.0 million, $4.9 million, and $(32.6)
million for 2001, 2000, and 1999, respectively. DBS premarketing cash flow is
calculated by taking the revenues of the DBS business and deducting programming
expense (excluding promotional programming), other subscriber related expenses,
and general and administrative expenses. DBS EBITDA is DBS premarketing cash
flow less promotional programming, promotions and incentives, and advertising
and selling expenses. We present DBS premarketing cash flow and DBS EBITDA
because the DBS business is our only significant segment and this business forms
the principal portion of our results of operations and cash flows. The increases
in DBS premarketing cash flow and DBS EBITDA in each year are due to the
increase in revenues generated by an increasing subscriber base in each year
outpacing the increasing costs in servicing the larger subscriber base in each.
The increase in 2001 compared to 2000 is additionally due to an increase of
$28.0 million in the amount of subscriber acquisition costs deferred and
capitalized in 2001 compared 2000. The increase in the amount of subscriber
acquisition costs deferred and capitalized is primarily due to a combination of:
(1) an increase in 2001 in the number of subscribers enrolling in plans under
which we were able to capitalize equipment provided to subscribers and (2)
subscription plans in place in 2001 that were not in place in 2000 under which
we were able to defer direct and incremental subscriber acquisition costs
associated with the plans. The increase in the number of subscribers enrolling
in plans under which we could capitalize equipment was due to the greater
availability of such plans in 2001 than in 2000 and the amount of time that such
plans were in place in 2001 than in 2000.

         Adjusted operating cash flow for the 12 months ended December 31, 2001
was $226.5 million. Adjusted operating cash flow is DBS operating cash flow for
the current quarter times four, plus operating cash flow from other operating
divisions for the last four quarters. Operating cash flow is income or loss from
operations adjusted for depreciation, amortization, and other noncash items
therein, and excludes subscriber acquisition costs and corporate expenses. We
present this measure for purpose of compliance with our debt indentures, and
such measure is not required to be presented on a comparative basis.

                                       37
<PAGE>

         DBS premarketing cash flow, DBS EBITDA, and adjusted operating 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. DBS premarketing cash flow, DBS
EBITDA, and adjusted operating 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 our industry or the economy generally.
We believe that DBS premarketing cash flow, DBS EBITDA, and adjusted operating
cash flow are important because people who follow our industry frequently use
them as measures of financial performance and ability to pay debt service, and
they are measures that we, our lenders, and investors use to monitor our
financial performance and debt leverage. Although EBITDA is a common measure
used by other companies, our calculation of EBITDA may not be comparable with
that of others.

         Net cash provided by financing activities in 2001 was approximately
$119.0 million. In the third quarter 2001, we borrowed $75.0 million under a
short term facility. This borrowing was repaid with the net proceeds received
from our issuance of $175.0 million principal amount of 11-1/4% notes in
December 2001. We received net proceeds of $170.2 million from the issuance,
after reduction for financing costs associated with the issuance of the notes.
We used the proceeds to repay the principal outstanding under the short term
facility, $57.0 million of debt outstanding under bank credit facilities, and
interest of $1.3 million accrued on debt repaid. The remaining proceeds were
kept on hand for working capital and other corporate purposes as needed. Overall
in 2001, we repaid a net $29.8 million principal of debt outstanding under bank
credit facilities, and repaid $7.6 million principal of other debt outstanding.

         In 2001, we used cash for investing activities of $60.2 million. Of
this amount, $42.7 million was spent on property and equipment, including $20.8
million for direct broadcast satellite equipment that was capitalized as fixed
assets. We also spent $11.9 million on intangible assets in 2001, including $3.7
million for three guardband licenses. We no longer hold these guardband licenses
and the ones we purchased in 2000, for we transferred to our parent company in
July 2001 our subsidiary that held the licenses.

         Net cash provided by financing activities was $395.4 million in 2000
and $208.8 million in 1999. The principal sources of cash for financing
activities in 2000 were net proceeds of $290.4 million received from the
issuance of our then Series C preferred stock and a net $117.8 million borrowed
on bank credit facilities, less a net $10.2 million of long term debt repaid.
The principal sources of cash for financing activities in 1999 were a net $130.3
million borrowed on bank credit facilities and net proceeds of $77.7 million
received from the issuance of our then Class A common stock in a public
offering.

         We used cash for investing activities of $162.9 million in 2000, less
net proceeds of $166.9 million received from the sale of our Puerto Rico cable
operations, and approximately $138.6 million in 1999. The principal investing
activities in 2000 were acquisitions of other DIRECTV providers of $152.7
million and our initial purchases of 31 guardband licenses of $91.7 million. In
2000, we also spent $46.4 million for combined direct broadcast satellite
equipment capitalized and other capital expenditures, $20.2 million for
intangible assets other than guardband licenses, and made investments in
affiliates of $14.6 million. The principal investing activities in 1999 were
acquisitions of other DIRECTV providers of $106.9 million, $19.4 million for
capital expenditures, $4.8 million in investments in affiliates, and $4.6
million for intangible assets. The acquisitions of other DIRECTV providers
enabled us to significantly increase our direct broadcast satellite subscriber
base. We no longer hold the investments in affiliates that we invested in during
these years, for we transferred to our parent company in the corporate
reorganization our subsidiary that held the investments.

                                       38
<PAGE>

New Accounting Pronouncements

         Statement of Financial Accounting Standards No. 141 "Business
Combinations" addresses financial accounting and reporting for business
combinations. One of the principal requirements of this statement is that all
business combinations initiated or for which the date of acquisition is after
June 30, 2001 are to be accounted for using only the purchase method. We have
not completed a business combination since June 30, 2001. Another principal
provision of this statement requires companies to reassess the classification of
carrying amounts for goodwill and intangible assets apart from goodwill
recognized in acquisitions in which the acquisition date was before July 1, 2001
to determine their appropriate classification in accordance with the statement.
For us, this provision became effective on January 1, 2002, and will be applied
by us in the first quarter 2002. We have not yet finalized our assessment of the
classification of the carrying amounts of goodwill and intangible assets apart
from goodwill, but based on our preliminary assessment, we believe that there
will be no material impact on us.

         Statement of Financial Accounting Standards No. 142 "Goodwill and Other
Intangible Assets" addresses financial accounting and reporting: (1) at the date
of acquisition of goodwill and intangible assets apart from goodwill acquired
other than in a business combination and (2) all goodwill and intangible assets
apart from goodwill subsequent to their acquisition. A principal requirement of
this statement is to determine the useful lives of intangible assets and
amortize or not amortize the intangible assets accordingly. Intangible assets
apart from goodwill with finite lives are to be amortized over their useful
lives to their residual value, if any, whereas goodwill and intangible assets
apart from goodwill with indefinite lives are not to be amortized. Another
principal requirement of this statement relates to impairment of goodwill and
intangible assets apart from goodwill. Goodwill is to be separately stated from
intangible assets apart from goodwill on the statement of financial position.
This statement in its entirety became effective for us on January 1, 2002.
Certain provisions of the statement were effective July 1, 2001, but did not
significantly impact us because we have not acquired any goodwill or significant
intangible assets apart from goodwill since July 1, 2001. Certain provisions of
the statement are to be applied by us by the end of the first quarter 2002.
Other provisions of this statement have transition periods that for us end June
30, 2002 and December 31, 2002, with retroactive application of the effects of
the transition periods to our first quarter 2002. We have not yet completed our
analyses associated with the impacts of this statement, and do not have
sufficient information at this time to determine whether or not the impacts will
be material to our financial position or results of operations.

         Statement of Financial Accounting Standards No. 143 "Accounting for
Asset Retirement Obligations" addresses financial accounting and reporting for
obligations associated with the retirement of tangible long lived assets and the
associated asset retirement costs. This statement is effective for financial
statements issued for fiscal years beginning after June 15, 2002. We are
studying the provisions of this statement and have not yet determined the
impacts, if any, that this statement may have on us.

         Statement of Financial Accounting Standards No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets" addresses financial accounting and
reporting for the impairment or disposal of long lived assets. The provisions of
this statement became effective for us on January 1, 2002. Many of the
provisions of this statement are the same as or similar to provisions of
previously existing accounting standards that this statement now supersedes. We
have not yet finalized our analysis of this statement. However, based on our
preliminary assessment of the statement and our belief that there are relatively
no new requirements imposed by the statement from requirements previously in
effect for us under prior accounting standards, we believe that there will be no
material impact on us.

ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         Our primary market risk is change in interest rates. Our primary
exposure is variable rates of interest associated with borrowings under our
revolving credit and term loan facilities. These rates of interest are based on
prime and LIBOR, as appropriate, which vary in accordance with prevailing
economic conditions. As required under the terms of our credit agreement, we
entered into interest rate hedging instruments aggregating $140.0 million in
notional amount. We did not enter into these instruments for trading or
speculative purposes.

                                       39
<PAGE>

         The following tables summarize our market risks associated with debt,
redeemable preferred stocks, and interest rate hedging instruments outstanding
at December 31, 2001 and 2000. The tables display future cash flows for periodic
payments and maturities of principal for debt and redemptions of preferred
stock. These cash flows reflect scheduled principal repayments and maturities
for debt, and the redemption amounts for preferred stocks assume that all shares
scheduled to be redeemed at the option of holders in each year are fully
redeemed, in addition to scheduled mandatory redemptions, based on amounts
outstanding at December 31, 2001 and 2000, respectively. The interest or
dividend rate for each year in the table is based on the principal or par value
outstanding at the end of the year, after taking into effect any payment,
maturities, and redemptions that occurred in that year. Because of their
variable and unpredictable nature, the interest rates specified for variable
rate debt for each year are based on the actual aggregate weighted average rate
in effect at December 31, 2001 and 2000, respectively, adjusted for the weighted
effect of payments and maturities that occur in each year. With respect to our
interest rate swap instruments, we pay fixed interest and receive variable
interest, and the rates specified are based on the contracted fixed interest
rates that we pay. With respect to our cap instruments, we receive variable
interest when the applicable rates exceed the cap rates, and the rates specified
are based on the contracted cap rates. Notional amounts for our swaps and caps
are presented in the period that the related contracts expire. The notional
amounts of the swaps and caps are used to measure interest to be paid or
received. We do not pay any cash with respect to the notional amounts when they
expire. Fair values of publicly held fixed rate debt and redeemable preferred
stocks were determined based on quoted market prices for each individual
security. Fair values for variable rate debt were based on their principal
amounts outstanding at December 31, 2001 and 2000, respectively, for the
principal amounts are subject to short term variable rates of interest and the
rates in effect at December 31, 2001 and 2000 approximate the market rates
available at each date. Valuations of nonpublicly held preferred stocks included
in the tables were not significant. Fair values of the swaps and caps were based
on the estimated amounts to settle the contracts assuming they were terminated
at December 31, 2001 and 2000, respectively.




                                       40
<PAGE>
                             (dollars in thousands)

Market Risks at December 31, 2001
<TABLE>
<CAPTION>
                                                                                                                Fair
                     2002        2003       2004        2005          2006       Thereafter       Total         Value
                     ----        ----       ----        ----          ----       ----------       -----         -----
<S>                <C>        <C>        <C>        <C>           <C>           <C>             <C>           <C>
Debt:
  Fixed rate        $5,978      $2,420       $458     $200,345      $295,159      $531,012      $1,035,372     $941,407
  Average
  interest rate      11.82%      11.83%     11.83%       12.07%        12.40%        12.40%              -            -

  Variable rate     $2,750     $29,417   $192,208     $127,875             -             -        $352,250     $352,250
  Average
  interest rate       5.62%       5.57%      5.44%           -             -             -               -            -

Redeemable
preferred stock          -           -          -            -             -      $172,952        $172,952     $124,525
Average
dividend rate        12.75%      12.75%     12.75%       12.75%        12.75%            -               -            -

Interest rate
swaps notional
amount                   -     $72,114          -            -             -             -         $72,114      $(4,161)
Average
interest rate         7.19%       7.19%         -            -             -             -               -            -

Interest rate
caps notional
amount                   -     $67,886          -            -             -             -         $67,886           $1
Average
interest rate         9.00%       9.00%         -            -             -             -               -            -
</TABLE>


                                       41
<PAGE>

Market Risks at December 31, 2000
<TABLE>
<CAPTION>
                                                                                                                Fair
                     2002        2003       2004        2005          2006       Thereafter       Total         Value
                     ----        ----       ----        ----          ----       ----------       -----         -----
<S>                <C>        <C>        <C>        <C>           <C>           <C>             <C>           <C>
Debt:
  Fixed rate        $8,141      $5,983     $1,970         $432      $200,345      $651,172        $868,043     $791,800
  Average
  interest rate      11.85%      11.89%     11.91%       11.91%        12.30%        12.30%              -            -

  Variable rate     $2,750      $3,100     $4,009     $208,725      $163,416             -        $382,000     $382,000
  Average
  interest rate      10.16%      10.16%     10.16%       10.13%            -             -               -            -

Redeemable
preferred stocks   $10,000     $10,707    $11,125       $6,375             -      $452,844        $491,051     $461,781
Average
dividend rate         8.30%       8.44%      8.55%        8.61%         8.61%         8.61%              -            -

Interest rate
swaps notional
amount                   -           -    $72,114            -             -             -         $72,114      $(1,554)
Average
interest rate         7.19%       7.19%      7.19%           -             -             -               -            -

Interest rate
caps notional
amount                   -           -    $67,886            -             -             -         $67,886          $14
Average
interest rate         9.00%       9.00%      9.00%           -             -             -               -            -
</TABLE>

                                       42
<PAGE>

         There was a marked decrease in interest rates on our variable rate debt
in 2001 compared to 2000. Short term interest rates in general declined
throughout 2001 in response to the Federal Reserve's attempt to stimulate the
sluggish economy by reducing interest rates. Such interest rate reductions in
general meant continually declining market rates of interest were available to
us on our variable rate debt in 2001 relative to the market rates of interest
available to us for this debt in 2000.

         We have two swap contracts, one with a notional amount of $35.0 million
and the other with a notional amount of $37.1 million. The aggregate weighted
average fixed rate of interest for these contracts was 7.19% in each year. Each
contract is marked to the 6 month LIBOR rate in effect at the beginning of each
6 month resetting period. We have two interest rate caps, one with a notional
amount of $33.9 million and the other with a notional amount of $34.0 million.
The cap rate under each contract is 9.0% and payment is determined quarterly
based on the 3 month LIBOR rate in effect at the beginning of each 6 month
resetting period. As a result of market LIBOR rates available to us for the
swaps being lower than the fixed rates we pay on the swaps, we paid net
additional interest of approximately $1.0 million in each of 2001 and 2000 with
respect to our interest rate instruments. The net effect of the interest rate
instruments on our weighted average variable rates of interest was an increase
of 21 basis points in 2001 and 30 basis points in 2000.

ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         The information required by this item is set forth on pages F-1 through
F-27.

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

         None.


                                       43
<PAGE>

                                    PART III

ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Directors and Executive Officers

         Set forth below is information regarding our directors and executive
officers. The directors listed below also currently serve as directors of
Pegasus Communications and our direct subsidiary, Pegasus Media &
Communications, Inc. Messrs. Pagon, Lodge, Verlin, Pooler, Blank and Hane and
Ms. Heisler hold the same positions with Pegasus Communications and Pegasus
Media & Communications, Inc. as they do with Pegasus Satellite.

         Marshall W. Pagon has served as Chairman of the Board and Chief
Executive Officer of Pegasus Satellite since its incorporation. Additionally,
Mr. Pagon served as President of Pegasus Satellite from its incorporation to
December 2001 and served as Treasurer of Pegasus Satellite from incorporation to
June 1997. From 1991 to October 1994, when the assets of various affiliates of
Pegasus Satellite, principally limited partnerships that owned and operated
Pegasus Satellite's television and cable operations, were transferred to
subsidiaries of Pegasus Media & Communications, Inc., one of our subsidiaries,
entities controlled by Mr. Pagon served as the general partner of these
partnerships and conducted the business of Pegasus Satellite. Mr. Pagon's
background includes over 20 years of experience in the media and communications
industry. Mr. Pagon is one of his own designees to the board of directors
pursuant to the amended voting agreement. See -ITEM 13: Certain Relationships
and Related Transactions--Voting Agreement. Mr. Pagon is 46 years old.

         Ted S. Lodge has been a director of Pegasus Satellite since May 5, 2000
and has served as Pegasus Satellite's President, Chief Operating Officer and
Counsel since December 2001. Mr. Lodge served as Senior Vice President, Chief
Administrative Officer, General Counsel and Assistant Secretary of Pegasus
Satellite beginning on July 1, 1996. In June 1997, Mr. Lodge became Pegasus
Satellite's Secretary, and in July 2000, he became an Executive Vice President.
From June 1992 through June 1996, Mr. Lodge practiced law with a number of law
firms including Lodge & Company, and during that period, was engaged by Pegasus
Satellite as its outside legal counsel in connection with various matters. Mr.
Lodge currently is serving as a director of Pegasus Satellite as one of Mr.
Pagon's designees to the board of directors pursuant to the amended voting
agreement. Mr. Lodge is 45 years old.

         Howard E. Verlin is Executive Vice President of Business Affairs,
Communications and IR/Capital Markets for Pegasus Satellite. Mr. Verlin served
as Assistant Secretary of Pegasus Satellite until June 2000 and supervised
Pegasus Satellite's cable operations until the sale of its last cable system in
September 2000. Mr. Verlin has served similar functions with respect to Pegasus
Satellite's predecessors in interest and affiliates since 1987 and has over 15
years of experience in the media and communications industry. Mr. Verlin is 40
years old.

         Joseph W. Pooler, Jr. has served as Pegasus Satellite's Vice President
- Finance and Controller since March 2002 and as Vice President and Controller
of Pegasus Satellite Television since December 1999. Prior to joining Pegasus
Satellite, from January 1997 to December 1999, Mr. Pooler served as Corporate
Controller of MEDIQ, Incorporated. Between 1993 and 1997, Mr. Pooler held
various other positions with MEDIQ, Incorporated, including Director of
Operations and Director of Sales Support. Mr. Pooler is a certified public
accountant. Mr. Pooler is 36 years old.

         Scott A. Blank currently serves as Senior Vice President of Legal and
Corporate Affairs, General Counsel and Secretary of Pegasus Satellite. Mr. Blank
served as Assistant General Counsel from January 1999 to January 2000 and as
Vice President of Legal and Corporate Affairs from January 2000 to May 2001. Mr.
Blank began serving as Senior Vice President of Legal and Corporate Affairs in
June 2001 and as General Counsel and Secretary in December 2001. Mr. Blank had
been an Assistant Secretary of Pegasus Satellite from January 1999 to December
2001. Prior to joining Pegasus Satellite, Mr. Blank was an attorney at the
Philadelphia, Pennsylvania law firm of Drinker Biddle & Reath LLP from November
1993 to January 1999. Mr. Blank is 41 years old.

                                       44
<PAGE>

         John Hane has served as Senior Vice President of Business Development
of Pegasus Satellite since April 2001, and is involved with Pegasus
Communications' advance Ka multimedia satellite system design and procurement.
Prior to April 2001, Mr. Hane served as Senior Vice President of Pegasus
Development Corporation from July 1999 through December 2000, and then as Vice
President, Space Development from January 2001 to April 2001. Mr. Hane is the
founder of Highcast Network, Inc., a developmental stage broadcast network that
enables local television stations to insert local advertising and station
promotions into digital signals, and has served as President and CEO of Highcast
from March 1999 until the present. Pegasus Development Corporation holds a
minority stake in Highcast and has the possibility of assuming a majority equity
and voting position in Highcast. Prior to founding Highcast, Mr. Hane was
Director of Regulatory Affairs for Lockheed Martin's commercial satellite
service subsidiary, Lockheed Martin Telecommunications, where he was responsible
for regulatory matters, and for assisting in the development of specifications
and applications for several proposed satellite systems. From September 1995
through January 1997, Mr. Hane served as Vice President of Governmental Affairs
for New World Television. Mr. Hane is 42 years old.

         Karen Heisler has served as Senior Vice President of Human Resources
and Administrative Services of Pegasus Satellite since April 2001. Prior to
April 2001, Ms. Heisler served as Vice President of Human Resources after
joining Pegasus Satellite in January 2001. From August 1999 through September
2000, Ms. Heisler was Vice President of Learning and Development for Comcast
Cable's Comcast University, where she was responsible for employee training and
development. Prior to this position, from November 1998 through August 1999, she
was Senior Vice President of Human Resources at Comcast Cellular Communications.
Prior to November 1998, Ms. Heisler spent approximately 13 years with Episcopal
Hospital Systems. Ms. Heisler is 42 years old.

         Robert F. Benbow has been a director of Pegasus Satellite since May 5,
2000. Mr. Benbow had been a director of Golden Sky and its predecessors from
February 1997 to May 5, 2000. He is a Vice President of Burr, Egan, Deleage &
Co., a private venture capital firm, and a Managing General Partner of Alta
Communications, Inc., a private venture capital firm. Prior to joining Burr,
Egan, Deleage & Co. in 1990, Mr. Benbow spent 22 years with the Bank of New
England N.A., where he was a Senior Vice President responsible for special
industries lending in the areas of media, project finance and energy. Mr. Benbow
currently is serving as a director of Pegasus Satellite designated by affiliates
of Alta Communications pursuant to the amended voting agreement. Mr. Benbow is
66 years old.

         Harry F. Hopper III has been a director of Pegasus Satellite since
April 27, 1998. Mr. Hopper is a Managing Member of Columbia Capital LLC, which
he joined in January 1994. Columbia Capital is a venture capital firm with an
investment focus on communications services, network infrastructure and
technologies, and communications software. Mr. Hopper is also a director of:
DSL.Net and the following private companies: Metro PCS, Inc., a major market
wireless mobile communications provider; Affinity, Inc., a web hosting company;
Pihana Pacific Corporation, a Pan-Asian internet peering and data center company
and Xemod, Inc., a producer of next generation linear power amplifiers. From
June 1996 until April 27, 1998, Mr. Hopper had been a director of Digital
Television Services or a manager of its predecessor limited liability company.
Mr. Hopper currently is one of Mr. Pagon's designees on the board of directors.
Mr. Hopper is 48 years old.

                                       45
<PAGE>

         James J. McEntee, III has been a director of Pegasus Satellite since
October 8, 1996. Mr. McEntee is of counsel to the law firm of Lamb, Windle &
McErlane, P.C. and was a Principal of that law firm and Chairman of its Business
Department from 1995 through March 1, 2000. Mr. McEntee is also a Principal in
Harron Capital, L.P., a venture capital firm focused on new and traditional
media ventures, and he is an executive officer of Harron Management Company,
LLC. In addition, Mr. McEntee is Chairman of the Board of Directors of Around
Campus, Inc., a company in the business of publishing college student
directories and creating marketing opportunities in college communities. He is
also a director of Bancorp.com, an affiliate based Internet bank, and Spectrum
Foods, Inc., a company specializing in selling and marketing specialty food
products. He is also a director of several other private companies. Mr. McEntee
is one of the directors designated as an independent director under the voting
agreement. Mr. McEntee is 44 years old.

         Mary C. Metzger has been a director of Pegasus Satellite since November
14, 1996. Ms. Metzger has been Chairman of Personalized Media Communications
L.L.C. 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. Ms. Metzger is one of the
directors designated as an independent director under the amended voting
agreement. She is also a designee of Personalized Media Communications under an
agreement between Pegasus and Personalized Media. See ITEM 13: Certain
Relationships and Related Transactions--Investment in Personalized Media
Communications, L.L.C. and Licensing of Patents. Ms. Metzger is 56 years old.

         William P. Phoenix has been a director of Pegasus Satellite since June
17, 1998. He is a Managing Director of CIBC World Markets Corp., dividing his
time between Trimaran Capital Partners, where he is an investment professional,
and CIBC Capital Partners, where he heads up the New York office focusing on
mezzanine transactions and private equity opportunities. Mr. Phoenix has
extensive experience as a provider of all forms of capital to non-investment
grade companies and is also a member of CIBC World Markets Corp.'s US
management, investment and credit committees. Prior to joining CIBC World
Markets 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 also serves as a director of Millennium Digital Media and Machslinke
Ltd. Mr. Phoenix is one of the directors designated as an independent director
pursuant to the amended voting agreement. Pegasus Satellite and CIBC World
Markets Corp. have engaged in various transactions. See ITEM 13: Certain
Relationships and Related Transactions--CIBC World Market Corp. and Affiliates.
Mr. Phoenix is 45 years old.

         Robert N. Verdecchio has been a director of Pegasus Satellite since
December 18, 1997. He served as Pegasus Satellite's Senior Vice President, Chief
Financial Officer and Assistant Secretary from its inception to March 22, 2000
and as its Treasurer from June 1997 until March 22, 2000. He has also performed
similar functions for Pegasus Media's affiliates and predecessors in interest
from 1990 to March 22, 2000. Mr. Verdecchio is a certified public accountant and
has over 15 years of experience in the media and communications industry. He is
now a private investor. Mr. Verdecchio currently is serving as a director of
Pegasus Satellite as one of Mr. Pagon's designees to the board of directors
pursuant to the amended voting agreement. Mr. Verdecchio is 45 years old.


                                       46
<PAGE>

ITEM 11: EXECUTIVE COMPENSATION

         The following table sets forth certain information for Pegasus
Satellite's last three fiscal years concerning the compensation paid to the
Chief Executive Officer and to each of Pegasus Satellite's four most highly
compensated officers other than the Chief Executive Officer. Each of these
individuals served in the same capacities with Pegasus Communications and
Pegasus Media & Communications, Inc. as they did with Pegasus Satellite.
Consequently, the amounts set forth below represent compensation paid to the
individuals for services they rendered to all three companies.

                           Summary Compensation Table
<TABLE>
<CAPTION>
                                                                                                   Long-Term
                                              Annual Compensation                             Compensation Awards
                      -----------------------------------------------------------------   -------------------------
                                                                                          Restricted     Securities
                        Principal                                          Other Annual      Stock       Underlying     All Other
       Name              Position      Year       Salary      Bonus(1)     Compensation    Award(5)      Options(6)  Compensation(8)
       ----              --------      ----       ------      --------     ------------    --------      ----------  ---------------
<S>                 <C>              <C>       <C>           <C>          <C>            <C>             <C>           <C>
Marshall W. Pagon....Chairman and      2001     $428,846      $174,997        $59,245(4)         --         245,000     $427,305(9)
                     Chief Executive   2000     $330,769            --        $40,150(4)         --         156,822(7)  $260,000(9)
                     Officer           1999     $274,743      $124,978             --            --         380,000     $256,368(9)


Ted S. Lodge.........President,        2001     $256,538      $112,492(2)          --            --         120,000       $3,900
                     Chief             2000     $207,404      $ 86,096(2)          --       $13,881          75,000       $3,900
                     Operating         1999     $164,647      $ 71,085(2)          --       $32,983         170,000       $3,600
                     Officer and
                     Counsel

Howard E. Verlin.....Executive Vice    2001     $231,538      $ 66,654(2)          --            --          71,639(7)   $10,500
                     President         2000     $185,539      $299,961(2)          --            --          75,000       $2,100
                                       1999     $155,974      $144,975(2)          --            --         190,000       $1,620


Kasin Smith(3).......Chief Financial   2001     $216,769      $ 62,397(2)          --       $17,587         120,000      $10,500
                     Officer,          2000     $151,674      $ 16,500(2)          --            --          51,142(7)   $10,090
                     Treasurer and     1999     $108,022            --             --            --         100,000       $2,021
                     Executive Vice
                     President of
                     Finance and
                     Information
                     Technology

Scott A. Blank....   Senior Vice       2001     $188,077      $25,803              --       $87,459          75,000      $10,500
                     President,
                     General Counsel
                     and Secretary
</TABLE>
--------------------------
(1)      Unless otherwise indicated, the included amounts represent the fair
         market value of shares of Pegasus Communications' Class A common stock
         vested at the time of award under Pegasus Communications' restricted
         stock plan. Subject to limitations specified in Pegasus Communications'
         restricted stock plan, an executive officer may elect to receive all or
         a portion of an award in the form of cash, Pegasus Communications'
         Class A common stock or an option to purchase shares of Pegasus
         Communications' Class A common stock. The cash portion of an award is
         reported as a bonus to executive officers, as described in note 2
         below. The portion of an award chosen to be received as Pegasus
         Communications' Class A common stock is reported either as a bonus if
         unrestricted at the time of grant or, if restricted, as a restricted
         stock award under note 5 below. The portion of an award chosen to be
         received as options to purchase shares of Pegasus Communications' Class
         A common stock is reported under note 7 below. Generally, awards made
         under Pegasus Communications' restricted stock plan vest based upon
         years of service with Pegasus Communications or its subsidiaries from
         the date of initial employment. Shares awarded under the plan are
         vested 34% after two years of employment, an additional 33% after three
         years of employment and the remaining 33% vests upon four years of
         employment. As a consequence, awards made under Pegasus Communications'
         restricted stock plan may be either partially or fully vested on the
         date they are granted. All awards made to Messrs. Pagon and Verlin
         under Pegasus Communications' restricted stock plan in fiscal years
         1999, 2000 and 2001 were fully vested on the date granted. Awards to
         Mr. Lodge in fiscal years 1999, 2000 and 2001 were 34%, 67% and fully
         vested on the date granted, respectively. In addition, Mr. Lodge
         received a special recognition award of 308 shares in 1999, which was
         fully vested upon issuance. Mr. Smith received an award in fiscal year
         2001, which was 34% vested on the date granted. Mr. Blank received
         three awards in fiscal year 2001, two of which were 34% vested and one
         which had not yet vested on the date granted.

                                       47
<PAGE>

(2)      Includes amounts chosen by each named executive officer to be received
         as cash under Pegasus Communications' restricted stock plan, as
         described in note 1 above. The amounts listed below reflect the cash
         portion of discretionary awards granted to each of the named executive
         officers of Pegasus Satellite for each of the three prior years.

                                    1999              2000             2001
                                    ----              ----             ----
                Mr. Pagon              --                --               --
                Mr. Lodge         $50,000           $58,000           $75,000
                Mr. Verlin        $45,000           $55,000           $33,333
                Mr. Smith              --           $16,500           $53,333
                Mr. Blank               *                *                --

         *Mr. Blank was named an executive officer of Pegasus Satellite in 2001.

(3)      Mr. Smith resigned from Pegasus Satellite on March 8, 2002.

(4)      Represents the value of benefits received related to the plane
         available for use by Pegasus Satellite.

(5)      The included amounts represent the fair market value of the restricted
         portion of stock awards chosen to be received under Pegasus
         Communications' restricted stock plan, as described in note 1 above.
         Mr. Lodge's employment with Pegasus Satellite began on July 1, 1996.
         Consequently, awards of 2,838 shares and 858 shares granted to Mr.
         Lodge in fiscal years 1999 and 2000, respectively, were fully vested on
         July 1, 2000, and the award of 1,456 shares granted in fiscal year 2002
         was fully vested on the date of grant. Mr. Smith's employment with
         Pegasus Satellite began on September 8, 1998. Consequently, as of
         December 31, 2001, 693 of the 1,035 shares awarded to Mr. Smith in
         fiscal year 2001, or 67%, had vested. The remaining 342 restricted
         shares of Pegasus Communications' Class A common stock held by Mr.
         Smith are scheduled to vest in 2002. Mr. Blank's employment with
         Pegasus Satellite began on January 18, 1999. Consequently, as of
         December 31, 2001, 1,721 of the 5,064 shares granted to Mr. Blank under
         Pegasus Communications' restricted stock plan in fiscal year 2001, or
         34%, had vested. 1,670 of the remaining 3,343 restricted shares of
         Pegasus Communications' Class A common stock held by Mr. Blank vested
         on January 18, 2002 and the remaining 1,673 shares are scheduled to
         vest on January 18, 2003. Based upon the closing price of Pegasus
         Communications' Class A common stock on December 31, 2001 of $10.41 per
         share, the 342 restricted shares held by Mr. Smith and the 3,343 shares
         held by Mr. Blank had a value of $3,560 and $34,801, respectively, on
         December 31, 2001. Subject to limitations specified in Pegasus
         Communications' restricted stock plan, executive officers are entitled
         to receive dividends on the unvested portion of their awards, excluding
         any portion of their award for which they elect to receive options to
         purchase shares of Pegasus Communications' Class A common stock in lieu
         of stock. Pegasus Communications' does not anticipate paying cash
         dividends on its common stock in the foreseeable future. Pegasus
         Communications' policy is to retain cash for operations and expansion.

                                       48
<PAGE>

(6)      Adjusted to reflect stock split of Pegasus Communications' Class A
         common stock effective as of May 30, 2000.

(7)      Includes options issued under Pegasus Communications' restricted stock
         plan in lieu of receiving the award in cash or shares of Pegasus
         Communications' Class A common stock. In fiscal year 2000, Messrs.
         Pagon and Smith received options under Pegasus Communications'
         restricted stock plan to purchase 6,822 shares and 1,142 shares,
         respectively. In fiscal year 2001, Mr. Verlin received options under
         Pegasus Communications' restricted stock plan to purchase 1,639 shares
         of Pegasus Communications' Class A common stock. Options granted
         pursuant to Pegasus Communications' restricted stock plan vest based
         upon years of service with Pegasus Communications or its subsidiaries
         from the date of initial employment, as described in note 1 above. For
         information regarding the exercise price and expiration date of these
         options, see the table below entitled "Option Grants in 2001."

(8)      Unless otherwise indicated, the amounts listed represent Pegasus
         Communications' contributions under the U.S. 401(k) plan established
         for its employees and the employees of its subsidiaries, including the
         employees of Pegasus Satellite.

(9)      Of the amounts listed for Mr. Pagon in each of the fiscal years 1999,
         2000 and 2001, $250,000, $250,000 and $416,805, respectively, represent
         the full-dollar value to Mr. Pagon of premiums paid by Pegasus
         Communications in connection with the split dollar agreements entered
         into by Pegasus Communications with the trustees of insurance trusts
         established by Mr. Pagon. The split dollar agreements provide that
         Pegasus Communications will be repaid all amounts it expends for such
         premiums, either from the cash surrender value or the proceeds of the
         insurance policies. See ITEM 13: Certain Relationships and Related
         Transactions - Split Dollar Agreement.



                                       49
<PAGE>

                              Option Grants in 2001

         Pegasus Communications granted options to its employees and the
employees of its subsidiaries, including Pegasus Satellite, to purchase a total
of 1,709,064 shares of Pegasus Communications' Class A common stock during 2001
of which 1,702,185 shares were granted under Pegasus Communications' stock
option plan and 6,879 were granted under Pegasus Communications' restricted
stock plan. 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. The 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.
<TABLE>
<CAPTION>
                                                                                   Potential Realizable Value
                                                                                   at Assumed Annual Rates of
                                                                                    Stock Price Appreciation
                                          Individual Grants                             for Option Term
                        -------------------------------------------------------    --------------------------
                         Number of      % of Total
                        Securities        Options
                        Underlying      Granted to      Exercise
                         Options       Employees in      Price       Expiration
       Name             Granted(1)      Fiscal Year    Per Share        Date           5%             10%
       ----             ----------      -----------    ---------        ----           --             ---
<S>                    <C>             <C>             <C>           <C>           <C>           <C>
Marshall W. Pagon........245,000           14.3%         $5.40        9/20/2011     $832,028      $2,108,521

Ted S. Lodge.............120,000            7.0%         $5.40        9/20/2011     $407,524      $1,032,745

Howard E. Verlin......... 70,000            4.1%         $5.40        9/20/2011     $237,722        $602,435
                           1,639(2)         .01%        $25.75        1/01/2006      $26,542         $67,263

Kasin Smith .............120,000            7.0%         $5.40        9/20/2011     $407,524      $1,032,745

Scott A. Blank........... 75,000            4.4%         $5.40        9/20/2011     $254,702        $645,466
</TABLE>
-----------------
(1)      Unless otherwise indicated, the included amounts represent the number
         of options issued on September 20, 2001 under Pegasus Communications'
         stock option plan. Options granted to named executive officers of
         Pegasus Satellite under Pegasus Communications' stock option plan
         become exercisable as determined by a stock option plan committee
         organized pursuant to the plan. The options issued as part of the
         September 20, 2001 grant vest based upon years of service with Pegasus
         Communications or its subsidiaries from the date of initial employment.
         Options issued are vested 34% after two years of employment, an
         additional 33% after three years of employment and the remaining 33%
         vests upon four years of employment. As a consequence, options issued
         to Messrs. Pagon, Lodge and Verlin were fully vested on the date of
         grant; options issued to Mr. Smith were 67% vested on the date of grant
         and options issued to Mr. Blank were 34% vested on the date granted.

(2)      Represents options to purchase Pegasus Communications' Class A common
         stock issued under Pegasus Communications' restricted stock plan in
         lieu of receiving the award in either cash or shares of Pegasus
         Communications' Class A common stock, as described in note 1 of the
         table above entitled "Summary Compensation Table." Options granted
         pursuant to Pegasus Communications' restricted stock plan vest based
         upon years of service with Pegasus Communications or its subsidiaries
         from the date of initial employment in a manner identical to that
         described in note 1 above. Mr. Verlin's employment with Pegasus
         Satellite began on January 1, 1987, consequently, all options granted
         to Mr. Verlin under Pegasus Communications' restricted stock plan were
         fully vested and exercisable on the date of grant.

                                       50
<PAGE>
         The table below shows aggregated stock option exercises for the
purchase of Pegasus Communications' Class A common stock by the named executive
officers of Pegasus Satellite in 2001 and 2001 year end values. In-the-money
options, which are listed in the last two columns, are those in which the fair
market value of Pegasus Communications' Class A common stock exceeds the
exercise price of the option. The closing price of Pegasus Communications' Class
A common stock on December 31, 2001, was $10.41 per share.

       Aggregate Option Exercises in 2001 and 2001 Year-End Option Values
<TABLE>
<CAPTION>
                                                      Number of Securities         Value of the Unexercised
                                                     Underlying Unexercised        In-the-Money Options at
                                                   Options at Fiscal Year End          Fiscal Year End
                     ----------------------------------------------------------------------------------------
                        Shares
                     Acquired on       Value
       Name            Exercise      Realized      Exercisable   Unexercisable   Exercisable    Unexercisable
       ----            --------      --------      -----------   -------------   -----------    -------------
<S>                   <C>            <C>           <C>           <C>             <C>            <C>
Marshall W. Pagon........ 0             --          924,489        197,333       $1,895,210        $166,940
Ted S. Lodge............. 0             --          481,053         82,491         $958,255         $35,745
Howard E. Verlin......... 0             --          369,666         90,613         $707,755         $35,745
Kasin Smith ............. 0             --          164,865        106,477         $402,804        $198,396
Scott A. Blank........... 0             --           46,100         89,100         $127,755        $247,995
</TABLE>
Compensation Committee Interlocks and Insider Participation

         During 2001, the compensation committee of the board of directors
generally made decisions concerning executive compensation of executive
officers. The compensation committee consisted of James J. McEntee, III, Harry
F. Hopper III, and Robert F. Benbow. Mr. Benbow is associated with affiliates of
Alta Communications that were formerly stockholders of Golden Sky. See ITEM 13 -
Certain Relationships and Related Transactions - Acquisition of Golden Sky
Holdings, Inc.

Compensation of Directors

         Under our 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. Each of our directors serves in the same capacity with Pegasus
Communications and Pegasus Media & Communications, Inc. as they do with Pegasus
Satellite. Consequently, the amounts set forth below represent compensation paid
to the individuals for services they rendered to all three companies. We
currently pay our directors who are not employees or officers of our company an
annual retainer of $10,000 plus $750 for each board meeting attended in person,
$375 for each meeting of a committee of the board and $375 for each board
meeting held by telephone. The annual retainer is payable, at each director's
option, in cash or in the form of options to purchase Pegasus Communications'
Class A common stock. We also reimburse 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 September 20, 2001, Robert F. Benbow, Harry F. Hopper III, James J.
McEntee, III, Mary C. Metzger, William P. Phoenix and Robert N. Verdecchio, who
were then all of our non-employee directors, each received options to purchase
20,000 shares of Pegasus Communications' Class A common stock under Pegasus
Communications' stock option plan. Each option vests based upon years of service
with Pegasus Communications or its subsidiaries from the date of initial
appointment to the board of directors. Options issued are vested 34% after two
years of service, an additional 33% after three years of service and the
remaining 33% vest upon four years of service. Each option was issued at an
exercise price of $5.40 per share, the closing price of the Pegasus
Communications' Class A common stock on September 19, 2001, the date prior to
the date of the grant, and is exercisable until the tenth anniversary from the
date of grant.

                                       51
<PAGE>
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Security Ownership of Pegasus Satellite

         Our outstanding common stock currently consists of 200 shares of Class
B common stock, par value $0.01 per share, all of which is held by our parent
company, Pegasus Communications. The address for Pegasus Communications is c/o
Pegasus Communications Management Company, 225 City Line Avenue, Suite 200, Bala
Cynwyd, Pennsylvania 19004.

Security Ownership of Pegasus Communications

         The following table sets forth information as of March 15, 2002 (unless
otherwise indicated in the notes below) regarding the beneficial ownership of
the Class A common stock and Class B common stock of Pegasus by (a) 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 Pegasus' Class A common stock
and Class B common stock, based upon Pegasus' records or the records of the
Securities and Exchange Commission, (b) each director of Pegasus, (c) each of
the named executive officers of Pegasus and (d) the directors and executive
officers of Pegasus as a group. Each share of Class B common stock of Pegasus is
currently convertible at the discretion of the holders into an equal number of
shares of Pegasus' Class A common stock. Each of the stockholders named below
has sole voting power and sole investment power with respect to the shares
indicated as beneficially owned, unless otherwise indicated.
<TABLE>
<CAPTION>
                                                     Pegasus Communications            Pegasus Communications
            Name and address of                       Class A Common Stock              Class B Common Stock         Voting
              Beneficial Owner                         Beneficially Owned                Beneficially Owned           Power
              ----------------                         ------------------                ------------------           -----
                                                      Shares          %                 Shares            %              %
                                                      ------          -                 ------            -              -
<S>                                                <C>             <C>              <C>                <C>            <C>
Marshall W. Pagon(1) (2)....................      13,565,703(3)(4)   22.3            9,163,800(4)       100            67.0
Ted S. Lodge................................         652,814(5)       1.3                    -            -               *
Howard E. Verlin............................         464,129(6)         *                    -            -               *
Kasin Smith ................................         205,277(7)         *                    -            -               *
Scott A. Blank..............................         536,953(8)       1.1                    -            -               *
Robert F. Benbow............................      13,577,995(4)(9)   22.3            9,163,800(4)       100            67.0
Harry F. Hopper III.........................         422,828(10)        *                    -            -               *
James J. McEntee, III.......................         114,135(11)        *                    -            -               *
Mary C. Metzger.............................       2,476,492(12)      4.6                    -            -             1.7
William P. Phoenix..........................          39,159(13)        *                    -            -               *
Robert N. Verdecchio........................         305,250(14)        *                    -            -               *
Alta Communications VI, L.P. and related
  entities (15).............................      13,565,703(4)      22.3            9,163,800(4)       100            67.0
FMR Corp. (16)..............................       5,547,729         10.9                    -            -             3.9
John Hancock Financial Services, Inc. and
  related entities (17).....................       5,230,350         10.3                    -            -             3.7
T. Rowe Price Associates, Inc. and related
  entities (18).............................       3,411,342          6.6                    -            -             2.4
Wellington Management Company,
  LLP (19)..................................       5,821,960         11.5                    -            -             4.1
Directors and executive officers as a group
  (20) (consists of 14 persons).............      18,872,773         29.2            9,163,800(4)       100            68.9
</TABLE>


                                       52
<PAGE>
---------------------------
 *  Represents less than 1% of the outstanding shares of Class A common stock or
    less than 1% of the voting power, as applicable.

(1) The address of this person is c/o Pegasus Communications Management Company,
    225 City Line Avenue, Suite 200, Bala Cynwyd, Pennsylvania 19004.

(2) Pegasus Capital, L.P. holds 2,488,138 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 of the
    6,675,662 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. is 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 355,000 shares of Class A common stock owned directly by Pegasus
    PCS Partners, L.P. Mr. Pagon, Pegasus Capital, Ltd., Pegasus Capital L.P.,
    Pegasus Communications Portfolio Holdings, Inc. and Pegasus PCS, Inc. are
    deemed to be beneficial owners of the shares. Mr. Pagon is the sole
    shareholder of the general partner of Pegasus Capital, L.P., which is the
    sole shareholder of Pegasus Communications Portfolio Holdings, Inc., the
    sole shareholder of Pegasus PCS, Inc., the general partner of Pegasus PCS
    Partners, L.P. Mr. Pagon and each of the entities named as beneficial owners
    of the 355,000 shares of Class A common stock disclaim beneficial ownership
    with respect to such shares, except to their respective pecuniary interests
    therein. Also includes the 9,163,800 shares of Class B common stock
    described in note 2 above which are convertible into shares of Class A
    common stock on a one for one basis, 958,489 shares of Class A common stock
    which are issuable upon the exercise of the vested portion of outstanding
    stock options and 38,522 shares of Class A common stock which Mr. Pagon
    holds directly.

(4) As a consequence of being parties to the voting agreement (described
    elsewhere herein), 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 will each be deemed to be the beneficial owner with
    respect to 9,163,800 shares of Class A common stock issuable upon conversion
    of all of the outstanding shares of Class B common stock beneficially owned
    by Mr. Pagon as described in note 2 above, the 1,352,011 additional shares
    of Class A common stock beneficially owned by Mr. Pagon as described in note
    3 above and 3,049,892 shares of Class A common stock held in the aggregate
    by Alta Communications VI, L.P., Alta Subordinated Debt Partners III, L.P.
    and Alta-Comm S By S LLC as described in note 15 below.

(5) This includes 3,000 shares of Class A common stock owned by Mr. Lodge's
    wife, of which Mr. Lodge disclaims beneficial ownership, and 488,333 shares
    of Class A common stock which are issuable upon the exercise of the vested
    portion of outstanding stock options.

(6) This includes 376,946 shares of Class A common stock which are issuable upon
    the exercise of the vested portion of outstanding stock options.

(7) This includes 204,465 shares of Class A common stock which are issuable upon
    the exercise of the vested portion of outstanding stock options.

(8) This includes 453,411 shares of Class A common stock held in Pegasus' 401(k)
    plans over which Mr. Blank and one other executive officer of Pegasus share
    voting power in their capacities as co-trustees and 77,250 shares of Class A
    common stock which are issuable upon the exercise of the vested portion of
    outstanding stock options.

(9) The information for Mr. Benbow includes 12,292 shares of Class A common
    stock which are issuable upon the exercise of the vested portion of
    outstanding stock options and all shares of Class A common stock held by
    Alta Communications VI, L.P., Alta Subordinated Debt Partners III, L.P. and
    Alta-Comm. S By S LLC as described below in note 15. Mr. Benbow is a general
    partner of Alta Communications VI, L.P. and Alta Subordinated Debt Partners
    III, L.P. Alta-Comm. S By S LLC is required to invest in the same securities
    as Alta Communications VI, L.P. Mr. Benbow disclaims beneficial ownership of
    all shares held directly by those entities, except for his pecuniary
    interest therein. The address of this person is 200 Clarendon Street, Floor
    51, Boston, Massachusetts 02116.

                                       53
<PAGE>
(10) This includes 45,832 shares of Class A common stock issuable upon the
     exercise of the vested portion of outstanding stock options, and 9,500
     shares held by the Hopper Family Foundation, of which Mr. Hopper is a
     trustee and officer.

(11) This includes 65,759 shares of Class A common stock which are issuable upon
     the exercise of the vested portion of outstanding stock options and 2,000
     shares held beneficially by Mr. McEntee's wife, of which Mr. McEntee
     disclaims beneficial ownership.

(12) This includes 400,000 shares of Class A common stock held by Personalized
     Media & Communications, L.L.C. of which Ms. Metzger is Chairman and
     warrants for 2,000,000 shares of Class A common stock exercisable by
     Personalized Media Communications, L.L.C. Ms. Metzger disclaims beneficial
     ownership of all shares held directly by Personalized Media, except for her
     pecuniary interest therein. Also includes 59,492 shares of Class A common
     stock, which are issuable upon the exercise of the vested portion of
     outstanding stock options. The address of Ms. Metzger is 110 East 42nd
     Street, Suite 1704, New York, New York, 10017.

(13) This includes 39,159 shares of Class A common stock issuable upon the
     exercise of the vested portion of outstanding stock options.

(14) This includes 179,816 shares of Class A common stock issuable upon the
     exercise of the vested portion of outstanding stock options.

(15) Based on information provided pursuant to Schedule 13G filed with the
     Securities and Exchange Commission on February 14, 2001. This includes the
     following number of shares of Class A common stock held by the designated
     entity: Alta Communications VI, L.P. (1,878,027); Alta Subordinated Debt
     Partners III, L.P. (1,129,092); and Alta-Comm. S By S LLC (42,773). The
     address for such entities is 200 Clarendon Street, Floor 51, Boston,
     Massachusetts 02116.

(16) Based on information provided pursuant to an amendment to Schedule 13G
     filed with the Securities and Exchange Commission on July 10, 2001. The
     address of this entity is 82 Devonshire Street, Boston, Massachusetts
     02109.

(17) Based on information provided pursuant to an amendment to Schedule 13G
     filed jointly by John Hancock Financial Services, Inc., its direct, wholly
     owned subsidiary, John Hancock Life Insurance Company, and its indirect
     subsidiaries, John Hancock Subsidiaries LLC, The Berkeley Financial Group,
     LLC and John Hancock Advisers, LLC with the Securities and Exchange
     Commission on February 8, 2002. John Hancock Advisers, LLC has both direct
     beneficial ownership of, and the sole power to vote or to direct the vote
     of all 5,230,350 shares. Through their parent subsidiary relationship with
     John Hancock Advisers, LLC, John Hancock Financial Services, Inc., John
     Hancock Life Insurance Company, John Hancock Subsidiaries LLC and The
     Berkeley Financial Group, LLC each have indirect beneficial ownership of
     the 5,230,350 shares. The address of John Hancock Financial Services, Inc.,
     John Hancock Life Insurance Company and John Hancock Subsidiaries LLC is
     John Hancock Place, P.O. Box 111, Boston, MA 02117. The address of The
     Berkeley Financial Group, LLC and John Hancock Advisers, LLC is 101
     Huntington Avenue, Boston, MA 02199.

(18) Based on information provided pursuant to an amendment to Schedule 13G
     filed with the Securities and Exchange Commission on February 12, 2001.
     These securities are owned by various individuals and institutional
     investors, including T. Rowe Price New Horizons Fund, Inc. which owns
     2,500,000 shares. T. Rowe Price Associates, Inc. (Price Associates) serves
     as investment adviser with respect to these securities, with sole voting
     power over 429,242 of the securities and sole dispositive power over all of
     the securities. For purposes of the reporting requirements of the
     Securities Exchange Act of 1934, Price Associates is deemed to be a
     beneficial owner of such securities; however, Price Associates expressly
     disclaims that it is, in fact, the beneficial owner of such securities. The
     address of T. Rowe Price Associates, Inc. and T. Rowe Price New Horizons
     Fund, Inc. is 100 East Pratt St., Baltimore, Maryland 21202.

(19) Based on information provided pursuant to an amendment to Schedule 13G
     filed with the Securities and Exchange Commission on February 13, 2001. The
     address of Wellington Management Company, LLP is 75 State Street, Boston,
     Massachusetts 02109.

(20) This includes 2,579,918 shares of Class A common stock which are issuable
     upon the vested portion of outstanding stock options.

                                       54
<PAGE>

ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Split Dollar Agreements

         In December 1996 and December 2001, Pegasus Communications entered into
split dollar agreements with the trustees of insurance trusts established by
Marshall W. Pagon. Under the split dollar agreements, Pegasus Communications
agreed to pay a portion of the premiums for certain life insurance policies
covering Mr. Pagon owned by the insurance trusts. The agreements provide that
Pegasus Communications 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 full-dollar value of premiums paid by Pegasus Communications
amounted to $250,000, $250,000 and $416,805 in each of the years of 1999, 2000
and 2001, respectively.

Relationship with W.W. Keen Butcher and Affiliated Entities

         Pegasus Satellite entered into an arrangement in 1998 with W.W. Keen
Butcher, the stepfather of Marshall W. Pagon and Nicholas A. Pagon, who until
March 23, 2001 was a Senior Vice President of Pegasus Satellite, and certain
entities controlled by Mr. Butcher and the owner of a minority interest in one
of the entities. Under this agreement, as modified in 1999, Pegasus Satellite
agreed to provide and maintain collateral for up to $8.0 million in principal
amount of bank loans to Mr. Butcher, his affiliated entities 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
Satellite pursuant to local marketing agreements.

         Under this arrangement, on November 10, 1998, Pegasus Satellite 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 Wilkes-Barre/Scranton, Pennsylvania
designated market area that is programmed by Pegasus Satellite. 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 Satellite 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 Satellite 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 Satellite assigned to one of the Butcher
companies its option to acquire the FCC license for television station WFXU,
which rebroadcasts WTLH pursuant to a local marketing agreement with Pegasus
Satellite. The Butcher company paid Pegasus Satellite $50,000 for the option. In
May 1999, the Butcher company purchased the station and assumed the obligations
under the local marketing agreement with Pegasus Satellite. The Butcher company
borrowed the $50,000 under the loan collateral arrangement, and granted Pegasus
Satellite an option to purchase the station on essentially the same terms
described above for WOLF. Pegasus Satellite has recently exercised this option
and currently has an application pending before the FCC seeking consent to the
assignment of WFXU's license from the Butcher company to a subsidiary of Pegasus
Satellite.

                                       55
<PAGE>

         In addition, a subsidiary of Pegasus Satellite has recently purchased
the construction permit for a new full power television station, WBPG(TV),
operating on Channel 55 at Gulf Shores, Alabama, from one of the Butcher
companies. On August 31, 2001, the parties consummated the sale of the assets
and construction permit for WBPG from the Butcher company to a subsidiary of
Pegasus Satellite for a purchase price of $451,906. One of the Butcher companies
had received the original construction permit for WBPG from the FCC in July
2000.

         Pegasus Satellite currently provides programming under a local
marketing agreement to television station WPME. Under the local marketing
agreement, Pegasus Satellite also holds an option to purchase WPME. One of the
Butcher companies acquired WPME and the FCC license from the prior owner in
February 2001. Pegasus Satellite believes that the WOLF, WFXU and WBPG
transactions were done at fair value and that any future transactions that may
be entered into with the Butcher companies or similar entities, including the
WPME transaction as described, will also be done at fair value.

Acquisition of Golden Sky Holdings, Inc.

         On May 5, 2000, Pegasus Satellite acquired Golden Sky Holdings, Inc.
through the merger of Golden Sky Holdings, Inc. with a subsidiary of Pegasus
Satellite. Prior to the merger, Golden Sky was the second largest independent
provider of DIRECTV. Golden Sky operates in 24 states and its territories
includes approximately 1.9 million households and 392,100 subscribers.

         In connection with the merger, Pegasus Communications issued
approximately 12.2 million shares of its Class A common stock, including stock
options, to stockholders and former employees of Golden Sky. Pegasus
communications also granted registration rights to certain Golden Sky
stockholders, including Alta Communications VI, L.P. and its affiliates and
Spectrum Equity Investors L.P. and its affiliates. As a result of the Golden Sky
merger and the amended voting agreement described below, Robert F. Benbow and
another former director of Golden Sky Holdings were elected to the board of
directors.

Voting Agreement

         In connection with Pegasus Satellite's acquisitions of Digital
Television Services in 1998 and of Golden Sky in 2000, some of the principal
stockholder groups of those two companies entered into, and later amended, a
voting agreement with Pegasus Satellite and Mr. Marshall W. Pagon. The voting
agreement provided those stockholder groups the right to designate members of
Pegasus Satellite's board of directors and required Mr. Pagon to cause all
shares whose vote he controls of Pegasus Satellite's Class A and Class B common
stock prior to Pegasus Satellite's February 2001 reorganization and all shares
whose vote he controls of Pegasus Communications' Class A and Class B common
stock after the reorganization to be voted to elect those designees.

         Because of later events, only affiliates of Alta Communications
currently have the right to designate a director. They have designated Mr.
Benbow.

         Under the amended voting agreement, Mr. Pagon has the right to
designate four directors. His designees are currently himself and Messrs. Lodge
and Verdecchio. Currently, Messrs. Hopper, McEntee and Phoenix and Ms. Metzger
are independent directors, as defined in the voting agreement. Mr. Hopper, prior
to May 2000, was the designee of one of the former stockholders of Digital
Television Services. In May 2000, he became one of Mr. Pagon's designees. At
Pegasus Satellite's 2001 annual meeting of stockholders, Mr. Hopper was elected
as an independent director, as defined by the voting agreement, and Mr. Pagon
therefore has the right to designate another director to the board.

                                       56
<PAGE>


CIBC World Markets Corp. and Affiliates

         William P. Phoenix, a director of Pegasus Satellite, is a Managing
Director of CIBC World Markets Corp. CIBC World Markets Corp. and its affiliates
have provided various services to us and our subsidiaries since the beginning of
1997. CIBC World Markets Corp. has historically performed a number of services
for us, including serving in the year 2000 and the first quarter of 2001 as
dealer manager and information agent for an exchange offer of our 12-3/4% Series
A cumulative exchangeable preferred stock for Pegasus Communications' 12-3/4%
Series A Cumulative Exchangeable Preferred Stock issued in connection with the
holding company reorganization. CIBC World Markets Corp. received customary
commissions for serving in this capacity.

         CIBC World Markets Corp. or its affiliates have also performed the
following services for Pegasus:

         o  acted as dealer manager and information agent for exchange offers in
            which the notes of our wholly owned subsidiaries, Golden Sky
            Systems, Inc. and Golden Sky DBS, Inc., were exchanged for our
            notes;

         o  issued letters of credit in connection with bridge financing
            obtained by us;

         o  provided fairness opinions to us and/or our affiliates in connection
            with certain intercompany loans and other intercompany transactions;

         o  acted as lender in connection with the credit facility of our wholly
            owned subsidiary, Pegasus Media & Communications;

         o  acted as one of the initial purchasers in our December 2001 Rule
            144A offering of $175.0 million in aggregate principal amount of our
            11-1/4% senior notes due 2010. In connection with that offering,
            CIBC World Markets Corp. agreed to provide up to $75.0 million in
            additional bank debt financing to us, at our election or the
            election of CIBC World Markets Corp., subject to certain conditions
            and for specific purposes. The option is coterminous with the
            uncommitted $200 million of additional financing available under
            Pegasus Media & Communications' revolving credit facility, which
            additional financing currently expires on June 30, 2002; and

         o  made a $75.0 million term loan to us in September 2001, expiring one
            year from the date of closing. The loan was repaid in December 2001.

         During 2001, for services rendered, Pegasus or its subsidiaries paid to
CIBC World Markets Corp. or its affiliates an aggregate of $8.4 million in fees.
As of March 6, 2002, Pegasus or its subsidiaries had paid no fees to CIBC World
Markets Corp. or its affiliates for services rendered in 2002. We believe that
all fees paid to CIBC World Markets Corp. or its affiliates in connection with
the transactions described above were customary. We anticipate that we, together
with our subsidiaries, may engage the services of CIBC World Markets Corp. in
the future.

Investment in Personalized Media Communications, L.L.C. and Licensing of Patents

         On January 13, 2000, Pegasus Satellite made an investment in
Personalized Media Communications, L.L.C. Personalized Media is an advanced
communications technology company that owns an intellectual property portfolio
consisting of seven issued U.S. patents and over 10,000 claims submitted in
several hundred pending U.S. patent applications. A majority of pending claims
are based on a 1981 filing date, with the remainder based on a 1987 filing date.
Mary C. Metzger, Chairman of Personalized Media and a member of Pegasus
Satellite's board of directors, and John C. Harvey, Managing Member of
Personalized Media and Ms. Metzger's husband, own a majority of and control
Personalized Media as general partners of the Harvey Family Limited Partnership.

                                       57
<PAGE>

         A subsidiary of Personalized Media granted Pegasus Communications an
exclusive license for the distribution of satellite based services using Ku band
BSS frequencies at the 101(degree), 110(degree) and 119(degree) west longitude
orbital locations and Ka band FSS frequencies at the 99(degree), 101(degree),
103(degree) and 125(degree) west longitude orbital locations, which frequencies
have been licensed by the FCC to affiliates of Hughes Electronics Corporation.
In addition, Personalized Media granted to Pegasus Communications the right to
license on an exclusive basis and on favorable terms the patent portfolio of
Personalized Media in connection with other frequencies that may be licensed to
Pegasus Communications in the future.

         The license granted by Personalized Media's subsidiary provides rights
to all claims covered by Personalized Media's patent portfolio, including
functionality for automating the insertion of programming at a DBS uplink, the
enabling of pay per view buying, the authorization of receivers, the assembly of
records of product and service selections made by viewers including the
communication of this information to billing and fulfillment operations, the
customizing of interactive program guide features and functions made by viewers
and the downloading of software to receivers by broadcasters. Pegasus
Communications will pay license fees to Personalized Media of $100,000 per year
for three years.

         Pegasus Communications acquired preferred interests of Personalized
Media for approximately $14.3 million in cash, 400,000 shares of Pegasus
Communications' Class A common stock and warrants to purchase 2.0 million shares
of Pegasus Communications' Class A common stock at an exercise price of $45.00
per share and with a term of ten years. After certain periods of time,
Personalized Media may redeem the preferred interests, and Pegasus
Communications may require the redemption of preferred interests, in
consideration for Personalized Media's transfer to Pegasus Communications of
Personalized Media's ownership interest in its wholly owned subsidiary that
holds the exclusive license from Personalized Media for the rights that are
licensed to Pegasus Communications. Pegasus Communications may also be required
to make an additional payment to Personalized Media if certain contingencies
occur that Pegasus Communications believes are unlikely to occur. Because of the
speculative nature of the contingencies, it is not possible to estimate the
amount of any such additional payments, but in some cases it could be material.
As part of the transaction, Personalized Media is entitled to designate one
nominee to serve on Pegasus Satellite's board of directors. Mary C. Metzger is
currently serving as Personalized Media's designee.

Other Transactions

         In 1999, Pegasus Satellite loaned $199,999 to Nicholas A. Pagon,
Pegasus Satellite's former Senior 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 was required
to use half of the proceeds of the loan to purchase shares of Pegasus
Satellite's Class A common stock prior to the February 2001 reorganization and
shares of Pegasus Communications' Class A common stock after the reorganization,
and the loan is collateralized by those shares. The balance of the loan proceeds
may be used at Mr. Pagon's discretion. Mr. Pagon resigned from Pegasus Satellite
as of March 23, 2001. The loan remains outstanding, with a balance of
approximately $238,000 at December 31, 2001, consisting of principal and
cumulative interest to that date.



                                       58
<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
                                                                           ----

Schedule II - Valuation and Qualifying Accounts........................     S-1

         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

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

2.1        Agreement and Plan of Merger among Pegasus Communications
           Corporation, Pegasus Holdings Corporation I and Pegasus Merger Sub,
           Inc. dated as of February 22, 2001 (which is incorporated herein by
           reference to Exhibit 2.3 to the 10-K of Pegasus Satellite
           Communications, Inc. (formerly named Pegasus Communications
           Corporation) dated April 2, 2001).

3.1        Amended and Restated Certificate of Incorporation of Pegasus
           Satellite Communications, Inc. (incorporated herein by reference to
           Exhibit 3.1 to the Annual Report on Form 10-K of Pegasus Satellite
           Communications, Inc. filed with the SEC on April 2, 2001).

3.2        By-Laws of Pegasus Satellite Communications, Inc. (incorporated
           herein by reference to Exhibit 3.2 to the Annual Report on Form 10-K
           of Pegasus Satellite Communications, Inc. filed with the SEC on April
           2, 2001).

3.3        Certificate of Designation, Preferences and Rights of 12-3/4% Series
           A Cumulative Exchangeable Preferred Stock of Pegasus Satellite
           Communications, Inc. (incorporated herein by reference to Exhibit 3.3
           to the Annual Report on Form 10-K of Pegasus Satellite
           Communications, Inc. filed with the SEC on April 2, 2001).

3.4        Certificate of Designation, Preferences and Rights of 12-3/4% Series
           B Cumulative Exchangeable Preferred Stock of Pegasus Satellite
           Communications, Inc. (incorporated herein by reference to Exhibit 3.4
           to the Annual Report on Form 10-K of Pegasus Satellite
           Communications, Inc. filed with the SEC on April 2, 2001).

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

                                       59
<PAGE>

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

4.3        Indenture, dated as of October 21, 1997, by and between Pegasus
           Communications Corporation and First Union National Bank, as trustee,
           relating to the 9-5/8% Senior Notes due 2005 (which is incorporated
           herein by reference to Exhibit 4.1 to Amendment No. 1 to the Form 8-K
           dated September 8, 1997 of Pegasus Satellite Communications, Inc.
           (formerly named Pegasus Communications Corporation)).

4.4        Indenture, dated as of November 30, 1998, by and between Pegasus
           Communications Corporation and First Union National Bank, as trustee,
           relating to the 9-3/4% Senior Notes due 2006 (which is incorporated
           herein by reference to Exhibit 4.6 to the Registration Statement on
           Form S-3 of Pegasus Satellite Communications, Inc. (formerly named
           Pegasus Communications Corporation) (File No. 333-70949)).

4.5        Indenture, dated as of November 19, 1999, by and between Pegasus
           Communications Corporation and First Union National Bank, as Trustee,
           relating to the 12-1/2% Senior Notes due 2007 (which is incorporated
           herein by reference to Exhibit 4.1 to the Registration Statement on
           Form S-4 of Pegasus Satellite Communications, Inc. (formerly named
           Pegasus Communications Corporation) (File No. 333-94231)).

4.6        Indenture, dated as of May 31, 2001, by and between Pegasus Satellite
           Communications, Inc. and First Union National Bank, as trustee,
           relating to the 12-3/8% Senior Notes due 2006 of Pegasus Satellite
           Communications, Inc. (which is incorporated herein by reference to
           Exhibit 4.6 to the Annual Report on Form 10-K of Pegasus
           Communications Corporation filed with the SEC on April 3, 2002).

4.7        Form of 12-3/8% Senior Note due 2006 of Pegasus Satellite
           Communications, Inc. (included in Exhibit 4.7 above).

4.8        Indenture, dated as of May 31, 2001, by and between Pegasus Satellite
           Communications, Inc. and First Union National Bank, as trustee,
           relating to the 13-1/2% Senior Subordinated Discount Notes due 2007
           of Pegasus Satellite Communications, Inc. (which is incorporated
           herein by reference to Exhibit 4.8 to the Annual Report on Form 10-K
           of Pegasus Communications Corporation filed with the SEC on April 3,
           2002).

4.9        Form of 13-1/2% Senior Subordinated Discount Note due 2007 of Pegasus
           Satellite Communications, Inc. (included in Exhibit 4.8 above).

4.10       Indenture, dated as of December 19, 2001, by and between Pegasus
           Satellite Communications, Inc. and J.P. Morgan Trust Company,
           National Association, as trustee, relating to the 11-1/4% Senior
           Notes due 2010 of Pegasus Satellite Communications, Inc. (which is
           incorporated herein by reference to Exhibit 4.10 to the Annual Report
           on Form 10-K of Pegasus Communications Corporation filed with the SEC
           on April 3, 2002).

                                       60
<PAGE>

4.11       Form of 11-1/4% Senior Note due 2010 of Pegasus Satellite
           Communications, Inc. (included in Exhibit 4.10 above).

4.12       Amended and Restated Voting Agreement, dated May 5, 2000, among
           Pegasus Communications Corporation, Fleet Venture Resources, Inc.,
           Fleet Equity Partners VI, L.P., Chisholm Partners III, L.P., and
           Kennedy Plaza Partners, Spectrum Equity Investors, L.P. and Spectrum
           Equity Investors II, L.P., Alta Communications VI, L.P., Alta
           Subordinated Debt Partners III, L.P. and Alta-Comm S BY S, L.L.C.,
           and Pegasus Communications Holdings, Inc., Pegasus Capital, L.P.,
           Pegasus Scranton Offer Corp, Pegasus Northwest Offer Corp, and
           Marshall W. Pagon, an individual (which is incorporated herein by
           reference to Exhibit 10.1 to the Form 8-K of Pegasus Satellite
           Communications, Inc. (formerly named Pegasus Communications
           Corporation) dated May 5, 2000).

4.13       Registration Rights Agreement dated May 5, 2000, among Pegasus
           Communications Corporation, Fleet Venture Resources, Inc., Fleet
           Equity Partners VI, L.P., Chisholm Partners III, L.P., and Kennedy
           Plaza Partners, Spectrum Equity Investors, L.P. and Spectrum Equity
           Investors II, L.P., Alta Communications VI, L.P., Alta Subordinated
           Debt Partners III, L.P. and Alta-Comm S BY S, L.L.C., and Pegasus
           Communications Holdings, Inc., Pegasus Capital, L.P., Pegasus
           Scranton Offer Corp, Pegasus Northwest Offer Corp, and Marshall W.
           Pagon, an individual (which is incorporated herein by reference to
           Exhibit 10.2 to the Form 8-K of Pegasus Satellite Communications,
           Inc. (formerly named Pegasus Communications Corporation) dated May 5,
           2000).

4.14       Registration Rights Agreement, dated as of December 19, 2001, by and
           among Pegasus Satellite Communications, Inc., CIBC World Markets
           Corp. and Bear Stearns & Co. Inc. (which is incorporated herein by
           reference to Exhibit 4.14 to the Annual Report on Form 10-K of
           Pegasus Communications Corporation filed with the SEC on April 3,
           2002).

10.1       NRTC/Member Agreement for Marketing and Distribution of DBS Services,
           dated June 24, 1993, between the National Rural Telecommunications
           Cooperative and Pegasus Cable Associates, Ltd. (which is incorporated
           herein by reference to Exhibit 10.28 to the Registration Statement on
           Form S-4 of Pegasus Media & Communications, Inc. (File No. 33-95042)
           (other similar agreements with the National Rural Telecommunications
           Cooperative are not being filed but will be furnished upon request,
           subject to restrictions on confidentiality, if any)).

10.2       Amendment to NRTC/Member Agreement for Marketing and Distribution of
           DBS Services, dated June 24, 1993, between the National Rural
           Telecommunications Cooperative and Pegasus Cable Associates, Ltd.
           (which is incorporated herein by reference to Exhibit 10.29 to the
           Registration Statement on Form S-4 of Pegasus Media & Communications,
           Inc. (File No. 33-95042)).

10.3       DIRECTV Sign-Up Agreement, dated May 3, 1995, between DIRECTV, Inc.
           and Pegasus Satellite Television, Inc. (which is incorporated herein
           by reference to Exhibit 10.30 to the Registration Statement on Form
           S-4 of Pegasus Media & Communications, Inc. (File No. 33-95042)).

10.4       Credit Agreement dated January 14, 2000 among Pegasus Media &
           Communications, Inc., the lenders thereto, CIBC World Markets Corp.,
           Deutsche Bank Securities Inc., Canadian Imperial Bank of Commerce,
           Bankers Trust Company and Fleet National Bank (which is incorporated
           herein by reference to Exhibit 10.7 to the Registration Statement on
           Form S-4 of Pegasus Satellite Communications, Inc. (formerly named
           Pegasus Communications Corporation) (File No. 333-31080)).

                                       61
<PAGE>

10.5       First Amendment to Credit Agreement dated as of July 23, 2001, which
           amends the Credit Agreement dated January 14, 2000 among Pegasus
           Media & Communications, Inc., the lenders thereto, CIBC World Markets
           Corp., Deutsche Bank Securities Inc., Canadian Imperial Bank of
           Commerce, Bankers Trust Company and Fleet National Bank, (which is
           incorporated herein by reference to Exhibit 10.1 of Pegasus
           Communications Corporation's Form 10-Q for the quarter ended June 30,
           2001).

10.6       Second Amendment to Credit Agreement dated as of November 13, 2001,
           which amends the Credit Agreement dated January 14, 2000 among
           Pegasus Media & Communications, Inc., the lenders thereto, CIBC World
           Markets Corp., Deutsche Bank Securities Inc., Canadian Imperial Bank
           of Commerce, Bankers Trust Company and Fleet National Bank. (which is
           incorporated herein by reference to Exhibit 10.6 to the Annual Report
           on Form 10-K of Pegasus Communications Corporation filed with the SEC
           on April 3, 2002).

10.7+      Pegasus Communications Corporation Restricted Stock Plan (as amended
           and restated generally effective as of December 18, 1998) (which is
           incorporated herein by reference to Exhibit 10.2 to the Form 10-Q of
           Pegasus Satellite Communications, Inc. (formerly named Pegasus
           Communications Corporation) dated August 13, 1999).

10.8+      Pegasus Communications Corporation 1996 Stock Option Plan (as amended
           and restated effective as of April 23, 1999) (which is incorporated
           herein by reference to Exhibit 10.1 to the Form 10-Q of Pegasus
           Satellite Communications, Inc. (formerly named Pegasus Communications
           Corporation) dated August 13, 1999).

10.9+      Pegasus Communications Corporation Executive Incentive Plan (which is
           incorporated herein by reference to Exhibit 10.1 to the Form 10-Q of
           Pegasus Communications Corporation dated May 17, 2001).

10.10      Agreement, effective as of September 13, 1999, by and among ADS
           Alliance Data Systems, Inc., Pegasus Satellite Television, Inc. and
           Digital Television Services, Inc. (which is incorporated herein by
           reference to Exhibit 10.1 to the Form 10-Q dated November 12, 1999 of
           Pegasus Satellite Communications, Inc. (formerly named Pegasus
           Communications Corporation)).

10.10      Amendment dated December 30, 1999, to ADS Alliance Agreement among
           ADS Alliance Data Systems, Inc., Pegasus Satellite Television, Inc.
           and Digital Television Securities, Inc., dated September 13, 1999
           (which is incorporated herein by reference to Exhibit 10.8 to the
           Registration Statement on Form S-4 of Pegasus Satellite
           Communications, Inc. (formerly named Pegasus Communications
           Corporation) (File No. 333-31080)).

12.1*      Statement Re Computation of Ratios

21.1*      Subsidiaries of Pegasus Satellite Communications, Inc.

24.1*      Power of Attorney (included in Power of Attorney).

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

                                       62
<PAGE>

         (b) Reports on Form 8-K.

         On October 17, 2001, Pegasus Satellite Communications, Inc. filed a
Current Report on Form 8-K dated October 12, 2001 reporting that its
subsidiaries, Pegasus Satellite Television, Inc. and Golden Sky Systems, Inc.,
and DirecTV entered into a new agreement for a revised seamless consumer
program. The new agreement preserves Pegasus Satellite's right to provide its
customers with video services currently distributed by DirecTV from certain
frequencies, including the right to provide the premium services HBO, Showtime,
Cinemax and The Movie Channel, which are the subject of separate litigation
among DirecTV, Pegasus Satellite Television and Golden Sky, as well as sports
programming and local TV stations.

         On October 23, 2001, Pegasus Satellite Communications, Inc. filed a
Current Report on Form 8-K dated October 22, 2001, reporting that oral argument
on a motion for summary judgment filed by DirecTV on July 2, 2001 in connection
with its term claim was held on October 22, 2001. This claim contends that the
length of the agreement between Pegasus Satellite, through its indirect
subsidiaries, and the National Rural Telecommunications Cooperative is tied to
the life of only one satellite, DBS-1. The court issued a written tentative
ruling denying DirecTV's motion and took the motion under submission.

         On December 10, 2001, Pegasus Satellite Communications, Inc. filed a
Current Report on Form 8-K dated December 10, 2001, reporting that Pegasus
Communications had announced that Pegasus Satellite, subject to certain market
and other conditions, intended to offer approximately $250 million of senior
notes due January 15, 2010. In addition, Pegasus Satellite reported that one of
its subsidiaries was sued (along with DirecTV, Hughes Electronics, EchoStar
Communications and others) by Broadcast Innovations, L.L.C. for patent
infringement.

                                       63



<PAGE>
                                  SIGNATURES

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

                                       PEGASUS SATELLITE COMMUNICATIONS, INC.



                                       By: /s/ Ted S. Lodge
                                          -------------------------------------
                                          Ted S. Lodge
                                          President and Chief Operating Officer
Date:  April 9, 2002

                                POWER OF ATTORNEY

         The undersigned directors and officers of Pegasus Satellite
Communications, Inc. hereby appoint Marshall W. Pagon, Ted S. Lodge and Scott A.
Blank or any of them individually, as attorney in fact and agent for the
undersigned, with full power of substitution for, and in the name, place and
stead of the undersigned, to sign and file with the Securities and Exchange
Commission under the Securities Exchange Act of 1934, as amended, any and all
amendments to this report on Form 10-K, and exhibits to this report on Form
10-K, with full power and authority to do and perform any and all acts and
things whatsoever requisite and necessary or desirable in connection with such
matters, hereby ratifying and confirming all that each of said attorneys in fact
and agents, or his substitute or substitutes, may lawfully do or cause to be
done by virtue hereof.





<PAGE>


         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>
               Signature                                 Title                                      Date
               ---------                                 -----                                      ----
<S>                                      <C>                                                   <C>
By:   /s/ Marshall W. Pagon               Chairman of the Board and Chief                        April 9, 2002
    --------------------------------      Executive Officer (Principal
      Marshall W. Pagon                   Executive Officer)


By:   /s/ Joseph W. Pooler, Jr.           Vice President--Finance and                            April 9, 2002
     -------------------------------      Controller
      Joseph W. Pooler, Jr.               (Principal Financial and
                                          Accounting Officer)


By:   /s/ Ted S. Lodge                    Director, President, Chief                             April 9, 2002
    --------------------------------      Operating Officer and Counsel
      Ted S. Lodge



By:  /s/ Robert F. Benbow                 Director                                               April 9, 2002
     -------------------------------
      Robert F. Benbow



By:   /s/ Harry F. Hopper III             Director                                               April 9, 2002
      ------------------------------
      Harry F. Hopper III



By:   /s/ James J. McEntee, III           Director                                               April 9, 2002
      ------------------------------
      James J. McEntee, III


By:   /s/ Mary C. Metzger                 Director                                               April 9, 2002
      ------------------------------
      Mary C. Metzger



By:  /s/ William P. Phoenix               Director                                               April 9, 2002
     -------------------------------
      William P. Phoenix



By:  /s/ Robert N. Verdecchio             Director                                               April 9, 2002
     -------------------------------
        Robert N. Verdecchio
</TABLE>


<PAGE>


                                  EXHIBIT INDEX
Exhibit
Number     Description of Document
------     -----------------------

2.1        Agreement and Plan of Merger among Pegasus Communications
           Corporation, Pegasus Holdings Corporation I and Pegasus Merger Sub,
           Inc. dated as of February 22, 2001 (which is incorporated herein by
           reference to Exhibit 2.3 to the 10-K of Pegasus Satellite
           Communications, Inc. (formerly named Pegasus Communications
           Corporation) dated April 2, 2001).

3.1        Amended and Restated Certificate of Incorporation of Pegasus
           Satellite Communications, Inc. (incorporated herein by reference to
           Exhibit 3.1 to the Annual Report on Form 10-K of Pegasus Satellite
           Communications, Inc. filed with the SEC on April 2, 2001).

3.2        By-Laws of Pegasus Satellite Communications, Inc. (incorporated
           herein by reference to Exhibit 3.2 to the Annual Report on Form 10-K
           of Pegasus Satellite Communications, Inc. filed with the SEC on April
           2, 2001).

3.3        Certificate of Designation, Preferences and Rights of 12-3/4% Series
           A Cumulative Exchangeable Preferred Stock of Pegasus Satellite
           Communications, Inc. (incorporated herein by reference to Exhibit 3.3
           to the Annual Report on Form 10-K of Pegasus Satellite
           Communications, Inc. filed with the SEC on April 2, 2001).

3.4        Certificate of Designation, Preferences and Rights of 12-3/4% Series
           B Cumulative Exchangeable Preferred Stock of Pegasus Satellite
           Communications, Inc. (incorporated herein by reference to Exhibit 3.4
           to the Annual Report on Form 10-K of Pegasus Satellite
           Communications, Inc. filed with the SEC on April 2, 2001).

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 the
           Registration Statement on Form S-4 of Pegasus Media & Communications,
           Inc. (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        Indenture, dated as of October 21, 1997, by and between Pegasus
           Communications Corporation and First Union National Bank, as trustee,
           relating to the 9-5/8% Senior Notes due 2005 (which is incorporated
           herein by reference to Exhibit 4.1 to Amendment No. 1 to the Form 8-K
           dated September 8, 1997 of Pegasus Satellite Communications, Inc.
           (formerly named Pegasus Communications Corporation)).

4.4        Indenture, dated as of November 30, 1998, by and between Pegasus
           Communications Corporation and First Union National Bank, as trustee,
           relating to the 9-3/4% Senior Notes due 2006 (which is incorporated
           herein by reference to Exhibit 4.6 to the Registration Statement on
           Form S-3 of Pegasus Satellite Communications, Inc. (formerly named
           Pegasus Communications Corporation) (File No. 333-70949)).


<PAGE>

4.5        Indenture, dated as of November 19, 1999, by and between Pegasus
           Communications Corporation and First Union National Bank, as Trustee,
           relating to the 12-1/2% Senior Notes due 2007 (which is incorporated
           herein by reference to Exhibit 4.1 to the Registration Statement on
           Form S-4 of Pegasus Satellite Communications, Inc. (formerly named
           Pegasus Communications Corporation) (File No. 333-94231)).

4.6        Indenture, dated as of May 31, 2001, by and between Pegasus Satellite
           Communications, Inc. and First Union National Bank, as trustee,
           relating to the 12-3/8% Senior Notes due 2006 of Pegasus Satellite
           Communications, Inc. (which is incorporated herein by reference to
           Exhibit 4.6 to the Annual Report on Form 10-K of Pegasus
           Communications Corporation filed with the SEC on April 3, 2002).

4.7        Form of 12-3/8% Senior Note due 2006 of Pegasus Satellite
           Communications, Inc. (included in Exhibit 4.7 above).

4.8        Indenture, dated as of May 31, 2001, by and between Pegasus Satellite
           Communications, Inc. and First Union National Bank, as trustee,
           relating to the 13-1/2% Senior Subordinated Discount Notes due 2007
           of Pegasus Satellite Communications, Inc. (which is incorporated
           herein by reference to Exhibit 4.8 to the Annual Report on Form 10-K
           of Pegasus Communications Corporation filed with the SEC on April 3,
           2002).

4.9        Form of 13-1/2% Senior Subordinated Discount Note due 2007 of Pegasus
           Satellite Communications, Inc. (included in Exhibit 4.8 above).

4.10       Indenture, dated as of December 19, 2001, by and between Pegasus
           Satellite Communications, Inc. and J.P. Morgan Trust Company,
           National Association, as trustee, relating to the 11-1/4% Senior
           Notes due 2010 of Pegasus Satellite Communications, Inc. (which is
           incorporated herein by reference to Exhibit 4.10 to the Annual Report
           on Form 10-K of Pegasus Communications Corporation filed with the SEC
           on April 3, 2002).

4.11       Form of 11-1/4% Senior Note due 2010 of Pegasus Satellite
           Communications, Inc. (included in Exhibit 4.10 above).

4.12       Amended and Restated Voting Agreement, dated May 5, 2000, among
           Pegasus Communications Corporation, Fleet Venture Resources, Inc.,
           Fleet Equity Partners VI, L.P., Chisholm Partners III, L.P., and
           Kennedy Plaza Partners, Spectrum Equity Investors, L.P. and Spectrum
           Equity Investors II, L.P., Alta Communications VI, L.P., Alta
           Subordinated Debt Partners III, L.P. and Alta-Comm S BY S, L.L.C.,
           and Pegasus Communications Holdings, Inc., Pegasus Capital, L.P.,
           Pegasus Scranton Offer Corp, Pegasus Northwest Offer Corp, and
           Marshall W. Pagon, an individual (which is incorporated herein by
           reference to Exhibit 10.1 to the Form 8-K of Pegasus Satellite
           Communications, Inc. (formerly named Pegasus Communications
           Corporation) dated May 5, 2000).

4.13       Registration Rights Agreement dated May 5, 2000, among Pegasus
           Communications Corporation, Fleet Venture Resources, Inc., Fleet
           Equity Partners VI, L.P., Chisholm Partners III, L.P., and Kennedy
           Plaza Partners, Spectrum Equity Investors, L.P. and Spectrum Equity
           Investors II, L.P., Alta Communications VI, L.P., Alta Subordinated
           Debt Partners III, L.P. and Alta-Comm S BY S, L.L.C., and Pegasus
           Communications Holdings, Inc., Pegasus Capital, L.P., Pegasus
           Scranton Offer Corp, Pegasus Northwest Offer Corp, and Marshall W.
           Pagon, an individual (which is incorporated herein by reference to
           Exhibit 10.2 to the Form 8-K of Pegasus Satellite Communications,
           Inc. (formerly named Pegasus Communications Corporation) dated May 5,
           2000).
<PAGE>

4.14       Registration Rights Agreement, dated as of December 19, 2001, by and
           among Pegasus Satellite Communications, Inc., CIBC World Markets
           Corp. and Bear Stearns & Co. Inc. (which is incorporated herein by
           reference to Exhibit 4.14 to the Annual Report on Form 10-K of
           Pegasus Communications Corporation filed with the SEC on April 3,
           2002).

10.1       NRTC/Member Agreement for Marketing and Distribution of DBS Services,
           dated June 24, 1993, between the National Rural Telecommunications
           Cooperative and Pegasus Cable Associates, Ltd. (which is incorporated
           herein by reference to Exhibit 10.28 to the Registration Statement on
           Form S-4 of Pegasus Media & Communications, Inc. (File No. 33-95042)
           (other similar agreements with the National Rural Telecommunications
           Cooperative are not being filed but will be furnished upon request,
           subject to restrictions on confidentiality, if any)).

10.2       Amendment to NRTC/Member Agreement for Marketing and Distribution of
           DBS Services, dated June 24, 1993, between the National Rural
           Telecommunications Cooperative and Pegasus Cable Associates, Ltd.
           (which is incorporated herein by reference to Exhibit 10.29 to the
           Registration Statement on Form S-4 of Pegasus Media & Communications,
           Inc. (File No. 33-95042)).

10.3       DIRECTV Sign-Up Agreement, dated May 3, 1995, between DIRECTV, Inc.
           and Pegasus Satellite Television, Inc. (which is incorporated herein
           by reference to Exhibit 10.30 to the Registration Statement on Form
           S-4 of Pegasus Media & Communications, Inc. (File No. 33-95042)).

10.4       Credit Agreement dated January 14, 2000 among Pegasus Media &
           Communications, Inc., the lenders thereto, CIBC World Markets Corp.,
           Deutsche Bank Securities Inc., Canadian Imperial Bank of Commerce,
           Bankers Trust Company and Fleet National Bank (which is incorporated
           herein by reference to Exhibit 10.7 to the Registration Statement on
           Form S-4 of Pegasus Satellite Communications, Inc. (formerly named
           Pegasus Communications Corporation) (File No. 333-31080)).

10.5       First Amendment to Credit Agreement dated as of July 23, 2001, which
           amends the Credit Agreement dated January 14, 2000 among Pegasus
           Media & Communications, Inc., the lenders thereto, CIBC World Markets
           Corp., Deutsche Bank Securities Inc., Canadian Imperial Bank of
           Commerce, Bankers Trust Company and Fleet National Bank, (which is
           incorporated herein by reference to Exhibit 10.1 of Pegasus
           Communications Corporation's Form 10-Q for the quarter ended June 30,
           2001).

10.6       Second Amendment to Credit Agreement dated as of November 13, 2001,
           which amends the Credit Agreement dated January 14, 2000 among
           Pegasus Media & Communications, Inc., the lenders thereto, CIBC World
           Markets Corp., Deutsche Bank Securities Inc., Canadian Imperial Bank
           of Commerce, Bankers Trust Company and Fleet National Bank. (which is
           incorporated herein by reference to Exhibit 10.6 to the Annual Report
           on Form 10-K of Pegasus Communications Corporation filed with the SEC
           on April 3, 2002).

10.7+      Pegasus Communications Corporation Restricted Stock Plan (as amended
           and restated generally effective as of December 18, 1998) (which is
           incorporated herein by reference to Exhibit 10.2 to the Form 10-Q of
           Pegasus Satellite Communications, Inc. (formerly named Pegasus
           Communications Corporation) dated August 13, 1999).
<PAGE>

10.8+      Pegasus Communications Corporation 1996 Stock Option Plan (as amended
           and restated effective as of April 23, 1999) (which is incorporated
           herein by reference to Exhibit 10.1 to the Form 10-Q of Pegasus
           Satellite Communications, Inc. (formerly named Pegasus Communications
           Corporation) dated August 13, 1999).

10.9+      Pegasus Communications Corporation Executive Incentive Plan (which is
           incorporated herein by reference to Exhibit 10.1 to the Form 10-Q of
           Pegasus Communications Corporation dated May 17, 2001).

10.10      Agreement, effective as of September 13, 1999, by and among ADS
           Alliance Data Systems, Inc., Pegasus Satellite Television, Inc. and
           Digital Television Services, Inc. (which is incorporated herein by
           reference to Exhibit 10.1 to the Form 10-Q dated November 12, 1999 of
           Pegasus Satellite Communications, Inc. (formerly named Pegasus
           Communications Corporation)).

10.10      Amendment dated December 30, 1999, to ADS Alliance Agreement among
           ADS Alliance Data Systems, Inc., Pegasus Satellite Television, Inc.
           and Digital Television Securities, Inc., dated September 13, 1999
           (which is incorporated herein by reference to Exhibit 10.8 to the
           Registration Statement on Form S-4 of Pegasus Satellite
           Communications, Inc. (formerly named Pegasus Communications
           Corporation) (File No. 333-31080)).

12.1*      Statement Re Computation of Ratios

21.1*      Subsidiaries of Pegasus Satellite Communications, Inc.

24.1*      Power of Attorney (included in Power of Attorney).

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





<PAGE>
                     PEGASUS SATELLITE COMMUNICATIONS, INC.
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
                        AND FINANCIAL STATEMENT SCHEDULE

<TABLE>
<CAPTION>

                                                                                                            Page
                                                                                                            ----

<S>                                                                                                         <C>
Financial Statements:

Report of Independent Accountants...........................................................................F-2

Consolidated Balance Sheets as of December 31, 2001 and 2000................................................F-3

Consolidated Statements of Operations and Comprehensive Loss for the years ended
December 31, 2001, 2000, and 1999...........................................................................F-4

Consolidated Statements of Stockholders' Equity (Deficit) for the years ended
December 31, 2001, 2000, and 1999...........................................................................F-5

Consolidated Statements of Cash Flows for the years ended
December 31, 2001, 2000, and 1999...........................................................................F-6

Notes to Consolidated Financial Statements..................................................................F-7

Financial Statement Schedule:

Schedule II - Valuation and Qualifying Accounts for the years ended
December 31, 2001, 2000, and 1999...........................................................................S-1
</TABLE>



                                       F-1



<PAGE>


                        Report of Independent Accountants

To the Board of Directors and Stockholders
of Pegasus Satellite Communications, Inc.:

         In our opinion, the consolidated financial statements listed in the
index appearing under Item 14(a)(1) on page F-1, present fairly, in all material
respects, the financial position of Pegasus Satellite Communications, Inc. and
its subsidiaries (the "Company") at December 31, 2001 and 2000, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 2001 in conformity with accounting principles
generally accepted in the United States of America. In addition, in our opinion,
the financial statement schedule listed in the index appearing under Item
14(a)(2) on page F-1 presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements. These financial statements and financial statement
schedule are the responsibility of the Company's management; our responsibility
is to express an opinion on these financial statements and financial statement
schedule based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States of
America, 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 our opinion.


PricewaterhouseCoopers LLP

Philadelphia, PA
February 13, 2002



                                       F-2

<PAGE>


                     Pegasus Satellite Communications, Inc.
                           Consolidated Balance Sheets
                      (In thousands, except share amounts)

<TABLE>
<CAPTION>
                                                                                                         December 31,  December 31,
                                                                                                             2001          2000
                                                                                                         ------------  ------------
                                     ASSETS
<S>                                                                                                       <C>           <C>
Current  assets:
     Cash and cash equivalents                                                                            $   144,350   $   214,361
     Accounts receivable:
       Trade, less allowance for doubtful accounts of $6,106 and $3,303, respectively                          34,727        41,533
       Other                                                                                                   39,853        16,110
     Inventory                                                                                                  9,553        16,854
     Deferred subscriber acquisition costs, net                                                                15,194             -
     Prepaid expenses                                                                                          12,686        12,778
     Other current assets                                                                                      17,968        14,038
                                                                                                          -----------   -----------
       Total current assets                                                                                   274,331       315,674

Property and equipment, net                                                                                    90,861        64,609
Intangible assets, net                                                                                      1,708,642     2,036,208
Other noncurrent assets                                                                                        75,202       188,895
                                                                                                          -----------   -----------

       Total assets                                                                                       $ 2,149,036   $ 2,605,386
                                                                                                          ===========   ===========

    LIABILITIES, REDEEMABLE PREFERRED STOCK, AND COMMON STOCKHOLDER'S EQUITY
Current liabilities:
     Current portion of long term debt                                                                        $ 8,728      $ 10,891
     Taxes payable                                                                                                  -        29,620
     Accounts payable                                                                                          10,537         9,782
     Accrued interest                                                                                          27,979        29,264
     Accrued programming, fees, and commissions                                                               112,971       104,627
     Accrued expenses                                                                                          30,279        31,256
     Other current liabilities                                                                                  4,755         4,684
                                                                                                          -----------   -----------
       Total current liabilities                                                                              195,249       220,124

Long term debt                                                                                              1,329,923     1,171,967
Deferred income taxes, net                                                                                     32,734       145,912
Other noncurrent liabilities                                                                                   46,796        40,198
                                                                                                          -----------   -----------
       Total liabilities                                                                                    1,604,702     1,578,201
                                                                                                          -----------   -----------

Commitments and contingent liabilities (see Note 16)

Minority interest                                                                                               1,315           911

Redeemable preferred stocks (liquidation value at December 31, 2001 was $184.0 million)                       183,503       491,843

Common stockholder's equity:
     Class A common stock, $0.01 par value; shares authorized: 0 and 250.0 million, respectively; shares
       issued: 0 and 45,957,464, respectively; shares outstanding: 0 and 45,942,227, respectively                   -           459
     Class B common stock, $0.01 par value; shares authorized: 200 and 30.0 million, respectively; shares
         issued and outstanding: 200 and 9,163,800, respectively                                                    -            92
     Nonvoting common stock, $0.01 par value; shares authorized: 0 and 200.0 million, respectively                  -             -
     Additional paid in capital                                                                             1,076,634       979,461
     Accumulated deficit                                                                                     (718,123)     (432,910)
     Accumulated other comprehensive income (loss), net of income tax expense (benefit) of
       $616 and $(7,340), respectively                                                                          1,005       (11,976)
     Class A common stock in treasury, at cost; 0 and 15,237 shares, respectively                                   -          (695)
                                                                                                          -----------   -----------
       Total common stockholder's equity                                                                      359,516       534,431
                                                                                                          -----------   -----------

     Total liabilities, redeemable preferred stock, and common stockholder's equity                       $ 2,149,036   $ 2,605,386
                                                                                                          ===========   ===========
</TABLE>


           See accompanying notes to consolidated financial statements

                                       F-3


<PAGE>

                     Pegasus Satellite Communications, Inc.
          Consolidated Statements of Operations and Comprehensive Loss
                                 (In thousands)
<TABLE>
<CAPTION>
                                                                                          Year Ended December 31,
                                                                                 2001               2000             1999
                                                                              ---------           ---------        ---------
<S>                                                                           <C>                 <C>             <C>
Net revenues:
     DBS                                                                      $ 838,208           $ 582,075        $ 286,353
     Other businesses                                                            34,281              35,433           36,415
                                                                              ---------           ---------        ---------
       Total net revenues                                                       872,489             617,508          322,768

Operating expenses:
     DBS
        Programming                                                             362,213             252,667          137,369
        Other subscriber related expenses                                       205,120             135,513           64,810
                                                                              ---------           ---------        ---------
        Direct operating expenses (excluding depreciation
          and amortization shown separately below)                              567,333             388,180          202,179

        Promotions and incentives                                                38,059              31,684           22,872
        Advertising and selling                                                 104,677             132,718           80,358
        General and administrative                                               36,132              24,593           13,523
        Depreciation and amortization                                           257,543             185,422           76,835

     Other businesses
        Programming                                                              13,088              14,198           12,846
        Other subscriber related expenses                                         2,479                   -                -
                                                                              ---------           ---------        ---------
        Direct operating expenses (excluding depreciation
          and amortization shown separately below)                               15,567              14,198           12,846

        Promotions and incentives                                                 2,531                   -                -
        Advertising and selling                                                  12,722               7,612            6,304
        General and administrative                                               19,861              10,195            9,966
        Depreciation and amortization                                             5,556               5,133            5,144

     Corporate expenses                                                          12,955               9,428            5,580
     Corporate depreciation and amortization                                      1,644               1,566            3,119
     Development costs                                                              249               4,630              386
     Other operating expenses, net                                               32,064              11,111            3,653
                                                                              ---------           ---------        ---------
       Loss from operations                                                    (234,404)           (208,962)        (119,997)

Interest expense                                                               (136,193)           (122,102)         (64,904)
Interest income                                                                   4,928              15,245            1,356
Loss on impairment of marketable securities                                     (34,205)                  -                -
Other nonoperating (expenses) income, net                                        (5,901)                602                -
                                                                               --------           ---------        ---------

     Loss before equity in affiliates, income taxes, discontinued
       operations, and extraordinary item                                      (405,775)           (315,217)        (183,545)

Equity in losses of affiliates                                                        -                (432)            (201)
(Benefit) expense for income taxes                                             (122,368)           (101,989)             496
                                                                              ---------           ---------        ---------
     Loss before discontinued operations and extraordinary item                (283,407)           (213,660)        (184,242)

Discontinued operations:
     Income from discontinued operations of cable segment, net of income
       tax expense of $632 and $0, respectively                                       -               1,031            2,128
     Gain on sale of discontinued operations, net of taxes of $28,000                 -              59,361                -
                                                                              ---------           ---------        ---------
     Loss before extraordinary item                                            (283,407)           (153,268)        (182,114)

Extraordinary loss from extinguishments of debt, net of income tax
     benefit of $1,106, $3,526 and $0 respectively                               (1,806)             (5,754)          (6,178)
                                                                              ---------           ---------        ---------
     Net loss                                                                  (285,213)           (159,022)        (188,292)

Other comprehensive income (loss):
     Unrealized loss on marketable securities, net of income tax benefit
        of $5,042 and $7,340, respectively                                       (8,226)            (11,976)               -
     Reclassification adjustment for accumulated unrealized loss on
        marketable securities included in net loss, net of income tax
        benefit of $(12,998)                                                     21,207                   -                -
                                                                              ----------          ---------        ---------
     Net other comprehensive income (loss)                                       12,981             (11,976)               -
                                                                              ---------           ---------        ---------
     Comprehensive loss                                                       $(272,232)          $(170,998)       $(188,292)
                                                                              =========           =========        =========
</TABLE>


           See accompanying notes to consolidated financial statements

                                       F-4



<PAGE>

<TABLE>
<CAPTION>

                                                                                  Pegasus Satellite Communications Inc.
                                                                    Consolidated Statements of Common Stockholder's Equity (Deficit)
                                                                                             (In thousands)


                                                                   Class A Common Stock        Class B Common Stock
                                                                 -------------------------------------------------------- Additional
                                                                  Number           Par        Number           Par          Paid In
                                                                 of Shares        Value      of Shares        Value         Capital
                                                                 -------------------------------------------------------------------
<S>                                                                    <C>        <C>          <C>             <C>        <C>
Balances at January 1, 1999                                            11,316     $ 113        4,582           $ 46       $ 173,871

Net loss
Issuance of Class A common stock due to:
  Secondary offering                                                    3,616        36                                      74,857
  Acquisitions                                                             12         -                                         550
  Exercise of warrants and stock options                                  220         2                                       2,781
  Employee plans and awards                                                52         1                                       1,399
Issuance of warrants and options due to acquisitions                                                                            814
Dividends accrued on redeemable preferred stock                                                                             (16,706)
Repurchase of Class A common stock
                                                                 -------------------------------------------------------------------
Balances at December 31, 1999                                          15,216       152        4,582             46         237,566

Net loss
Issuance of Class A common stock due to:
  Acquisitions                                                          6,564        65                                     619,933
  Investment in affiliate                                                 200         2                                      18,773
  Exercise of warrants and stock options                                1,392        13                                       3,219
  Conversion of preferred stock of subsidiary                              67         1                                       3,047
  Employee plans and awards                                                67         1                                       2,095
  Two-for-one stock dividend                                           22,170       222                                        (222)
  Payment of preferred stock dividends                                    281         3                                      15,000
Issuance of options and warrants due to:
  Acquisitions                                                                                                               33,367
  Investment in affiliate                                                                                                    78,780
Two-for-one stock dividend on Class B common stock                                             4,582             46             (46)
Dividends accrued on redeemable preferred stocks                                                                            (35,161)
Accretion on preferred stock                                                                                                   (380)
Compensation related to stock options issued                                                                                  3,490
Unrealized loss on marketable securities, net of
  tax benefit of $7,340
Repurchase of Class A common stock
                                                                 -------------------------------------------------------------------
Balances at December 31, 2000                                          45,957       459        9,164             92         979,461

Net loss
Issuance of Class A common stock due to:
  Exercise of warrants and stock options                                   48         1                                         386
  Employee plans and awards                                                27         -                                         315
  Payment of preferred stock dividends                                    223         2                                       6,070
Dividends accrued on redeemable preferred stocks                                                                            (26,492)
Accretion on preferred stock                                                                                                    (95)
Recapitalization in connection with reorganization                    (46,255)     (462)      (9,164)           (92)        328,715
Distribution of Pegasus Development Corporation to Pegasus
  Communications Corporation in corporate reorganization                                                                   (114,800)
Contribution of Pegasus Broadband Communications by Pegasus
  Communications Corporation in corporate reorganization                                                                     (2,930)
Distribution of guardband licenses to Pegasus Communications
  Corporation                                                                                                               (95,427)
Contribution of Pegasus Communications Corporation's common
  stock in acquiring subscribers                                                                                              1,431
Unrealized loss on marketable securities, net of tax benefit
  of $5,042
Reclassification adjustment for accumulated unrealized loss
  on marketable securities included in net loss, net of income
  tax benefit of $12,998
                                                                 -------------------------------------------------------------------
Balances at December 31, 2001                                               -     $   -            -           $  -      $ 1,076,634
                                                                 ===================================================================
</TABLE>


<PAGE>




<TABLE>
<CAPTION>
                                                                                    Pegasus Satellite Communications Inc.
                                                                    Consolidated Statements of Common Stockholder's Equity (Deficit)
                                                                                               (In thousands)


                                                                                Accumulated       Treasury Stock
                                                                                   Other       -------------------     Total Common
                                                                Accumulated    Comprehensive     Number                Stockholder's
                                                                  Deficit      Income (Loss)    of Shares    Cost   Equity (Deficit)
                                                                --------------------------------------------------------------------
<S>                                                               <C>                <C>                        <C>        <C>
Balances at January 1, 1999                                      $ (85,596)     $     -             -          $ -       $  88,434

Net loss                                                          (188,292)                                               (188,292)
Issuance of Class A common stock due to:
  Secondary offering                                                                                                        74,893
  Acquisitions                                                                                                                 550
  Exercise of warrants and stock options                                                                                     2,783
  Employee plans and awards                                                                                                  1,400
Issuance of warrants and options due to acquisitions                                                                           814
Dividends accrued on redeemable preferred stock                                                                            (16,706)
Repurchase of Class A common stock                                                                  4         (187)           (187)
                                                                --------------------------------------------------------------------
Balances at December 31, 1999                                     (273,888)                         4         (187)        (36,311)

Net loss                                                          (159,022)                                               (159,022)
Issuance of Class A common stock due to:
  Acquisitions                                                                                                             619,998
  Investment in affiliate                                                                                                   18,775
  Exercise of warrants and stock options                                                                                     3,232
  Conversion of preferred stock of subsidiary                                                                                3,048
  Employee plans and awards                                                                        (5)         239           2,335
  Two-for-one stock dividend                                                                                                     -
  Payment of preferred stock dividends                                                                                      15,003
Issuance of options and warrants due to:
  Acquisitions                                                                                                              33,367
  Investment in affiliate                                                                                                   78,780
Two-for-one stock dividend on Class B common stock                                                                               -
Dividends accrued on redeemable preferred stocks                                                                           (35,161)
Accretion on preferred stock                                                                                                  (380)
Compensation related to stock options issued                                                                                 3,490
Unrealized loss on marketable securities, net of
  tax benefit of $7,340                                                         (11,976)                                   (11,976)
Repurchase of Class A common stock                                                                 16         (747)           (747)
                                                                --------------------------------------------------------------------
Balances at December 31, 2000                                     (432,910)     (11,976)           15         (695)        534,431

Net loss                                                          (285,213)                                               (285,213)
Issuance of Class A common stock due to:
  Exercise of warrants and stock options                                                                                       387
  Employee plans and awards                                                                                                    315
  Payment of preferred stock dividends                                                                                       6,072
Dividends accrued on redeemable preferred stocks                                                                           (26,492)
Accretion on preferred stock                                                                                                   (95)
Recapitalization in connection with reorganization                                                (15)         695         328,856
Distribution of Pegasus Development Corporation to Pegasus
  Communications Corporation in corporate reorganization                                                                   (114,800)
Contribution of Pegasus Broadband Communications by Pegasus
  Communications Corporation in corporate reorganization                                                                     (2,930)
Distribution of guardband licenses to Pegasus Communications
  Corporation                                                                                                              (95,427)
Contribution of Pegasus Communications Corporation's common
  stock in acquiring subscribers                                                                                             1,431
Unrealized loss on marketable securities, net of tax benefit
  of $5,042                                                                      (8,226)                                    (8,226)
Reclassification adjustment for accumulated unrealized loss
  on marketable securities included in net loss, net of income
  tax benefit of $12,998                                                         21,207                                     21,207
                                                                --------------------------------------------------------------------
Balances at December 31, 2001                                    $(718,123)     $ 1,005             -          $ -       $ 359,516
                                                                ====================================================================
</TABLE>





           See accompanying notes to consolidated financial statements

                                       F-5




<PAGE>


                     Pegasus Satellite Communications, Inc.
                      Consolidated Statements of Cash Flows
                                 (In thousands)

<TABLE>
<CAPTION>


                                                                                                 Year Ended December 31,
                                                                                       2001                2000              1999
                                                                                       ----                ----              ----
<S>                                                                                <C>                 <C>               <C>
Cash flows from operating activities:
    Net loss                                                                        $(285,213)          $(159,022)        $(188,292)
    Adjustments to reconcile net loss to net cash used for
    operating activities:
      Extraordinary loss on extinguishment of debt                                      2,912               9,280             6,178
      Loss on derivative instruments                                                    4,160                   -                 -
      Depreciation and amortization                                                   270,441             202,504            95,766
      Amortization of debt discount and deferred financing fees                        24,393              16,906             1,446
      Noncash incentive compensation                                                    2,096               5,779             2,002
      Loss on disposal of assets                                                        2,788               5,148             4,588
      Gain on sale of cable operations                                                      -             (87,361)                -
      Bad debt expense                                                                 36,511              14,531             8,369
      Deferred income taxes                                                          (122,721)           (106,553)                -
      Loss on impairment of marketable securities                                      34,205                   -                 -
      Other                                                                             3,200              (3,764)           (3,918)
      Change in current assets and liabilities:
         Accounts receivable                                                          (65,344)            (43,330)          (19,301)
         Inventory                                                                      7,301              (5,144)           (4,422)
         Deferred subscriber acquisition costs                                        (19,421)                  -                 -
         Prepaid expenses                                                                  92              (7,274)           (3,315)
         Taxes payable                                                                (29,620)             29,620                 -
         Accounts payable and accrued expenses                                          7,424              58,937            22,481
         Accrued interest                                                              (1,285)             11,129            (5,873)
         Other current assets and liabilities, net                                       (713)                  -                 -
                                                                                    ---------           ---------          --------
    Net cash used for operating activities                                           (128,794)            (58,614)          (84,291)
                                                                                    ---------           ---------          --------
Cash flows from investing activities:
    Acquisitions, net of cash acquired                                                   (889)           (152,715)         (106,902)
    DBS equipment capitalized                                                         (20,830)            (12,209)                -
    Other capital expenditures                                                        (21,916)            (34,231)          (19,372)
    Purchases of guardband licenses                                                    (3,689)            (91,746)                -
    Purchases of intangible assets                                                     (8,239)            (20,264)           (4,552)
    Payments for programming rights                                                    (4,629)             (4,442)           (3,452)
    Proceeds from sale of cable operations                                                  -             166,937                 -
    Investment in affiliates                                                                -             (14,643)           (4,800)
    Other                                                                                   -                 450               509
                                                                                    ---------           ---------          --------
    Net cash used for investing activities                                            (60,192)           (162,863)         (138,569)
                                                                                    ---------           ---------          --------

Cash flows from financing activities:
    Proceeds from long term debt                                                      175,000               8,750                 -
    Repayments of long term debt                                                       (7,585)            (18,999)          (14,291)
    Net (repayments) borrowings on bank credit facilities                             (29,750)            117,800           130,300
    Changes in restricted cash, net of cash acquired                                     (916)              5,189            19,100
    Debt financing costs                                                               (9,423)             (9,762)           (3,608)
    Advances to affiliates, net of advances from same                                  (8,451)                  -                 -
    Net proceeds from issuance of Class A common stock                                      -               3,232            77,677
    Net proceeds from issuance of Series C preferred stock                                  -             290,422                 -
    Other                                                                                 100              (1,247)            (370)
                                                                                    ---------           ---------          --------
    Net cash provided by financing activities                                         118,975             395,385           208,808
                                                                                    ---------           ---------          --------

Net (decrease) increase in cash and cash equivalents                                  (70,011)            173,908           (14,052)
Cash and cash equivalents, beginning of year                                          214,361              40,453            54,505
                                                                                    ---------           ---------          --------
Cash and cash equivalents, end of period                                            $ 144,350           $ 214,361          $ 40,453
                                                                                    =========           =========          ========
</TABLE>

           See accompanying notes to consolidated financial statements

                                       F-6



<PAGE>



                     PEGASUS SATELLITE COMMUNICATIONS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.       The Company

General

         On February 22, 2001, Pegasus Communications Corporation ("Pegasus
Communications") underwent a corporate reorganization. A new publicly held
parent holding company was formed that assumed the name Pegasus Communications
Corporation. The former parent holding company previously known as Pegasus
Communications Corporation was renamed Pegasus Satellite Communications, Inc
("Pegasus Satellite"). The ownership interests and rights of Pegasus Satellite's
common and preferred stockholders at the date of the reorganization were
automatically transferred into common and preferred stocks of Pegasus
Communications in the reorganization. In the reorganization, all of Pegasus
Satellite's common and preferred stock were recapitalized into 200 shares of
newly issued Series B common stock. All of Pegasus Satellite's common stock is
owned by Pegasus Communications, and as a result, Pegasus Satellite is a direct
subsidiary of Pegasus Communications. Pegasus Satellite continued to be
obligated under debt securities and agreements after the reorganization that it
held at the date of the reorganization. Through a series of concurrent exchange
transactions connected with the reorganization, the 12-3/4% Series preferred
stock of Pegasus Satellite outstanding prior to the reorganization continued to
be outstanding with Pegasus Satellite after the reorganization on the same
terms, conditions, and amounts outstanding as before the reorganization. Also in
the reorganization, Pegasus Satellite distributed its then subsidiary Pegasus
Development Corporation to Pegasus Communications.

         Pegasus Satellite (together with its subsidiaries, the "Company') is a
holding company, and its principal subsidiaries are Pegasus Media &
Communications, Inc. and Pegasus Broadband Communications. Pegasus Media &
Communications is a holding company. Its principal operating subsidiaries are
Pegasus Satellite Television, Inc. and Pegasus Broadcast Television, Inc.
Pegasus Satellite Television provides multichannel direct broadcast satellite
("DBS") services as an independent provider of DIRECTV(R) ("DIRECTV") audio and
video programming in exclusive territories primarily within rural areas of 41
states. DIRECTV is a service of DirecTV, Inc. ("DirecTV"). Pegasus Broadcast
Television owns and/or programs broadcast television ("Broadcast") stations
affiliated with the Fox Broadcasting Company, United Paramount Network and The
WB Television Network. Pegasus Broadband Communications conducts the Company's
broadband ("Broadband") business. The primary business of Broadband, which
commenced commercial operation May 2001, is providing two way satellite access
to the Internet through its Pegasus Express service. The Company may offer this
service anywhere in North America that is accessible to the satellite link.

Significant Risks and Uncertainties

         The Company is highly leveraged. At December 31, 2001, the Company had
a combined carrying amount of debt and redeemable preferred stock outstanding of
$1.5 billion. Because the Company is highly leveraged, it is more vulnerable to
adverse economic and industry conditions. The Company dedicates a substantial
portion of cash to pay amounts associated with debt. In 2001, the Company paid
interest of $113.2 million. In July 2002, the Company is scheduled to begin
paying cash dividends on its 12-3/4% series preferred stock, amounting to $11.7
million in 2002 and $23.5 million annually thereafter. Pegasus Communications'
principal operations are held by Pegasus Satellite and at the present time it
relies on the Company as a source of cash in meeting its cash obligations. For
example, the Company funded the cash payment of $5.7 million made by Pegasus
Communications to redeem one of its series of preferred stock in March 2002.
Pegasus Communications has another $5.0 million of preferred stock that is
redeemable in 2002 at the election of holders of the preferred stock. It is
likely that Pegasus Communications will continue to rely on the Company as its
principal source of cash for the foreseeable future. Using cash for the
previously indicated purposes reduces the availability of funds to the Company
for working capital, capital expenditures, and other activities, and limits the
Company's flexibility in planning for, or reacting to, changes in its business
and the industries in which it operates. The Company's ability to make payments
on and to refinance indebtedness and redeemable preferred stock outstanding and
to fund planned capital expenditures and other activities will depend on its
ability to generate cash in the future. The Company's ability to generate cash
will depend upon the success of its business strategy, prevailing economic
conditions, regulatory risks, its ability to integrate acquired assets
successfully into its operations, competitive activities by other parties,
equipment strategies, technological developments, level of programming costs,
levels of interest rates and financial, business, and other factors that are
beyond the Company's control. The Company cannot assure that its business will
generate sufficient cash flow from operations or that alternative financing will
be available to it in amounts sufficient to service outstanding debt and
redeemable preferred stocks or to fund other liquidity needs. The Company's
indebtedness and preferred stock contain numerous covenants that, among other
things, generally limit the ability to


                                      F-7

<PAGE>


                     PEGASUS SATELLITE COMMUNICATIONS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)




incur additional indebtedness and liens, issue other securities, make certain
payments and investments, pay dividends, transfer cash, dispose of assets, and
enter into other transactions, and impose limitations on the activities of
subsidiaries. Failure to make debt payments or comply with covenants could
result in an event of default that, if not cured or waived, could have a
material adverse effect on the Company.

         The Company has a history of losses principally due to the substantial
amounts incurred for subscriber acquisition costs, interest expense, and noncash
depreciation and amortization. The Company expects that these amounts will
continue to be substantial. As a result, the Company does not expect to have net
income for the foreseeable future.

Reliance on DirecTV, Inc.

         The Company's principal business is its DBS business which is derived
from providing audio and video programming as an independent DIRECTV provider.
For 2001, 2000, and 1999, revenues for this business were 96%, 94%, and 89%,
respectively, of total consolidated revenues in each respective year, and
operating expenses for this business were 91%, 92%, and 89%, respectively, of
total consolidated operating expenses in each respective year. Total assets of
the DBS business were 94% and 86% of total consolidated assets at December 31,
2001 and 2000, respectively. Because the Company is a distributor of DIRECTV,
the Company may be adversely affected by any material adverse changes in the
assets, financial condition, programming, technological capabilities, or
services of DirecTV. Currently, the Company is in litigation against DirecTV
(see Note 16). Additionally, Hughes Electronics Corporation, which is the parent
company of DirecTV, and EchoStar Communications Corporation, which owns the only
other nationally branded direct broadcast satellite programming service in the
United States, have agreed to merge. At this time, the Company is unable to
predict the effect of its litigation with DirecTV and the merger of EchoStar
Communications and Hughes Electronics, should it occur, on the Company's
financial position, results of operations, cash flows, and future operations.

Overview of the DBS and Broadband Sales and Distribution Channels

         For both the DBS and Broadband businesses, the primary means to obtain
subscribers is through an independent retail network channel. To a lesser
extent, subscribers are also obtained through the Company's inside sales
channel. In both channels, the Company creates and launches the promotions for
its services, equipment, and installations. In addition, the Company specifies
the retail prices for its services and establishes the suggested retail prices
at which dealers sell or provide and install equipment. The Company also obtains
subscribers to its DIRECTV programming through national retail chains selling
DIRECTV under arrangements directly with DirecTV.

         The Company's independent retail network consists of dealer and
distributor relationships. Distributors purchase directly from manufacturers and
maintain in their inventory the equipment needed by subscribers to access the
Company's DIRECTV programming and Internet service. Distributors sell this
equipment to dealers who in turn provide the equipment to subscribers.
Distributors directly charge the dealers for the equipment they sell to them.
Dealers enroll subscribers to the Company's DIRECTV programming and Pegasus
Express, provide them with equipment, and arrange for installation of the
equipment. Dealers directly charge new subscribers for equipment, installation,
and set up at the point of enrollment. The Company also directly enrolls
subscribers, provides equipment to them, and arranges for installation of the
equipment through its inside sales channel. In this channel, the Company charges
new subscribers at the point of enrollment for equipment, installation, and set
up. The amounts charged are deferred as unearned revenues and are recognized as
revenues over the Company's expected life of subscribers of five years. Once
subscribers have been enrolled under either channel, they contact the Company
directly to activate programming and Internet service.

         The Company offers a variety of incentives to its subscribers and to
its distributors and dealers. Incentives to subscribers consist of free or
discounted prices for its DIRECTV programming, equipment needed to access its
DIRECTV programming and Internet service, and installation of equipment that
accesses its DIRECTV programming. The Company pays incentives directly to
dealers and distributors in the form of equipment subsidies, installation
subsidies, and commissions.

         Subscriber acquisition costs are incurred when the Company adds new
subscribers to its DIRECTV programming and Internet service. These costs consist
of the portion of programming costs associated with promotional programming
provided to subscribers; equipment costs and related subsidies paid to
distributors; installation costs and related subsidies paid to dealers; dealer
commissions; advertising and marketing costs; and selling costs. Promotional
programming costs, which are included in programming expense on the statement of
operations and comprehensive loss, are charged to expense when incurred.
Equipment costs and related subsidies and installation costs and related
subsidies, which are included in promotions and incentives on the statement of
operations and comprehensive loss, are charged to expense when the equipment is
delivered and the installation occurs, respectively. Dealer commissions,
advertising and marketing costs, and selling costs, which are included in
advertising and selling on the statement of operations and comprehensive loss,
are charged to expense when incurred.




                                       F-8

<PAGE>


                     PEGASUS SATELLITE COMMUNICATIONS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


         Certain subscriber acquisition costs are capitalized or deferred. Under
certain of its subscription plans for DIRECTV programming, the Company retains
or takes title to equipment delivered to subscribers. The equipment costs and
subsidies related to this equipment are capitalized as fixed assets and
depreciated. The Company also has subscription plans for its DIRECTV programming
that contain commitment periods and early termination fees for subscribers.
Direct and incremental subscriber acquisition costs associated with these plans
are deferred in the aggregate not to exceed the amounts of applicable
termination fees, which are less than the contractual revenue over the
commitment period. These costs are amortized over the period of the arrangement
for which early termination fees apply and are charged to amortization expense.
Direct and incremental subscriber acquisition costs consist of equipment costs
and related subsidies not capitalized as fixed assets, installation costs and
related subsidies, and dealer commissions. Direct and incremental subscriber
acquisition costs in excess of termination fee amounts are expensed immediately
and charged to promotion and incentives or advertising and selling, as
applicable, in the statements of operations and comprehensive loss.

         Refer to the following "Summary of Significant Accounting Policies" for
a description of the Company's accounting policies with respect to the
significant matters described above.

2.       Summary of Significant Accounting Policies

Basis of Presentation

         The financial statements include the accounts of Pegasus Satellite and
all of its subsidiaries on a consolidated basis. All intercompany transactions
and balances have been eliminated. The Company has an investment in another
entity in which it does not have a significant or controlling interest and,
accordingly, this investment is accounted for under the cost method. Since
Pegasus Satellite's common stock is wholly owned by its parent company,
computations of per common share amounts are not required nor presented. Certain
prior year amounts have been reclassified for comparative purposes.

         The corporate reorganization discussed in Note 1 was accounted for as a
recapitalization in which the historical basis of assets and liabilities
existing at the date of the reorganization did not change in the reorganization.

Use of Estimates in the Preparation of Financial Statements

         The preparation of financial statements in conformity with generally
accepted accounting principles in the United States of America requires the
Company 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 useful lives and recoverability of the Company's long lived assets, including
investments the Company has in other entities, intangible assets, valuation
allowances associated with deferred income tax assets, average subscriber life
associated with recognition of unearned revenues, amounts associated with barter
transactions, NRTC patronage, allowance for doubtful accounts, and litigation
contingencies.

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.


                                      F-9
<PAGE>

NRTC Patronage Capital Distributions

         The Company is an affiliate of the National Rural Telecommunications
Cooperative ("NRTC"), which is a tax exempt organization that operates on a
nonprofit basis. The NRTC is a cooperative organization whose members and
affiliates are engaged in the distribution of telecommunications and other
services in predominantly rural areas of the United States. Throughout each
year, the NRTC bills its members and affiliates the costs incurred by the NRTC
under its agreement with DirecTV, certain other costs incurred by the NRTC
relating to associated DBS projects, and margin on the costs of providing DBS
services pursuant to the NRTC member agreement for marketing and distribution of
DBS services. The most notable service that the NRTC provides to the Company is
programming related to the DIRECTV programming the Company provides. The Company
records as expenses the amounts it pays to the NRTC. Members and affiliates that
participate in the NRTC's projects may be eligible to receive an allocation of
the NRTC's net savings (generally, amounts collected from NRTC members and
affiliates in excess of the NRTC's costs) in the form of a patronage
distribution through the NRTC's patronage capital distribution program.
Generally, each patron who does business with the NRTC receives an annual
distribution composed of both patronage capital certificates and cash. The
patronage capital certificates represent equity interests in the NRTC. The
amount of the distribution is generally based on the ratio of business a patron
conducts with the NRTC during a given fiscal year of the NRTC times the NRTC's
net savings available for patronage distribution for that year. Throughout each
year, the Company accrues a receivable from the NRTC based on its best estimate
of its share of the patronage distribution for that year, with an offsetting
reduction to the expenses that were recorded by the Company for the payments
made to the NRTC during the year. The Company adjusts its accrual of the
estimated patronage distribution in the year that the distribution is received
and, accordingly, adjusts the related expenses in and for the year the
distribution is received. At December 31, 2001 and 2000, the Company had accrued
in accounts receivable - other $31.0 million and $13.3 million, respectively,
for its estimate of its share of patronage for the respective years. Based on
past experience, the Company expects that a majority of the patronage capital
distribution for 2001 to be made in 2002 will be tendered by the NRTC in the
form of patronage capital certificates. At December 31, 2001 and 2000, the
Company's investment in the NRTC, which is included in other noncurrent assets
on the balance sheet, was $28.6 million and $11.1 million, respectively. The
Company has no commitments to fund the NRTC's operations or acquire additional
equity interests in the NRTC.



                                      F-10



<PAGE>


                     PEGASUS SATELLITE COMMUNICATIONS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)



Inventory

         Inventory consists of equipment that enables access to the Company's
DIRECTV programming, equipment that enables two way satellite access to the
Internet through Pegasus Express, and supplies used in the installation of
equipment. Equipment is purchased from manufacturers in a completed state ready
for its intended use. Such equipment primarily consists of antennas that receive
satellite signals, receivers that decode signals to permit access to the
Company's DIRECTV programming and that also permit communications to authorize
on demand viewing of certain programming, and modems that decode signals to
permit two way communication with the Internet. Inventory is stated at the lower
of cost or market on a first in, first out basis.

         Equipment that the Company delivers to subscribers is removed from
inventory at its carrying amount and charged to subscriber acquisition costs
when the equipment is delivered. Under certain of its subscription plans for
DIRECTV programming, the Company retains title to equipment delivered to
subscribers. In these cases, the inventory carrying amounts of this equipment
are capitalized as fixed assets and the equipment is depreciated over its useful
life of three years. Other inventory items are removed from inventory and
charged to the appropriate expense when used.

Investment in Marketable Securities

         The Company has an investment in the common stock of another company.
The Company acquired this common stock in one transaction. The Company considers
this investment to be available for sale and it is carried at its fair market
value based on the quoted market price of the common stock held. Accordingly,
unrealized gain or loss for changes in the fair market value of the investment
is recorded in common stockholder's equity as accumulated other comprehensive
income or loss as appropriate, and is presented as other comprehensive gain or
loss, as appropriate, on the statements of operations and comprehensive loss.
The fair market value of this investment at December 31, 2001 was $4.9 million,
which is included in other noncurrent assets on the balance sheet.

Property and Equipment

         Property and equipment are stated at cost. The cost and related
accumulated depreciation of assets sold, retired, or otherwise disposed of are
removed from the respective accounts and any resulting gains and losses are
included in results of operations. Expenditures for repairs and maintenance are
charged to expense when incurred. Expenditures for major renewals and
betterments that extend the useful lives of the related assets are capitalized
and depreciated. Depreciation is computed for financial reporting purposes using
the straight line method based upon the estimated useful lives of the assets.
DBS equipment delivered to subscribers that comes from the Company's inventory
and to which the Company retains title is capitalized at its inventory carrying
amount. DBS equipment delivered to subscribers by authorized dealers of the
Company to which the Company takes title is capitalized at the amount of the
subsidy paid by the Company for the equipment. The Company has a process in
place to recover the equipment or the cost thereof from subscribers should they
terminate their subscription.

Intangible Assets

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


                                      F-11



<PAGE>



                     PEGASUS SATELLITE COMMUNICATIONS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


Long Lived Assets

         The Company's intangible and fixed assets are reviewed for impairment
whenever events or circumstances provide evidence that suggest the carrying
amounts may not be recoverable. An impairment loss would be recognized when
estimated undiscounted future cash flows expected to result from the use of the
asset and its eventual disposition is less than its carrying value. The
impairment, if any, would be measured as the excess of the carrying amount over
the asset's fair value. To date, no such impairments have occurred.

Deferred Financing Costs

         Financing costs incurred in obtaining long term financing are deferred
and amortized over the term of the related financing. The Company uses the
straight line method to amortize these costs. Accumulated amortization was $15.6
million and $11.2 million at December 31, 2001 and 2000, respectively.

Broadcast Sale/Leaseback Transaction

         The Company retains a continuing involvement in Broadcast assets that
had been sold and leased back. This sale/leaseback is accounted for under the
financing method in which the Company continues to record and depreciate the
related assets and recognizes a finance obligation representing a deferral of
the gain on the sale that would have otherwise been recognized at the date of
the sale. Under the finance method, lease payments made on the assets leased
back are allocated between a reduction of the finance obligation and interest as
appropriate. As a result of the amount of interest associated with the finance
obligation relative to the amount of the lease payments, the payments have been,
and are expected to continue to be, applied to interest expense. The accounting
of the sale/leaseback transaction as a financing will continue until the
Company's continuing involvement in the related assets ceases.

Derivative Financial Instruments

         Derivative financial instruments are utilized by the Company to reduce
interest rate risk. The Company does not hold or issue financial instruments for
trading or speculative purposes. The Company uses interest rate swap and cap
agreements to reduce the impact of interest rate increases on its variable rate
debt. The interest rate swaps involve the exchange of variable for fixed rate
interest payments without the exchange or the payment of the underlying notional
amounts. The effects of the swaps are recorded as adjustments to the Company's
interest expense on an accrual basis. Under the interest rate caps, the Company
receives interest from the other parties to the agreements when market interest
rates specified in the cap agreements exceed the contracted interest cap rates.
Premiums paid by the Company to enter into interest rate cap agreements are
amortized to interest expense.

         Statement of Financial Accounting Standards No. 133 "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"), as amended by SFAS
No. 138, became effective for the Company on January 1, 2001. SFAS 133
establishes accounting and reporting standards for derivative instruments and
hedging activities. The statement requires that all derivatives are to be
recognized as either assets or liabilities in the statement of financial
position and the instruments are to be measured at fair value. The accounting
for changes in the fair value of a derivative depends on the intended use of the
derivative and the resulting designation. The fair values of interest rate swaps
and caps held by the Company are determined by the financial institutions that
are party to the contracts. The fair values are measured by the amount that the
Company or the other parties to the contracts would pay if the contracts were
terminated at the measurement date. No cash is transferred in determining the
termination values. The Company did not designate these instruments as hedges
upon adopting SFAS 133. Accordingly, the changes in the fair values of these
instruments are recognized in earnings in other nonoperating income or expense
in the period of change. The net cumulative effect on January 1, 2001 of
adopting SFAS 133 was not significant.

Revenues

         Principal revenue of the DBS business is earned by providing the
Company's DIRECTV programming on a subscription or on demand basis. Standard
subscriptions are recognized as revenue monthly at the amount earned and billed
based on the level of programming content subscribed to during the month.
Promotional programming provided to subscribers at discounted prices is
recognized as revenue monthly at the promotional amount earned and billed. No
revenue is recognized for promotional programming that is provided free of
charge. Revenue for on demand viewing is recognized at the amount billed in the
month when the programming is viewed and earned. Fees



                                      F-12


<PAGE>

                     PEGASUS SATELLITE COMMUNICATIONS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

that the Company charges new subscribers for set up upon initiation of service
are deferred as unearned revenue and are recognized as revenue over the
Company's expected subscriber life of five years. Amounts charged for DBS
equipment rented is recognized as revenue monthly at the amount earned and
billed during the month.

         Principal revenue of the Broadband business is earned by providing two
way satellite access to the Internet through Pegasus Express on a subscription
basis. This revenue is recognized monthly at the amount billed to subscribers
for service subscribed to and earned during the month.

         Equipment used by subscribers for the Company's DIRECTV programming and
Internet service is an integral component of these services. Accordingly,
amounts that the Company charges for equipment sold and installations are
deferred as unearned revenue and are recognized as revenue over the Company's
expected life for subscribers of five years. No revenue is recognized for
equipment and installations provided free of charge.

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

Subscriber Acquisition Costs

         Subscriber acquisition costs are incurred when the Company adds new
subscribers to its DIRECTV programming and Internet service. These costs consist
of the portion of programming costs associated with promotional programming
provided to subscribers; equipment costs and related subsidies paid to
distributors; installation costs and related subsidies paid to dealers; dealer
commissions; advertising and marketing costs; and selling costs. Promotional
programming costs, which are included in programming expense on the statements
of operations and comprehensive loss, are charged to expense when incurred.
Promotional programming amounted to $2.3 million, $5.6 million and $14.5 million
in 2001, 2000, and 1999, respectively. Equipment costs and related subsidies and
installation costs and related subsidies, which are included in promotions and
incentives on the statements of operations and comprehensive loss, are charged
to expense when the equipment is delivered and the installation occurs,
respectively. Dealer commissions, advertising and marketing costs, and selling
costs, which are included in advertising and selling on the statements of
operations and comprehensive loss, are charged to expense when incurred.
Subscriber acquisition costs included in the accompanying consolidated
statements of operations and comprehensive loss were $152.4 million, $170.0
million, and $117.8 million in 2001, 2000, and 1999, respectively.

         Under certain of its subscription plans for DIRECTV programming, the
Company retains or takes title to equipment delivered to subscribers. The
equipment costs and subsidies related to this equipment are capitalized as fixed
assets and depreciated. Capitalized DBS equipment was $20.8 million and $12.2
million in 2001 and 2000, respectively. No DBS equipment was capitalized during
1999. The Company also has subscription plans for its DIRECTV programming that
contain commitment periods and early termination fees for subscribers. Direct
and incremental subscriber acquisition costs associated with these plans are
deferred in the aggregate not to exceed the amounts of applicable termination
fees, which are less than the contractual revenue over the commitment period.
These costs are amortized over the period of the arrangement for which early
termination fees apply and are charged to amortization expense. Direct and
incremental subscriber acquisition costs consist of equipment costs and related
subsidies not capitalized as fixed assets, installation costs and related
subsidies, and dealer commissions. Direct and incremental subscriber acquisition
costs in excess of termination fee amounts are expensed immediately and charged
to promotion and incentives or advertising and selling, as applicable, in the
statements of operations and comprehensive loss. Deferred subscriber acquisition
costs amounted to $19.4 million in 2001. Amortization of deferred subscriber
acquisition costs for the year ended December 31, 2001 was $4.2 million. No
subscriber acquisition costs were deferred during 2000 or 1999.

         Total subscriber acquisition costs expensed, capitalized, and deferred
were $192.6 million, $182.2 million, and $117.8 million in 2001, 2000, and 1999,
respectively. Total advertising costs incurred were approximately $18.0 million,
$21.9 million, and $8.7 million for 2001, 2000, and 1999, respectively.

Other Subscriber Related Expenses

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

Broadcast Barter Transactions

         The Company's Broadcast stations obtain programming for viewing from
the networks they are affiliated with, as well as from independent producers and
syndicators. Broadcast barter transactions represent the exchange of advertising
time for programming, except those involving the exchange of advertising time
for network programming. We do not report revenue or expenses for barter
transactions involving the exchange of advertising time for network programming.
Barter transactions are reported at the fair market value of the advertising
time relinquished. Barter programming revenue and the related programming
expense are recognized at the time that the advertisement airtime is broadcast.
For 2001, 2000, and 1999, $6.6 million, $7.1 million, and $7.6 million,
respectively, related to barter transactions were included in revenue and
programming expense of other businesses in the statements of operations and
comprehensive loss.

                                      F-13


<PAGE>


                     PEGASUS SATELLITE COMMUNICATIONS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


Deferred Income Taxes

         The Company accounts for deferred income taxes utilizing the asset and
liability approach, whereby deferred income tax assets and liabilities are
recorded for the tax effect of differences between the financial statement
carrying values and tax bases of assets and liabilities. Deferred income taxes
are measured using enacted tax rates and laws that will be in effect when the
underlying assets or liabilities are expected to be received or settled. A
valuation allowance is recorded for deferred income taxes where it appears more
likely than not that the Company will not be able to recover the deferred income
tax asset.

Accretion on Notes Issued at a Discount

         Notes issued at a discount from their full face value were initially
recorded at the amount of the discounted cash proceeds received. The difference
between the carrying amount and the full face value of the notes is accreted to
interest expense and to the carrying amount of the notes. The accretion is over
the discount period that ends with the date that cash interest begins to accrue,
at which time the carrying amount of the notes will equal their full face value.

Dividends on Redeemable Cumulative Preferred Stock

         The carrying amount of the Company's mandatorily redeemable cumulative
preferred stock is periodically increased by dividends not currently declared or
paid but which will be payable under the redemption or liquidation features. The
increase in carrying amount is effected by charges to additional paid in
capital, in the absence of retained earnings. Accrued dividends that are
subsequently declared and payable in cash are deducted from the carrying amount
of the preferred stock and classified as dividends payable in current
liabilities. Accrued dividends that are subsequently declared and payable in
either like kind shares or shares of common stock remain in the carrying amount
of the preferred stock until paid.

Concentration of Credit Risk

         Financial instruments that 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 numbers comprising the Company's
subscriber and customer base and their dispersion across different businesses
and geographic regions. At December 31, 2001 and 2000, the Company had no other
significant concentrations of credit risk.

New Accounting Pronouncements

         SFAS No. 141 "Business Combinations" addresses financial accounting and
reporting for business combinations. One of the principal requirements of this
statement is that all business combinations initiated or for which the date of
acquisition is after June 30, 2001 are to be accounted for using only the
purchase method. The Company has not completed a business combination since June
30, 2001. Another principal provision of this statement requires companies to
reassess the classification of carrying amounts for goodwill and intangible
assets apart from goodwill recognized in acquisitions in which the acquisition
date was before July 1, 2001 to determine their appropriate classification in
accordance with the statement. For the Company, this provision became effective
on January 1, 2002, and will be applied by the Company in the first quarter
2002. The Company has not yet finalized its assessment of the classification of
the carrying amounts of goodwill and intangible assets apart from goodwill, but
based on its preliminary assessment, the Company believes that there will be no
material impact on it.

         SFAS No. 142 "Goodwill and Other Intangible Assets" addresses financial
accounting and reporting: 1) at the date of acquisition of goodwill and
intangible assets apart from goodwill acquired other than in a business
combination, and 2) all goodwill and intangible assets apart from goodwill
subsequent to their acquisition. A principal requirement of this statement is to
determine the useful lives of intangible assets and amortize or not



                                      F-14



<PAGE>




                     PEGASUS SATELLITE COMMUNICATIONS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


amortize the intangible assets accordingly. Intangible assets apart from
goodwill with finite lives are to be amortized over their useful lives to their
residual value, if any, whereas goodwill and intangible assets apart from
goodwill with indefinite lives are not to be amortized. Another principal
requirement of this statement relates to impairment of goodwill and intangible
assets apart from goodwill. Goodwill is to be separately stated from intangible
assets apart from goodwill on the statement of financial position. This
statement in its entirety became effective for the Company on January 1, 2002.
Certain provisions of the statement were effective July 1, 2001, but did not
significantly impact the Company because it has not acquired any goodwill or
significant intangible assets apart from goodwill since July 1, 2001. Certain
provisions of the statement are to be applied by the Company by the end of the
first quarter 2002. Other provisions of this statement have transition periods
that for the Company end June 30, 2002 and December 31, 2002, with retroactive
application of the effects of the transition periods to the Company's first
quarter 2002. The Company has not yet completed its analyses associated with the
impacts of this statement, and does not have sufficient information at this time
to determine whether or not the impacts will be material to its financial
position or results of operations.

         SFAS No. 143 "Accounting for Asset Retirement Obligations" addresses
financial accounting and reporting for obligations associated with the
retirement of tangible long lived assets and the associated asset retirement
costs. This statement is effective for financial statements issued for fiscal
years beginning after June 15, 2002. The Company is studying the provisions of
this statement and has not yet determined the impacts, if any, that this
statement may have on it.

         SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived
Assets" addresses financial accounting and reporting for the impairment or
disposal of long lived assets. The provisions of this statement became effective
for the Company on January 1, 2002. Many of the provisions of this statement are
the same as or similar to provisions of previously existing accounting standards
that this statement now supersedes. The Company has not yet finalized its
analysis of this statement. However, based on its preliminary assessment of the
statement and the belief that there are relatively no new requirements imposed
by the statement from requirements previously in effect for the Company under
prior accounting standards, the Company believes that there will be no material
impact on it.

3.       Property and Equipment

         Property and equipment, along with the applicable estimated useful life
of each category, consisted of the following at December 31, 2001 and 2000 (in
thousands):


<TABLE>
<CAPTION>
                                                                                   2001          2000
                                                                                 --------      --------
<S>                                                                             <C>              <C>
    Towers, antennas, and related equipment (7 to 20 years)................     $ 10,198      $  5,952
    Television broadcasting and production equipment (7 to 10 years).......       24,219        20,117
    Equipment, furniture, and fixtures (5 to 10 years).....................       32,644        25,811
    DBS equipment capitalized (3 years)....................................       33,039        12,209
    Building and improvements (40 years)...................................       26,249        23,964
    Land...................................................................        6,372         7,131
    Other..................................................................        4,498         2,415
                                                                                --------      --------
                                                                                 137,219        97,599
    Accumulated depreciation...............................................      (46,358)      (32,990)
                                                                                --------      --------
    Net property and equipment.............................................     $ 90,861      $ 64,609
                                                                                ========      ========
</TABLE>



         Total depreciation expense was $15.1 million, $10.7 million, and $7.9
million for 2001, 2000, and 1999, respectively. Depreciation expense associated
with DBS equipment capitalized was $5.4 million for 2001 and $3.9 million for
2000. There was no DBS equipment capitalized in 1999.


                                      F-15



<PAGE>

                     PEGASUS SATELLITE COMMUNICATIONS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


4.       Intangibles

         Intangible assets, along with the applicable estimated useful life of
each category, consisted of the following at December 31, 2001 and 2000 (in
thousands).

                                                        2001             2000
                                                      --------         --------
    DBS rights (10 years)......................      $2,259,231      $2,245,036
    Other (2 to 40 years) .....................         130,978         220,259
                                                     ----------      ----------
                                                      2,390,209       2,465,295
    Accumulated amortization...................        (681,567)       (429,087)
                                                     ----------      -----------
    Net intangible assets......................      $1,708,642      $2,036,208
                                                     ==========      ===========

         Total amortization expense was $245.4 million, $187.1 million, and
$84.2 million for 2001, 2000, and 1999, respectively. Other intangibles
decreased in 2001 as a result of the Company's distribution of guardband
licenses, with a carrying amount of $95.4 million at the date of distribution,
to Pegasus Communications in July 2001.

5.       Common Stock

         In the corporate reorganization, all shares and each class of Pegasus
Satellite's Class A and Class B common stocks outstanding and in treasury at
that date, along with the nonvoting common stock authorized but unissued, were
cancelled. Simultaneously, Pegasus Satellite authorized and issued 200 shares of
a new series of Class B, par value $.01 common stock. All of the new Class B
shares became owned by Pegasus Communications. The combined carrying amount of
the Class A and B common stocks of $554,000 and the carrying amount of treasury
stock of $695,000 at the date of the reorganization were transferred to
additional paid in capital in the reorganization.

6.       Redeemable Preferred Stocks

         In the corporate reorganization, all shares and each series of Pegasus
Satellite's Series B junior convertible participating, 6-1/2% Series C
convertible, Series D junior convertible participating, and Series E junior
convertible participating preferred stocks designated, issued, and outstanding
at that date were cancelled. The aggregate carrying amount of these series of
preferred stocks at the date of the reorganization of $328.7 million was
transferred to additional paid in capital in the reorganization. Through a
series of concurrent exchange transactions connected with the reorganization,
the 12-3/4% cumulative exchangeable preferred stock ("12-3/4% Series")
outstanding prior to the reorganization continued to be outstanding after the
reorganization on the same terms, conditions, and amounts outstanding as before
the reorganization.

         At December 31, 2001 and 2000, Pegasus Satellite had 172,952 shares
with a carrying amount of $183.5 million and 152,844 shares with a carrying
amount of $162.0 million of 12-3/4% Series outstanding. Additionally at December
31, 2000, Pegasus Satellite had the following preferred stocks outstanding
(dollars in thousands):

                                     Carrying
                      Shares          Amount
                      ------          ------
Series B.........       5,707       $  5,707
Series C.........   3,000,000        290,422
Series D.........      22,500         23,325
Series E.........      10,000         10,372

12-3/4% Series

         Each whole share of the 12-3/4% Series has a liquidation preference of
$1,000 per share plus accrued and unpaid dividends. Dividends of 12-3/4% are
payable semiannually on January 1 and July 1, and are payable on a cumulative
basis when in arrears. Up to and including January 1, 2002, at the option of
Pegasus Satellite, dividends may be paid in cash or by the issuance of
additional shares of its own series. Thereafter, the dividends are payable in
cash. Subject to certain conditions, the 12-3/4% Series is exchangeable in whole
at the option of Pegasus Satellite for 12-3/4% senior subordinated exchange
notes due 2007. The exchange notes would contain substantially the same
redemption provisions, restrictions, and other terms as the 12-3/4% Series. No
such exchanges have taken place. At


                                      F-16

<PAGE>

                     PEGASUS SATELLITE COMMUNICATIONS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Pegasus Satellite's option, on and after January 1, 2002 Pegasus Satellite may
redeem the 12-3/4% Series in whole or part at redemption prices specified in the
certificate of designation for this series. On January 1, 2007, Pegasus
Satellite is scheduled to redeem all of the 12-3/4% Series outstanding at that
date at a redemption price equal to the liquidation preference per share plus
accrued and unpaid dividends. The 12-3/4% Series ranks senior to all outstanding
classes or series of capital stock with respect to dividend rights and rights on
liquidation.

         The increase in the number of shares outstanding and the carrying
amount of the 12-3/4% Series from December 31, 2000 to December 31, 2001 was due
to dividends of $20.1 million on the series paid in 2001 with its own shares.
The carrying amount was also increased during 2001 due to accretion of $95,000
of unamortized discount recognized when the series was issued and an increase of
$1.3 million in dividends accrued at December 31, 2001 compared to December 31,
2000. In January 2002, a dividend of $11.0 million was paid with 11,026 shares
of its own series. The liquidation value of the 12-3/4% Series at December 31,
2001 was approximately $184.0 million, and included $475,000 of remaining
unamortized discount recognized when the series was issued and $11.0 million in
accrued dividends.

7.        Long Term Debt

          Long term debt consisted of the following at December 31, 2001 and
2000 (in thousands):


<TABLE>
<CAPTION>

                                                                                  2001               2000
                                                                                -------             ------
<S>                                                                              <C>                 <C>
12-1/2% senior subordinated notes of Pegasus Media &
Communications due July 2005, interest payable
semiannually on January 1 and July 1, net of unamortized
discount of $1.4 million and $1.8 million at December 31,
2001 and 2000, respectively.......................................              $ 83,578           $ 83,176

9-5/8% senior notes of Pegasus Satellite Communications due
October 2005, interest payable semiannually on April 15 and
October 15........................................................               115,000            115,000

12-3/8% senior notes of Pegasus Satellite Communications due
August 2006, interest payable semiannually on February 1 and
August 1..........................................................               195,000                  -


9-3/4% senior notes of Pegasus Satellite Communications due
December 2006, interest payable semiannually on June 1 and
December 1........................................................               100,000            100,000

13-1/2% senior subordinated discount notes of Pegasus Satellite
Communications due March 2007, interest payable semiannually on
March 1 and September 1 commencing September 2004, net of
unamortized discount of $47.5 million at December 31, 2001........               145,551                  -

12-1/2% senior notes of Pegasus Satellite Communications due
August 2007, interest payable semiannually on February 1 and
August 1..........................................................               155,000            155,000

11-1/4% senior notes of Pegasus Satellite Communications due
January 2010, interest payable semiannually on January 15 and
July 15...........................................................               175,000                  -

Senior five year term loan facility of Pegasus Media &
Communications, interest at the company's option at either the
lender's base rate plus an applicable margin or LIBOR plus an
applicable margin.................................................               272,250            275,000

Senior five year revolving credit facility of Pegasus Media &
Communications, interest at the company's option at either the
lender's base rate plus an applicable margin or LIBOR plus an
applicable margin.................................................                80,000             35,000

Senior seven year revolving credit facility of Golden Sky Systems.                     -             37,000

Senior seven year term loan facility of Golden Sky Systems........                     -             35,000
</TABLE>
                                      F-17


<PAGE>

                     PEGASUS SATELLITE COMMUNICATIONS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

<TABLE>
<CAPTION>

                                                                               2001                2000
                                                                             --------            --------
<S>                                                                          <C>                  <C>
13-1/2% senior discount notes of Golden Sky DBS, net of
unamortized discount of $65.4 million.............................                 -              127,739

12-3/8% senior subordinated notes of Golden Sky Systems...........                 -              195,000

Mortgage payable, due 2010, interest at 9.25%.....................             8,580                8,680

Other notes, due 2002 to 2005, stated interest up to 8%...........             8,676               16,161

Capital leases and other..........................................                16                  102
                                                                          ----------           ----------
                                                                           1,338,651            1,182,858
Less current maturities...........................................             8,728               10,891
                                                                          ----------           ----------
Long term debt....................................................        $1,329,923           $1,171,967
                                                                          ==========           ==========
</TABLE>


Long Term Debt of Pegasus Media & Communications

         The 12-1/2% senior subordinated notes due July 2005 are unconditionally
guaranteed on an unsecured senior subordinated basis, jointly and severally by
specified subsidiaries of Pegasus Media & Communications. The notes are general
unsecured obligations that are subordinated to other senior indebtedness of the
company such as, among other things, its credit agreement. Pegasus Media &
Communications presently has the option to redeem the notes at prices specified
in the indenture for these notes.

         Pegasus Media & Communications has a credit agreement that initially
provided for a $225.0 million senior revolving credit facility that expires in
October 2004 and a $275.0 million senior term loan facility that expires in
April 2005. The agreement also contains an uncommitted facility that gives the
company the option to seek $200.0 million in incremental term loans through June
30, 2002, as extended in 2001. Amounts borrowed under the agreement are
collateralized by substantially all of the assets of Pegasus Media &
Communications and its subsidiaries. The agreement contains certain financial
covenants. The borrowing commitment under the revolving facility automatically
and permanently reduces quarterly over the term of the facility that began on
March 31, 2001. At December 31, 2001, the commitment was $202.5 million.
Principal amounts outstanding in excess of the reduced commitment are to be
repaid on each commitment reduction date. Amounts repaid under the revolving
facility may be reborrowed, subject to the available borrowing commitment.
Availability under the revolving facility, net of outstanding stand by letters
of credit of $63.2 million, was $59.1 million at December 31, 2001. Generally,
letters of credit are not acted upon. Principal outstanding under the term loan
facility is payable quarterly in increasing increments over the term of the
facility that began on March 31, 2001. Amounts repaid under the term loan
facility may not be reborrowed. Margins on revolver base rates range from 1% to
2%, and margins on revolver LIBOR rates range from 2% to 3%, both of which are
determined by the level of a ratio computation specified in the agreement.
Margins on term loans are 2.5% for base rates and 3.5% for LIBOR rates. Interest
on outstanding principal borrowed under base rates is due and payable quarterly
and interest on outstanding principal borrowed under LIBOR rates is due and
payable the earlier of the end of the contracted interest rate period or three
months. Unused amounts under the revolving facility are subject to a commitment
fee at either .5% or .75% based on the aggregate of borrowings outstanding and
letters of credit issued under the facility. The weighted average variable rates
of interest, including applicable margins, on amounts outstanding at December
31, 2001 were approximately 6.25% for the revolving facility and 5.44% for the
term facility. The weighted average variable rates of interest, including
applicable margins, on amounts outstanding at December 31, 2000 were
approximately 10.11% for the revolving facility and 10.19% for the term
facility. The $80.0 million outstanding under the revolving credit facility at
December 31, 2001 was repaid in January 2002.

Long Term Debt of Pegasus Satellite

         Pegasus Satellite Communications' 9-5/8% senior notes due October 2005,
9-3/4% senior notes due December 2006, and 12-1/2% senior notes due August 2007
are subordinated to all liabilities of the company's subsidiaries and are on
parity with other senior indebtedness of Pegasus Satellite. Pegasus Satellite
presently has the option to redeem the 9-5/8% notes, and can redeem at its
option the 9-3/4% notes and 12-1/2% notes beginning on December 1, 2002 and
August 1, 2003, respectively, each at prices specified in the indenture for each
respective note.

          In the second quarter 2001, Pegasus Satellite concurrently issued
$195.0 million principal amount of 12-3/8% senior notes due August 2006 and
issued $193.1 million maturity value of 13-1/2% senior subordinated discount
notes due March 2007. These notes were issued, respectively, in exchange for all
of the outstanding $195.0

                                      F-18
<PAGE>


                     PEGASUS SATELLITE COMMUNICATIONS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

million principal amount of 12-3/8% senior subordinated notes due August 2006 of
its subsidiary Golden Sky Systems and all of the outstanding $193.1 million
maturity value of 13-1/2% senior discount notes due March 2007 of its subsidiary
Golden Sky DBS. The Golden Sky Systems and Golden Sky DBS notes exchanged were
cancelled. The 13-1/2% notes issued were recorded on the date of issuance at a
discounted amount of $134.9 million, which equaled the carrying amount of the
notes they were exchanged for. The discount of $58.2 million is being amortized
to interest expense over the term of the new notes. Consent fees of $1.6 million
incurred in the exchanges were recorded as deferred financing costs. Other costs
incurred in the exchanges, which principally consisted of dealer manager,
accounting and legal fees, were expensed as incurred. Unamortized deferred
financing costs associated with each of the Golden Sky Systems and Golden Sky
DBS notes, including the consent fees incurred in the exchanges, were
transferred to the respective Pegasus Satellite notes they were exchanged for,
in an aggregate amount of $9.5 million. The unamortized deferred financing costs
transferred are being amortized over the respective remaining terms of the
Pegasus Satellite notes to which they apply.

          The 12-3/8% notes are unsecured senior obligations. They rank senior
to subordinated indebtedness of the company and rank equally in right of payment
with its other senior indebtedness. The 13-1/2% notes are unsecured senior
subordinated obligations and are subordinated in right of payment to all
existing and future senior indebtedness of the company. The discount on the
13-1/2% notes will be fully amortized at March 1, 2004. Cash interest on the
13-1/2% notes begins accruing on March 1, 2004. Both notes rank junior to the
indebtedness of the company's subsidiaries, even their subordinated
indebtedness. Pegasus Satellite has the option to redeem any or all of the
12-3/8% notes commencing August 1, 2003 and the 13-1/2% notes commencing March
1, 2004, each at prices specified in their respective indentures. Subject to
certain exceptions described in the indenture, Pegasus Satellite must offer to
repurchase either notes if certain assets of the company or its restricted
subsidiaries are sold or if changes in control specified in the indentures occur
with respect to the company, its subsidiaries, or Pegasus Communications.

          In September 2001, Pegasus Satellite entered into a 364 day credit
agreement under which it borrowed all of the $75.0 million available under the
agreement. The amounts outstanding thereunder were repaid in December 2001 with
a portion of the proceeds from the issuance of the 11-1/4% senior notes and the
credit agreement was terminated.

          In December 2001, Pegasus Satellite issued $175.0 million principal
amount of 11-1/4% senior notes due January 2010. These notes are unsecured
senior obligations. They rank senior to subordinated indebtedness of the company
and rank equally in right of payment with its other senior indebtedness. The
notes rank junior to the indebtedness of the company's subsidiaries, even their
subordinated indebtedness. Pegasus Satellite has the option to redeem 35% of the
notes prior to January 15, 2005 at a price of 111.25% of their face amount, plus
accrued interest, with the net proceeds of certain equity offerings. Otherwise,
the company can redeem any or all of the notes anytime on and after January 15,
2006 at prices specified in the indenture for these notes. Subject to certain
exceptions described in the indenture, Pegasus Satellite must offer to
repurchase the notes if certain assets of the company or its restricted
subsidiaries are sold or if changes in control specified in the indenture occur
with respect to the company, its restricted subsidiaries, or Pegasus
Communications.

Additional Information on Long Term Debt

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

          In June 2001, all principal amounts outstanding under the term loan
and revolving credit facilities of the Golden Sky Systems' credit agreement were
repaid and the credit agreement was terminated. The mortgage payable in 2010 is
on the Company's corporate headquarters and is being amortized over 25 years
with a balloon payment to satisfy the remaining mortgage balance in 2010.

         Unamortized balances of deferred financing costs associated with notes
repaid and credit facilities terminated during the respective periods reported
were written off and reported as extraordinary losses from extinguishments of
debt in the period that the associated borrowings were repaid or agreement
terminated, except as otherwise indicated above. Aggregate commitment fees
incurred by the Company under all credit facilities


                                      F-19

<PAGE>

                     PEGASUS SATELLITE COMMUNICATIONS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


outstanding in the respective periods were $999,000 in 2001 and $1.6 million in
2000. Commitment fees were not significant in 1999.

         Scheduled maturities of long term debt at their stated maturity values,
repayment of principal on capital lease obligations, and repayment of principal
outstanding under term loans and revolving credit facilities for amounts
outstanding at December 31, 2001 were $8.7 million in 2002, $31.8 million in
2003, $192.7 million in 2004, $328.2 million in 2005, $295.2 million in 2006,
and $531.0 million in the aggregate thereafter.

8.       Leases

         The Company leases certain studios, towers, buildings, vehicles, and
various types of equipment through separate operating lease agreements. The
operating leases expire at various dates through 2010. Rent expense for 2001,
2000, and 1999 was $3.5 million, $3.1 million, and $2.3 million, respectively.
At December 31, 2001, minimum lease payments on noncancellable operating leases
were $3.0 million in 2002, $2.7 million in 2003, $2.6 million in 2004, $2.6
million in 2005, $2.1 million in 2006, and $1.4 million thereafter. At December
31, 2001, minimum lease payments associated with assets subject to
sale/leaseback transactions were $806,000 in 2002, $838,000 in 2003, $872,000 in
2004, $907,000 in 2005, $943,000 in 2006, and $3.7 million thereafter. At
December 31, 2001, property and equipment subject to capital leases and related
obligations were not significant.

9.           Other Operating Expenses

         Other operating expenses for 2001, 2000, and 1999 included expenses
associated with the Company's litigation with DirecTV of $21.2 million, $3.2
million, and $9,000, respectively. See Note 16 for information concerning this
litigation.

10.      Loss on Impairment of Marketable Securities

         In the third quarter 2001, the Company determined that its sole
investment in marketable securities, which are included in other noncurrent
assets on the balance sheet, had incurred an other than temporary decline in
market value. Accordingly, the Company wrote down the cost basis in this
investment to its then fair market value and charged earnings in the amount of
$34.2 million for the impairment loss realized. In connection with this write
down, the Company made a reclassification adjustment to other comprehensive
income (loss) of $21.2 million, net of income tax benefit of $13.0 million, to
remove all of the net unrealized losses on this investment that had been
accumulated at the date of the write down. The amount of the reclassification
adjustment was based on specific identification of the cost of the common stock
held, as all of the common stock held had been acquired in one transaction.

11.      Income Taxes

         Following is a summary of income taxes for 2001, 2000, and 1999 (in
thousands):


<TABLE>
<CAPTION>

                                                                    2001          2000        1999
                                                                  ---------     ---------   --------
<S>                                                                 <C>            <C>        <C>
State and local - current (benefit) expense.................      $    (753)    $   1,670      $496
                                                                  ---------     ---------      ----
Federal - deferred:
   Benefits of net operating loss carryforwards.............        (75,904)      (56,576)        -
   Other....................................................        (45,711)      (47,083)        -
                                                                  ---------     ---------      ----
   Total federal deferred...................................       (121,615)     (103,659)        -
                                                                  ---------     ---------      ----
(Benefit) expense attributable to continuing operations.....       (122,368)     (101,989)      496
Income taxes associated with other items:
   Deferred expense for discontinued operations.............              -           632         -
   Deferred benefit for extinguishment of debt..............         (1,106)       (3,526)        -
   Deferred benefit for comprehensive income/loss...........         (5,042)       (7,340)        -
   Deferred benefit for comprehensive loss reversed when
    related unrealized loss was reclassed...................         12,998             -         -
                                                                  ---------     ---------      ----
   Total income tax (benefit) expense recorded..............      $(115,518)    $(112,223)     $496
                                                                  =========     =========      ====
</TABLE>



                                      F-20


<PAGE>


                     PEGASUS SATELLITE COMMUNICATIONS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


         Following were the deferred income tax assets and liabilities at
December 31, 2001 and 2000 (in thousands):


<TABLE>
<CAPTION>

                                                                                    2001               2000
                                                                                ------------        -----------
<S>                                                                             <C>                 <C>
Assets:
   Receivables...............................................................       $  2,286          $     699
   Excess of tax basis over book basis in marketable securities..............         25,745             20,073
   Excess of tax basis over book basis in interest rate instruments..........          1,581                  -
   Loss carryforwards........................................................        326,879            265,400
                                                                                ------------        ------------
       Total deferred tax assets.............................................        356,491            286,172
                                                                                ------------        -----------
Liabilities:
   Excess of book basis over tax basis of property and equipment.............         (5,364)            (3,454)
   Excess of book basis over tax basis of amortizable intangible assets......       (381,575)          (427,931)
                                                                                ------------        -----------
       Total deferred tax liabilities........................................       (386,939)          (431,385)
                                                                                ------------        -----------
Net deferred tax assets (liabilities)........................................        (30,448)          (145,213)
Valuation allowance..........................................................              -                  -
                                                                                ------------        -----------
Net deferred tax liabilities.................................................      $ (30,448)         $(145,213)
                                                                                ============        ===========
</TABLE>


         At December 31, 2001, the Company had net operating loss carryforwards
for income tax purposes of $860.2 million available to offset future taxable
income that expire beginning 2002 through 2021.

         Following is a reconciliation of the federal statutory income tax rate
to the Company's effective federal income tax rate attributable to continuing
operations for 2001, 2000, and 1999:

<TABLE>
<CAPTION>
                                                                     2001             2000              1999
                                                               -------------    -------------     --------------
<S>                                                                 <C>              <C>               <C>
        Statutory rate........................................      35.00%           35.00%            35.00%
        Valuation allowance...................................          -                -            (29.70)
        Other.................................................      (4.97)           (2.33)            (5.30)
                                                               -------------    -------------     --------------
        Effective tax rate....................................      30.03%           32.67%                -%
                                                               =============    =============     ==============
</TABLE>


12.     Supplemental Cash Flow Information

         Following are significant noncash investing and financing activities
for 2001, 2000, and 1999 (in thousands):

<TABLE>
<CAPTION>

                                                                                   2001         2000          1999
                                                                                 --------    ---------     ---------
<S>                                                                                <C>          <C>           <C>
Preferred stock dividends, accrued and deemed, and accretion on preferred
stock with reduction of paid in capital......................................... $ 26,587    $  41,080       $16,706

Payment of 12-3/4% Series preferred stock dividends with 12-3/4% Series
preferred stock.................................................................   20,109       17,771        15,704

Payment of other preferred stock dividends with Class A common stock newly
issued and from treasury........................................................    6,072       15,003             -

Net effect of entities exchanged with Pegasus Communications in corporate
reorganization .................................................................  117,730            -             -

Distribution of guardband licenses to Pegasus Communications....................   95,427            -             -

Net unrealized gain (loss) on marketable securities, net of related
deferred taxes..................................................................   12,981      (11,976)            -

Patronage capital distribution received.........................................   17,544       10,322           319

Capital issued and related investment in affiliates.............................        -       97,555         1,364

Marketable securities received in sale of tower assets..........................        -       37,516             -

Capital issued and related acquisition of intangibles ..........................        -      693,620             -

Debt assumed or issued and related acquisition of intangibles...................        -      379,773         6,467

Deferred taxes, net and related acquisition of intangibles......................        -      259,062            29
</TABLE>


                                      F-21


<PAGE>


                     PEGASUS SATELLITE COMMUNICATIONS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

         For 2001, 2000, and 1999, the Company paid cash interest of $113.2
million, $94.1 million, and $69.4 million, respectively. The Company paid no
federal income taxes in 2001, 2000, and 1999. The amount paid for state income
taxes was less than $1.0 million in each of 2001, 2000, and 1999.

13.      Acquisitions

         In 1999, the Company acquired 15 independent DIRECTV providers along
with the rights to provide DIRECTV programming in certain rural areas of the
United States and related assets that were accounted for under the purchase
method. Total consideration was $79.5 million, consisting of $64.6 million in
cash, 25,000 shares of Pegasus Communications' Class A common stock valued at
$550,000, warrants to purchase a total of 50,000 shares of Class A common stock
valued at $814,000, $6.5 million in promissory notes, $6.7 million in accrued
expenses, and $365,000 in assumed net liabilities.

         Effective March 31, 1999, the Company purchased a cable system serving
Aguadilla, Puerto Rico and neighboring communities for $42.1 million in cash.
This system was sold in September 2000.

         On May 5, 2000, the Company acquired Golden Sky Holdings in a
transaction accounted for as a purchase. Golden Sky Holdings through its
subsidiaries holds the rights to provide DIRECTV programming in various rural
areas of 24 states. The stockholders of Golden Sky Holdings exchanged all of
their outstanding capital stock for approximately 12.2 million shares of Pegasus
Communications' Class A common stock valued at $578.6 million and options to
purchase approximately 724,000 shares of Class A common stock valued at $33.2
million. As a consequence of this exchange, Golden Sky Holdings became a direct
wholly owned subsidiary of the Company. The total consideration for the
acquisition was $1.2 billion. The merger consideration included $293.7 million
of Golden Sky Holdings consolidated net liabilities, including a deferred income
tax asset of $89.3 million principally for Golden Sky Holdings' cumulative
consolidated income tax net operating loss carryforwards existing at the
acquisition date. Also included in the consideration was a deferred income tax
liability of $421.3 million principally for the excess of the book basis over
the income tax basis of the amount of DBS rights assets existing at the
acquisition date. Of the total acquisition cost, $1.0 billion was allocated to
the DBS rights assets, net of $94.1 million for the effect of the Company's
consolidated deferred income tax valuation allowances no longer required in
association with the merger.

         During 2000, the Company completed 19 other acquisitions of independent
providers of DIRECTV. These acquisitions principally consisted of the rights to
provide DIRECTV programming in various rural areas of the United States. The
total consideration for these acquisitions of $232.6 million consisted of cash
of $131.6 million, 905,000 shares of Pegasus Communications' Class A common
stock valued at $40.8 million, 22,500 shares of Pegasus Communications' Series D
preferred stock valued at $22.5 million, 10,000 shares of Pegasus
Communications' Series E preferred stock valued at $10.0 million, warrants to
purchase 4,000 shares of Class A common stock valued at $192,000, a deferred tax
liability incurred of $24.4 million, $200,000 in promissory notes and $2.9
million in assumed net liabilities. These acquisitions were accounted for by the
purchase method, wherein substantially all of the total consideration for these
acquisitions was allocated to DBS rights.

         Minority interest at December 31, 2001 and 2000 represents a
partnership interest in Golden Sky Systems.

14.      Discontinued Operations

         Discontinued operations on the statements of operations and
comprehensive loss represent Pegasus Media & Communications' cable operations.
The Company completely exited the cable business with the sale of the Puerto
Rico operations, as discussed below.

         In September 2000, Pegasus Media & Communications sold to a third party
its interests in the assets of its entire cable operations in Puerto Rico. The
sale price was $170.0 million in cash, and the net cash proceeds of the sale
were $164.5 million. The gain on the sale was $59.4 million, net of currently
payable Puerto Rico capital gains and withholding taxes of $28.0 million. Net
revenues from discontinued operations were $18.1 million and $21.2 million in
2000 and 1999, respectively.



                                      F-22


<PAGE>


                     PEGASUS SATELLITE COMMUNICATIONS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


15.      Financial Instruments

         The carrying and fair values of the Company's long term debt and
redeemable preferred stocks at December 31, 2001 and 2000 were as follows (in
thousands):


<TABLE>
<CAPTION>
                                                                      2001                         2000
                                                           ---------------------------- ---------------------------
                                                             Carrying        Fair         Carrying        Fair
                                                               Value         Value         Value         Value
                                                           ------------- -------------- ------------- -------------
<S>                                                          <C>           <C>           <C>           <C>
Long term debt (including current portion)................   $1,338,651    $1,244,686    $1,182,858    $1,106,615
Redeemable preferred stocks...............................      183,503       135,076       491,843       462,573
</TABLE>


         The fair values of the Company's publicly held notes and preferred
stock, with a combined fair value of $835.2 million and $1.1 billion at December
31, 2001 and 2000, respectively, were determined based on quoted market prices
for each individual security. The carrying value of amounts outstanding under
the Company's revolving credit and term loan facilities aggregating $352.3
million and $382.0 million at December 31, 2001 and 2000, respectively,
approximates fair value because the outstanding amounts are subject to short
term variable rates of interest and the rates in effect at December 31, 2001 and
2000 approximate the market rates available at each date. Due to the proximity
of its issuance to December 31, 2001, the carrying amount of the Company's
unregistered 11-1/4% senior notes due 2010 of $175.0 million approximates its
fair value. Valuation of the Company's nonpublicly held preferred stocks
outstanding at December 31, 2000 included in the table was not significant. The
carrying values of other financial instruments included in the table equal or
approximate their fair values and were not significant.

         The Company is party to interest rate swap and interest rate cap
contracts to manage its interest rate exposure. These instruments were entered
into as a condition of the Company's credit agreement. The principal object of
these contracts is to minimize the risks and/or costs associated with the
Company's variable rate debt incurred under the credit agreement. The notional
amounts of the swaps and caps are used to measure interest to be paid or
received. However, no cash is transferred with respect to the notional amounts.
Net cash paid or received on the instruments is recognized as an adjustment to
interest expense over the related market interest rate setting period. The
parties to these swaps and caps are major financial institutions. The Company is
exposed to credit loss in the event of nonperformance by these institutions,
however, the Company does not anticipate their nonperformance.

         The Company has two interest rate swaps, each with a different
financial institution. Both swaps terminate March 2003. One contract is for a
notional amount of $35.0 million and has a fixed rate of interest of 7.195%. The
other contract is for a notional amount of $37.1 million and has a fixed rate of
interest of 7.18%. The variable rate of interest under both contracts is marked
to the 6 month LIBOR rate in effect at the beginning of each 6 month resetting
period. Under the interest rate swaps, variable interest is exchanged for fixed
interest. The Company owes interest to the contracting institutions when the
specified market rate is below the contracted fixed rate and receives interest
from them when the specified market rate is above the contracted fixed rate. The
Company has two interest rate caps, each with a different financial institution.
Both caps terminate March 2003. One contract has a notional amount of
approximately $33.9 million and the other has a notional amount of $34.0
million. The cap rate under each contract is 9.0% and payment is determined
quarterly based on the 3 month LIBOR rate in effect at the beginning of each 6
month resetting period. Under the interest rate caps, the Company receives
interest from the contracting institutions when the specified market rate is
above the cap rate. The Company adjusts the swaps and caps to fair values at
each quarter. The aggregate fair value of the swaps and caps at December 31,
2001, estimated based on the amount that the Company would receive or pay to
terminate the contracts on that date, was a liability of $4.2 million. As a
result of market LIBOR rates available to the Company for the swaps being lower
than the fixed rates it pays on the swaps, the Company paid net additional
interest of approximately $1.0 million in each of 2001 and 2000 with respect to
the interest rate instruments.


                                      F-23




<PAGE>




                     PEGASUS SATELLITE COMMUNICATIONS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)




16.      Commitments and Contingent Liabilities

Legal Matters

         DirecTV Litigation
         ------------------

         National Rural Telecommunications Cooperative

         Pegasus Satellite Television and Golden Sky Systems, which are
subsidiaries of the Company, are affiliates of the NRTC that participate through
agreements in the NRTC's direct broadcast satellite program.

         On June 3, 1999, the NRTC filed a lawsuit in federal court against
DirecTV, Inc. seeking a court order to enforce the NRTC's contractual rights to
obtain from DirecTV certain premium programming formerly distributed by United
States Satellite Broadcasting Company, Inc. for exclusive distribution by the
NRTC's members and affiliates in their rural markets. The NRTC also sought a
temporary restraining order preventing DirecTV from marketing the premium
programming in such markets and requiring DirecTV to provide the NRTC with the
premium programming for exclusive distribution in those areas. The court, in an
order dated June 17, 1999, denied the NRTC a preliminary injunction on such
matters, without deciding the underlying claims.

         On July 22, 1999, DirecTV responded to the NRTC's continuing lawsuit by
rejecting the NRTC's claims to exclusive distribution rights and by filing a
counterclaim seeking judicial clarification of certain provisions of DirecTV 's
contract with the NRTC. As part of the counterclaim, DirecTV is seeking a
declaratory judgment that the term of the NRTC's agreement with DirecTV is
measured only by the orbital life of DBS-1, the first DIRECTV satellite
launched, and not by the orbital lives of the other DIRECTV satellites at the
101(degree)W orbital location. According to DirecTV, DBS-1 suffered a failure of
its primary control processor in July 1998 and since that time has been
operating normally using a spare control processor. While the NRTC has a right
of first refusal to receive certain services from any successor DIRECTV
satellite, the scope and terms of this right of first refusal are also being
disputed in the litigation, as discussed below. This right is not expressly
provided for in the Company's agreements with the NRTC. If DirecTV were to
prevail on its counterclaim, any failure of DBS-1 could have a material adverse
effect on the Company's DIRECTV rights.

         On September 9, 1999, the NRTC filed a response to DirecTV's
counterclaim contesting DirecTV's interpretations of the end of term and right
of first refusal provisions. On December 29, 1999, DirecTV filed a motion for
partial summary judgment. The motion sought a court order that the NRTC's right
of first refusal, effective at the termination of DirecTV's contract with the
NRTC, does not include programming services and is limited to 20 program
channels of transponder capacity. On January 31, 2001, the court issued an order
denying DirecTV's motion in its entirety for partial summary judgment relating
to the right of first refusal.

         On August 26, 1999, the NRTC filed a separate lawsuit in federal court
against DirecTV claiming that DirecTV had failed to provide to the NRTC its
share of launch fees and other benefits that DirecTV and its affiliates have
received relating to programming and other services. On November 15, 1999, the
court granted a motion by DirecTV and dismissed the portion of this lawsuit
asserting tort claims, but left in place the remaining claims asserted by the
NRTC. NRTC and DirecTV have also filed indemnity claims against one another,
which pertain to NRTC's alleged obligation to indemnify DirecTV for costs
incurred in the various lawsuits described herein.

         Both of the NRTC's lawsuits against DirecTV have been consolidated for
discovery and pretrial purposes. A trial date of December 2, 2002 has been set,
although at this time it is not clear which of the lawsuits will be tried on
that date.

         The NRTC and DirecTV have also filed indemnity claims against one
another that pertain to the alleged obligation, if any, of the NRTC to indemnify
DirecTV for costs incurred in various lawsuits described herein. These claims
have been severed from the other claims in the case and will be tried
separately. Each side has filed a summary judgment motion relating to the
claims.


                                      F-24


<PAGE>


                     PEGASUS SATELLITE COMMUNICATIONS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

         Pegasus Satellite Television and Golden Sky Systems

         On January 10, 2000, Pegasus Satellite Television and Golden Sky
Systems filed a class action lawsuit in federal court in Los Angeles against
DirecTV as representatives of a proposed class that would include all members
and affiliates of the NRTC that are distributors of DIRECTV. The complaint
contained causes of action for various torts, common counts and declaratory
relief based on DirecTV's failure to provide the NRTC with certain premium
programming, and on DirecTV's position with respect to launch fees and other
benefits, term and right of first refusal. The complaint sought monetary damages
and a court order regarding the rights of the NRTC and its members and
affiliates.

         On February 10, 2000, Pegasus Satellite Television and Golden Sky
Systems filed an amended complaint which added new tort claims against DirecTV
for interference with Pegasus Satellite Television's and Golden Sky Systems'
relationships with manufacturers, distributors and dealers of direct broadcast
satellite equipment. The class action allegations Pegasus Satellite Television
and Golden Sky Systems previously filed were withdrawn to allow a new class
action to be filed on behalf of the members and affiliates of the NRTC. The new
class action was filed on February 29, 2000.

         On December 10, 2000, the court rejected in its entirety DirecTV's
motion to dismiss certain of the claims asserted by Pegasus Satellite
Television, Golden Sky Systems, and the putative class. On January 31, 2001, the
court denied in its entirety a motion for summary judgment filed by DirecTV
relating to the right of first refusal. The court also certified the plaintiff's
class on December 28, 2000.

         On March 9, 2001, DirecTV filed a counterclaim against Pegasus
Satellite Television and Golden Sky Systems, as well as the class members. In
the counterclaim, DirecTV seeks two claims for relief: (i) a declaratory
judgement that Pegasus Satellite Television and Golden Sky Systems have no right
of first refusal in their agreements with the NRTC to have DirecTV provide any
services after the expiration of the term of these agreements, and (ii) an order
that DBS-1 is the satellite (and the only satellite) that measures the term of
Pegasus Satellite Television's and Golden Sky Systems' agreements with the NRTC.
Pegasus Satellite Television's and Golden Sky Systems' motion to dismiss the
counterclaims were denied on May 8, 2001, and on June 4, 2001, Pegasus Satellite
Television, Golden Sky Systems, and the class filed a response denying DirecTV's
counterclaims. On July 2, 2001, DirecTV filed under seal a summary judgment
motion on its term claim, but the court denied the motion on October 31, 2001.

         On May 21, 2001, Pegasus Satellite Television, Golden Sky Systems, and
the class members moved to amend their complaints to add certain additional
claims against DirecTV relating to, among other things, DirecTV's provision of
advanced services. The court granted this motion on June 19, 2001. DirecTV filed
its answer to the second amended complaint on July 20, 2001.

         On June 22, 2001, DirecTV brought suit against Pegasus Satellite
Television and Golden Sky Systems in Los Angeles County Superior Court for
breach of contract and common counts. The lawsuit pertains to the seamless
marketing agreement dated August 9, 2000, as amended, between DirecTV and
Pegasus Satellite Television and Golden Sky Systems. On July 13, 2001, Pegasus
Satellite Television and Golden Sky Systems terminated the seamless marketing
agreement. On July 16, 2001, Pegasus Satellite Television and Golden Sky Systems
filed a cross complaint against DirecTV alleging, among other things, that (i)
DirecTV has breached the seamless marketing agreement, and (ii) DirecTV has
engaged in unlawful and/or unfair business practices, as defined in Section
17200, et seq. of California Business and Professions Code. On July 19, 2001,
Pegasus Satellite Television and Golden Sky Systems removed the case from state
to federal court. DirecTV moved to remand the case back to state court but, on
September 19, 2001, the court denied DirecTV's motion.

         All five lawsuits discussed above, including both lawsuits brought by
the NRTC, the class action, and Pegasus Satellite Television's and Golden Sky
Systems' lawsuit, are pending before the same judge. The court has set a trial
date of December 2, 2002, although, as noted above, it is not clear whether all
the lawsuits will be tried together.


                                      F-25



<PAGE>

                     PEGASUS SATELLITE COMMUNICATIONS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


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

         In addition to the matters discussed above, from time to time the
Company is involved with claims that arise in the normal course of the Company's
business. In the Company's opinion, the ultimate liability with respect to these
claims will not have a material adverse effect on the Company's consolidated
operations, cash flows, or financial position.

Commitments

         Call Center Services
         --------------------

         The Company has an agreement with a provider of integrated marketing,
information, and transaction services to provide customer relationship
management services. The initial term of the agreement ends in December 2004,
and is subject to automatic renewal for successive three year terms unless
either party provides notice of termination. The fees that the Company must pay
vary based on the types of service provided, performance criteria, and other
costs incurred by the provider. The minimum annual fees that the Company must
pay over the remaining initial term of this agreement are $20.3 million in each
year 2002 through 2004. Expense recognized under this agreement was $27.9
million, $22.3 million, and $1.7 million 2001, 2000, and 1999, respectively.

         Communications Services
         -----------------------

         The Company has an agreement with a provider of telephone services that
commenced in May 2000 and expires May 2003. The fees that the Company must pay
vary based on usage type and volume. The Company must pay a minimum annual fee
of $7.0 million over the term of the agreement. Expense recognized under this
agreement was $9.2 million in 2001 and $6.3 million in 2000.

         Purchase Option
         ---------------

         In January 2002, the Company exercised its option to purchase for $10.7
million an office building it has been renting, and is in the process of
negotiating the purchase agreement.

17.      Related Party Transactions

         The Company has an arrangement with W.W. Keen Butcher, 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 agrees to provide and maintain
cash collateral for up to $8.0 million in principal amount of bank loans to Mr.
Butcher and the minority owner. Mr. Butcher is the stepfather of Marshall W.
Pagon, the Company's Chairman of the board of Directors and Chief Executive
Officer. 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. Pursuant to this arrangement, at December 31, 2001 and
2000, the Company had provided collateral of $7.6 million and $4.9 million,
respectively, which is recorded as restricted cash within other current assets.

         William P. Phoenix, a director of Pegasus Communications since 1998, is
a managing director of CIBC World Markets Corporation ("CIBC"), a financial
services firm. CIBC and its affiliates have provided various services to the
Company over the last three years. Total fees and expenses incurred by the
Company with respect to CIBC were $8.4 million, $4.4 million, and $940,000 in
2001, 2000, and 1999, respectively.

         At December 31, 2001, the Company has a loan outstanding to Nicholas
Pagon, a former executive of the Company and the brother of Marshall W. Pagon,
chairman and chief executive officer of the Company, amounting to approximately
$238,000 for principal and interest accrued on the loan. The loan matures in
January 2004 and bears interest at 6% per annum. Principal and any accrued and
unpaid interest are due at maturity. The loan is collateralized by shares of
Pegasus Communications' Class A common stock.

18.      Industry Segments

         At December 31, 2001, the Company's only reportable segment was its DBS
business. DBS provides multichannel digital broadcast satellite audio and video
programming of DIRECTV service in rural areas of the United States on a
subscription basis. Audio and video programming provided 93% of the total DBS
revenues in each of 2001, 2000, and 1999. Performance of the DBS business is
evaluated based on premarketing cash flow and EBITDA. Premarketing cash flow of
the DBS business is DBS revenues less programming expense (excluding promotional
programming), other subscriber related expenses, and general and administrative
expenses. EBITDA of the DBS business is premarketing cash flow less promotional
programming, promotions and incentives, and advertising and selling expenses.
Premarketing cash flow and EBITDA 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 the Company's
operating performance or liquidity, as determined under generally accepted
accounting principles. Although EBITDA is a common measure used by other
companies, the Company's calculation of EBITDA may not be comparable with that
of others. Information on DBS' revenue and results of operations is as presented
on the statements of operations and comprehensive loss. DBS derived all of its
revenues from external customers for each period reported. Capital expenditures
for the DBS


                                      F-26
<PAGE>

                     PEGASUS SATELLITE COMMUNICATIONS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

business were approximately $37.0 million, $19.1 million, and $3.6 million for
2001, 2000, and 1999, respectively. Capital expenditures for all other
operations were $5.7 million, $27.3 million, and $15.8 million for 2001, 2000,
and 1999, respectively. Identifiable total assets for DBS were $2.0 billion and
$2.2 billion at December 31, 2001 and 2000, respectively. Identifiable total
assets for all other operations were $131.9 million and $375.1 million at
December 31, 2001 and 2000, respectively.

19.      Quarterly Information (Unaudited)
         (in thousands)

<TABLE>
<CAPTION>
                                                                         Quarter Ended
                                               March 31,           June 30,        September 30,     December 31,
                                                 2001                2001              2001              2001
                                                 ----                ----              ----              ----
<S>                                             <C>                <C>               <C>               <C>
Net revenues................................    $213,484           $215,352          $215,212          $228,461
Loss from operations .......................     (73,459)           (66,530)          (54,286)          (40,129)
Loss before extraordinary item..............     (70,642)           (65,514)          (85,776)          (61,475)
Net loss....................................     (70,642)           (66,500)          (85,776)          (62,295)

In the quarter ended September 30, 2001, the Company recognized a loss on the
impairment of marketable securities it held of $34.2 million.

                                               March 31,           June 30,        September 30,      December 31,
                                                 2000                2000              2000              2000
                                                 ----                ----              ----              ----
Net revenues................................    $103,995           $143,683          $168,301          $201,529
Loss from operations........................     (22,633)           (40,065)          (72,867)          (73,397)
Loss before extraordinary item..............     (40,266)           (41,729)           (8,037)          (63,236)
Net loss....................................     (46,020)           (41,729)           (8,037)          (63,236)
</TABLE>


In the quarter ended September 30, 2000, the Company recognized a gain of $59.4
million, net of applicable taxes of $28.0 million, on the sale of its Puerto
Rico cable operations.



                                      F-27


<PAGE>




PEGASUS SATELLITE COMMUNICATIONS, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 2001, 2000, and 1999
(In thousands)


<TABLE>
<CAPTION>

                                     Balance at       Additions         Additions
                                    Beginning of      Charged To        Charged To                         Balance at
          Description                  Period          Expenses       Other Accounts      Deductions      End of Period

<S>                                    <C>               <C>            <C>                <C>                <C>
  Allowance for Uncollectible
      Accounts Receivable
      -------------------
           Year 2001                  $3,303          $36,511          $    -            $33,798(b)          $6,016
           Year 2000                   1,410           14,531           1,000(a)          13,638(b)           3,303
           Year 1999                     567            8,369               -              7,526(b)           1,410



    Valuation Allowance for
      Deferred Tax Assets
      -------------------
           Year 2001                 $     -          $     -          $    -           $     -             $     -
           Year 2000                  59,808                -           2,729(c)         62,537(d)                -
           Year 1999                   5,301           54,507               -                 -              59,808
</TABLE>



(a)      Represents allowance for doubtful accounts obtained in the acquisition
         of Golden Sky Holdings, Inc.
(b)      Amounts written off, net of recoveries.
(c)      Net operating loss carryforwards incurred during the year.
(d)      Valuation allowances no longer required due to the acquisition of
         Golden Sky Holdings, Inc.





                                      S-1