<PAGE>

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


                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                            -------------------------
                                    FORM 10-K

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

                   For the fiscal year ended December 31, 2003

                                       OR

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

                         Commission File Number 0-21389

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

                    Delaware                              51-0374669
                    --------                              ----------
         (State or other jurisdiction of                (IRS  Employer
         incorporation or organization)               Identification No.)

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

       Registrant's telephone number, including area code: (800) 376-0022
                                 --------------
        Securities registered pursuant to section 12(b) of the Act: None
        Securities registered pursuant to section 12(g) of the Act: 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/

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

         As of the last business day of the registrant's most recently completed
second fiscal quarter on June 30, 2003, all of the registrant's outstanding
voting stock was held by the parent of the registrant, and therefore, the
aggregate market value of the registrant's voting stock held by nonaffiliates of
the registrant was $0.00.

         Number of shares of each class of the registrant's common stock
outstanding as of March 15, 2004:

                   Class B Common Stock, $0.01 par value: 100

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

<PAGE>


                                TABLE OF CONTENTS
<TABLE>
<CAPTION>
                                                                                                           PAGE
                                                                                                           ----

                                                     PART I
                                                     ------

<S>       <C>                                                                                              <C>
ITEM 1.   BUSINESS........................................................................................    1
ITEM 2.   PROPERTIES.......................................................................................  28
ITEM 3.   LEGAL PROCEEDINGS................................................................................  28
ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..............................................  32

                                                     PART II
                                                     -------

ITEM 5.   MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS............................  33
ITEM 6.   SELECTED FINANCIAL DATA..........................................................................  34
ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............  35
ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.......................................  54
ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA......................................................  57
ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
          FINANCIAL DISCLOSURE.............................................................................  57
ITEM 9A.  CONTROLS AND PROCEDURES..........................................................................  57

                                                    PART III
                                                    --------

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT...............................................  59
ITEM 11.  EXECUTIVE COMPENSATION...........................................................................  61
ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
          RELATED STOCKHOLDER MATTERS .....................................................................  69
ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...................................................  73
ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES...........................................................  75

                                                     PART IV
                                                     -------

ITEM 15.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.................................  77
</TABLE>

                                       i

<PAGE>


ITEM 1.  BUSINESS

The Company

         Pegasus Satellite Communications, Inc. ("Pegasus Satellite") is a
direct subsidiary of Pegasus Communications Corporation ("Pegasus
Communications"). Pegasus Satellite is a holding company, has issued debt and
preferred stock, and is the parent company of Pegasus Media & Communications,
Inc. ("Pegasus Media"). Pegasus Media has debt outstanding under a credit
agreement and has separate subsidiaries that conduct our direct broadcast
satellite business and substantially all of our broadcast television business.

         The corporate organization described above is illustrated in the chart
on the following page. The chart sets forth the capital structure and principal
assets of (i) Pegasus Satellite and its principal subsidiaries and (ii) Pegasus
Satellite's parent, Pegasus Communications, and of some of the parent's
principal subsidiaries. Pegasus Communications is a publicly reporting company
that files reports under the Securities Exchange Act of 1934, as amended. The
most recently filed reports of Pegasus Communications, including its Annual
Report on Form 10-K for the year ended December 31, 2003, contain information
relating to the parent and the principal subsidiaries of the parent.

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

         Unless the context otherwise indicates, all references to "we," "us,"
and "our" refer to Pegasus Satellite together with its direct and indirect
subsidiaries.

                                       1

<PAGE>

<TABLE>
<CAPTION>
<S>                                                  <C>
           -------------------------------------------------------------------------------------------------------------
          |                                     Pegasus Communications Corporation                                      |
          |-------------------------------------------------------------------------------------------------------------|
          |   Capital Structure (as of December 31, 2003):                                                              |
          |         Class A common stock: 5,443,497, including 682,104 held by subsidiaries                             |
          |         of Pegasus Communications                                                                           |
          |         Class B common stock: 916,380                                                                       |
          |         Nonvoting common stock: none                                                                        |
          |         6-1/2% Series C convertible preferred stock: $198.8 million, including                              |
          |         accrued dividends of $22.7 million                                                                  |
          |         Series D preferred stock: $13.5 million, including accrued dividends of $1.0 million                |
          |         Series E preferred stock: $3.2 million, including accrued dividends of $241 thousand                |
          |-------------------------------------------------------------------------------------------------------------|
          |   Assets (as of December 31, 2003):                                                                         |
          |         Cash: $55.9 million                                                                                 |
          |         12-3/4% cumulative exchangeable preferred stock of Pegasus Satellite: $115.7 million, including     |
          |         accrued dividends of $23.5 million                                                                  |
          |         Note payable from Pegasus Satellite: $45.7 million                                                  |
           -------------------------------------------------------------------------------------------------------------
                                      |                                                                       |
                                      |                                                                       |
 --------------------------------------------------------------------------------                             |
|Subsidiaries of Pegasus                                                         |                            |
|Communications                Principal Assets                                  |                            |
|--------------------------------------------------------------------------------|                            |
|Pegasus Development           Intellectual property, including Personalized     |                            |
|Corporation                   Media licenses; Ka band license for 107(degree)and|                            |
|                              87(degree)west longitude orbital locations;       |                            |
|--------------------------------------------------------------------------------|                            |
|Pegasus Guard Band LLC        Licensee of 34 guard band licenses,               |                            |
|                              for use of frequencies located in the 700         |                            |
|                              megahertz frequency band                          |                            |
|--------------------------------------------------------------------------------|                            |
|Pegasus Communications        Management company                                |                            |
|Management Company                                                              |                            |
|--------------------------------------------------------------------------------|                            |
|Pegasus Rural Broadband LLC   Provider of broadband Internet service in         |                            |
|                              rural areas                                       |                            |
|--------------------------------------------------------------------------------|                            |
|Misc. Subsidiaries            Television license in Tallahassee, FL             |                            |
 --------------------------------------------------------------------------------                             |
                                                                                                              |
                      -------------------------------------------------------------------------------------------------------------
                     |                                   Pegasus Satellite Communications, Inc.                                    |
                     |-------------------------------------------------------------------------------------------------------------|
                     |Capital Structure (as of December 31, 2003):                                                                 |
                     |         9-5/8% senior notes due 2005: $81.6 million                                                         |
                     |         12-3/8% senior notes due 2006: $158.2 million                                                       |
                     |         9-3/4% senior notes due 2006: $71.1 million                                                         |
                     |         13-1/2% senior subordinated discount notes due 2007: $126.1 million, net of unamortized discount    |
                     |           of $2.7 million                                                                                   |
                     |         12-1/2% senior notes due 2007: $118.5 million                                                       |
                     |         11-1/4% senior notes due 2010: $341.9 million, net of unamortized net premium of $1.0 million       |
                     |         12-3/4% cumulative exchangeable preferred stock: $230.9 million, including accrued                  |
                     |           dividends of $46.9 million                                                                        |
                     |         Note payable to Pegasus Communications due 2010: $45.7 million                                      |
                     |         Term loan facility due 2009: $94.2 million, net of unamortized discount of $8.5 million             |
                     |Assets (as of December 31, 2003):                                                                            |
                     |         Cash: $27.0 million                                                                                 |
                     |         Pegasus Communications Class A common stock: 657,604 shares                                         |
                     |         Television license: WGFL, Gainesville, FL                                                           |
                     |         Option to acquire television licenses: WPME, WSWB, WTLF and pending applications                    |
                      -------------------------------------------------------------------------------------------------------------
                                                  |
                                                  |
                                                  |
 -------------------------------------------------------------------------------------------------------------
|                                    Pegasus Media & Communications, Inc.                                     |
|-------------------------------------------------------------------------------------------------------------|
|Capital Structure (as of December 31, 2003):                                                                 |
|         Term loan facility due 2005:  $75.6 million                                                         |
|         Incremental term loan facility due 2005: $17.6 million                                              |
|         Tranche D term loan facility: $295.0 million, net of unamortized discount of  $4.2 million          |
|         Revolver: $0 million                                                                                |
 -------------------------------------------------------------------------------------------------------------
                     |                                                                      |
                     |                                                                      |
 --------------------------------------                                     ----------------------------------
| Pegasus Satellite Television, Inc.    |                                  | Pegasus Broadcast Television,    |
| and Subsidiaries                      |                                  | Inc. and Subsidiaries            |
|-------------------------------------- |                                  |----------------------------------|
| Largest independent distributor of    |                                  | Television licenses: WDSI,       |
| DIRECTV programming with in excess    |                                  | Chattanooga, TN; WTLH,           |
| of 1.1 million subscribers at         |                                  | Tallahassee, FL; WOLF,           |
| December 31, 2003 with the            |                                  | Wilkes-Barre/Scranton, PA; and   |
| exclusive right to distribute         |                                  | WPXT, Portland, ME               |
| DIRECTV services to approximately     |                                  |                                  |
| 8.4 million rural households in       |                                  |                                  |
| specific territories within 41 states |                                  |                                  |
 --------------------------------------                                     ---------------------------------

</TABLE>

                                        2

<PAGE>


Corporate Mission

         Our mission is to provide broadcast video and other media and
communications services to consumers in rural and underserved areas of the
United States. Pegasus Communications is the only publicly traded media company
primarily focused on serving America's rural and underserved areas. In the
future, we hope to expand the scope of services that we offer and believe that
the sales, customer service, and business infrastructure that we have developed
and continue to refine will assist us in accomplishing our mission.

General

         Our principal operating business is the direct broadcast satellite
business providing DIRECTV(R) programming services. We are the largest
independent distributor of DIRECTV programming with in excess of 1.1 million
subscribers at December 31, 2003 with the exclusive right to distribute DIRECTV
services to approximately 8.4 million rural households in specific territories
within 41 states, representing a market penetration of 13% of the rural
households in these territories at December 31, 2003. We have a network for our
DIRECTV services of over 4,000 independent retailers. For 2003, 2002, and 2001,
revenues for this business were 96%, 96%, and 97%, respectively, of total
consolidated revenues, and operating expenses for this business were 92%, 92%,
and 93%, respectively, of total consolidated operating expenses. Total assets of
the direct broadcast satellite business were $1.6 billion at December 31, 2003,
and represented 91% and 93% of total consolidated assets at December 31, 2003
and 2002, respectively. As a distributor of DIRECTV, we may be adversely
affected by any material adverse changes in the assets, financial condition,
programming, technological capabilities, or services of DIRECTV, Inc.

         We are the owner or programmer of nine television stations affiliated
with either CBS Television ("CBS"), Fox Broadcasting Company ("Fox"), United
Paramount Network ("UPN"), or The WB Television Network ("WB"). The carrying
amount of assets of our broadcast television operations was $57.0 million at
December 31, 2003.

         We have a history of losses principally due to the substantial amounts
incurred for interest expense and amortization expense associated with
intangible assets. Consolidated net losses were $136.7 million, $109.4 million,
and $285.2 million for 2003, 2002, and 2001, respectively. Consolidated interest
and amortization expenses were $167.8 million and $116.5 million, respectively,
for 2003, $148.0 million and $117.4 million, respectively, for 2002, $136.2
million and $245.4 million, respectively, for 2001.

         On a consolidated basis, we are highly leveraged. At December 31, 2003,
we had a combined carrying amount of long term debt, including the portion that
is current, and mandatorily redeemable preferred stock outstanding, including
associated accrued and unpaid dividends considered to be interest, of $1.7
billion.

         We are in significant litigation against DIRECTV, Inc. (See ITEM 3.
Legal Proceedings - DIRECTV Litigation and - Seamless Marketing Litigation.)

Direct Broadcast Satellite Television

         There are currently two nationally branded direct broadcast satellite
programming services: DIRECTV and The DISH Network ("DISH"). DIRECTV is a
service of DIRECTV, Inc., a subsidiary of Hughes Electronics Corporation
("Hughes Electronics"). The News Corporation Limited ("News Corp") purchased a
34% interest in Hughes Electronics, and subsequently transferred its entire
interest to its subsidiary Fox Entertainment Group, Inc. ("Fox Entertainment").
DISH is owned by EchoStar Communications Corporation ("EchoStar"). Additionally,
Cablevision Systems launched a high

                                       3

<PAGE>

definition focused direct broadcast satellite service in late 2003 through its
Rainbow DBS LLC subsidiary. This new direct broadcast satellite entrant operates
under the VOOM brand name.

         Direct broadcast satellite programming services are digital services
and require that a subscriber install or have installed a satellite receiving
antenna (or dish) and a digital receiver. DIRECTV and DISH require a satellite
dish (as small as 18 inches in diameter, depending upon the services received).
As of December 31, 2003, the market shares of DIRECTV (including our
subscribers) and DISH among all direct broadcast satellite subscribers
nationally were approximately 57% and 43%, respectively, compared to
approximately 58% and 42%, respectively, at December 31, 2002.

Direct Broadcast Satellite in Rural Areas

         Rural areas include approximately 80% of the total landmass of the
continental United States and are home to approximately 20% of the U.S.
population. 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, direct broadcast satellite
services have strong cost advantages over cable and other wireline distribution
systems in rural areas. Rural areas, therefore, represent a large and attractive
market for direct broadcast satellite services.

         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 operate a limited number of store locations. For
these reasons, service providers seeking to establish broad and effective rural
distribution have limited alternatives:

            o  they may seek to distribute their services through 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 networks of independent
               retailers serving rural areas, such as have been established by
               EchoStar, the provider of another large direct broadcast
               satellite service and one of our competitors, and by us.

Our Direct Broadcast Satellite Business Strategy

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

                                       4
<PAGE>

         Continued improvement in results from operations will in large part
depend upon our obtaining a sufficient number of quality subscribers, retention
of these subscribers for extended periods of time, and maintaining adequate
margins from them. While our direct broadcast satellite business strategy has
resulted in an increase in income from operations, that strategy along with
other very significant factors, has contributed to a certain extent to a
decrease in the number of our direct broadcast satellite subscribers. These
other significant factors include a significant competitive disadvantage that we
experience in a large number of our territories in which EchoStar offers or is
introducing local channels but DIRECTV does not; competition from EchoStar other
than with respect to local channels; competition from digital cable providers;
and the effect of general economic conditions on our subscribers and potential
subscribers. The number of territories in which we are disadvantaged by a lack
of local channel service increased in 2003 and we believe will continue to
increase in the first two quarters of 2004 because of DIRECTV's delay in
launching its DIRECTV 7S spot beam satellite to provide local channels in
markets where EchoStar offers or is introducing local channels, and DIRECTV's
failure to provide certain of our key markets with local channels. DIRECTV,
Inc., according to its most recent statements, intends to launch this satellite
in the second quarter of 2004. Our direct broadcast satellite business strategy
may result in further decreases in the number of our direct broadcast satellite
subscribers and our direct broadcast satellite net revenues when compared to
prior periods, but we believe that our results from operations for the direct
broadcast satellite business will not be significantly impacted. We cannot make
any assurances that this will be the case, however. If a disproportionate number
of subscribers churn relative to the number of quality subscribers we enroll, we
are not able to enroll a sufficient number of quality subscribers, and/or we are
not able to maintain adequate margins from our subscribers, our results from
operations may not improve or improved results that do occur may not be
sustained. (See Risk Factors - We have a recent history of net decreases in our
total number of subscribers.)

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 five high power Ku band satellites and has two spare satellites in
orbit. It also has stated plans to expand its satellite capacity with the launch
of the DIRECTV 7S spot beam satellite, which according to its most recent
statements is planned during the second quarter of 2004. 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 direct broadcast satellite
subscribers and that these product features coupled with expanded local channel
availability will continue to drive significant subscriber growth for DIRECTV
programming in the future.

DIRECTV Rural Affiliates

         Prior to the launch of DIRECTV's programming service, Hughes
Communications Galaxy, Inc. ("Hughes Communications"), succeeded by DIRECTV,
Inc., entered into an agreement with the National Rural Telecommunications
Cooperative ("NRTC") authorizing the NRTC 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 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. Approximately 250 NRTC members and affiliates initially acquired such
exclusive rights, thereby becoming DIRECTV rural affiliates.

                                       5
<PAGE>

         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. Between October 1996 and February
2001, we acquired collectively an aggregate of 159 territories directly
ourselves or indirectly through our acquisitions of other DIRECTV rural
affiliates.

DIRECTV Programming

         DIRECTV programming includes 1) cable networks, broadcast networks
(including, where available, local broadcast network services, which is also
known as "local into local" channels), and audio services available for purchase
in tiers for a monthly subscription, 2) premium services available a la carte
for a monthly subscription, 3) sports programming (including regional sports
networks and seasonal collegiate and premium professional sports packages)
available for a yearly, seasonal, or monthly subscription, 4) movies and events
available for purchase on a pay per view basis, and 5) a package for high
definition televisions on a monthly subscription basis.

         Our core programming packages consist of Select Choice, Total Choice
Limited, Total Choice, Total Choice Plus, and Total Choice Premier. The
following is a summary of these programming packages and their latest pricing
(excluding applicable fees and taxes):

            o  Select Choice. Delivers over 45 popular channels of news, sports,
               and entertainment programming and optional access to pay per view
               channels that retails for $29.99 per month.
            o  Total Choice Limited. Delivers over 80 basic entertainment
               channels, including 31 digital music channels and optional access
               to pay per view channels, which retails for $34.99 per month.
            o  Total Choice. Delivers over 115 basic entertainment channels,
               including 31 digital music channels and optional access to pay
               per view channels, which retails for $39.99 per month.
            o  Total Choice Plus. Delivers over 135 basic entertainment
               channels, including everything in Total Choice and over 15
               additional channels, which retails for $42.99 per month.
            o  Total Choice Premier. Delivers more than 195 channels, including
               everything in Total Choice Plus, 31 premium movie channels, and
               over 20 regional and specialty sports networks and optional
               access to pay per view channels, which retails for $89.99 per
               month.

We continually evaluate our core programming prices given wholesale programming
costs and competitive developments. Based on these and other factors, we
periodically adjust our core programming prices.

         Core programming package pricing includes the benefits of the Pegasus
Digital One Plan (see - Direct Broadcast Satellite Sales and Distribution - The
Pegasus Digital One Plan below), such as repair service without an additional
monthly cost, but does not include a royalty fee of up to $1.75 to reimburse us
for certain costs.

         We offer other programming in addition to our core programming
packages. In designated market areas ("DMA's") where available, subscribers may
obtain local broadcast network services packages along with their core
programming for $3.00 or $6.00 per month. There are 206 DMA's in the continental
United States. We have subscribers that reside in 133 DMA's, representing 8.4

                                       6
<PAGE>

million households. Local broadcast network services offered by DIRECTV, Inc.
are currently available in 42 of the DMA's where our subscribers reside,
representing 3.2 million households. Our local broadcast network services
packages include stations from the major networks ABC, CBS, NBC, and Fox, as
well as Public Broadcasting Systems, WB, and UPN stations and independent
stations, where available.

         DIRECTV, Inc., according to its most recent statements, intends to
provide in 2004 local broadcast network services to an additional 29 DMA's that
we serve, upon the successful launch of the DIRECTV 7S spot beam satellite,
which according to its most recent statements is planned for the second quarter
of 2004. If completed, this will increase the number of local broadcast network
eligible households in our markets by approximately 2.5 million, to a total of
approximately 5.7 million households. DIRECTV, Inc., according to its most
recent statements, also intends to provide local broadcast network services in
15 DMA's that we serve, representing approximately 763,000 households, using
capacity at the 72.5(degree) west longitude orbital location, which is assigned
to Canada. (See Risk Factors - The introduction of local channels in new markets
could be delayed and could be delivered from orbital locations requiring that
customers change-out their direct broadcast satellite receiving equipment or use
two antennas.) Based on the recent statements of DIRECTV, Inc. described above,
the total number of households in our markets that will be eligible for local
broadcast network services in 2004 will increase to approximately 6.4 million,
or 77% of the total households in our markets.

         The table below summarizes the impact of DIRECTV, Inc.'s stated planned
DIRECTV 7S and 72.5(degree) west longitude orbital location satellites on local
broadcast network services availability in our markets using three different
scenarios. As described above, if all launches are completed as stated by
DIRECTV the majority (approximately 77%) of households residing in our markets
will have access to local channel service in 2004. Additionally, the table shows
the number of our households where DISH has an advantage with respect to local
channel availability. This local service disadvantage to us decreases
significantly from 2.8 million of our households as of December 31, 2003 to
approximately 102,000 households with the successful launch of DIRECTV 7S and
re-slotting of the existing satellite to 72.5(degree) west orbital location. The
amounts in the table are approximations.

<TABLE>
<CAPTION>
                           Our Households                                                                Our
                         with Local Channel                Our Households Where Local                   Total
 Launch Scenarios           Availability                  Channels are Not Available:                Households*
--------------------     --------------------    -----------------------------------------------    --------------
                                                  For Neither     DISH Has and
                                                  Us or Dish        We Do Not          Total
<S>                      <C>                     <C>              <C>                 <C>           <C>
No Launch of D7S
   or re-slotting
   to 72.5(degree)           3,170,935             2,447,615           2,777,962      5,225,577         8,396,512
Launch of D7S only           5,666,941             2,005,569             724,002      2,729,571         8,396,512
Launch of Both D7S
   and re-slotting
   to 72.5(degree)           6,430,350             1,863,782             102,380      1,966,162         8,396,512
</TABLE>

* Total number of our households at December 31, 2003.

         We provide premium sports programming such as NFL SUNDAY TICKET((TM)),
which allows subscribers to view the largest selection of NFL games played each
Sunday during the regular season, subject to blackout restrictions. DIRECTV is
the exclusive direct broadcast satellite provider of NFL SUNDAY TICKET. In
addition, we provide subscriptions for other premium professional and collegiate
sports programming, such as NBA LEAGUE PASS, MEGA MARCH MADNESS(R), MLB EXTRA
INNINGS(SM), NHL(R) CENTER ICE(R), MLS SHOOTOUT, ESPN GamePlan, and ESPN FULL
COURT(R).

                                       7
<PAGE>

         All of our programming packages offer access to our pay per view
channels. We offer a selection of movies, including new hit movies, sports, and
other live events on a pay per view basis that subscribers can order from their
remote controls, online or by telephone. Pay per view movies range in price from
$1.99 to $5.99 per movie, with most being priced at $3.99.

         Subscribers may also subscribe to various premium services. We
distribute up to 31 different premium channels (some under an agency arrangement
with DIRECTV, Inc.) including seven HBO channels, four STARZ! (R), five
SHOWTIME(R), eight ENCORE(SM), two feeds of The Movie Channel(R), three
Cinemax(R) channels, FLIX(R), and Sundance Channel(R). We also offer SPORTS
Pack, consisting of regional and specialty sports networks including The Golf
Channel(R), NBA TV, The Outdoor Channel(R), Fox Sports World, Fox Sports Net(R)
channels, Comcast Sports Net (in the Baltimore/Washington area), Empire Sports
Network, Madison Square Garden(R), New England Sports Network, Sunshine Network,
and the YES Network(R). Premium services are available to subscribers at prices
based upon the number of services selected, ranging from $12 for one service to
$48 for five services.

Direct Broadcast Satellite Sales and Distribution

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

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

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

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

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

                                       8
<PAGE>

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

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

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

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

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

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

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

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

                                       9
<PAGE>

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

Direct Broadcast Satellite Agreements

         Prior to the launch of the first DIRECTV satellite in 1993, Hughes
Communications 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 direct broadcast satellite reception equipment
and with United States Satellite Broadcasting Company, Inc. for the sale of five
transponders on the first satellite. In an agreement entered into in 1992, as
amended in 1994, Hughes Communications offered members and affiliates of the
NRTC the opportunity to become the exclusive providers of certain direct
broadcast satellite services using the DIRECTV satellites at the 101(degree)
west longitude orbital location, generally including DIRECTV programming, to
specified residences and commercial subscribers in rural areas of the U.S. NRTC
members and affiliates that participated in its direct broadcast satellite
program acquired the rights to provide the direct broadcast satellite services
described above in their service areas. The service areas purchased by
participating NRTC members and affiliates were initially acquired for aggregate
commitment payments exceeding $100 million.

         We are an affiliate of the NRTC, participating through agreements in
its direct broadcast satellite program. The agreement between Hughes
Communications (and DIRECTV, Inc. as its successor) and the NRTC, and related
agreements between the NRTC and its participating members and affiliates,
provide those members and affiliates with substantial rights and benefits from
distribution in their service areas of the direct broadcast satellite 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
DIRECTV, Inc. In addition, the participating members and affiliates are required
to reimburse DIRECTV, Inc. 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, Inc. a 5%
fee on subscription revenues.

         DIRECTV, Inc. has disputed the extent of the rights held by the
participating NRTC members and affiliates. (See ITEM 3. Legal Proceedings -
DIRECTV Litigation.)

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

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

                                       10
<PAGE>

            o  If we fail to make any payment due to the NRTC or otherwise
               breach a material obligation of our agreements with the NRTC, the
               NRTC may terminate our agreement with the NRTC in addition to
               exercising other rights and remedies against us.
            o  If the NRTC's agreement with DIRECTV, Inc. is terminated because
               of a breach by the NRTC, DIRECTV, Inc. is obligated to continue
               to provide DIRECTV programming to us by assuming the NRTC's
               rights and obligations under the NRTC's agreement with DIRECTV,
               Inc. or under a new agreement containing substantially the same
               terms and conditions as the NRTC's agreement with DIRECTV, Inc.

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

         The NRTC has adopted a policy requiring any party acquiring DIRECTV
distribution rights from a NRTC member or affiliate to post letters of credit to
secure payment of the NRTC's billings when acquisitions occur and when monthly
payments to the NRTC exceed a specified amount. Pursuant to this policy, our
subsidiaries have posted at December 31, 2003 $59.0 million of letters of
credit.

         On August 9, 2000, our subsidiaries Pegasus Satellite Television, Inc.
and Golden Sky Systems, Inc. entered into an agreement with DIRECTV, Inc. to
provide seamless customer service to all of our existing and prospective
subscribers pursuant to a seamless consumer program agreement. The seamless
consumer program agreement allows us to provide subscribers more expansive
service selection during activation and a simplified and consolidated billing
process. In particular, we have the right to provide our subscribers with video
services currently distributed by DIRECTV, Inc. from certain frequencies,
including the right to provide the premium services HBO, Showtime, Cinemax, and
The Movie Channel, as well as sports programming and local television stations.
Under the agreement, we retain 10% to 20% of the revenues associated with these
additional programming services. The agreement is terminable by DIRECTV, Inc.
and by us on 90 days notice. The premium services portion of the agreement is
the subject of litigation with DIRECTV, Inc. For more information concerning
this ongoing litigation, see ITEM 3. Legal Proceedings - DIRECTV Litigation.

Broadcast Television

         We own six television stations affiliated with CBS, Fox, UPN, or WB.
The markets served by, call letters, and network affiliations of the stations we
own are: Chattanooga, Tennessee - WDSI (Fox); Tallahassee, Florida - WTLH (Fox)
and WFXU (UPN); Wilkes-Barre/Scranton, Pennsylvania - WOLF (Fox); Gainesville,
Florida - WGFL (CBS); and Portland, Maine - WPXT (WB). In addition, we operate
three television stations affiliated with UPN or WB. The markets served by, call
letters, and network affiliations of the stations we operate are:
Wilkes-Barre/Scranton, Pennsylvania - WSWB (WB); Tallahassee, Florida - WTLF
(UPN); and Portland, Maine - WPME (UPN).

         We have entered into local marketing or similar agreements ("LMA's") in
certain markets where we already own a station. These agreements allow us to
program the broadcast hours of a station we do not own and sell advertising for
that time, and provide additional opportunities for increasing revenue share
with limited additional operating expenses. Pursuant to its biennial review
mandated by the Telecommunications Act, in June 2003 the Federal Communications
Commission ("FCC") adopted certain changes to its ownership rules including,
among other issues, the number of television stations in which one party may own
in the same market. The June 2003 ruling allows us to continue our LMA's
indefinitely and would also allow us to acquire the stations with which we have
an LMA relationship. However, the effect of these rules has been stayed while
the rules are appealed and, as a result, the FCC's prior rules remain in effect
at the current time. If the proposed June 2003 rules do not supersede the

                                       11
<PAGE>

currently effective rules, the continuation of our existing LMA's and our
ability to expand in existing markets may depend on the outcome of future FCC
proceedings. We have three markets in which we own a station and separately
program a station pursuant to an LMA (or similar arrangement): in Portland,
Maine, we own a station affiliated with WB and program a UPN affiliate pursuant
to an LMA; in Wilkes-Barre/Scranton, we own a station affiliated with Fox and
program a WB affiliate pursuant to an LMA; in Tallahassee, Florida, we own a
station affiliated with Fox and sell the advertising time for a UPN affiliate
pursuant to a Joint Services Agreement.

         In February 2004, we exercised an option to acquire WPME serving
Portland, Maine for approximately $3.8 million. In March 2004, we exercised an
option to acquire WSWB in Scranton, Pennsylvania for approximately $2.0 million.

Competition

         Our direct broadcast satellite business competes with a number of
different sources that provide news, information, and entertainment programming
to consumers, including:

            o  EchoStar and new direct broadcast satellite entrants such as
               Rainbow DBS (doing business under the VOOM brand name);
            o  cable television systems;
            o  internet companies;
            o  local television broadcast stations that provide off air
               programming that 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  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
DIRECTV, Inc. or we can provide. In addition, the direct broadcast satellite
industry is still evolving and recent or future competitive developments could
adversely affect our direct broadcast satellite business.

         Our television 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 television 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 the possible effects on our businesses.


                                       12
<PAGE>


Employees

         As of December 31, 2003, we had 990 full time and 82 part time
employees. We are not a party to any collective bargaining agreements and we
consider our relations with our employees to be good.

Legislation and Regulation

         This section sets forth a brief summary of regulatory issues pertaining
to our direct broadcast satellite business. It is not intended to describe all
present and proposed government regulation and legislation that affects the
direct broadcast satellite industry in general or us or our operations in
particular.

         In February 1996, Congress passed the Telecommunications Act, which
substantially amended the Federal Communications Act of 1934, as amended
("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.
SHVIA permits direct broadcast satellite 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), direct broadcast satellite operators such as DIRECTV, Inc. are free to
set prices and serve subscribers according to their business judgment, without
rate of return or other regulation or the obligation not to discriminate among
subscribers. However, there are laws and regulations that affect DIRECTV, Inc.
and, therefore, affect us. As an operator of a privately owned U.S. satellite
system, DIRECTV, Inc. 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, Inc. 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 direct broadcast satellite licenses, including rules that the
               FCC has adopted to govern the retransmission of television
               broadcast stations by direct broadcast satellite operators.

         As a distributor of television programming, DIRECTV, Inc. 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
direct broadcast satellite 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

                                       13
<PAGE>

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 direct broadcast satellite.

         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 multichannel video services, such as
wireless cable and direct to home. DIRECTV, Inc. and we have benefited from the
programming access provisions of the Communications Act and implementing rules
in that DIRECTV, Inc. has been able to gain access to previously unavailable
programming services and, in some circumstances, has obtained 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, Inc. in making programming available (or to discriminate in the
terms and conditions of such programming) could adversely affect DIRECTV, Inc.'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 2007
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 nondiscriminatory access by qualified candidates for
federal office at the lowest unit rates and the obligation to set aside four
percent of the licensee's channel capacity for noncommercial 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 direct broadcast satellite
operator may retransmit local and distant broadcast television stations to
subscribers. The 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, television stations are generally entitled to seek carriage on any direct
broadcast satellite operator's system providing local into local service in
their respective markets.

         SHVIA creates a statutory copyright license applicable to the
retransmission of broadcast television stations to direct broadcast satellite
subscribers located in their markets. Although there is no royalty payment
obligation associated with this 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 provided
that, beginning 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. In markets where a satellite carrier is
retransmitting a local signal, broadcast stations were required to make their
initial election by July 1, 2001 or within 30 days after commencing broadcast

                                       14
<PAGE>

operations, whichever is later, or within 30 days of receiving notice from a
satellite carrier of its intention to commence retransmissions of a local
signal. Carriers have 30 days to respond to a timely carriage request from an
eligible broadcast station. On October 1, 2004 and every three years thereafter,
broadcasters are required to make new elections. In December 2001, the U.S.
Court of Appeals for the Fourth Circuit rendered a decision upholding the carry
one, carry all provisions of SHVIA. In June 2002, the U.S. Supreme Court denied
requests that it review the Fourth Circuit decision.

         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 direct
broadcast satellite provider may retransmit such "distant" broadcast stations
affiliated with the national broadcast television networks to those subscribers
meeting certain specified eligibility criteria that 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.

         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. The compulsory copyright license applicable
to the retransmission of distant broadcast signals to satellite service
subscribers will expire on December 31, 2004, unless extended by Congress. While
Congress is considering legislation to extend these provisions, we cannot
predict the outcome of any such legislative effort or their effect on our
business. If the license expires, direct broadcast satellite 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.

         We are subject to federal regulatory requirements other than those
discussed above, such as equal employment opportunity regulations and the
Federal Trade Commission and FCC telemarketing rules. In addition, although
Congress has granted the FCC exclusive jurisdiction over the provision of direct
to home satellite services, aspects of direct broadcast satellite service remain
regulated at the state and local level. A number of state and local governments
have attempted to impose consumer protection, customer service, and other types
of regulation on direct broadcast satellite providers that may affect the way in
which we conduct our operations.

         We have entered into LMA's in certain markets where we already own a
broadcast television station. These agreements allow us to program the broadcast
hours of a station we do not own and sell advertising for that time, and provide
additional opportunities for increasing revenue share with limited additional
operating expenses. Pursuant to its biennial review mandated by the
Telecommunications Act, in June 2003 the FCC adopted certain changes to its
ownership rules including, among other issues, the number of television stations
in which one party may own in the same market. The June 2003 ruling allows us to
continue our LMA's indefinitely and would also allow us to acquire the stations
with which we have an LMA relationship. However, the effect of these rules has
been stayed while the rules are appealed and, as a result, the FCC's prior rules
remain in effect at the current time. If the proposed June 2003 rules do not
supersede the currently effective rules, the continuation of our existing LMA's
and our ability to expand in existing markets may depend on the outcome of
future FCC proceedings. We have three markets in which we own a station and

                                       15
<PAGE>

separately program a station pursuant to an LMA (or similar arrangement): in
Portland, Maine, we own a station affiliated with WB and program a UPN affiliate
pursuant to an LMA; in Wilkes-Barre/Scranton, we own a station affiliated with
Fox and program a WB affiliate pursuant to an LMA; in Tallahassee, Florida, we
own a station affiliated with Fox and sell the advertising time for a UPN
affiliate pursuant to a Joint Services Agreement.

         In early February 2004, the United States Court of Appeals for the
Third Circuit heard oral argument on the appeal of the rules adopted by the FCC
in June 2003. A decision of the court on these rules should be forthcoming this
year. The court could uphold the rules allowing them to take effect, or could
reverse some or all of the newly adopted rules, or could perhaps remand the
rules to the FCC for further consideration. With the uncertainty in the
ownership rules, the market for the purchase and sale of broadcast properties
has been disrupted, and those buyers who are allowed by the new FCC rules to
acquire stations are precluded by the current stay from doing so. Thus, the
purchase of additional broadcast properties by us, or the sale of existing
properties, may be affected by the ultimate resolution of this proceeding.

         On January 14, 2004, the FCC approved a transaction whereby News Corp,
owner of Fox Entertainment Group, acquired a controlling interest in Hughes
Electronics and its subsidiaries, including DIRECTV, Inc. In approving the
transaction, the FCC imposed a number of conditions on News Corp. and DIRECTV,
Inc., including conditions aimed at ensuring that no competitive harm would
result from the transaction. Among the conditions imposed were requirements that
the parties not discriminate against unaffiliated programming providers or
unaffiliated multichannel video programming distributors, that DIRECTV, Inc.
provide local into local service in 30 additional markets by the end of 2004,
and that the parties adopt and abide by corporate resolutions aimed at
mitigating national security, law enforcement, foreign policy and trade policy
concerns. It is unclear what effect this transaction will have on our business.

         In May 2003, the FCC granted authority to Digital Broadband
Applications Corporation to access Canadian satellites located at 82(degree) and
91(degree) west longitude orbital locations for the provision of direct
broadcast satellite services into the United States. The order in theory creates
potential opportunities for entry into the U.S. direct broadcast satellite
market. We cannot, however, predict the impact of the order on our operations.

         In the summer and fall of 2003, Pegasus Communications and one of its
wholly owned subsidiaries submitted several applications requesting similar
authority to access Canadian satellites at those orbital locations for the
provision of services into the United States. Those applications are still
pending, and we cannot predict whether they will be granted.

         In September 2003, DIRECTV, Inc. submitted an application to relocate
one of its direct broadcast satellite satellites to 82(degree) west longitude
orbital location in order to provide service into Canada. The filing also
indicated that DIRECTV, Inc. had entered into an agreement with Telesat Canada,
the Canadian licensee authorized at that location. In January 2004, DIRECTV,
Inc. submitted applications to relocate a different satellite to 72.5(degree)
west longitude orbital location, another Canadian orbital location authorized to
Telesat Canada, in order to provide direct broadcast satellite services into the
United States. The applications by DIRECTV, Inc. are still pending. We have
argued in filings before the FCC that these applications by DIRECTV, Inc. are
anticompetitive and foreclose potential competition in the United States' direct
broadcast satellite market and that DIRECTV, Inc. has been less than candid with
the FCC regarding its relationship with Telesat Canada.

Risk Factors

         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. These statements may differ materially from actual future
events or results. When used in this Report, the words "estimate," "project,"
"believe," "anticipate," "hope," "intend," "expect," and similar expressions are

                                       16
<PAGE>

intended to identify forward looking statements, although not all forward
looking statements contain these identifying words. Any statement that is not a
historical fact, including estimates, projections, future trends and the outcome
of events that have not yet occurred, are forward looking statements. Such
statements reflect our current views with respect to future events and are
subject to unknown risks, uncertainties, and other factors that may cause actual
results to differ from those contained in the forward looking statements. Such
factors include the risks described in this section below and elsewhere in this
Report and, although it is not possible to create a comprehensive list of all
factors that may cause actual results to differ from our forward looking
statements, such factors include, but are not limited to, 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
NRTC; litigation with DIRECTV, Inc.; the recent change of control of DIRECTV,
Inc.; demographic changes; existing government regulations, and changes in, or
the failure to comply with, government regulations; competition, including our
ability to offer local programming in our direct broadcast satellite markets;
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 mentioned 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.

         We have a history of substantial losses; we expect them to continue;
losses could adversely affect our access to capital markets.

         We have not made a profit, except in 1995, when we had a $10.2 million
gain from extinguishment of debt. Consolidated net losses were $136.7 million,
$109.4 million, and $285.2 million for 2003, 2002, and 2001, 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. Consolidated interest and amortization expenses were $167.8 million and
$116.5 million, respectively, for 2003, $148.0 million and $117.4 million,
respectively, for 2002, $136.2 million and $245.4 million, respectively, for
2001.

         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 consolidated indebtedness that amounted
to $1.4 billion at December 31, 2003. Our indebtedness could have important
consequences. 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;
            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.

         We may be able to incur substantially more debt that could exacerbate
the risks associated with our substantial leverage, including our ability to
service our indebtedness.

                                       17
<PAGE>

         We 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. Although there are limitations on the amounts of debt that
Pegasus Media and Pegasus Satellite may incur under our existing credit
agreements and our Pegasus Satellite indentures, both of these entities could
incur additional debt. At December 31, 2003, there was $17.5 million available
to be drawn under our existing Pegasus Media credit facility. In January 2004,
we amended Pegasus Media's credit agreement to permit us to have a total of $650
million of senior secured debt, including second lien secured term loan
financings at Pegasus Satellite. In addition, additional debt could be incurred
by Pegasus Communications and its subsidiaries apart from Pegasus Satellite
since there are no debt incurrence constraints on these entities.

         Additional borrowings could impose additional financial risks to our
various efforts to improve our financial condition and results of operations or
could intensify risks associated with our substantial leverage.

         We are highly leveraged and may not be able to generate enough cash to
service our debt, repay all of our existing indebtedness, and maintain our
operations.

         We are highly leveraged on a consolidated basis. At December 31, 2003,
we had a combined carrying amount of long term debt, including the portion that
is current, and redeemable preferred stock outstanding, including associated
accrued and unpaid interest, of $1.7 billion. Our ability to make payments on
and/or to refinance our indebtedness and to fund planned capital expenditures
and other activities will depend on our ability to generate sufficient cash in
the future. This, to a certain extent, is subject to general economic,
financial, competitive, legislative, regulatory, and other factors, including
the other risks described below, which are beyond our control. Accordingly, we
cannot assure that our business will generate sufficient cash flow to service
our debt. Consolidated net cash was provided by operating activities in 2003 and
2002 of $30.2 million and $45.5 million, respectively, and net cash was used for
operating activities in 2001 of $141.9 million. Total consolidated cash at
December 31, 2003 was $27.0 million.

We cannot assure that:

            o  our business will generate sufficient cash flow from operations
               to service all of our debt and preferred stock obligations and
               maintain our operations; or
            o  future borrowings will be available to us in amounts sufficient
               to pay our indebtedness, or to fund other liquidity needs.

         We may need to refinance all or a portion of our indebtedness. Our
ability to access the debt and equity markets may be limited by adverse market
conditions, our results, and the material litigation described under ITEM 3.
Legal Proceedings - DIRECTV Litigation. In addition, our ability to incur
indebtedness is limited by covenants in Pegasus Satellite's August 2003 term
loan agreement, the credit agreement of our subsidiary Pegasus Media, and
Pegasus Satellite's indentures. These covenants include restrictions on the
amount we can borrow based on formulas and the average cash interest rate on
certain Pegasus Satellite indebtedness, as well as limits on letters of credit
that can be issued on our behalf. Pegasus Media currently has provided cash
collateral of approximately $61.9 million to support letters of credit in favor
of the NRTC. If the amount of the NRTC letter of credit requirement increases
under the terms of our agreements with the NRTC (as it has in the past), we
would need to post cash or other collateral and possibly adjust our borrowing
arrangements to accommodate additional letters of credit.

                                       18
<PAGE>

         If a change of control occurs, we may be unable to refinance our
publicly held debt, bank debt, and preferred stock.

         If certain kinds of change of control events occur, Pegasus Satellite
will be required to offer to repurchase all of Pegasus Satellite's outstanding
publicly held debt securities. Pegasus Media will also be required to repay its
credit facilities upon certain kinds of change of control. If a change of
control occurs, and Pegasus Satellite or Pegasus Media are unable to refinance
their debt that becomes due, we would be in default. The events that could have
these effects include change of control events affecting Pegasus Communications.

         We have a recent history of net decreases in our total number of
subscribers.

         We have been experiencing net decreases in our total number of
subscribers since 2001 which we believe are attributable to several factors,
including: a significant competitive disadvantage that we have experienced in
numerous markets in which EchoStar provides local network channels but DIRECTV,
Inc. does not; our focus on enrolling more creditworthy subscribers; our
unwillingness to aggressively invest retention amounts in low margin
subscribers; competition from digital cable providers; and competition from
EchoStar other than with respect to local network channels. The number of our
territories in which we are disadvantaged by a lack of local channel service
increased in 2003 and we believe will continue to increase in the first two
quarters of 2004 because of DIRECTV, Inc.'s delay in launching its DIRECTV 7S
spot beam satellite to provide local channels in markets where EchoStar offers
or is introducing local channels and DIRECTV, Inc.'s failure to provide certain
of our key markets with local channels. DIRECTV, Inc., according to its most
recent statements, intends to launch this satellite in the second quarter of
2004. (See Risk Factors - The introduction of local channels in new markets
could be delayed and could be delivered from orbital locations requiring that
customers change-out their direct broadcast satellite receiving equipment or use
two antennas.)

         Our total number of subscribers decreased by approximately 153,000 in
2003, and we expect further decreases in 2004. The further decrease would be due
to the number of territories in which we are disadvantaged by a lack of local
channel service that we believe will continue to increase in the first two
quarters of 2004 because of DIRECTV's delay in launching its DIRECTV 7S spot
beam satellite to provide local channels in markets where EchoStar offers or is
introducing local channels, and DIRECTV's failure to provide certain of our key
markets with local channels. If a disproportionate number of our subscribers
churn relative to the number of quality subscribers we enroll, we do not enroll
a sufficient number of quality subscribers, and/or we are not able to maintain
adequate margins from our subscribers, our operating results would deteriorate.

         Equipment shortages could adversely affect our direct broadcast
satellite business.

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

         We may lose subscribers if satellite and direct broadcast satellite
technology fail, are impaired, or are delayed.

         If DIRECTV satellites are damaged or stop working partially or
completely, DIRECTV, Inc. may not be able to continue to provide subscribers
with services. Moreover, if DIRECTV, Inc. elects not to deploy new DIRECTV
satellites or direct broadcast satellite technology that would enhance DIRECTV's

                                       19
<PAGE>

competitive position, or such satellites or technology fail or are delayed,
DIRECTV, Inc. may not be able to continue to provide subscribers with
competitive services. In any of these cases, we would likely lose subscribers,
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.

         Direct broadcast satellite 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 DIRECTV satellites at the 101(degree) west longitude
orbital location may not last for their expected lives. In July 1998, DIRECTV,
Inc. reported that the primary spacecraft control processor failed on one of its
satellites, DBS-1, although the satellite automatically switched to its on board
spare processor. Other DIRECTV satellites have suffered the same anomaly or
other malfunctions. A more substantial failure of the DIRECTV system could occur
in the future.

         Events at DIRECTV, Inc., including decisions about programming and
access to local network channels, could adversely affect us.

         Our primary source of revenue has historically been derived from our
distribution of DIRECTV programming. For 2003, 2002, and 2001, revenues for this
business were 96%, 96%, and 97%, respectively, of total consolidated revenues,
and operating expenses for this business were 92%, 92%, and 93%, respectively,
of total consolidated operating expenses. Total assets of the direct broadcast
satellite business represented 91% and 93% of total consolidated assets at
December 31, 2003 and 2002, respectively. As a distributor for DIRECTV, Inc.,
events we do not control at DIRECTV, Inc. could adversely affect us. One of the
most important of these is DIRECTV, Inc.'s ability or willingness to provide
programming that appeals to our subscribers. DIRECTV, Inc. generally does not
produce its own programming; it purchases programming from third parties.
DIRECTV, Inc.'s success - and accordingly ours - depends in large part on its
ability to select popular programming sources and acquire and retain access to
this programming on favorable terms. Moreover, DIRECTV, Inc.'s decisions
respecting which television markets should be served with local network channels
affect us since many subscribers desire this programming. If DIRECTV, Inc. is
unable or unwilling to provide desirable programming, we would be placed at a
competitive disadvantage and may lose subscribers and revenues.

         In December 2003, News Corp acquired a controlling interest in DIRECTV,
Inc.'s parent company, Hughes Electronics. News Corp subsequently transferred to
its subsidiary Fox Entertainment all of its interest in Hughes Electronics.
Since this transaction, DIRECTV, Inc. has already instituted significant changes
in management and announced its intention to implement fundamental changes in
its business strategy, such as changes related set top box design, manufacture
and distribution. Changes in management and strategy of DIRECTV, Inc. as a
result of the change of control may affect our relationship with DIRECTV, Inc.
and our business. We will evaluate the effects of this transaction upon our
business as DIRECTV's new initiatives are implemented.

         In approving News Corp's acquisition of DIRECTV, Inc., the FCC imposed
a number of conditions on News Corp and DIRECTV, Inc., including conditions
aimed at ensuring that no competitive harm would result from the transaction.
Among the conditions imposed were requirements that the parties not discriminate
against unaffiliated programming providers or unaffiliated multichannel video
programming distributors, that DIRECTV, Inc. provide local into local service in
30 additional markets by the end of 2004, and that the parties adopt and abide
by corporate resolutions aimed at mitigating national security, law enforcement,
foreign policy and trade policy concerns. (See Legislation and Regulation for a
discussion of the conditions with respect to this acquisition.) It is unclear
what effect this transaction will have on our business.

                                       20
<PAGE>

         Fox Entertainment is the owner of the Fox Television Network ("Fox"),
the Fox owned and operated television stations, the Fox studios, and numerous
cable programming networks. Fox Entertainment's control over DIRECTV, Inc.
raises issues regarding vertical pricing between Fox and DIRECTV, Inc. We
believe that the principal risk in this relationship is that Fox Entertainment
will use its control to cause DIRECTV, Inc. to agree to accept higher rates for
Fox programming than DIRECTV, Inc. would were it independent of Fox
Entertainment. These higher rates may increase our cost of programming.

         The introduction of local channels in new markets could be delayed and
could be delivered from orbital locations requiring that customers change out
their direct broadcast satellite receiving equipment or use two antennas.

         DIRECTV, Inc., according to its most recent statements, intends that it
will provide in 2004 local broadcast network services to 29 additional DMA's
that we serve upon the successful launch of the DIRECTV 7S spot beam satellite,
which according to DIRECTV, Inc.'s most recent statements is planned for the
second quarter of 2004. There have been numerous delays in the scheduled launch
of DIRECTV 7S, and DIRECTV, Inc. has not announced a firm launch date. DIRECTV
7S will use capacity at an orbital location requiring our existing customers to
change out their antennas and in some cases their set-top boxes. Delays in the
launch of DIRECTV 7S and the requirement that customers change out their
antennas and set-top boxes may have an adverse impact on the retention of
customers. (See Risk Factors - We have a recent history of net decreases in our
total number of subscribers.)

         DIRECTV, Inc., according to its most recent statements, intends to
provide local broadcast network services in 15 additional DMAs served by us
using capacity at the 72.5(degree) west longitude orbital location, which is
assigned to Canada. DIRECTV, Inc. has applied to the FCC for authority to use
this Canadian licensed capacity for delivery of local broadcast network services
into the United States, and it is unknown whether and/or when such authority
would be granted. In addition, our customers would be required to use a second
antenna to receive such services, and we do not know whether they would be
willing to use a second antenna for reception of such services.

         Certain advanced services and programming require different and more
expensive set top boxes for the customer to receive such services, and may
require that a customer obtain such services from DIRECTV, Inc.

         DIRECTV, Inc. has recently emphasized the importance of digital video
recorders to its future business direction, because DIRECTV, Inc. believes that
this service is attractive to new customers, helps retain existing customers and
increase revenue generation from existing customers. DIRECTV's digital video
recorder service, DIRECTV(R) DVR with Tivo(R), is like a VCR but with a hard
drive that digitally records television programming. The right to distribute
DIRECTV DVR with Tivo service has been part of our litigation with DIRECTV,
Inc., and we currently do not have an arrangement to distribute this service,
although our customers can receive the service directly from DIRECTV, Inc. In
addition, because we do not have an arrangement to distribute this service, we
do not provide financial incentives for DIRECTV DVR with Tivo equipment
comparable to the incentives offered by DIRECTV, Inc. or the financial
incentives offered by EchoStar for the sale of its digital video recorder
equipment. Because our customers must obtain the DIRECTV DVR with Tivo service
from DIRECTV, Inc. itself rather than us and may have to pay significantly more
for the DIRECTV DVR with Tivo equipment than the set top box used to receive
DIRECTV services offered by us, our customers may not subscribe to this service
and we may be at a competitive disadvantage. We may also be at a competitive
disadvantage in the future if DIRECTV, Inc. disputes our right to distribute
other advanced services and programming offered by DIRECTV, Inc. which require
expensive equipment in order for the customer to receive the service or
programming.

                                       21
<PAGE>

         Programming and other costs may increase, which could adversely affect
our direct broadcast satellite business.

         Program suppliers and other vendors could increase the rates they
charge DIRECTV, Inc. and us for programming and other services, increasing our
costs. Increases in programming and other costs could cause us to increase the
rates we charge subscribers and, as a result, we could lose subscribers.

         FCC regulations require programming suppliers affiliated with cable
companies to provide programming to all multichannel distributors - including
DIRECTV, Inc. - on nondiscriminatory terms. Some of the rules implementing this
law are scheduled to expire on October 5, 2007. If these rules are not extended,
DIRECTV, Inc. could lose its access to programming, including prime time
programming. If a significant amount of programming becomes unavailable, we may
lose subscribers and our revenues and financial performance could be adversely
affected.

         Fox Entertainment is the owner of the Fox Television Network ("Fox"),
the Fox owned and operated television stations, the Fox studios, and numerous
cable programming networks. As mentioned previously, Fox Entertainment controls
DIRECTV, Inc. Fox Entertainment's control over DIRECTV, Inc. raises issues
regarding vertical pricing between Fox and DIRECTV, Inc. We believe that the
principal risk in this relationship is that Fox Entertainment will use its
control to cause DIRECTV, Inc. to agree to accept higher rates for Fox
programming than DIRECTV, Inc. would were it independent of Fox Entertainment.
These higher rates may increase our cost of programming. (See Legislation and
Regulation for a discussion of the conditions with respect to this acquisition.)

         Our ability to provide DIRECTV services may be limited by adverse
rulings in litigation or by the settlement between DIRECTV, Inc. and the NRTC.

         The initial term of our agreements with the NRTC is not stated
according to a period of years, but is based on the lives of a satellite or
satellites. DIRECTV, Inc. has asserted, in litigation and elsewhere, that the
initial term of the NRTC's agreements with Pegasus Satellite Television, Inc.
and Golden Sky Systems, Inc. (together, "Pegasus Satellite Television") is
measured only by the life of DBS-1, the first DIRECTV satellite launched, and
not as we believe by the orbital lives of any other DIRECTV satellite at the
101(degree) west longitude orbital location providing us programming services.
DBS-1 suffered a failure of one of its two satellite control processors in 1998.
Moreover, DBS-1 has an estimated fuel life through 2009 according to public
documents filed by DIRECTV, Inc. with the Securities and Exchange Commission
("SEC"), although DIRECTV, Inc. has indicated its belief that the fuel life of
DBS-1 for purposes of our direct broadcast satellite rights is 2007. If DIRECTV,
Inc. were to prevail in its position on term, the initial term of our DIRECTV
rights would likely be shorter than a term based on other satellite(s) at the
101(degree) west longitude orbital location providing us programming services,
which could have a material adverse impact on our DIRECTV rights and our
business. Moreover, in the event DIRECTV, Inc. prevails on term, any premature
failure of DBS-1 could have a material adverse impact on our DIRECTV rights and
our business. (See ITEM 3. Legal Proceedings - DIRECTV Litigation.)

         While the NRTC obtained a right of first refusal to receive certain
services after the expiration of the initial term of the NRTC's agreement with
DIRECTV, Inc., DIRECTV, Inc. has disputed the scope and terms of that right of
first refusal, asserting among other things that the right of first refusal does
not include programming services. Moreover, Pegasus Satellite Television's
agreements with the NRTC do not explicitly provide for the right of first
refusal, although we believe we have the right to participate in the
distribution of services pursuant to the right of first refusal. If DIRECTV,
Inc. were to prevail in its position on the right of first refusal and/or we are
not able to participate in the right of first refusal, we may not have the
opportunity to provide DIRECTV services after the initial term of our agreements
with the NRTC.

                                       22
<PAGE>

         DIRECTV, Inc., the NRTC, and a class of NRTC participants other than
Pegasus Satellite Television have entered into a settlement of outstanding
litigation in federal court. For a more complete description of the settlement,
see ITEM 3. Legal Proceedings - DIRECTV Litigation. The settlement amends the
agreement between DIRECTV, Inc. and the NRTC to, among other things (i) change
the expiration date of the initial term of that agreement to the later of the
date that DBS-1 is removed from its assigned orbital location under certain
specified conditions or June 30, 2008 and (ii) eliminate the contractually
provided right of first refusal after the initial term but provide an extension
of the term through either December 31, 2009 or June 30, 2011 at the election of
the participating member or affiliate and subject to acceptance of certain
conditions. While the court has ruled that the settlement does not affect
Pegasus Satellite Television's rights under its agreements with the NRTC,
DIRECTV, Inc. and the NRTC have asserted that our rights are limited by the
terms of the settlement and the amended agreement between DIRECTV, Inc. and the
NRTC. If DIRECTV, Inc. and the NRTC prevail in this position, we may not be able
to provide DIRECTV services after the term specified in the settlement, which
would have a material adverse impact on our DIRECTV rights and our business.

         An unfavorable ruling that the initial term of our agreements with the
NRTC is determined by DBS-1 could have a material adverse impact on our business
and would lead to a reassessment of the carrying amount of our direct broadcast
satellite rights, as the underlying assumptions regarding estimated future cash
flows associated with those rights could change (ignoring any renewal rights or
alternatives to generate cash flows from our subscriber base). Likewise, the
election to participate in the settlement reached among DIRECTV, Inc., the NRTC,
and the class, if participation in the settlement is again made available, could
have a material adverse impact on our business and would lead to a reassessment
of the carrying amounts of our direct broadcast satellite rights using estimates
of future cash flows through June 30, 2011 at the latest instead of 2016
(ignoring alternatives to generate cash flows from our subscriber base). In the
case of an unfavorable litigation result relating to the term of our agreements
or participation in the settlement, we currently estimate that we could record
an impairment loss with respect to our direct broadcast satellite rights of
between $425 million and $600 million, and that annual amortization expense for
direct broadcast satellite rights could increase by between $12 million and $35
million. (See ITEM 3. Legal Proceedings - DIRECTV Litigation.)

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

         We may be exposed to significant damages in the seamless marketing
litigation trial.

         In 2001, DIRECTV, Inc. brought suit against Pegasus Satellite
Television for Pegasus Satellite Television's alleged failure to make payments
under the seamless marketing agreement dated August 9, 2000, as amended, between
DIRECTV, Inc. and Pegasus Satellite Television. The seamless marketing agreement
provided for seamless marketing and sales for DIRECTV retailers and
distributors, and related compensation. DIRECTV, Inc. has asserted that it is
entitled to an award of damages in an amount exceeding $50 million, plus
prejudgment interest of approximately $10 million. Pegasus Satellite Television
has asserted that it has defenses to DIRECTV, Inc.'s claim and an affirmative
claim for recovery that would include the approximately $29 million it paid
under the agreement (subject to any potential offsets that may be found) plus
additional amounts to compensate it for damages proximately caused by DIRECTV,
Inc.'s fraudulent inducement of the seamless marketing agreement. The factual
and legal bases of the parties' claims are sharply disputed, but if Pegasus
Satellite Television is unsuccessful in its claims and defenses in the matter
and is held to be liable to DIRECTV, Inc. for breaching the contract or on the
common counts asserted in the complaint in the full amount sought by DIRECTV,
Inc., then an adverse judgment could be entered against it in an amount that
exceeds $50 million plus prejudgment interest. For a more complete description
of the litigation, see ITEM 3. Legal Proceedings - Seamless Marketing
Litigation.

                                       23
<PAGE>

         We could lose revenues because of signal theft.

         The delivery of subscription programming requires the use of encryption
technology to limit access to programming to those who pay for it. It is illegal
to create, sell, or otherwise distribute software or devices that circumvent
that encryption technology. Theft of cable and satellite programming has been
widely reported and technology that restricts access to programming transmitted
via satellite has been compromised and may be further compromised in the future.
If signal theft increases, our revenues could suffer. There is no industry data
on revenue lost due to signal theft that we are aware of, and we do not have any
practicable way to measure any loss. Direct broadcast satellite providers may
improve the capabilities of their encryption technology, but we cannot guarantee
that such improvements would remove the threat posed by signal theft to our
business.

         We face significant competition; the competitive landscape changes
constantly.

         Our direct broadcast satellite business faces competition from other
multichannel video service providers, including other direct broadcast satellite
operators, cable operators, and wireless cable operators, which may be able to
offer more competitive programming packages or pricing than we provide. We
believe competition may increase as cable operators continue to upgrade their
systems to offer digital signals and high speed Internet access to subscribers.
In addition, the direct broadcast satellite industry and the multichannel
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.

         Direct broadcast satellite services face competition from cable
operators.

         We compete against cable television and other land based system
operators offering video, audio, and data programming and entertainment
services. Some of our competitors have greater financial, marketing, and other
resources than we have. Our ability to increase earnings depends, in part, upon
our ability to compete with these operators. Cable television operators have a
large, established subscriber base, and many cable operators have significant
investments in, and access to, programming. Because many cable television
operators have significant investments in programming and program providers,
they may have access to programming that is not available to us or that we can
only obtain on less favorable terms and conditions.

         One of the competitive advantages of direct broadcast satellite systems
is their ability to provide subscribers 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
subscribers. As a result of these upgrades, cable television operators have
become better able to compete with direct broadcast satellite providers.

         Cable television operators have other advantages over direct broadcast
satellite providers by, among other things, providing service to multiple
television sets within the same household at a lesser incremental cost to the
consumer, by being able to provide local and other programming in a larger
number of geographic areas, and through bundling their analog video service with
expanded digital video services delivered terrestrially or via satellite,
efficient two way high-speed internet access, and telephone service on upgraded
cable systems. 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 acquiring new subscriptions.

                                       24
<PAGE>

         Peninsula has accumulated a significant portion of Pegasus
Communications' Class A common stock and will have a significant influence on
any matter that requires approval of the holders of Pegasus Communications'
Class A common stock voting as a separate class.

         In statements filed with the SEC through March 11, 2004, Peninsula
Capital Advisors, LLC and Peninsula Investment Partners, L.P. (together,
"Peninsula") have reported that they acquired beneficial ownership of 2,379,050
shares of Pegasus Communications' Class A common stock in a series of open
market purchases beginning in late 2003. This amounts to approximately 49.9% of
the voting power of the outstanding shares of Pegasus Communications' Class A
common stock. (See ITEM 12. Security Ownership of Certain Beneficial Owners and
Management and Certain Related Stockholder Matters -- Security Ownership of
Pegasus Communications).

         It is possible that Peninsula will acquire additional shares. Under
Pegasus Communications' certificate of incorporation, some but not all matters
that require stockholder approval require the approval of the holders of Pegasus
Communications' Class A common stock voting as a separate class. Although a
class vote is not required for a merger, consolidation, sale of assets, or
tender offer, there are a number of matters affecting Pegasus Communications'
common stock that do require a class vote. They include (i) the issuance of
additional shares of Pegasus Communications' Class B common stock (except in
instances in which parallel action is being taken on Pegasus Communications'
Class A common stock such as with stock dividends, stock splits, etc.), (ii) any
decrease in the voting rights per share of Pegasus Communications' Class A
common stock or any increase in the voting rights of Pegasus Communications'
Class B common stock, (iii) any increase in the number of shares of Pegasus
Communications' Class A common stock into which shares of Pegasus
Communications' Class B common stock are convertible, (iv) any relaxation on the
restrictions on transfer of Pegasus Communications' Class B common stock, and
(v) any changes in the powers, preferences, or special rights of Pegasus
Communications' Class A common stock or Pegasus Communications' Class B common
stock which may adversely affect holders of Pegasus Communications' Class A
common stock. If Peninsula maintains or increases its holding of Pegasus
Communications' Class A common stock, it could be in a position, as a practical
matter, to determine the outcome of such a class vote regardless of the wishes
of a significant number of other stockholders. In addition, under our
certificate of incorporation, all matters that require stockholder approval also
require the approval of the stockholders of Pegasus Communications, by the same
vote as is required under Delaware law or by our certificate of incorporation.
As a result, by virtue of its ownership of Pegasus Communications' Class A
common stock, Peninsula also could be in a position to affect matters that
require the approval of our sole stockholder, Pegasus Communications.

         Our ability to use our substantial tax loss carryforwards could be
limited by reason of changes in stock ownership of Pegasus Communications.

         As of December 31, 2003, we had approximately $1.0 billion of net
operating loss carryforwards available to reduce future taxable income and gain.
Our ability to use those carryforwards may be substantially limited if Pegasus
Communications has experienced, or experiences in the future, an "ownership
change," as defined in section 382 of the Internal Revenue Code. Generally, an
ownership change can occur if 5% stockholders (measured by value) of Pegasus
Communications increase their aggregate ownership of Pegasus Communications
stock to such an extent that the total increase over any three-year period
amounts to more than 50% of the outstanding stock, measured by value. In light
of recent accumulation of Pegasus Communications Class A common stock (as
described in the preceding risk factor), including those by Peninsula, there can
be no assurance that an "ownership change" within the meaning of section 382
will not occur which would have the effect of limiting our ability to use our
loss carryforwards.

                                       25
<PAGE>

         The effect of federal satellite television legislation on our business
is unclear.

         SHVIA establishes the rules governing the retransmission of local and
distant broadcast television signals by satellite carriers. The FCC and, to a
more limited extent, the Copyright Office, are responsible for implementing and
interpreting the provisions of SHVIA. While we cannot predict the outcome of any
pending or future proceedings relating to the retransmission of broadcast
television signals, including both analog broadcast television signals and
digital broadcast television signals, it is possible that actions taken by the
FCC or the Copyright Office, may adversely affect our ability to provide our
subscribers with retransmissions of broadcast television signals or the channel
capacity that is available to provide other non-broadcast services, or with our
ability to transmit certain programming provided by retransmitted broadcast
stations. In addition, certain provisions of SHVIA are subject to expire on
specified dates. For example, certain provisions of SHVIA that facilitate the
retransmission of distant broadcast television stations (including network
affiliated and independent stations) are scheduled to expire on December 31,
2004 and the failure to extend the legislation may adversely affect our ability
to provide distant broadcast signal retransmissions to our subscribers. While
Congress is considering legislation to extend these provisions, we cannot
predict the outcome of any such legislative effort or their effect on our
business.

         Changes in the FCC's media ownership rules may affect our ability to
acquire or dispose of broadcast television stations.

         We have entered into LMA's in three markets where we already own a
station. Pursuant to its biennial review mandated by the Telecommunications Act,
in June 2003 the FCC adopted certain changes to its ownership rules including,
among other issues, the number of television stations that one party may own in
the same market. The June 2003 ruling allows us to continue our LMA's
indefinitely and would also allow us to acquire the stations with which we have
an LMA relationship. However, the effect of these rules has been stayed while
the rules are appealed and, as a result, the FCC's prior rules remain in effect
at the current time. In early February 2004, the United States Court of Appeals
for the Third Circuit heard oral argument on the appeal of the rules adopted by
the FCC in June 2003. A decision of the court on these rules should be
forthcoming this year. The court could uphold the rules allowing them to take
effect, or could reverse some or all of the newly adopted rules, or could
perhaps remand the rules to the FCC for further consideration. With the
uncertainty in the ownership rules, the market for the purchase and sale of
broadcast properties has been disrupted, including valuation of properties, and
those buyers who are allowed by the new FCC rules to acquire stations are
precluded by the current stay from doing so. Thus, the purchase of additional
broadcast properties by us, including those for which we have LMA's in place, or
the sale of existing properties by us, may be affected by the ultimate
resolution of this proceeding. If the proposed June 2003 rules do not supersede
the currently effective rules, the continuation of our existing LMA's and our
ability to expand in existing markets may depend on the outcome of future FCC
proceedings. In addition, our opportunities to dispose of broadcast properties
may be impaired.

         The outcome of proceedings to implement industry regulations and to
approve and maintain FCC licenses could adversely affect our business.

         The direct broadcast satellite industry is subject to regulation by the
FCC and, to a certain extent, by international, state, and local authorities.
The Communications Act established the FCC and gave the agency the broad
authority to regulate the use of the radio spectrum. Under the Communications
Act, 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

                                       26
<PAGE>

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 FCC'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, Inc. 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.

Available Information

         Our website is located at www.pgtv.com. Through the Investor Relations
Section of our website, we make available, free of charge, our Annual Report on
Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any
amendments to those reports, as soon as reasonably practicable after they are
filed with the SEC.

         A copy of the materials that we have filed with the SEC may be read at
the SEC's public reference room located at 450 Fifth Street, N.W., Room 1024,
Washington D.C. 20549. Call the SEC at 1-800-SEC-0330 for further information on
the public reference room. In addition, our filings with the SEC are available
to the public on the SEC's web site at www.sec.gov.




                                       27
<PAGE>


ITEM 2.  PROPERTIES

         We rent space for our corporate headquarters located in Bala Cynwyd,
Pennsylvania from a subsidiary of Pegasus Communications that owns the building
in which our headquarters are located.

         We lease space in Marlborough, Massachusetts, Louisville, Kentucky, and
Lenexa, Kansas for call centers or other functions related to our direct
broadcast satellite operations. These leases expire on various dates through
2009.

         In connection with our broadcast television operations, we own four
parcels of real property on which television stations are located in the
following areas: Chattanooga, Tennessee; Tallahassee, Florida;
Wilkes-Barre/Scranton, Pennsylvania; and Portland, Maine. We also lease property
in Gainesville, Florida on which a television station is located, and we lease
various towers and office space in support of our broadcast television
operations.

ITEM 3.  LEGAL PROCEEDINGS

DIRECTV, Inc. Litigation:

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

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

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

                                       28
<PAGE>

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

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

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

         The lawsuits described above, including the NRTC, class and Pegasus
Satellite Television lawsuits were set to be tried together in phases beginning
August 14, 2003. After DIRECTV, Inc. and the NRTC informed the court of a
settlement among DIRECTV, Inc., the NRTC, and the class relating to all of their
claims, conditioned on a satisfactory fairness hearing in the class action
lawsuit, the court vacated the trial date. Pegasus Satellite Television is not a

                                       29
<PAGE>

party to the settlement, which was formally available for its participation
until March 8, 2004. A copy of the settlement has been filed as exhibits 99.1
and 99.2 to Pegasus Communications' Form 8-K filed on August 13, 2003.

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

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

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

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

         On January 8, 2004, the court set a briefing schedule for further
motions in the Pegasus Satellite Television litigation against DIRECTV, Inc.
DIRECTV, Inc. has filed a motion to dismiss the remaining Pegasus Satellite
Television claims, including our declaratory relief claims relating to the
initial term and rights after term under the DBS Distribution Agreement and our
unfair competition law claims relating to premiums, advanced services, and
launch fees. As discussed above, DIRECTV, Inc. has also filed a motion for

                                       30
<PAGE>

reconsideration of the court's 2001 order denying DIRECTV, Inc.'s motion for
summary judgment seeking a declaration that the term of the NRTC/Member
Agreement is governed by DBS-1. In addition to DIRECTV, Inc.'s motions, Pegasus
Satellite Television filed a contingent motion to dismiss DIRECTV, Inc.'s
counterclaim relating to the term of the NRTC/Member Agreement in the event that
the court grants DIRECTV, Inc.'s motion to dismiss Pegasus Satellite
Television's claims. We anticipate that the court will decide these motions by
the end of March 2004.

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

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

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

Seamless Marketing Litigation:

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

                                       31
<PAGE>

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

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

Other Legal Matters:

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

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

         No matters were submitted to a vote of our stockholder during the
fourth quarter of 2003.



                                       32
<PAGE>



                                     PART II

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

         Common Stock. Pegasus Satellite's outstanding common stock currently
consists of 100 shares of Class B common stock, par value $.01 per share, all of
which is held by Pegasus Communications. As a result, there is no established
public trading market for the common stock. From time to time, as permitted by
the certificate of designation for Pegasus Satellite's 12-3/4% cumulative
exchangeable preferred stock and the indentures related to our notes, we make
cash and noncash distributions to Pegasus Communications. Distributions to
Pegasus Communications were $148.8 million in 2002. We currently are prohibited
from making any further distributions due to arrearages of dividends on our
12-3/4% cumulative exchangeable preferred stock. See Preferred Stock below.

         Preferred Stock. Pegasus Satellite has 183,978 shares of 12-3/4%
cumulative exchangeable preferred stock outstanding, of which 92,156 shares are
owned by Pegasus Communications.

         As permitted by the certificate of designation for this series, the
board of directors has the discretion to declare or not to declare any scheduled
quarterly dividends for this series. The board of directors has not declared any
of the scheduled semiannual dividends for this series since January 1, 2002.
Dividends in arrears at December 31, 2003 were $35.2 million, with interest
thereon of $5.2 million. Of these amounts, $17.6 million and $2.6 million,
respectively, were payable to Pegasus Communications on account of the 92,156
shares of the 12-3/4% preferred stock held by Pegasus Communications. An
additional $11.7 million of dividends payable on January 1, 2004 were not
declared or paid and became in arrears on that date, of which $5.9 million was
payable to Pegasus Communications. Dividends not declared accumulate in arrears
and incur interest at a rate of 14.75% per year until paid. Unless full
cumulative dividends in arrears on the 12-3/4% series have been paid or set
aside for payment, Pegasus Satellite may not, with certain exceptions, with
respect to capital stock junior to the series (1) declare, pay, or set aside
amounts for payment of future cash dividends or distributions or (2) purchase,
redeem, or otherwise acquire for value any shares.

Recent Sales of Unregistered Securities

         During the fourth quarter of 2003, Pegasus Satellite issued to an
institutional investor an aggregate of $4.25 million principal amount of its
11-1/4% senior notes due January 2010 in exchange for $4.25 million fully
accreted principal amount of its 13-1/2% senior subordinated discount notes due
March 2007. The terms and conditions of the 11-1/4% notes issued in the exchange
are the same as those contained in the indenture for the notes of this series
already outstanding. The 11-1/4% notes were issued without registration in
reliance on Section 4(2) of the Securities Act of 1933 and are eligible for
resale under Rule 144A promulgated under the Securities Act of 1933.

         All other sales for the period covered by this report, to the extent
there have been any sales, have been previously reported by Pegasus Satellite in
its Quarterly Reports on Form 10-Q for the quarters ended March 31, 2003, June
30, 2003, and September 30, 2003.



                                       33
<PAGE>



ITEM 6.  SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
In thousands                                 2003             2002              2001           2000             1999
                                          ----------       ----------        ----------    -----------        ---------
<S>                                       <C>              <C>               <C>            <C>              <C>
Net revenues:
   Direct broadcast satellite
     business                             $  831,211       $  864,855        $  838,208    $   582,075        $ 286,353
   Broadcast television and other
     operations                               30,716           31,505            27,647         30,344           30,925
                                          ----------       ----------        ----------    -----------        ---------
Total net revenues                        $  861,927       $  896,360        $  865,855    $   612,419        $ 317,278
                                          ==========       ==========        ==========    ===========        =========
Operating expenses:
   Direct broadcast satellite
     business                             $  775,298       $  826,005        $1,003,744    $   762,597        $ 395,767
   Broadcast television and other
     operations                               29,819           30,811            32,576         33,386           31,202
Income (loss) from operations                 17,874           (2,532)         (217,324)      (210,299)        (122,429)
Loss from continuing operations             (146,610)        (104,137)         (274,336)      (220,699)        (193,267)
Total assets                               1,813,882        1,859,150         2,149,036      2,605,386          881,838
Total long term debt (including
    current portion)                       1,425,603        1,335,862         1,338,651      1,182,858          684,414
Redeemable preferred stock (1)               224,583          199,022           183,503        491,843          142,734
Cash provided by (used for)
   operating activities                       30,219           45,475          (141,874)       (63,056)         (84,291)
Cash used for investing activities            (7,609)         (30,731)          (55,563)      (158,421)        (138,569)
Cash (used for) provided by
   financing activities                       (8,643)        (146,071)          127,426        395,385          208,808
Direct broadcast satellite
   operating profit (loss) before
   depreciation and amortization             213,811          211,939            92,007          4,900          (32,579)
</TABLE>

     (1) For 2003, includes liquidation preference value of the 12-3/4% series
         preferred stock of $177.7 million reported as a liability, plus accrued
         and unpaid dividends of $46.9 million associated with this series
         reported as noncurrent accrued interest, on the consolidated balance
         sheet.

         Since Pegasus Satellite's common stock is wholly owned by its parent
company, computations of per common share amounts and cash dividends are neither
required nor presented.

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

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

                                       34
<PAGE>

of the fee. We present this measure because our direct broadcast satellite
business is our only significant business and this business forms the principal
portion of our results of operations and cash flows.

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

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

General

         Our principal operating business is the direct broadcast satellite
business. This business provides multichannel direct broadcast satellite
services as an independent provider of DIRECTV services in exclusive territories
primarily within rural areas of 41 states. For 2003, 2002, and 2001, revenues
for this business were 96%, 96%, and 97%, respectively, of total consolidated
revenues, and operating expenses for this business were 92%, 92%, and 93%,
respectively, of total consolidated operating expenses. Total assets of the
direct broadcast satellite business were $1.6 billion at December 31, 2003, and
represented 91% and 93% of total consolidated assets at December 31, 2003 and
2002, respectively. As a distributor of DIRECTV, we may be adversely affected by
any material adverse changes in the assets, financial condition, programming,
technological capabilities, or services of DIRECTV, Inc.

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

         The following sections focus on our direct broadcast satellite
business, as this is our only significant business segment. We believe this will
assist with understanding our financial position, results of operations, and
cash flows.

Use of Estimates and Critical Accounting Policies

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

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

                                       35
<PAGE>

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

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

         NRTC Patronage Distributions. Our subsidiaries, Pegasus Satellite
Television and Golden Sky Systems, are affiliates of the NRTC, a tax exempt
entity that is organized to operate on a nonprofit basis. Throughout each year,
the NRTC bills its members and affiliates the costs incurred by it under its
agreement with DIRECTV, Inc., certain other costs incurred by the NRTC relating
to associated direct broadcast satellite projects, and margin on the costs of
providing direct broadcast satellite services pursuant to the NRTC member
agreement for marketing and distribution of direct broadcast satellite services.
The most notable service that the NRTC provides to us is programming related to
the DIRECTV programming that we provide. We record as expenses the amounts we
pay to the NRTC. Members and affiliates that participate in the NRTC's projects
may be eligible to receive an allocation of the NRTC's net savings (generally,
amounts collected from NRTC members and affiliates in excess of the NRTC's
costs) in the form of a patronage distribution through the NRTC's patronage
capital distribution program. Generally, each patron who does business with the
NRTC receives an annual distribution composed of both patronage capital
certificates and cash. The patronage capital certificates represent equity
interests in the NRTC. The amount of the distribution is generally based on the
ratio of business a patron conducts with the NRTC during a given fiscal year of
the NRTC times the NRTC's net savings available for patronage distribution for
that year. Throughout each year, we accrue amounts we estimate to receive from
the NRTC, with an offsetting reduction to the expenses that were recorded by us
for costs incurred with the NRTC during the year. The estimated cash portion of
the distribution is recorded in accounts receivable-other and the estimated

                                       36
<PAGE>

capital portion is recorded as an investment in the NRTC in other noncurrent
assets. Distributions are received in the year subsequent to the year that the
accruals are made. Amounts previously accrued are adjusted in the year that
distributions are received with a like adjustment to the related expenses in and
for the year the distributions are received. Based on past experience, we
estimate that a majority of the patronage capital distribution for 2003 to be
made in 2004 will be tendered by the NRTC in the form of patronage capital
certificates. At December 31, 2003 and 2002, we had accrued in accounts
receivable-other $5.5 million and $7.2 million, respectively, and our capital
investment in the NRTC was $76.3 million and $66.2 million, respectively. The
reduction to programming expense, as adjusted for differences between
distributions received and amounts previously accrued, was $14.5 million, $22.7
million, and $44.8 million in 2003, 2002, and 2001, respectively. We have no
commitment to fund the NRTC's operations or acquire additional equity interests
in the NRTC. The factors that the NRTC uses in determining its patronage are not
in our control, and our estimate of our share of the NRTC patronage can vary
from the actual patronage that we receive.

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

         Valuation Allowance for Deferred Income Tax Assets. We record a
valuation allowance against the deferred income tax assets balance when it is
more likely than not that the benefits of the tax assets balance will not be
realized, and record a corresponding charge to income tax expense. Historically,
we have applied a full valuation allowance against the deferred income tax
assets balance that exist because our past operating results have not provided
us with sufficient evidence that we will realize the benefits of the tax assets.
Our ability to record lesser amounts or no amount for a valuation allowance for
deferred income tax assets will depend upon our ability to generate taxable
income in the future. The balance in the valuation allowance for deferred income
tax assets was $71.5 million and $22.9 million at December 31, 2003 and 2002,
respectively.

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

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

         Promotional programming costs, which are included in promotions and
incentives expense on the statement of operations, are charged to expense when
incurred. Equipment and installation subsidies that are expensed, as described

                                       37
<PAGE>

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

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

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

<TABLE>
<CAPTION>
                                                 2003            2002             2001
                                               --------        --------         --------
<S>                                             <C>              <C>              <C>
Gross subscriber acquisition costs
   incurred                                    $ 80,860        $102,576         $185,321
Capitalized                                     (22,122)        (27,021)         (20,830)
Deferred                                        (21,100)        (31,086)         (19,421)
                                               --------        --------         --------
Expensed                                       $ 37,638        $ 44,469         $145,070
                                               ========        ========         ========
Promotions and incentives                      $ 14,157        $ 13,562         $ 40,393
Advertising and selling                          23,481          30,907          104,677
                                               --------        --------         --------
Total expensed                                 $ 37,638        $ 44,469         $145,070
                                               ========        ========         ========
Amortization of amounts deferred               $ 24,656        $ 30,574         $  4,227
Depreciation of amounts capitalized              17,970          16,270            5,380
</TABLE>

         Direct Broadcast Satellite Revenue. Principal revenue of the direct
broadcast satellite business is earned by providing our DIRECTV programming on a
subscription or pay per view basis. Effective July 1, 2003, we adopted Emerging
Issues Task Force Issue No. 00-21, "Revenue Arrangements With Multiple
Deliverables" ("EITF 00-21"). Effective with the adoption of EITF 00-21, certain
new subscribers are considered to enroll under multiple deliverable arrangements
with equipment, installation, and programming being separate units of
accounting. Fees that we charge new subscribers for set up and activation upon
initiation of service are included as part of total consideration for these
multiple deliverable arrangements. Under these arrangements, revenue allocated
to delivered units of accounting is recognized immediately upon delivery.
Revenue allocated to undelivered units of accounting is recognized upon their
subsequent delivery. The undelivered units of accounting are programming and, in
cases where we retain title, the satellite receiving equipment. Standard
subscriptions are recognized as revenue monthly at the amount earned and billed,

                                       38
<PAGE>

based on the level of programming content subscribed to during the month, as
adjusted for allocations to separate units of accounting. Promotional
programming provided to subscribers at discounted prices is recognized as
revenue monthly at the promotional amount earned and billed, as adjusted for
allocations to separate units of accounting. Revenue for pay per view is
recognized at the amount billed in the month in which the programming is viewed
and earned. Fees that we charged new subscribers for set up and activation upon
initiation of service prior to July 1, 2003 were deferred as unearned revenue
and recognized as revenue over the expected life of our subscribers of five
years. Amounts that we charged for equipment sold and installations arranged by
us prior to July 1, 2003 were deferred as unearned revenue and recognized as
revenue over the expected life of our subscribers of five years. The fees and
amounts deferred prior to July 1, 2003 continue to be recognized over the
expected life of our subscribers. The adoption of EITF 00-21 did not have a
material impact on our results of operations or financial position.

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

Results of Operations

         We have a history of losses principally due to the substantial amounts
incurred for interest expense and amortization expense associated with
intangible assets. Consolidated net losses were $136.7 million, $109.4 million,
and $285.2 million for 2003, 2002, and 2001, respectively. Consolidated interest
and amortization expenses were $167.8 million and $116.5 million, respectively,
for 2003, $148.0 million and $117.4 million, respectively, for 2002, and $136.2
million and $245.4 million, respectively, for 2001.

         We made substantial improvements in our operating results in 2003
compared to 2002 and in 2002 compared to 2001. We had income from operations of
$17.9 million in 2003, compared to loss from operations of $2.5 million in 2002
and $217.3 million in 2001. For 2003, 2002, and 2001, the direct broadcast
satellite business had income (loss) from operations of $55.9 million, $38.9
million, and $(165.5) million, respectively. We primarily attribute the
improvement in 2003 compared to 2002 to the continuation of the direct broadcast
satellite business strategy. The loss from the direct broadcast satellite
operations for 2002 included an accrued expense for a contract termination fee
of $4.5 million that was reversed in 2003. The improvement in 2002 compared to
2001 was primarily a combination of our direct broadcast satellite business
strategy, broad based cost reduction measures undertaken in 2002, and a decrease
in 2002 of amortization of direct broadcast satellite rights assets of $126.2
million due to a change in amortization of these assets effected in 2002 (see
discussion below under the Direct Broadcast Satellite business section in the
comparison between 2002 and 2001 with respect to the change in amortization of
these assets).

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

         In fiscal 2001, we shifted our business strategy from an emphasis on
subscriber growth to a focus on increasing the quality of new subscribers and
the composition of our existing subscriber base, enhancing the returns on
investment in our subscribers, generating free cash flow, and preserving
liquidity. We continued this strategy in 2002 and 2003. The primary focus of our
"Quality First" strategy is to improve the quality and creditworthiness of our

                                       39
<PAGE>

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

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

Comparison of 2003 to 2002

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

Direct Broadcast Satellite Business

         We had 1,155,101 subscribers at December 31, 2003, a decrease of
153,369 from the number of subscribers at December 31, 2002. The average number
of subscribers was 1,235,393 and 1,358,309 during 2003 and 2002, respectively.
Gross subscriber additions were 146,374 and 216,701 in 2003 and 2002,
respectively. In addition to the effects of our "Quality First" strategy on the
number of our subscribers, other reasons for the decrease in subscribers include
a significant competitive disadvantage that we experience in a large number of
our territories in which EchoStar provides local channels but DIRECTV does not;
competition from EchoStar other than with respect to local channels; competition
from digital cable providers; our continued focus on enrolling more creditworthy
subscribers; our continued unwillingness to aggressively invest retention
amounts in low margin subscribers; subscriber reaction to our price increases
instituted in 2003; and a reduction in the number of new subscribers we obtain
from DIRECTV, Inc.'s national retail chains. The number of territories in which
we are disadvantaged by a lack of local channel service increased in 2003 and we
believe will continue to increase in the first two quarters of 2004 because of

                                       40
<PAGE>

DIRECTV Inc.'s delay in launching its DIRECTV 7S spot beam satellite to provide
local channels in markets where EchoStar offers or is introducing local
channels, and DIRECTV Inc.'s failure to provide certain of our key markets with
local channels. DIRECTV, Inc., according to its most recent statements, intends
to launch this satellite in the second quarter of 2004. Additionally, we believe
that all other factors cited above contributing to our subscriber losses will
continue over the near term.

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

Revenues:

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

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

Direct Operating Expenses:

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

                                       41
<PAGE>

January 2003, in certain pay per view programming costs charged to us by the
NRTC. The net decreases to programming expense were also partially offset by our
estimate of patronage to be received from the NRTC being $8.2 million less for
2003 compared to 2002.

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

Other Operating Expenses:

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

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

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

                                       42
<PAGE>


Other Statement of Operations and Comprehensive Loss Items

         Other operating expenses decreased by $2.5 million to $23.9 million
primarily due to $3.8 million of asset write offs and impairments in 2002
compared to $829 thousand in 2003. Other operating expenses include expenses
associated with our litigation with DIRECTV, Inc. of $12.3 million for 2003 and
$12.4 million for 2002. (See ITEM 3. Legal Proceedings - DIRECTV Litigation for
information regarding these litigations.) The loss on impairment of marketable
securities for 2002 of $3.3 million was due to the write off of an investment in
the common stock of another entity we owned at the time to the stock's then fair
market value. The decrease in other nonoperating income of $16.5 million to $3.0
million was primarily due to a net gain on the retirement of debt recorded in
2002 of $16.7 million.

     Interest expense increased $19.8 million to $167.8 million primarily due
     to:

    1)   dividends on Pegasus Satellite's 12-3/4% preferred stock of $12.8
         million that were classified as interest expense in 2003 due to the
         stock being classified as a liability commencing July 1, 2003 upon our
         adoption on that date of Statement of Financial Accounting Standards
         No. 150;
    2)   $3.5 million of interest on dividends in arrears for Pegasus
         Satellite's 12-3/4% preferred stock;
    3)   net incremental interest expense of $3.7 million associated with
         Pegasus Media's credit agreement, principally due to the Tranche D term
         loan of $300.0 million borrowed in October 2003 at a weighted average
         rate of 9.0%; and
    4)   net interest of $5.5 million with respect to Pegasus Satellite's $100.0
         million term loan due 2009 borrowed in August 2003 at a rate of 12.5%;

offset in part by:

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

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

         In August 2003, Pegasus Satellite borrowed $100.0 million in a term
loan that bears interest at 12.5% and is due August 2009. A portion of the
proceeds were used to redeem in September 2003 all of the $67.9 million
principal outstanding for Pegasus Media's 12-1/2% notes due July 2005. A
discount of $8.8 million recorded in the issuance of this term loan is being
amortized and charged to interest expense over the term of the notes. The total

                                       43
<PAGE>

debt financing costs incurred for this loan were $5.5 million, which have been
deferred and are being amortized and charged to interest expense over the term
of the loan. Further, aggregate costs of $1.6 million were incurred to amend
Pegasus Media's credit agreement and for associated consent fees in connection
with this term loan and other matters associated with the credit agreement.
These costs have been deferred and are being amortized and charged to interest
expense over the remaining term of the credit agreement. The rate of interest
for this loan is 12.5%. Interest accrues quarterly on the term loan, of which
48% is payable in cash and 52% is added to principal. Interest added to
principal is subject to the full compounded rate of interest of 12.5%.

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

         For continuing operations, we had income tax expense of $174 thousand
for 2003 compared to an income tax benefit of $29.6 million for 2002. The income
tax expense for 2003 represents expense for state income taxes payable. No
deferred income tax benefit or expense was recorded for 2003 because we were in
a net deferred income tax asset position throughout the year against which a
full valuation allowance was applied. At December 31, 2003, we had a net
deferred income tax asset balance of $71.5 million, offset by a valuation
allowance in the same amount. The valuation allowance increased by $48.6 million
during 2003. This increase to the valuation allowance was charged to income
taxes for continuing operations, thereby completely offsetting the deferred
income tax benefits generated during the year and resulting in no deferred
income tax expense or benefit for 2003. We believed that a valuation allowance
sufficient to bring the deferred income tax asset balance to zero at December
31, 2003 was necessary because, based on our history of losses, it was more
likely than not that the benefits of the deferred income tax asset will not be
realized. Excluding the expense for state income taxes payable, our effective
income tax rate for continuing operations for 2003 was zero, compared to the
overall effective income tax rate for continuing operations for 2002 of 22.1%.
The effective income tax rate for 2002 was impacted by valuation allowances
recorded during 2002.

         For discontinued operations, we had net income of $10.0 million for
2003 and net loss of $5.3 million for 2002. Discontinued operations for 2003 and
2002 consisted of a broadcast television station located in Mobile, Alabama and
two broadcast television stations located in Mississippi, and also for 2002 our
Pegasus Express business that we ceased in 2002. We completed the sale of three
broadcast television stations in two separate transactions in 2003. The
aggregate sale price was $24.9 million cash, and we recognized a net gain on the
sales of $10.3 million. Aggregate revenues for and pretax income (loss) from
discontinued operations were as follows (in thousands):

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



                                       44
<PAGE>
Comparison of 2002 to 2001

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

Direct Broadcast Satellite Business

Revenues:

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

Direct Operating Expenses:

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

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

Other Operating Expenses:

         Gross subscriber acquisition costs decreased $82.7 million to $102.6
million primarily due to reduced gross subscriber additions this year compared
to last year and to the gross commissions and subsidies we incurred in 2001
under the seamless marketing agreement with DIRECTV, Inc. that was in effect
during part of that year. We incurred gross commissions and subsidies of $80.3
million in 2002 compared to $143.2 million in 2001. Of the amount incurred in
2001, $41.7 million was incurred under the seamless marketing agreement. That

                                       45
<PAGE>

agreement was terminated in July 2001 and is the subject of litigation. (See
ITEM 3. Legal Proceedings -DIRECTV Litigation for information regarding this
litigation.)

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

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

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

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

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

Other Statement of Operations and Comprehensive Loss Items

         Other operating expenses for 2002 of $26.4 million and 2001 of $30.2
million included expenses associated with our litigation with DIRECTV, Inc. of
$12.4 million and $21.4 million, respectively. (See ITEM 3. Legal

                                       46
<PAGE>

Proceedings--DIRECTV Litigation for information regarding this litigation.)
Other changes within other operating expenses were primarily due to the
aggregate of incentive compensation and severances of $9.0 million for 2002
compared to the aggregate of $5.2 million for 2001, and aggregate asset write
offs and impairments of $3.8 million for 2002.

         Interest expense increased $11.8 million to $148.0 million primarily
due to: 1) $18.9 million for Pegasus Satellite's 11-1/4% notes issued in
December 2001; 2) $2.9 million for Pegasus Satellite's note payable to Pegasus
Communications issued in June 2002; 3) increased interest of $2.3 million
incurred in 2002 with respect to Pegasus Media's swap instruments; and 4) $1.1
million for incremental accretion of the discount on Pegasus Satellite's 13-1/2%
senior discount notes. These increases in interest expense were offset in part
by $14.1 million of lower variable rate interest incurred in 2002 under Pegasus
Media's credit facility. With respect to interest expense we incurred on our
variable rate debt borrowings in 2002, we benefited from lower interest rates
available throughout the year as well as a lesser average amount of debt
outstanding compared to 2001. Our average amount of variable rate debt
outstanding during 2002 was $309.9 million compared to $399.6 million in 2001.
The weighted average interest rate, including applicable margins but excluding
the effects of interest rate hedging instruments, incurred on variable rate debt
in 2002 was 5.46% compared to 7.61% in 2001. Short term interest rates in
general declined throughout 2002 in response to the Federal Reserve's continuing
attempt that was initiated in 2001 to stimulate the economy by reducing interest
rates. Such interest rate reductions in general meant that continually declining
market rates of interest were available to us in 2002 relative to 2001.
Borrowings under Pegasus Media's credit facility are subject to short term
interest rates, principally LIBOR, that vary with market conditions. However, a
portion of this interest has been fixed in connection with Pegasus Media's swap
instruments. Under the swaps, we pay fixed rate interest to the counter parties
to the contracts at the rates specified in the contracts. In exchange, the
counter parties pay variable LIBOR interest rates to us as specified in the
contracts. The purpose of the swaps is to protect us from an increase in market
LIBOR rates above the contracted fixed rates. The applicable LIBOR rates were
less than the related fixed swap rates for all of 2002 and 2001, resulting in
additional interest expense of $3.6 million in 2002 and $1.3 million in 2001.
The LIBOR rates in 2002 were lower than the LIBOR rates in 2001, resulting in
the additional interest for the swaps in 2002. The additional interest incurred
by the swaps in both years had the effect of adding 117 and 34 basis points to
our aggregate combined weighted average variable interest rate associated with
amounts outstanding under the credit facility for 2002 and 2001, respectively.

          Interest income decreased by $4.3 million to $566 thousand due to
reduced cash amounts available for earning interest income and much lower
interest rates available during 2002 compared to 2001. Our average monthly cash
balances available to earn interest income were $36.8 million and $99.3 million
for 2002 and 2001, respectively, and the average monthly interest rate available
on such balances was 1.57% and 4.96% for 2002 and 2001, respectively.

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

         We had other nonoperating income of $19.5 million in 2002 compared to
other nonoperating expense of $8.3 million in 2001. This difference was
primarily due to a net gain of $16.7 million on the retirement of debt recorded
in 2002 compared to a loss of $2.9 million on the retirement of debt in 2001 and

                                       47
<PAGE>

the changes in the fair values of our interest rate financial instruments, with
a net increase in the fair values in 2002 that resulted in a gain of $3.0
million compared to a net decrease in the fair values in 2001 that resulted in a
loss of $4.2 million.

         The income tax benefit on the loss from continuing operations decreased
$87.2 million to $29.6 million due to a reduced amount of pretax losses in the
current year and the effect of a valuation allowance of $22.9 million recorded
against the deferred income tax asset balance existing at December 31, 2002 in
the same amount. The valuation allowance was a charge to income taxes on the
loss from continuing operations. We felt a valuation allowance was necessary at
December 31, 2002 because, based on our history of losses, it was more likely
than not that the benefits of this tax asset balance would not be realized. The
effect of the valuation allowance lowered our effective income tax rate on
continuing operations to 22.1% from that for 2001 of 29.9%.

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

                                      2002              2001
                                 ---------------    -------------
Revenues                            $ 8,325            $ 7,861
Pretax loss                          (5,292)           (17,544)

Liquidity and Capital Resources

         We had cash and cash equivalents on hand at December 31, 2003 of $27.0
million compared to $13.0 million at December 31, 2002. The changes in cash for
2003 and 2002 are discussed below in terms of the amounts shown on our statement
of cash flows.

         Net cash provided by operating activities was $30.2 million and $45.5
million for 2003 and 2002, respectively, with net cash used for operating
activities in 2001 of $141.9 million. We believe that the net cash flows
provided by operating activities for 2003 and 2002 were reflective of our
strategy for our direct broadcast satellite business, as described above, when
compared to 2001. The principal item that contributed to the decrease in cash
provided by operating activities for 2003 compared to 2002 was a net increase in
cash interest paid in 2003 of $7.8 million to $118.8 million primarily due to
the timing of interest payments associated with Pegasus Satellite's 11-1/4%
notes resulting in increased cash interest paid in 2003. Interest on the 11-1/4%
notes is payable semiannually in January and July. These notes were first issued
in December 2001 with the first interest payment due July 2002. The remainder of
the decrease in cash provided by operating activities for 2003 compared to 2002
was primarily due to cash received from sales of equipment inventories in 2002
of $4.3 million, cash received from the sale of subscribers for the discontinued
Pegasus Express business in 2002 of $1.2 million, and cash patronage received in
2003 being $2.9 million less than the amount received in 2002. The principal
reasons for the change between 2002 and 2001 were: 1) increased level of direct
broadcast satellite revenues and improved collections on direct broadcast
satellite accounts receivable due to a higher quality subscriber base in place
in 2002; 2) much less subscriber acquisition costs incurred in 2002 primarily
due to reduced gross subscriber additions in the current year and commissions
and subsidies incurred in 2001 under the seamless marketing agreement with
DIRECTV, Inc. that was in effect during part of that year; 3) a lower level of
other subscriber related expenses and general and administrative expenses
achieved by cost reduction measures in place during 2002; and 4) taxes paid in
2001 with respect to the 2000 sale of our cable operations. These decreases were
offset in part by incremental direct broadcast satellite programming expenses
incurred in 2002.

                                       48
<PAGE>

         Net cash was used for investing activities in 2003, 2002, and 2001 of
$7.6 million, $30.7 million, and $55.6, respectively. The investing activities
for 2003 primarily reflect cash received of $21.6 million from sales of three
broadcast television stations, cash utilized for direct broadcast satellite
receiver equipment capitalized of $21.5 million, and purchases of shares of
Pegasus Communications' Class A common stock aggregating $6.0 million. The 2002
period primarily consisted of cash utilized for direct broadcast satellite
receiver equipment capitalized of $26.4 million, other capital expenditures of
$3.3 million, and purchases of shares of Pegasus Communications' Class A common
stock aggregating $1.9 million. Primary investing activities for 2001 were
direct broadcast satellite equipment capitalized of $20.8 million, other capital
expenditures of $21.9 million primarily for a new call center and capital
improvements to existing buildings, and purchases of intangible assets of $11.9
million, consisting of additional guard band licenses and costs incurred to
acquire and convert subscribers of a cable system to our DIRECTV services. The
guard band licenses were subsequently transferred to a subsidiary of Pegasus
Communications.

         Net cash was used for financing activities in 2003 and 2002 of $8.6
million and $146.1 million, respectively, and net cash was provided by financing
activities in 2001 of $127.4 million. We received proceeds of $395.5 million
from new borrowings in 2003. The primary expenditures for financing activities
for 2003 were: 1) repayments on Pegasus Media's term loan facilities of $239.8
million; 2) redemption of all of the outstanding principal of Pegasus Media's
12-1/2% notes due July 2005 of $67.9 million; 3) debt financing costs of $17.6
million incurred with respect to financing activities during the year; and 4)
repayment of $18.1 million of outstanding principal on the note payable to
Pegasus Communications. Additionally, Pegasus Media placed $60.1 million as
collateral for a letter of credit facility that is restricted cash to us.
Primary financing activities for 2002 were cash distributions to Pegasus
Communications of $148.8 million, repayment of amounts outstanding under Pegasus
Media's revolving credit facility of $80.0 million, and purchases of our
outstanding notes of $25.5 million. Net cash used for financing activities was
offset in part by $60.1 million borrowed under term loans, net of repayments of
$3.1 million, and $53.8 million borrowed from Pegasus Communications, net of
repayments of $58.5 million. Primary financing activities in 2001 were proceeds
from a note issuance of $175.0 million, less repayment of term loans of $37.8
million and incurrence of debt financing costs of $9.4 million.

         We project that our capital expenditures for 2004 will be approximately
$17 million, of which approximately $15 million will be for capitalized
equipment for the direct broadcast satellite business.

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

         As noted above under Results of Operations, a series of exchanges were
completed in which Pegasus Satellite issued an aggregate of $165.9 million
principal amount of 11-1/4% notes due January 2010 in exchange for $168.1
million principal amount of various series of our outstanding notes. The
principal effect of these exchanges was to extend the maturity of $165.9 million
of principal outstanding to 2010. As a result of the exchanges, we experienced a
net reduction in cash interest paid of $2.3 million in 2003. Excluding the
exchanges for the 13-1/2% notes, the effect of the exchanges on cash interest to
be paid in 2004 will not be significant. However, the aggregate annual net
effect on cash interest to be paid thereafter will increase incrementally, after
giving effect to what would have been the maturity date of each respective note

                                       49
<PAGE>

previously outstanding received in the exchanges and the interest associated
with the principal amount of the 11-1/4% notes issued in their place, for as
long as the 11-1/4% notes remain outstanding. With respect to the exchanges
involving the 13-1/2% notes, we will experience a net increase in cash interest
paid in 2004 of $1.3 million, principally due to two interest payments due on
the 11-1/4% notes and only one interest payment that would have been due on the
13-1/2% notes. For 2005 through what would have been the maturity date in 2007
of the 13-1/2% notes exchanged, we will experience a net reduction in annual
cash interest paid in excess of $900 thousand. Thereafter, annual cash interest
paid will increase for the interest associated with the 11-1/4% notes for as
long as these notes remain outstanding.

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

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

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

         In December 2003, Pegasus Media entered into a new revolving credit
facility with an aggregate commitment of $20.0 million that expires July 31,
2006. However, availability under the new revolving credit facility is limited,
such that the aggregate amount of debt outstanding under this facility and
Pegasus Media's credit agreement cannot exceed $410.0 million through July 31,
2005 and $250.0 million thereafter. Amounts available to be borrowed under the

                                       50
<PAGE>

revolving credit facility are reduced by amounts outstanding for letters of
credit issued under the facility. Borrowed amounts repaid may be reborrowed. At
December 31, 2003, the amount available to be borrowed under the revolving
credit facility was $17.5 million. We may elect an interest rate for outstanding
principal under this facility at either 1) 7.00% plus the greater of (i) the
LIBOR rate and (ii) 2.0% or 2) the base rate plus 6.00%. The base rate is the
higher of the Federal funds rate plus 1% or the prime rate. Interest on
outstanding principal borrowed under the Federal funds rate or prime rate is due
and payable quarterly and interest on outstanding principal borrowed under LIBOR
rates is due and payable the earlier of the end of the contracted interest rate
period or three months. Any aggregate commitment amount in excess of the
outstanding principal borrowed and letters of credit under this facility is
subject to a commitment fee at an annual rate of 1.50% payable quarterly.

         The following table displays payments for our contractual obligations
outstanding at December 31, 2003 (in thousands). It represents contracts and
commitments with initial terms in excess of one year, and excludes accounts
payable and accrued expenses incurred during the normal course of business that
generally have terms of less than one year.
<TABLE>
<CAPTION>
                                                                 Payments due by period
                                                           Less than                                        More than
Contractual Obligations                     Total           1 year           1-3 Years       3-5 Years       5 Years
-----------------------------------       ----------       ---------         ---------       ---------      ---------
<S>                                       <C>                <C>             <C>             <C>             <C>
Long term debt                            $1,484,596         $3,025          $746,092        $247,311        $488,168
Redeemable preferred stock                   224,354              -                 -         224,354               -
Operating leases                              14,961          3,906             6,691           2,730           1,634
Broadcast programming rights                  14,572          3,899             5,953           2,258           2,462
                                          ----------        -------          --------        --------        --------
     Total                                $1,738,483        $10,830          $758,736        $476,653        $492,264
                                          ==========        =======          ========        ========        ========
</TABLE>

Long term debt is presented in the table based on principal amounts outstanding
at December 31, 2003. Redeemable preferred stock in the table represents the
12-3/4% series because the stock is mandatorily redeemable at a scheduled date.
The amount includes the series' liquidation preference value at December 31,
2003 of $184.0 million plus dividends in arrears for the series on that date of
$35.2 million and accrued interest thereon of $5.2 million. The dividends in
arrears and interest thereon were included and assumed to be payable on the
redemption date of the series because they are required to be paid no later than
the redemption date and their payment prior to that date is at our discretion.
We had no capital lease obligations at December 31, 2003. In January 2004, the
due date of Pegasus Satellite's note payable to Pegasus Communications with
outstanding principal at December 31, 2003 of $45.7 million was extended from
June 2005 to June 2007.

         As permitted by the certificate of designation for 12-3/4% series
preferred stock, the board of directors has the discretion to declare or not to
declare any scheduled quarterly dividends for this series. The board of
directors has not declared any of the scheduled semiannual dividends for this
series since January 1, 2002. Dividends in arrears at December 31, 2003 were
$35.2 million, with interest thereon of $5.2 million. Of these amounts, $17.6
million and $2.6 million, respectively, were payable to Pegasus Communications
on account of the 92,156 shares of the 12-3/4% preferred stock held by Pegasus
Communications. An additional $11.7 million of dividends payable on January 1,
2004 were not declared or paid and became in arrears on that date, of which $5.9
million was payable to Pegasus Communications. Dividends not declared accumulate
in arrears and incur interest at a rate of 14.75% per year until paid.

         In February 2004, we exercised an option to acquire from a related
party a broadcast television station serving Portland, Maine for approximately
$3.8 million. It is anticipated that the sale of the station to us will result
in the release of approximately $4.0 million of our cash that collateralizes

                                       51
<PAGE>

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

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

         On a consolidated basis, we are highly leveraged. At December 31, 2003,
we had a combined carrying amount of long term debt, including the portion that
is current, and redeemable preferred stock outstanding, including associated
accrued and unpaid dividends considered to be interest, of $1.7 billion. We
dedicate a substantial portion of cash to pay amounts associated with debt. In
2003, 2002, and 2001, we paid interest of $118.8 million, $111.0 million, and
$113.2 million, respectively. Our high leverage makes us more vulnerable to
adverse economic and industry conditions and limits our flexibility in planning
for, or reacting to, changes in our business and the industries in which we
operate. Our ability to make payments on and to refinance indebtedness and
redeemable preferred stock outstanding and to fund operations, planned capital
expenditures, and other activities and to fund preferred stock requirements
depends on our ability to generate cash in the future. Our ability to generate
cash depends on the success of our business strategy, prevailing economic
conditions, regulatory risks, competitive activities by other parties, the
business strategies of DIRECTV, Inc. and the NRTC, equipment strategies,
technological developments, levels of programming costs and subscriber
acquisition costs, levels of interest rates, and financial, business, and other
factors that are beyond our control. We cannot assure that our business will
generate sufficient cash flow from operations or that alternative financing will
be available to us in amounts sufficient to fund the needs previously specified.
Our indebtedness and preferred stock contain numerous covenants that, among
other things, generally limit the ability to incur additional indebtedness and
liens, issue other securities, make certain payments and investments, pay
dividends, transfer cash, dispose of assets, and enter into other transactions,
and impose limitations on the activities of our subsidiaries. Failure to make
debt payments or comply with covenants could result in an event of default that,
if not cured or waived, could adversely impact us.

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

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

                                       52
<PAGE>

New Accounting Pronouncements

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

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

KB Prime Media Companies

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

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

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

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

                                       53
<PAGE>

Pegasus Communications

         Pegasus Satellite has acquired from unaffiliated parties 657,604 shares
of Pegasus Communications' Class A common stock. At December 31, 2003, the
carrying amount of the shares was $8.0 million.

         In addition to its investment in Pegasus Satellite, Pegasus
Communications and its subsidiaries other than Pegasus Satellite hold two Ka
band satellite licenses granted by the FCC, hold intellectual property rights
licensed from Personalized Media Communications L.L.C., hold FCC licenses to
provide terrestrial communications services in the 700 MHZ spectrum, are
developing a business to provide broadband internet access in rural areas, and
provide management services to Pegasus Satellite. At December 31, 2003, the
carrying value of the foregoing licenses and intellectual property held by
subsidiaries of Pegasus Communications other than Pegasus Satellite was $158.5
million. At December 31, 2003, Pegasus Communications and its subsidiaries other
than Pegasus Satellite also held $55.9 million of cash, had a note receivable
from Pegasus Satellite with a balance of $45.7 million and owned an aggregate of
$115.7 million of redeemable preferred stock and related dividends outstanding
at Pegasus Satellite.

         At December 31, 2003, Pegasus Satellite's maximum exposure to loss as a
result of its investment in Pegasus Communications is $8.0 million, representing
the carrying amount of the shares of Class A common stock of Pegasus
Communications.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         Because of our high leverage and need from time to time to refinance
our borrowings or seek new or additional sources of funding, our principal
market risk is exposure to market rates of interest. Although we manage our
overall debt service on a continual basis, our principal exposure has been
variable rates of interest associated with borrowings under our credit
facilities, consisting of revolving credit and term loans. Market variable rates
of interest have declined over the last eight quarters, reaching historic lows
in 2003. Commencing in the second quarter 2003, we focused our attention to
extending maturities of our debt.

         The following tables summarize our market risks associated with debt,
redeemable preferred stock that has a specified redemption date, and interest
rate financial instruments outstanding at December 31, 2003 and 2002, as
applicable. For debt and redeemable preferred stock, the tables display future
cash flows for periodic payments and maturities of principal of debt and the
scheduled redemption of the liquidation preference value for preferred stock
based on amounts outstanding at December 31, 2003 and 2002, as applicable. The
percentage rate indicated within each year for debt and redeemable preferred
stock represents the applicable weighted average interest or dividend rate
associated with payments, maturities, and/or redemption, as the case may be,
occurring in that year. Because of their variable and unpredictable nature, the
interest rate specified for variable rate debt for each year is based on the
actual weighted average rate in effect at December 31, 2003 and 2002, as
applicable, adjusted for payments and maturities that occur in each subsequent
year within the tables. For interest rate financial instruments, the tables
reflect the year in which the contracts related to the notional amounts
terminate and the weighted average rate of interest associated with the
terminating contracts. The notional amounts of the swaps and caps are used to
measure interest to be paid or received. We do not pay or receive any cash for
the notional amounts when the contracts terminate.

         Not all of our preferred stock and debt are traded. Fair values of our
preferred stock, notes, and certain term loans were based on the latest
available determinable trade prices for those that have trading activity and an
estimate of trade prices based on our comparable instruments for those that do
not have trading activity. Other debt included in the table was not significant
and its fair value was assumed to be equal to its carrying amount. Fair values
of the swaps and caps were based on the estimated amounts to settle the
contracts assuming they were terminated at December 31, 2003 and 2002, as
applicable.

                                       54
<PAGE>


<TABLE>
<CAPTION>
Market Risks at December 31, 2003
---------------------------------
(dollars in                                                                                                                 Fair
thousands)                2004           2005          2006          2007          2008        Thereafter      Total        Value
                          ----           ----          ----          ----          ----        ----------      -----        -----
<S>                        <C>        <C>          <C>           <C>            <C>             <C>         <C>           <C>
Debt:
   Fixed rate              $25        $81,591      $229,260      $247,311                       $488,168    $1,046,355    $964,620
   Average
   interest rate          6.75%          9.63%        11.56%        13.02%                         11.63%
   Variable rate        $3,000       $141,991      $293,250                                                   $438,241    $436,358
   Average
   interest rate          9.00%          5.04%         9.00%
Redeemable
preferred
stock                                                                           $230,893                      $230,893    $211,705
Average
dividend
rate                                                                               12.75%
Caps notional
amount                                $31,600                                                                  $31,600         $12
Average
contract rate                            6.50%

Market Risks at December 31, 2002
---------------------------------
(dollars in                                                                                                                 Fair
thousands)                2003           2004          2005          2006          2007        Thereafter      Total        Value
                          ----           ----          ----          ----          ----        ----------      -----        -----
Debt:
   Fixed rate           $2,249           $425      $182,895      $295,000      $316,245         $175,000      $971,814    $523,746
   Average
   interest rate          6.55%          4.73%        10.69%        11.49%        13.01%           11.25%
   Variable rate        $3,382       $155,138      $229,071                                                   $387,591    $387,591
   Average
   interest rate          5.31%          5.31%         5.56%
Redeemable
preferred
stock                                                                          $207,435                       $207,435     $59,199
Average
dividend
rate                                                                              12.75%
Swaps notional
amount                 $72,114                                                                                 $72,114     $(1,269)
Average
pay
rate                      7.19%
Caps notional
amount                 $67,886                      $31,600                                                    $99,486         $71
Average
contract rate             9.00%                        6.50%
</TABLE>


                                       55
<PAGE>


Since the redeemable preferred stock is cumulative, the amounts presented
include dividends accrued of $46.9 million and $23.5 million at December 31,
2003 and 2002, respectively. In January 2004, the due date of Pegasus
Satellite's note payable to Pegasus Communications with outstanding principal at
December 31, 2003 of $45.7 million was extended from June 2005 to June 2007.

         In 2003, Pegasus Media borrowed $300.0 million due in 2006 at a rate of
interest subject to the greater of the applicable variable rate of interest or
2.00% plus a margin of 7.00%. The applicable rate for this loan at December 31,
2003 was 9.00%. Also in 2003, Pegasus Satellite borrowed $100.0 million due in
2009 at a fixed rate of interest of 12.5%. Of the amount of interest incurred on
this loan, 52% is capitalized quarterly as principal over the term of the loan,
and is subject to the full compounded rate of interest of 12.5%. During 2003,
Pegasus Satellite completed a series of exchanges in which we issued an
aggregate of $165.9 million principal amount of 11-1/4% notes due January 2010
in exchange for $168.1 million principal amount of our outstanding notes,
consisting of $33.4 million of 9-5/8% notes due October 2005, $28.9 million of
9-3/4% notes due December 2006, $36.5 million of 12-1/2% notes due August 2007,
$36.8 million of 12-3/8% notes due August 2006, and $32.5 million of 13-1/2%
notes due March 2007. The principal effect of these exchanges was to extend the
maturity of $165.9 million of principal outstanding to 2010.

         Under Pegasus Media's interest rate caps, we receive interest from the
counterparties to the contracts when the variable market rates of interest
specified in the contracts exceed the contracted interest cap rates. The effects
of the caps are recorded as adjustments to our interest expense. Premiums paid
by us to enter into these contracts are amortized to interest expense. The
aggregate fair values of our caps at December 31, 2003 and 2002 were nominal.
The caps have not had any effect on our effective interest rates or the amount
of interest incurred during 2003 or 2002.

         We measure Pegasus Media's interest rate financial instruments based on
their fair values, and recognize related assets or liabilities as appropriate in
the statement of financial position. The fair values of interest rate swaps and
caps were determined by the counterparties to the contracts of the respective
instruments. The fair values are measured by the amount that the contracts could
be settled at on any designated day. No cash is exchanged on these assumed
settlements, but we record gains for increases and losses for decreases in the
fair values between assumed settlement dates, which occur quarterly. These gains
and losses are recorded in the period of change in other nonoperating income and
expense, respectively. We recognized a gain of $1.2 million and $3.0 million in
2003 and 2002, respectively, for the net change in the aggregate net fair value
of our interest rate financial instruments within those years.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         The information required by this item is set forth beginning on page
F-1.

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

         None.

ITEM 9A. CONTROLS AND PROCEDURES

         We carried out an evaluation under the supervision and with the
participation of our management, including our Chief Executive Officer and Chief
Financial Officer, to determine the effectiveness of our disclosure controls and
procedures as of the end of the period covered by this annual report. Based on
this evaluation, the Chief Executive Officer and the Chief Financial Officer
concluded that these controls and procedures are effective in their design to
ensure that information required to be disclosed by the registrant in reports
that it files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized, and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms, and that such information
has been accumulated and communicated to the management of the registrant,
including the above indicated officers, as appropriate to allow timely decisions
regarding the required disclosures. There has been no change in our internal
control over financial reporting that occurred during the fourth quarter of
fiscal year 2003 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.

                                       56

<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. In connection with its acquisition of two companies in 1998 and 2000,
Pegasus Communications entered into a voting agreement with certain principal
stockholder groups of the acquired companies and with Mr. Pagon. Under the
voting agreement, which has since been amended, Messrs. Pagon, Lodge, Benbow,
Verdecchio, and Verlin have been designated as directors to the Pegasus
Communications board of directors. Although all of our directors also currently
serve on the board of directors of Pegasus Communications, none of our directors
is designated pursuant to the voting agreement, which applies solely to the
board of Pegasus Communications. All of our executive officers hold the same
positions with Pegasus Communications as they do with Pegasus Satellite.

         Marshall W. Pagon has served as our Chairman of the Board and Chief
Executive Officer since our incorporation. Additionally, Mr. Pagon served as our
President from our incorporation to December 2001 and served as our Treasurer
from incorporation to June 1997. From 1991 to October 1994, when the assets of
our various affiliates, principally limited partnerships that owned and operated
our television and cable operations, were transferred to subsidiaries of Pegasus
Media, entities controlled by Mr. Pagon served as the general partner of these
partnerships and conducted our business. Mr. Pagon's background includes over 20
years of experience in the media and communications industry. Mr. Pagon is 48
years old.

         Ted S. Lodge has been a director of our company since May 5, 2000 and
has served as our President, Chief Operating Officer and Counsel since December
2001. Mr. Lodge served as our Senior Vice President, Chief Administrative
Officer, General Counsel and Assistant Secretary beginning on July 1, 1996. In
June 1997, Mr. Lodge became our Secretary, and in July 2000, he became an
Executive Vice President. From June 1992 through June 1996, Mr. Lodge practiced
law with Lodge & Company, and during that period, was engaged by our company as
our outside legal counsel in connection with various matters. Mr. Lodge is 47
years old.

         Robert F. Benbow has been a director of our company since May 5, 2000.
Mr. Benbow had been a director of Golden Sky Systems, Inc. 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
is 68 years old.

         Robert N. Verdecchio has been a director of our company since December
18, 1997. He served as our Senior Vice President, Chief Financial Officer and
Assistant Secretary from our inception to March 22, 2000 and as our Treasurer
from June 1997 until March 22, 2000. He has also performed similar functions for
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 is 47 years old.

         Joseph W. Pooler, Jr. has served as our Chief Financial Officer since
January 1, 2004. Mr. Pooler served as Senior Vice President of Finance between
February 2003 and January 2004 and as our Vice President of Finance and
Controller from January 2001 until February 2003. Mr. Pooler also served as Vice

                                       57
<PAGE>

President and Controller of Pegasus Satellite Television from December 1999
through January 2001. Prior to joining our company, 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 38 years old.

         Howard E. Verlin has served as Executive Vice President of our Company
since July 1, 2000. Mr. Verlin served as Assistant Secretary of our company
until June 2000 and supervised our cable operations until the sale of our last
cable system in September 2000. Mr. Verlin has served similar functions with
respect to our predecessors in interest and affiliates since 1987 and has over
20 years of experience in the media and communications industry. Mr. Verlin is
42 years old.

         Scott A. Blank currently serves as Senior Vice President of Legal and
Corporate Affairs, General Counsel and Secretary of our company. 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 our company from January 1999 to December 2001.
Prior to joining our company, 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 43 years old.

         John K. Hane has served as Senior Vice President of Business
Development of our company since April 2001, and is involved with our advance Ka
multimedia satellite system design and procurement. Prior to April 2001, Mr.
Hane served as Senior Vice President of Pegasus Development 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.
("Highcast"), 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 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 44 years old.

         Karen M. Heisler has served as Senior Vice President of Human Resources
and Administrative Services of our company since April 2001. Prior to April
2001, Ms. Heisler served as Vice President of Human Resources after joining our
company 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 44 years old.

         Rory J. Lindgren has served as Executive Vice President, Operations
responsible for Marketing, Direct Sales, Customer Care and Information
Technology since February 2003. Mr. Lindgren served as our Senior Vice
President, Operations from July 2002 to February 2003. Prior to July 2002, Mr.
Lindgren served as Senior Vice President, Customer Relationship Management after
joining our Company in April 2001. Prior to joining our Company, Mr. Lindgren
served as Senior Vice President Customer Service for Fleet Boston Financial
where he was responsible for leading customer care operations. Prior to August

                                       58
<PAGE>

1998, Mr. Lindgren held key management positions at MasterCard International,
First Chicago NBD Corporation and American Express. Mr. Lindgren is 47 years
old.

Code of Ethics

         We have adopted a Code of Ethics that applies to our chief executive
officer, chief financial officer, and chief accounting officer. Our Code of
Ethics is posted on our website, at www.pgtv.com, and may be accessed by
clicking on "Investor Relations" and then clicking on "Code of Ethics for Senior
Officers." We intend to satisfy the disclosure requirement under Item 10 of Form
8-K, regarding an amendment to, or waiver from, our Code of Ethics by posting
such information on our website at the location specified above.

Audit Committee Financial Expert

         We have no audit committee financial expert, as defined under Item
401(h) of Regulation S-K, because we have no audit committee; we are not
required to have an audit committee because we do not have listed securities as
defined under Rule 10A-3 of the Securities Exchange Act of 1934.

ITEM 11.  EXECUTIVE COMPENSATION

Incentive Compensation

         Prior to 2001, management employees received incentive compensation
based upon year over year increases in divisional cash flow. The additional
compensation took the form of awards made pursuant to the Pegasus Communications
Restricted Stock Plan. Management employees had the election of receiving awards
in the form of restricted stock and/or stock options. Executive officers had the
additional option of receiving a portion of their awards in the form of cash to
the extent the amount did not exceed one-third of their salary.

         In 2001, in lieu of awards being made pursuant to the Pegasus
Communications Restricted Stock Plan, a short-term incentive plan (the "2001 STI
Plan"), was established whereby executives and other key employees had the
opportunity to receive cash awards based upon the achievement of company wide
and individual performance goals. The 2001 STI Plan was designed as a "pay for
performance" incentive plan intended to encourage senior management to strive
for operational excellence and to increase stockholder value through the
attainment of specified performance targets in 2002. One hundred and ten
employees participated in the 2001 STI Plan. Although managers received cash
awards under the plan, no awards were granted in 2001 to executive officers
under the plan.

         In 2002, one of management's primary objectives was to significantly
improve consolidated cash flows from operating and investing activities. As a
consequence, effective April 1, 2002, Pegasus Communications adopted its 2002
Short-Term Incentive Plan (the "2002 STI Plan") pursuant to which cash bonuses
were payable to 126 management employees participating in the 2002 STI Plan
based upon the achievement of certain "free cash flow" (as this term is defined
in the 2002 STI Plan) targets during calendar year 2002. During 2002, cash used
in operating and investing activities decreased by approximately $196 million
compared to 2001 for Pegasus Communications, and cash bonuses were paid to all
managers and executive officers under the plan.

         In addition to the 2002 STI Plan, the compensation committee of the
board of directors of Pegasus Communications also established an incentive
program whereby a participating officer would be awarded restricted stock under
the Pegasus Communications Restricted Stock Plan based upon the amount of cash
bonus earned by the officer under the 2002 STI Plan.

                                       59
<PAGE>

         In 2003, Pegasus Communications adopted its 2003 Short-Term Incentive
Plan (the "2003 STI Plan"), which became effective January 1, 2003. Cash bonuses
were paid to 142 management employees participating in the 2003 STI Plan based
upon the achievement of certain objectives related to increasing "free cash
flow" and "pre-marketing cash flow," and significantly improving subscriber
quality. In addition, a participating officer was again eligible in 2003 to earn
restricted stock under the Pegasus Communications Restricted Stock Plan based
upon the amount of cash bonus earned by the officer under the 2003 STI Plan.

                                       60
<PAGE>


Summary 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 as they
did with Pegasus Satellite.

<TABLE>
<CAPTION>
                                                                Summary Compensation Table

                                                  Annual Compensation
                       ------------------------------------------------------------------------
                                                                          Bonus(1)
                                                             ----------------------------------
                          Principal                               STI              Vested            Other Annual
        Name              Position      Year      Salary      Cash Bonus        Stock Award(3)      Compensation(5)
--------------------   --------------  ------   ----------   ------------      ----------------    -----------------

<S>                    <C>             <C>      <C>           <C>                 <C>                <C>
Marshall W. Pagon...   Chairman and     2003     $475,000      $620,218          $  340,285           $99,085(6)
                       Chief            2002     $475,000      $892,992          $1,123,333           $80,990(6)
                       Executive        2001     $428,846         --             $  174,997           $59,245(6)
                       Officer

Ted S. Lodge........   President,       2003     $350,000      $342,784          $  188,058               --
                       Chief            2002     $358,654      $493,398          $1,675,817(4)            --
                       Operating        2001     $256,538         --             $  112,492               --
                       Officer and
                       Counsel

Howard E. Verlin....   Executive        2003     $250,000      $179,998          $   98,740               --
                       Vice President   2002     $250,000      $268,216          $  364,671               --
                                        2001     $231,538         --             $   66,654               --


Rory J. Lindgren....   Executive        2003     $242,839      $175,579          $   96,334               --
                       Vice President

Scott A. Blank......   Senior Vice      2003     $217,673      $157,150          $   86,216               --
                       President,       2002     $210,000      $276,539(2)       $  294,267               --
                       General          2001     $188,077          --            $   25,803               --
                       Counsel and
                       Secretary
</TABLE>



<PAGE>


<TABLE>
<CAPTION>
                              Long-Term
                         Compensation Awards
                     ---------------------------



                      Restricted     Securities
                         Stock       Underlying       All Other
        Name           Award(7)       Options      Compensation(10)
-------------------- ------------   ------------  ------------------

<S>                    <C>             <C>             <C>
Marshall W. Pagon... $  340,256        50,000         $ 12,000(11)
                     $1,189,296(8)     50,000         $201,818(11)
                          --           24,500         $336,804(11)


Ted S. Lodge........ $  188,058        25,000         $ 39,519(12)
                     $  657,552(8)     25,000         $ 35,506(12)
                          --           12,000         $  3,900



Howard E. Verlin.... $   98,740         7,500         $ 12,000
                     $  357,451(8)      5,000         $  4,039
                          --            7,164(9)      $ 10,500


Rory J. Lindgren.... $   96,305        10,000         $ 11,969


Scott A. Blank...... $   86,216         7,500         $  7,247
                     $  301,912(8)      4,999         $  4,458
                     $   87,459         7,500         $  4,306
</TABLE>

                                       61

<PAGE>



Notes to Summary Compensation Table

(1)  Bonuses to named executive officers consist of (a) a cash award under
     Pegasus Communications' short term incentive plan and (b) the fair market
     value of shares of Pegasus Communications' Class A common stock that are
     vested at the time of award under Pegasus Communications' Restricted Stock
     Plan (including shares surrendered to discharge withholding tax
     obligations).
(2)  Includes a one time cash bonus of $50,000 in connection with Mr. Blank's
     appointment as General Counsel of Pegasus Communications and certain of its
     subsidiaries.
(3)  Subject to limitations specified in the Restricted Stock Plan, an executive
     officer may receive all or a portion of an award under the Restricted Stock
     Plan in the form of cash, Class A common stock or an option to purchase
     shares of Class A common stock. The amounts listed in this column reflect
     the fair market value of shares of Class A common stock that were vested at
     the time of award under the Restricted Stock Plan and the cash portion of
     the 2002 restricted stock award that was paid for the payment of taxes on
     the awards. In addition, for fiscal year 2001, the amounts included reflect
     the cash portion of discretionary awards awarded to Messrs. Lodge and
     Verlin under the Restricted Stock Plan. The portion of an award under the
     Restricted Stock Plan that was restricted at the time of grant is reported
     under the Restricted Stock Award column, as described in note 7 below. The
     portion of an award received as options to purchase shares of Class A
     common stock is reported under the Securities Underlying Options column, as
     described in note 9 below.
(4)  Of the amount listed for Mr. Lodge in fiscal year 2002, $1,005,000
     represents compensation in the form of fully vested restricted stock of
     Pegasus Communications granted to Mr. Lodge in February 2002 under the
     Restricted Stock Plan in connection with Mr. Lodge's appointment as
     President and Chief Operating Officer of Pegasus Communications and certain
     of its subsidiaries.
(5)  No named executive officer received a perquisite or other personal benefit
     in excess of the lesser of $50,000 or 10% of such individual's salary plus
     annual bonus, except as set forth in note 6 below.
(6)  Represents the value of benefits received by Mr. Pagon related to his use
     of a business aircraft in which Pegasus Communications has a fractional
     ownership interest.
(7)  The included amounts represent the fair market value of the restricted
     portion of stock awards received under the Restricted Stock Plan. Awards
     for 2001 under the Restricted Stock Plan vest based upon years of service
     with Pegasus Communications or its subsidiaries from the date of initial
     employment. These shares vest 34% after two years of employment, an
     additional 33% after three years of employment and the remaining 33% vest
     upon four years of employment. As a consequence, awards to Messrs. Pagon,
     Lodge, and Verlin for 2001 of 680 shares, 146 shares, and 130 shares,
     respectively, were fully vested at the time of their award. For 2001, Mr.
     Blank received 508 shares in three separate awards, two of which were 34%
     vested and one which had not yet vested at the time of award. All 508
     shares awarded to Mr. Blank for 2001 had fully vested as of December 31,
     2003.

     For 2002 and 2003, our executive officers received restricted stock awards
     pursuant to a long term incentive program established for the 2002 and 2003
     fiscal year. These awards were based upon the total cash bonus earned by
     each executive officer in 2002 and 2003 under the STI Plans. The number of
     shares awarded was derived by dividing the total amount of the STI cash
     bonus received by each executive officer by the market price of Pegasus
     Communications' Class A common stock on the date that the award was
     approved by Pegasus Communications' Compensation Committee. For the 2002
     awards, executive officers were given up to 40% of the vested portion of
     the grant in cash for the sole purpose of satisfying their tax obligations.
     This cash portion of the 2002 award is reported under the Bonus--Vested
     Stock Award column and is discussed in note 3 above. For the unvested
     portion of the 2002 award, rather than awarding up to 40% in cash to
     satisfy tax obligations upon vesting, on February 25, 2004 an additional
     restricted stock award was granted to the executive officers. Upon vesting
     of this award, the executive officers have the option to surrender shares
     in an amount sufficient to satisfy tax obligations. Executive officers
     received their entire 2003 award in the form of shares of Class A common
     stock. The following table sets forth the grant date and the total number
     of shares granted to each of the named executive officers based on awards
     under Pegasus Communications' long term incentive plans for 2002 and 2003
     performance.

                                       62

<PAGE>
<TABLE>
<CAPTION>
                                                   2002 Performance                  2003 Performance
                                     ----------------------------------------      --------------------
                                     June 6, 2003(a)     February 25, 2004(b)      February 25, 2004(c)
                                     ---------------     --------------------      --------------------

<S>                                      <C>                    <C>                        <C>
                  Mr. Pagon              52,650                 17,024                     23,475
                  Mr. Lodge              28,740                  9,581                     12,974
                  Mr. Verlin             15,624                  5,208                      6,812
                  Mr. Lindgren              *                      *                        6,645
                  Mr. Blank              13,196                  4,399                      5,948
</TABLE>

           *    Mr. Lindgren was named an executive officer in 2003.
           (a)  Shares vested 50% at the time of grant, with an additional 25%
                to vest on June 6, 2004, and the final 25% to vest on
                June 6, 2005.
           (b)  Shares are to vest 50% on June 6, 2004 and the final 50% to vest
                on June 6, 2005.
           (c)  Shares vest 50% at the time of grant, with an additional 25% to
                vest on February 25, 2005, and the final 25% to vest on February
                25, 2006.

     Based upon the closing price of Pegasus Communications' Class A common
     stock on December 31, 2003 of $28.08 per share, the 26,325 restricted
     shares then held by Mr. Pagon had a value of $739,206; the 14,370
     restricted shares then held by Mr. Lodge had a value of $403,510; the 7,812
     restricted shares then held by Mr. Verlin had a value of $219,361; the
     6,554 restricted shares then held by Mr. Lindgren had a value of $184,036;
     and the 6,598 restricted shares then held by Mr. Blank had a value of
     $185,272. Subject to limitations specified in the 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 in lieu of stock. Pegasus Communications does
     not anticipate paying cash dividends on its common stock in the foreseeable
     future. The policy of Pegasus Communications is to retain cash for
     operations and expansion.
(8)  Reflects an increase in amounts reported for 2002 in Pegasus
     Communications' definitive proxy statement filed with the SEC on November
     19, 2003 to include an additional grant of restricted stock awarded on
     February 25, 2004, as discussed in note 7 above.
(9)  Includes options issued under the Restricted Stock Plan in lieu of
     receiving the award in cash or stock. In fiscal year 2001, Mr. Verlin
     received options under the Restricted Stock Plan to purchase 163 shares.
     Options granted pursuant to the 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 7 above.
(10) Unless otherwise indicated, the amounts listed represent Pegasus
     Communications' contributions under its U.S. 401(k) plan established for
     its employees and the employees of its subsidiaries.
(11) For fiscal years 2001 and 2002, Pegasus Communications paid $416,805 and
     $250,000, respectively, with respect to split dollar agreements entered
     into by Pegasus Communications with the trustees of insurance trusts
     established by Mr. Pagon. In 2003, premiums under the policies were paid
     out of the accrued proceeds of the policies and by Mr. Pagon; Pegasus
     Communications did not pay any amount of the premiums in 2003. The split
     dollar agreements provide that Pegasus Communications will be repaid all
     amounts expended for premiums, either from the cash surrender value or the
     proceeds of the insurance policies. For purposes of this table, the
     applicable SEC rules permit an alternative method to be presented: the
     dollar value of the benefit to Mr. Pagon determined based upon the net
     premium paid by us less the present value of the future recovery of the
     premium. The present value of the recovery of the premium may be calculated
     by taking the long term applicable federal rate and discounting the annual
     net premium by the number of years until a recovery is anticipated. Based
     upon an actuarial life expectancy for Mr. Pagon of 76 years and the
     applicable federal rate for the month of December for 2001 and 2002 of
     5.05% and 4.92%, respectively, under the alternative reporting methodology,
     the amounts reported in the table for 2001 and 2002 are $326,304, and
     $190,818, respectively. The amounts paid by Pegasus Communications for
     premiums and the amounts reported in the prior sentence under the
     alternative reporting methodology are presented in conformity with the SEC
     rules relating to this table and are not indicative of amounts includable
     in compensation pursuant to applicable IRS rules.
(12) For fiscal years 2002 and 2003, we paid $25,802 and $26,721, respectively,
     in connection with disability and life insurance policies pursuant to Mr.
     Lodge's employment contract. In 2002 and 2003, Mr. Lodge received benefits
     of $4,771 and $2,828, respectively, related to his use of a business
     aircraft in which Pegasus Communications has a fractional ownership
     interest.
                                       63

<PAGE>
Option Grants in 2003

         Pegasus Communications granted options to its employees and the
employees of its subsidiaries, including Pegasus Satellite, to purchase a total
of 136,535 shares of Pegasus Communications' Class A common stock during 2003,
which were granted under Pegasus Communications' Stock Option 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      Market Price   Expiration
        Name           Granted (1)    Fiscal Year   Per Share      Per Share       Date        0%           5%         10%
        ----           -----------    -----------   ---------      ---------       ----        --           --         ---
<S>                       <C>             <C>         <C>            <C>          <C>       <C>         <C>        <C>
Marshall W. Pagon...      50,000          36.6        $26.42         $27.05       6/11/13    $31,500     $882,100   $2,187,050

Ted S. Lodge........      25,000          18.3        $26.42         $27.05       6/13/13    $15,750     $441,050   $1,093,525

Howard E. Verlin....       7,500           5.5        $26.42         $27.05       6/11/13    $ 4,725     $132,315   $  328,058

Rory J. Lindgren....      10,000           7.3        $26.42         $27.05       6/11/13    $ 6,300     $176,420   $  437,410

Scott A. Blank......       7,500           5.5        $26.42         $27.05       6/11/13    $ 4,725     $132,315   $  328,058
</TABLE>
-------------
(1) The included amounts represent the number of options issued on June 11,
    2003, under Pegasus Communications' Stock Option Plan. Options granted to
    executive officers under the Stock Option Plan become exercisable as
    determined by the compensation committee of Pegasus Communications' board of
    directors. The options issued as part of the June 11, 2003 grant vest as
    follows: 25% on date of grant; an additional 2.083% on the 11th day of each
    calendar month starting on July 11, 2003, and ending on May 11, 2006; and an
    additional 2.095% on June 11, 2006.



                                       64
<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 2003 and 2003 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, 2003 was $28.08 per share.

       Aggregate Option Exercises in 2003 and 2003 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             --        162,177          50,004        $ 586,695      $ 385,305

Ted S. Lodge........         0             --         81,496          25,003        $ 293,338      $ 192,662

Howard E. Verlin....         0             --         51,962           6,564        $  60,213      $  41,137

Rory J. Lindgren....         0             --         13,024          13,474        $ 117,313      $  77,087

Scott A. Blank......         0             --         19,434           6,563        $  60,213      $  41,120
</TABLE>

Employment Contracts

         Mr. Lodge serves as our President and Chief Operating Officer pursuant
to an agreement effective as of June 1, 2002. The agreement is for a three year
term and is automatically renewable for additional one year terms at the
agreement's second anniversary and every anniversary thereafter, unless ninety
days prior written notice of nonrenewal is given by Mr. Lodge or us. Neither
party gave a notice of nonrenewal within 90 days before June 1, 2004. Under the
agreement, Mr. Lodge receives an annual base salary that is subject to at least
annual review by us and which may be increased but not decreased below its
current amount. In addition, under the agreement, Mr. Lodge is eligible to
participate in Pegasus Communications' short term incentive plan; is to receive
supplemental life insurance and long term disability coverage with the cost of
each coverage not to exceed $15 thousand annually; and such other employee
benefits and perquisites as are generally available to our executive officers.
If Mr. Lodge's employment is terminated for any reason other than for cause, Mr.
Lodge is entitled to: (1) an amount equal to two times his base salary (as is
then in effect); (2) an amount equal to two times the average amount of his
annual award payments under the short term incentive plan; (3) a lump sum
payment to offset the taxable cost of COBRA coverage; and (4) professional
outplacement assistance not to exceed $25 thousand. If we decline to renew this
agreement, Mr. Lodge is entitled to receive a payment equal to his annual base
salary (as is then in effect).

         If Mr. Lodge's employment is terminated any time six months prior to a
change in control or within two years following a change of control and if he
signs a waiver and release agreement, he will be entitled to receive certain
severance benefits in a lump sum payment. The severance benefits would generally
equal the sum of (1) three times his annual base salary and (2) three times the
average annual amount of the annual award under Pegasus Communications' short
term incentive plan for a specified three year period and (3) the aggregate
taxable cost of the continued health benefits provided under the employment
agreement but not paid by Mr. Lodge divided by 0.65. Also, Mr. Lodge will be
entitled to receive (1) continued health coverage for three years after his
termination, (2) professional outplacement assistance not to exceed $25
thousand, and (3) all of his options as if fully vested.


                                       65
<PAGE>

         In general under the employment agreement, a change of control is one
or more of the following events: (1) the sale, lease, transfer, conveyance or
other disposition of all or substantially all of the assets of Pegasus
Communications and its subsidiaries, (2) any person becomes a beneficial owner
of more of Pegasus Communications' voting stock than is at the time beneficially
owned by Marshall W. Pagon and his related parties in the aggregate, (3) Mr.
Pagon and his related parties collectively cease to beneficially own at least
thirty percent of the combined voting power of all classes of voting stock of
Pegasus Communications, (4) Mr. Pagon and his related parties acquire, in the
aggregate, beneficial ownership of more than 66-2/3% of the shares of Pegasus
Communications' Class A common stock at the time outstanding, (5) certain
changes are made to the composition of Pegasus Communications' board of
directors, or (6) a plan of liquidation or dissolution is adopted. The
employment agreement also contains certain non-competition and confidentiality
provisions.

Compensation Committee Interlocks and Insider Participation

         During 2003, the compensation committee of Pegasus Communications'
board of directors generally made decisions concerning the compensation of
executive officers. James J. McEntee, III, Robert N. Verdecchio, and Robert F.
Benbow each served on the compensation committee during all or part of fiscal
year 2003. Mr. Benbow is associated with affiliates of Alta Communications that
were formerly stockholders of Golden Sky. Mr. Verdecchio served as our Senior
Vice President, Chief Financial Officer and Assistant Secretary from our
inception to March 22, 2000 and as our Treasurer from June 1997 until March 22,
2000. He has also performed similar functions for affiliates and predecessors in
interest from 1990 to March 22, 2000.

Compensation of Directors

         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 as they do with Pegasus
Satellite. Consequently, the amounts set forth below represent compensation paid
to the individuals for services they rendered to both companies. We currently
pay our directors who are not our employees or officers an annual retainer of
$10 thousand plus $1 thousand for each board meeting attended in person, $500
for each meeting of a committee of the board and $500 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 or non-voting 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 June 11, 2003, each nonemployee director received options to
purchase 10,000 shares of Pegasus Communications' Class A common stock under
Pegasus Communications' Stock Option Plan at an exercise price of $26.42 per
share, the closing price of Pegasus Communications' Class A common stock on June
10, 2003, the date prior to the date of the grant. The options issued vested 25%
on the date of the grant, with an additional 2.083% vesting on the 11th day of
each calendar month from July 11, 2003 to May 11, 2006 and an additional 2.095%
vesting on June 11, 2006. Each option is exercisable until June 11, 2013, the
tenth anniversary of the date of grant.

                                       66
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
         RELATED STOCKHOLDER MATTERS

Security Ownership of Pegasus Satellite

         Pegasus Satellite's outstanding common stock currently consists of 100
shares of Class B common stock, par value $0.01 per share, all of which is held
by 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 1, 2004 (unless
otherwise indicated in the notes below) regarding the beneficial ownership of
Pegasus Communications' Class A common stock and Class B common stock by (a)
each stockholder known to us to be the beneficial owner, as defined in Rule
13d-3 under the Exchange Act, of more than 5% of the Class A common stock and
Class B common stock, based upon the records of Pegasus Communications or the
records of the Securities and Exchange Commission, (b) each director of Pegasus
Satellite, (c) each of the named executive officers of Pegasus Satellite and (d)
the directors and current executive officers of Pegasus Satellite as a group.
Each share of Pegasus Communications' Class B common stock is currently
convertible at the discretion of the holders into an equal number of shares of
Pegasus Communications' 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. Percentages in the
table are calculated on the basis of 5,451,908 shares of Class A common stock
outstanding as of March 1, 2004, which includes 682,104 shares held by
subsidiaries of Pegasus Communications.
<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).....................          1,524,063(3)(4)      23.3     916,380(4)       100          66.1
Ted S. Lodge................................            142,535(5)          2.6             --        --          *
Howard E. Verlin............................             86,509(6)          1.6             --        --          *
Rory J. Lindgren............................             37,522(7)          *               --        --          *
Scott A. Blank..............................            252,120(8)          4.6             --        --           1.7
Robert F. Benbow............................          1,537,457(4)(9)      23.5     916,380(4)       100          66.1
Robert N. Verdecchio........................             42,168(10)         *               --        --          *
Alta Communications VI, L.P. and related
  entities (11).............................          1,524,063(4)         23.3     916,380(4)       100          66.1
Avenue Special Situations
  Fund II, LP (12)..........................            350,000             6.0             --        --           2.3
DBS Investors, LLC (13).....................            550,000             9.2             --        --           3.6
FMR Corp. (14)..............................            549,254            10.1             --        --           3.8
John Hancock Financial Services, Inc.  and                                                  --        --
  related entities (15).....................            387,732             7.1                                    2.7
Par Capital Management Inc. (16)............            588,031            10.8             --        --           4.0
Stephen L. Farley (17)......................            287,000             5.3             --        --           2.0
Perry Corp. (18)............................            415,418             7.6             --        --           2.9
Peninsula Capital Advisors, LLC (19)........          2,099,750            38.5             --        --          14.4
Directors and current executive officers as
  a group (20)(consists of 10 persons)......          2,164,084            31.8     916,380(4)       100          69.2
</TABLE>


                                       67
<PAGE>

*   Represents less than 1% of the outstanding shares of the Pegasus
    Communications 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, PA 19004.
(2) Pegasus Capital Holdings, LLC holds 300,475 shares of the Pegasus
    Communications Class B common stock. Mr. Pagon is the managing member of
    Pegasus Capital Holdings, LLC and is deemed to be the beneficial owner of
    these shares. All of the 615,905 remaining shares of Pegasus Communications'
    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 Pegasus Communications' Class B common stock with sole voting and
    investment power over all such shares.
(3) Includes 35,500 shares of Pegasus Communications' Class A common stock owned
    directly by Pegasus PCS Partners, L.P. Mr. Pagon, Pegasus Capital Holdings,
    LLC, Pegasus Communications Portfolio Holdings, Inc. and Pegasus PCS, Inc.
    are deemed to be beneficial owners of these shares. Mr. Pagon is the
    managing member of BDI Associates, LLC, which is the sole stockholder of
    Pegasus Communications Portfolio Holdings, Inc., which, in turn, is the sole
    stockholder of Pegasus PCS, Inc., which is the sole general partner in
    Pegasus PCS Partners, L.P. Mr. Pagon and each of the entities named as
    beneficial owners of the 35,500 shares of Pegasus Communications' Class A
    common stock disclaim beneficial ownership with respect to such shares,
    except to their respective pecuniary interests therein. Also includes the
    916,380 shares of Pegasus Communications' Class B common stock described in
    note 2 above, which are convertible into shares of the Pegasus
    Communications Class A common stock on a one for one basis, 170,509 shares
    of Pegasus Communications' Class A common stock which are issuable upon the
    exercise of outstanding stock options that are vested or become vested
    within 60 days and 96,685 shares of Pegasus Communications' Class A common
    stock which Mr. Pagon holds directly.
(4) As a consequence of being parties to the voting agreement of Pegasus
    Communications, 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 916,380 shares of Pegasus Communications' Class A common stock issuable
    upon conversion of all of the outstanding shares of Pegasus Communications'
    Class B common stock beneficially owned by Mr. Pagon as described in note 2
    above, the 302,694 additional shares of Class A common stock beneficially
    owned by Mr. Pagon as described in note 3 above and 304,989 shares of
    Pegasus Communications' 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 13 below.
(5) This includes 300 shares of Pegasus Communications' Class A common stock
    owned by Mr. Lodge's wife, of which Mr. Lodge disclaims beneficial
    ownership, and 85,662 shares of Class A common stock which are issuable upon
    the exercise of outstanding stock options that are vested or become vested
    within 60 days.
(6) This includes 53,004 shares of Pegasus Communications' Class A common stock
    which are issuable upon the exercise of outstanding stock options that are
    vested or become vested within 60 days.
(7) This includes 14,690 shares of Pegasus Communications' Class A common stock
    issuable upon the exercise of outstanding stock options that are vested or
    become vested within 60 days.
(8) This includes 210,736 shares of Pegasus Communications' Class A common stock
    held in 401(k) plans over which Mr. Blank and one other executive officer
    share voting power in their capacities as co-trustees and 20,475 shares of
    Pegasus Communications' Class A common stock which are issuable upon the
    exercise of outstanding stock options that are vested or become vested
    within 60 days.
(9) The information for Mr. Benbow includes 13,394 shares of Pegasus
    Communications' Class A common stock which are issuable upon the exercise of
    outstanding stock options that are vested or become vested within 60 days
    and all shares of Pegasus Communications' 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 13. 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, MA 02116.


                                       68
<PAGE>

(10) This includes 29,659 shares of Pegasus Communications' Class A common stock
     issuable upon the exercise of outstanding stock options that are vested or
     become vested within 60 days.
(11) Based on information provided pursuant to an amendment to Schedule 13G
     filed with the Securities and Exchange Commission on February 12, 2004.
     This includes the following number of shares of Pegasus Communications'
     Class A common stock held by the designated entity: Alta Communications VI,
     L.P. (187,803); Alta Subordinated Debt Partners III, L.P. (112,909); and
     Alta-Comm S By S LLC (4,277). The address for such entities is 200
     Clarendon Street, Floor 51, Boston, MA 02116.
(12) Based on information provided pursuant to a Schedule 13G filed jointly by
     Avenue Special Situations Fund II, LP ("Avenue"), Avenue Capital Partners
     II, LLC ("Avenue Capital"), GL Partners II, LLC ("GL"), Avenue Capital
     Management II, LLC ("Management"), and Marc Lasry with the Securities and
     Exchange Commission on August 11, 2003. According to the Schedule 13G,
     Avenue Capital and GL are, respectively, the general partner and managing
     member of Avenue. Management is the investment advisor to Avenue. Marc
     Lasry is the managing member of both GL and Management. The Schedule 13G
     indicates that, by virtue of the foregoing, each of Avenue, Avenue Capital,
     GL, Management, and Marc Lasry may be deemed to share voting power and
     power to direct the disposition of 350,000 shares of Pegasus
     Communications' Class A common stock, representing shares that may, in
     certain circumstances, be issuable upon the exchange, on a one-for-one
     basis, of 350,000 shares of Pegasus Communications' non-voting common
     stock, which are in turn exercisable upon the exercise of 350,000
     outstanding warrants. The address of each of the foregoing persons or
     entities is 535 Madison Avenue, 15th Floor, New York, NY 10022.
(13) Based on information provided pursuant to a Schedule 13G filed jointly by
     DBS Investors, LLC ("DBS"), Pegasus Partners II, L.P. ("Pegasus Partners"),
     Pegasus Investors II, LP ("Pegasus Investors"), Pegasus Investors II GP,
     LLC ("Pegasus GP") and Pegasus Capital LLC on August 11, 2003. According to
     the Schedule 13G, Pegasus Partners is the sole member of DBS. Pegasus
     Investors is the general partner of Pegasus Partners. Pegasus GP is the
     general partner of Pegasus Investors LP. Pegasus GP is wholly owned by
     Pegasus Capital LLC, which is controlled by Craig Cogut. The Schedule 13G
     indicates that, by virtue of the foregoing, each of DBS, Pegasus Partners,
     Pegasus Investors, Pegasus GP, and Pegasus Capital LLC may be deemed to
     share voting power and power to direct the disposition of 550,000 shares of
     Pegasus Communications' Class A common stock, representing shares that may,
     in certain circumstances, be issuable upon the exchange, on a one-for-one
     basis, of 550,000 shares of Pegasus Communications' non-voting common
     stock, which are in turn exercisable upon the exercise of 550,000
     outstanding warrants. The address for each of the foregoing persons or
     entities is c/o Pegasus Partners II, L.P., 99 River Road, Cos Cob, CT
     06807-2514. These entities are not otherwise related to Pegasus
     Communications.
(14) Based on information provided pursuant to an amendment to Schedule 13G
     filed with the Securities and Exchange Commission on February 17, 2004. The
     entity has sole power to dispose or direct the disposition of 549,254
     shares. The address of this entity is 82 Devonshire Street, Boston, MA
     02109.
(15) 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 10, 2004. John Hancock Advisers, LLC has direct
     beneficial ownership of, the sole power to vote or to direct the vote, and
     sole power to dispose or direct the disposition of, all 387,732 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 387,732 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.
(16) Based on information provided pursuant to an amendment to Schedule 13G
     filed jointly by Par Investment Partners, L.P., Par Group, L.P. and Par
     Capital Management, Inc. with the Securities and Exchange Commission on
     June 9, 2003. The address of Par Investment Partners, L.P., Par Group, L.P.
     and Par Capital Management, Inc. is One Financial Center, Suite 1600,
     Boston, MA 02111.

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<PAGE>

(17) Based on information provided pursuant to a Schedule 13G filed jointly by
     Labrador Partners L.P. ("Labrador"), Farley Associates L.P. ("Farley
     Associates"), Farley Capital L.P. ("Farley Capital"), and Stephen L. Farley
     with the Securities and Exchange Commission on January 21, 2004. According
     to the Schedule 13G, Farley Associates serves as the general partner of
     Labrador, and Stephen L. Farley serves as the managing general partner of
     Labrador and the general partner of both Farley Associates and Farley
     Capital. Farley Capital serves as the investment manager of certain managed
     accounts, with respect to 8,000 shares of Pegasus Communications' Class A
     common stock directly owned by such accounts. The Schedule 13G indicates
     that, by virtue of the foregoing, each of Labrador, Farley Associates and
     Stephen L. Farley may be deemed to share voting power and the power to
     direct the disposition of 279,000 shares of Pegasus Communications' Class A
     common stock, while both Farley Capital and Mr. Farley may be deemed to
     share voting power and the power to direct the disposition of 8,000 shares
     of Pegasus Communications' Class A common stock. The address of Mr. Farley
     and each of the foregoing entities is 780 Third Avenue, Suite 3801, New
     York, NY 10017.
(18) Based on information provided pursuant to a Schedule 13G filed jointly by
     Perry Corp. and Richard C. Perry with the Securities and Exchange
     Commission on February 17, 2004. According to the Schedule 13G, Perry Corp.
     serves as the general partner and/or investment advisor for funds holding
     Pegasus Communications' Class A common stock. Mr. Perry serves as the
     President and sole stockholder of Perry Corp. The Schedule 13G indicates
     that, by virtue of the foregoing, both Perry Corp. and Mr. Perry have the
     sole power to vote and to dispose of 415,418 shares of Pegasus
     Communications' Class A common stock. Mr. Perry disclaims any beneficial
     ownership interest in the shares held by any funds for which Perry Corp.
     acts as the general partner and/or investment adviser, except for that
     portion of such shares that relates to his economic interest in such
     shares. The address of Perry Corp. and Mr. Perry is 599 Lexington Avenue,
     New York, NY 10022.
(19) Based on information provided pursuant to an amendment to Schedule 13D
     filed by Peninsula Capital Advisors, LLC ("Peninsula Capital") and
     Peninsula Investment Partners, L.P. ("Peninsula Partners") with the
     Securities and Exchange Commission on February 27, 2004. According to the
     amendment to Schedule 13D, Peninsula Capital is the investment manager of
     Peninsula Partners and also serves as investment advisor to a number of
     separate managed accounts and trusts. The Schedule 13G indicates that, by
     virtue of the foregoing, both Peninsula Capital and Peninsula Partners may
     be deemed to share voting power and the power to direct the disposition of
     2,017,000 shares of Pegasus Communications' Class A common stock. In
     addition, Peninsula Capital has the sole power to dispose, or to direct the
     disposition of, 82,750 shares of Pegasus Communications' Class A common
     stock and the sole power to vote, or to direct the vote of, 74,750 of these
     shares. Both Peninsula Capital and Peninsula Partners disclaim beneficial
     ownership in the shares reported, except to the extent of their pecuniary
     interest therein. The address of each of the foregoing entities is 404B
     East Main Street, Charlottesville, VA 22902. These entities have increased
     their ownership interests in Pegasus Communications since March 1, 2004.
     For more current information, see ITEM 1. Business - Risk Factors -
     Peninsula has accumulated a significant portion of Pegasus Communications'
     Class A common stock and will have a significant influence on any matter
     that requires approval of the holders of Pegasus Communications' Class A
     common stock voting as a separate class.
(20) This includes 429,826 shares of Pegasus Communications' Class A common
     stock which are issuable upon the exercise of outstanding stock options
     that are vested or become vested within 60 days.

Equity Compensation Plan Information

         No compensation plans currently exist under which our equity securities
are authorized for issuance, and therefore, the tabular disclosure required
under Item 201(d) of Regulation S-K has been omitted.


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<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Relationship with W.W. Keen Butcher and Affiliated Entities

         We entered into an arrangement in 1998 with W.W. Keen Butcher, the
stepfather of Marshall W. Pagon, and certain entities controlled by Mr. Butcher
and the owner of a minority interest in one of the entities. Under this
agreement, as later amended and modified, we agreed to provide and maintain
collateral for the principal amount of bank loans to Mr. Butcher, his affiliated
entities, and the minority owner. Mr. Butcher and the minority owner are
required to lend or contribute the proceeds of those bank loans to one or more
of the entities owned by Mr. Butcher (the "KB Prime Media Companies") for the
acquisition of television broadcast stations to be programmed by us pursuant to
local marketing agreements or for which we have the right to sell all of the
advertising time pursuant to sales agreements. Under the 1998 agreement, as
amended, the KB Prime Media Companies granted us an option to purchase all of
its broadcast station licenses, permits, and/or assets, in whole or in part, if
and when permitted by applicable FCC rules and regulations. The option price is
based upon the cost attributed to an asset, plus compound interest at 12% per
year. The arrangement with Mr. Butcher permits us to realize the benefit or cost
savings for programming and collecting revenues from two or more stations in a
television market where the FCC's ownership rules would otherwise prohibit
outright ownership. Pursuant to these arrangements, at December 31, 2003, we had
$6.6 million of cash being used to collateralize the bank loans. The KB Prime
Media Companies are required to repay the bank loans with proceeds received from
the disposition of assets.

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

         We currently provide programming and sales activities for the KB Prime
Media Companies' three existing broadcast television stations: (i) WSWB, serving
the Wilkes-Barre/Scranton, Pennsylvania designated market area; (ii) WPME,
serving the Portland, Maine designated market area; and (iii) WTLF-DT, serving
the Tallahassee, Florida designated market area. For each station, we retain all
revenues generated from advertising in exchange for monthly payments to the KB
Prime Media Companies in the amounts of $4 thousand for WSWB, $5 thousand for
WPME, and $2 thousand for WTLF. In addition to the monthly fees, we are
responsible for the reimbursement of certain expenses, such as utilities,
salaries, and legal and accounting fees.

         Aside from its existing broadcast television stations, the KB Prime
Media Companies also have pending applications before the FCC for construction
permits for stations in Gainesville, Florida and Tupelo, Mississippi and a
preliminary grant of a construction permit for a station licensed to Hammond,
Louisiana and to be located in the New Orleans DMA.

         In April 2003, we waived our rights under the 1998 agreement to acquire
a broadcast television construction permit held by one of the KB Prime Media
Companies and consented to the sale of the permit to an unaffiliated party. We
received $1.5 million from the unaffiliated party as consideration for our
consent. As a result of the sale of the construction permit and application by
the KB Prime Media Companies of the net proceeds to repayment of bank loans,
approximately $2.6 million of our cash collateralizing the bank loans was
released.

         Pegasus Communications' board of directors has authorized us to acquire
any of the stations, licenses, permits, or other assets of the KB Prime Media
Companies for cash when it is permissible to do so under the FCC's rules and
regulations.


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<PAGE>

         In February 2004, we exercised an option to acquire WPME serving
Portland, Maine for approximately $3.8 million. It is anticipated that the sale
of the station to us will result in approximately $4.0 million to be released
from the cash collateralizing the bank loans of the KB Prime Media Companies.

         In February 2004, the FCC preliminarily granted a new, digital only,
full power construction permit to one of the KB Prime Media Companies for a
station licensed to Hammond, Louisiana and to be located in the New Orleans DMA.
We expect this approval to become final in April 2004, at which time we intend
to exercise our option to acquire the construction permit. The option price for
the construction permit is estimated to be $1.5 million and will further reduce,
to the extent outstanding, the cash collateralizing the bank loans of the KB
Prime Media Companies.

         In March 2004, we exercised an option to acquire the KB Prime Media
Companies' station in Scranton, Pennsylvania (WSWB) for approximately $2.0
million. To the extent that bank loans of the KB Prime Media Companies are
outstanding, the consideration paid by us will be used to further reduce the
cash collateralizing the bank loans of the KB Prime Media Companies.

         We believe that all of its transactions with the KB Prime Media
Companies were at fair value and that any future transactions that may be
entered into with the KB Prime Media Companies or similar entities will also be
at fair value.

Other Transactions

         In 1999, Pegasus Satellite loaned approximately $200 thousand to
Nicholas A. Pagon, then our 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 our Class A common
stock, 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 as of March
23, 2001. The loan remains outstanding, with a balance of approximately $269
thousand at December 31, 2003, consisting of principal and cumulative interest
to that date. The maturity date of this promissory note has been extended for
one year under the same terms.

         Pegasus Communications Management Company ("PCMC"), one of our
subsidiaries at December 31, 2003, has from time to time provided accounting and
administrative services to companies affiliated with Marshall W. Pagon and has
paid certain expenses on behalf of the affiliated companies. These payments have
been reflected on our books and financial statements as receivables from the
affiliated companies. These receivables primarily comprise legal, accounting,
and corporate organizational fees charged by third parties and paid by PCMC.
During 2003, the largest amount of receivables outstanding at any time occurred
in February of approximately $656 thousand. As of December 31, 2003, the
aggregate amount of receivables outstanding was approximately $497 thousand. No
interest was charged with respect to amounts outstanding from time to time.


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<PAGE>
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

         The aggregate fees for professional services rendered to us by the firm
of PricewaterhouseCoopers LLP, our independent public auditor, for the fiscal
years ended December 31, 2002 and 2003, are as follows (in whole dollars):

                                       Fiscal Year Ended
                            December 31, 2003     December 31, 2002
                            -----------------     -----------------
Audit fees                       $757,850               $963,455
Audit related fees                172,550                 25,300
Tax fees                                -                      -
All other fees                      4,200                      -
                                 --------               --------
   Total                         $934,600               $988,755
                                 ========               ========

Audit Fees

         The "audit fees" reported above were billed to us by
PricewaterhouseCoopers LLP for professional services rendered in connection with
its audit of the consolidated financial statements and its limited reviews of
the unaudited consolidated interim financial statements included in the
quarterly reports of Pegasus Communications and its subsidiaries, including
Pegasus Satellite, and for services normally provided by PricewaterhouseCoopers
LLP in connection with other statutory and regulatory filings or engagements,
including audit consultations and SEC comment letters associated with Pegasus
Communications and its subsidiaries, including Pegasus Satellite.

Audit Related Fees

         The "audit related fees" reported above were billed to us by
PricewaterhouseCoopers LLP for assurance and related services that were
reasonably related to the performance of its audit or review of the financial
statements of Pegasus Communications and its subsidiaries, including Pegasus
Satellite, but which are not reported as Audit Fees. These services include
accounting consultations in connection with the impact of prospective accounting
pronouncements and stock based compensation matters.

Tax Fees

         During the fiscal years reported above, PricewaterhouseCoopers LLP
rendered no professional services to Pegasus Communications and its
subsidiaries, including Pegasus Satellite, relating to tax compliance, tax
advice, or tax planning.

All Other Fees

         The "all other fees" reported above that were billed to us by
PricewaterhouseCoopers LLP related to license fees for PricewaterhouseCoopers
LLP's computer based research tool.

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<PAGE>

Audit Committee Pre-Approval Policies and Procedures

         Because we do not have listed securities, as defined under Rule 10A-3
of the Securities Exchange Act of 1934, we are not required to have, and do not
have, an audit committee of our board of directors. The audit committee of
Pegasus Communications has adopted a policy requiring the pre-approval of all
audit and permissible nonaudit services provided by our independent public
auditors. Under the policy, the audit committee is to specifically pre-approve
before the end of each fiscal year any recurring audit and audit related
services to be provided to Pegasus Communications and its subsidiaries,
including Pegasus Satellite, during the following fiscal year. The audit
committee also may generally pre-approve, up to a specified maximum amount, any
nonrecurring audit and audit related services for the following fiscal year. All
pre-approved matters must be detailed as to the particular service or category
of services to be provided, whether recurring or non-recurring, and reported to
the audit committee at its next scheduled meeting. Permissible nonaudit services
are to be pre-approved on a case-by-case basis. The audit committee may delegate
its pre-approval authority to any of its members, provided that such member
reports all pre-approval decisions to the audit committee at its next scheduled
meeting. Our independent public auditors and members of management are required
to periodically report to the audit committee the extent of all services
provided in accordance with the pre-approval policy, including the amount of
fees attributable to such services.

         All services provided by our independent public auditors after May 5,
2003 were pre-approved by Pegasus Communications' audit committee; none of the
audit-related fees, tax fees, and all other fees listed above were approved by
the audit committee pursuant to the exemption from pre-approval provided by Rule
2-01(c)(7)(i)(C) of Regulation S-X.


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<PAGE>
                                     PART IV

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

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

             (1) Financial Statements

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

             (2) Financial Statement Schedules
                                                                         Page
                                                                         ----

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

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

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<PAGE>

4.3        Indenture, dated as of November 30, 1998, by and between Pegasus
           Satellite Communications, Inc. (then named Pegasus Communications
           Corporation) and First Union National Bank, as trustee, relating to
           the 9-3/4% Senior Notes due 2006 (which is incorporated herein by
           reference to Exhibit 4.6 to the Registration Statement on Form S-3 of
           Pegasus Satellite Communications, Inc. (formerly named Pegasus
           Communications Corporation) (File No. 333-70949)).
4.4        Form of 9-3/4/% Senior Notes due 2006 (included in Exhibit 4.3
           above).
4.5        Indenture, dated as of November 19, 1999, by and between Pegasus
           Satellite Communications, Inc. (then named Pegasus Communications
           Corporation) and First Union National Bank, as Trustee, relating to
           the 12-1/2% Senior Notes due 2007 (which is incorporated herein by
           reference to Exhibit 4.1 to the Registration Statement on Form S-4 of
           Pegasus Satellite Communications, Inc. (formerly named Pegasus
           Communications Corporation) (File No. 333-94231)).
4.6        Form of 12-1/2/% Senior Notes due 2007 (included in Exhibit 4.5
           above).
4.7        Indenture, dated as of May 31, 2001, by and between Pegasus Satellite
           Communications, Inc. and First Union National Bank, as trustee,
           relating to the 12-3/8% Senior Notes due 2006 of Pegasus Satellite
           Communications, Inc. (which is incorporated herein by reference to
           Exhibit 4.6 to the Annual Report on Form 10-K of Pegasus
           Communications Corporation filed with the SEC on April 3, 2002).
4.8        Form of 12-3/8% Senior Notes due 2006 of Pegasus Satellite
           Communications, Inc. (included in Exhibit 4.7 above).
4.9        Indenture, dated as of May 31, 2001, by and between Pegasus Satellite
           Communications, Inc. and First Union National Bank, as trustee,
           relating to the 13-1/2% Senior Subordinated Discount Notes due 2007
           of Pegasus Satellite Communications, Inc. (which is incorporated
           herein by reference to Exhibit 4.8 to the Annual Report on Form 10-K
           of Pegasus Communications Corporation filed with the SEC on April 3,
           2002).
4.10       Form of 13-1/2% Senior Subordinated Discount Notes due 2007 of
           Pegasus Satellite Communications, Inc. (included in Exhibit 4.9
           above).
4.11       Indenture, dated as of December 19, 2001, by and between Pegasus
           Satellite Communications, Inc. and J.P. Morgan Trust Company,
           National Association, as trustee, relating to the 11-1/4% Senior
           Notes due 2010 of Pegasus Satellite Communications, Inc. (which is
           incorporated herein by reference to Exhibit 4.10 to the Annual Report
           on Form 10-K of Pegasus Communications Corporation filed with the SEC
           on April 3, 2002).
4.12       Form of 11-1/4% Senior Notes due 2010 of Pegasus Satellite
           Communications, Inc. (included in Exhibit 4.11 above).
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)).

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<PAGE>

10.4       Fourth Amendment and Restatement of Credit Agreement dated as of
           October 22, 2003 by and among Pegasus Media & Communications, Inc.,
           the several lenders from time to time parties thereto, Banc of
           America Securities LLC, as sole lead arranger, Deutsche Bank Trust
           Company as resigning agent, and Bank of America, N.A., as
           administrative agent for the lenders (which is incorporated herein by
           reference to Exhibit 10.1 to Form 10-Q of Pegasus Communications
           Corporation filed with the Securities and Exchange Commission
           November 14, 2003).
10.5       First Amendment to Fourth Amendment and Restatement of Credit
           Agreement by and among Pegasus Media & Communications, Inc., the
           lenders party thereto, and Bank of America, N.A. dated February 5,
           2004 (which is incorporated herein by reference to Exhibit 99.1 to
           Form 8-K of Pegasus Satellite Communications, Inc. filed with the
           Securities and Exchange Commission February 17, 2004).
10.6       Credit Agreement among Pegasus Media & Communications, Inc., the
           lenders party thereto, Madeleine L.L.C., and Banc of America
           Securities LLC dated December 19, 2003 (which is incorporated herein
           by reference to Exhibit 99.2 to Form 8-K of Pegasus Satellite
           Communications, Inc. filed with the Securities and Exchange
           Commission February 17, 2004).
10.7       Amended and Restated Term Loan Agreement dated as of August 1, 2003,
           among Pegasus Satellite Communications, Inc., the several lenders
           from time to time parties thereto and DBS Investors Agent, Inc., as
           Administrative Agent for such lenders (which is incorporated herein
           by reference to Exhibit 10.1 to Form 8-K of Pegasus Satellite
           Communications, Inc. filed with the Securities and Exchange
           Commission August 5, 2003).
10.8+      Pegasus Communications 1996 Stock Option Plan, as amended and
           restated effective as of February 13, 2002, and as amended through
           Amendment No. 5 (which is incorporated herein by reference to Exhibit
           10.8 to the Annual Report on Form 10-K of Pegasus Communications
           Corporation filed with the SEC on March 15, 2004).
10.9+      Pegasus Communications Restricted Stock Plan, as amended and restated
           effective as of February 13, 2002, and as amended through Amendment
           No. 4 (which is incorporated herein by reference to Exhibit 10.9 to
           the Annual Report on Form 10-K of Pegasus Communications Corporation
           filed with the SEC on March 15, 2004).
10.10+     Pegasus Communications Corporation Executive Incentive Plan (which is
           incorporated herein by reference to Exhibit 10.1 to the Form 10-Q of
           Pegasus Communications Corporation dated May 17, 2001).
10.11      Executive Employment Agreement effective as of June 1, 2002 for Ted
           S. Lodge (which is incorporated herein by reference to Exhibit 10.1
           to Form 10-Q of Pegasus Communications Corporation filed with the
           Securities and Exchange Commission on August 14, 2002).
10.12+     Pegasus Communications Corporation Short Term Incentive Plan
           (Corporate, Satellite and Business Development) for calendar year
           2002 (which is incorporated herein by reference to Exhibit 10.2 to
           the Form 10-Q of Pegasus Communications Corporation filed with the
           Securities and Exchange Commission on August 14, 2002).
10.13+     Supplemental Description of Pegasus Communications Corporation Short
           Term Incentive Plan (Corporate, Satellite and Business Development)
           for calendar year 2002 (which is incorporated herein by reference to
           Exhibit 10.3 to the Form 10-Q of Pegasus Communications Corporation
           filed with the Securities and Exchange Commission on August 14,
           2002).
10.14+     Description of Long Term Incentive Compensation Program Applicable to
           Executive Officers for calendar year 2002 (which is incorporated
           herein by reference to Exhibit 10.4 to the Form 10-Q of Pegasus
           Communications Corporation filed with the Securities and Exchange
           Commission on August 14, 2002).
10.15+     Pegasus Communications Corporation Short Term Incentive Plan
           (Corporate, Satellite and Business Development) for calendar year
           2003 (which is incorporated herein by reference to Exhibit 10.15 to
           the Annual Report on Form 10-K of Pegasus Communications Corporation
           filed with the SEC on March 15, 2004).

                                       77
<PAGE>

10.16+     Supplemental Description of Pegasus Communications Corporation Short
           Term Incentive Plan (Corporate, Satellite and Business Development)
           for calendar year 2003 (which is incorporated herein by reference to
           Exhibit 10.16 to the Annual Report on Form 10-K of Pegasus
           Communications Corporation filed with the SEC on March 15, 2004).
10.17+     Description of Long-Term Incentive Compensation Program Applicable to
           Executive Officers for calendar year 2003 (which is incorporated
           herein by reference to Exhibit 10.17 to the Annual Report on Form
           10-K of Pegasus Communications Corporation filed with the SEC on
           March 15, 2004).
21.1*      Subsidiaries of Pegasus Satellite Communications, Inc.
24.1*      Power of Attorney (included on Signatures page).
31.1*      Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of
           2002.
31.2*      Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of
           2002.
32.1       Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of
           2002 (furnished herewith).
32.2       Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of
           2002 (furnished herewith).

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

         (b) Reports on Form 8-K.

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


                                       78
<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/ Marshall W. Pagon
                              ---------------------
                              Marshall W. Pagon
                              Chairman of the Board and Chief Executive Officer

Date: March 23, 2004

                                POWER OF ATTORNEY

         The undersigned directors and officers of Pegasus Satellite
Communications, Inc. hereby appoint Marshall W. Pagon, Ted S. Lodge, Joseph W.
Pooler, Jr., 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.

         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 Executive                  March 23, 2004
    -------------------------         Officer (Principal Executive Officer)
    Marshall W. Pagon

By: /s/ Joseph W. Pooler, Jr.         Chief Financial Officer                                    March 23, 2004
    -------------------------         (Principal Financial and Accounting Officer)
    Joseph W. Pooler, Jr.

By: /s/ Ted S. Lodge                  Director                                                   March 23, 2004
    -------------------------
    Ted S. Lodge

By: /s/ Robert F. Benbow              Director                                                   March 23, 2004
    -------------------------
    Robert F. Benbow

By: /s/ Robert N. Verdecchio          Director                                                   March 23, 2004
    -------------------------
    Robert N. Verdecchio
</TABLE>




<PAGE>
                     PEGASUS SATELLITE COMMUNICATIONS, INC.
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
                        AND FINANCIAL STATEMENT SCHEDULE
<TABLE>
<CAPTION>
                                                                                                                        Page
                                                                                                                        ----
<S>                                                                                                                    <C>
Financial Statements:

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

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

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

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

Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002, and 2001............................  F-6

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

Financial Statement Schedule:

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

                                      F-1
<PAGE>
                         Report of Independent Auditors


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

In our opinion, the consolidated financial statements listed in the index
appearing under Item 15(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, 2003 and 2002, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 2003, in conformity with accounting principles
generally accepted in the United States of America. In addition, in our opinion,
the financial statement schedule listed in the index appearing under Item
15(a)(2) on page F-1 presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements. These financial statements and financial statement
schedule are the responsibility of the Company's management; our responsibility
is to express an opinion on these financial statements and the 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.

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

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


/s/ PricewaterhouseCoopers LLP

Philadelphia, PA
February 20, 2004


                                      F-2

<PAGE>
                     Pegasus Satellite Communications, Inc.
                           Consolidated Balance Sheets
                      (In thousands, except share amounts)
<TABLE>
<CAPTION>
                                                                                     December 31,          December 31,
                                                                                        2003                  2002
                                                                                     -----------           -----------
<S>                                                                                 <C>                   <C>
Current assets:
   Cash and cash equivalents                                                         $    26,990           $    13,023
   Restricted cash                                                                        62,359                   293
   Accounts receivable:
     Trade, less allowance for doubtful accounts of $3,993 and $7,221,
       respectively                                                                       24,891                27,163
     Other                                                                                 7,487                 9,557
   Deferred subscriber acquisition costs, net                                              9,945                15,706
   Prepaid expenses                                                                        6,885                 8,087
   Other current assets                                                                    6,549                 7,288
                                                                                     -----------           -----------
     Total current assets                                                                145,106                81,117
Property and equipment, net                                                               68,417                69,951
Intangible assets, net                                                                 1,449,016             1,564,874
Other noncurrent assets                                                                  151,343               143,208
                                                                                     -----------           -----------
   Total                                                                             $ 1,813,882           $ 1,859,150
                                                                                     ===========           ===========

Current liabilities:
   Current portion of long term debt                                                 $     3,025           $     5,631
   Accounts payable                                                                       11,948                15,886
   Accrued interest                                                                       34,632                38,383
   Accrued programming fees                                                               54,303                57,196
   Accrued commissions and subsidies                                                      39,114                40,191
   Other accrued expenses                                                                 21,096                31,778
   Other current liabilities                                                               7,156                 7,201
                                                                                     -----------           -----------
     Total current liabilities                                                           171,274               196,266
Long term debt                                                                         1,376,854             1,274,981
Mandatorily redeemable preferred stock                                                   177,668                     -
Note payable to parent                                                                    45,724                55,250
Other noncurrent liabilities                                                              96,599                46,596
                                                                                     -----------           -----------
   Total liabilities                                                                   1,868,119             1,573,093
                                                                                     -----------           -----------
Commitments and contingencies  (see Note 14)
Redeemable preferred stock                                                                     -               199,022
Minority interest                                                                            452                 2,157
Common stockholder's equity:
   Class B common stock, $0.01 par value; 100 shares authorized, issued, and
       outstanding                                                                             -                     -
   Additional paid in capital                                                            909,518               912,430
   Accumulated deficit                                                                  (964,207)             (827,552)
                                                                                     -----------           -----------
     Total common stockholder's (deficit) equity                                         (54,689)               84,878
                                                                                     -----------           -----------

   Total                                                                             $ 1,813,882           $ 1,859,150
                                                                                     ===========           ===========
</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,
                                                                      2003            2002           2001
                                                                    ---------       ---------      ---------
<S>                                                                <C>             <C>            <C>
Net revenues:
   Direct broadcast satellite                                       $ 831,211       $ 864,855      $ 838,208
   Broadcast television and other operations                           30,716          31,505         27,647
                                                                    ---------       ---------      ---------
     Total net revenues                                               861,927         896,360        865,855
Operating expenses:
   Direct broadcast satellite
     Programming                                                      378,552         387,849        359,879
     Other subscriber related expenses                                172,873         197,841        205,120
                                                                    ---------       ---------      ---------
       Direct operating expenses (excluding depreciation and
         amortization shown below)                                    551,425         585,690        564,999
     Promotions and incentives                                         14,157          13,562         40,393
     Advertising and selling                                           23,481          30,907        104,677
     General and administrative                                        23,837          27,257         36,132
     Depreciation and amortization                                    162,398         168,589        257,543
                                                                    ---------       ---------      ---------
       Total direct broadcast satellite                               775,298         826,005      1,003,744
   Broadcast television and other operations (including
     depreciation and amortization of $2,438, $3,256, and $4,795,
     respectively)                                                     29,819          30,811         32,576
   Corporate and development expenses (including depreciation
     and amortization of $1,384, $1,502, and $1,433, respectively)     14,993          15,670         16,668
   Other operating expenses                                            23,943          26,406         30,191
                                                                    ---------       ---------      ---------
     Income (loss) from operations                                     17,874          (2,532)      (217,324)

Interest expense                                                     (167,821)       (147,980)      (136,191)
Interest income                                                           484             566          4,907
Loss on impairment of marketable securities                                 -          (3,310)       (34,205)
Other nonoperating income (expense), net                                3,027          19,496         (8,330)
                                                                    ---------       ---------      ---------
      Loss before income taxes and continued operations              (146,436)       (133,760)      (391,143)
Net (expense) benefit for income taxes                                   (174)         29,623        116,807
                                                                    ---------       ---------      ---------
     Loss before discontinued operations                             (146,610)       (104,137)      (274,336)

Discontinued operations:
  Income (loss) from discontinued operations (including gain
     on disposal of $10,346 in 2003 and $1,395 in 2002), net of
     income tax benefit of $6,667 in 2001                               9,955          (5,292)       (10,877)
                                                                    ---------       ---------      ---------

     Net loss                                                        (136,655)       (109,429)      (285,213)
Other comprehensive (loss) income:
  Unrealized loss on marketable securities, net of income tax
    benefit of $5,042 in 2001                                               -          (4,931)        (8,226)
  Reclassification adjustment for accumulated unrealized loss on
    marketable securities included in net loss, inclusive of
    accumulated income tax expense of $616 in 2002 and net of
    benefit of $12,998 in 2001                                              -           3,926         21,207
                                                                    ---------       ---------      ---------
     Net other comprehensive (loss) income                                  -          (1,005)        12,981
                                                                    ---------       ---------      ---------
     Comprehensive loss                                             $(136,655)      $(110,434)     $(272,232)
                                                                    =========       =========      =========
</TABLE>

           See accompanying notes to consolidated financial statements

                                      F-4
<PAGE>
                     Pegasus Satellite Communications, Inc.
             Consolidated Statements of Common Stockholder's Equity
                                 (In thousands)
<TABLE>
<CAPTION>
                                          Class A Common Stock  Class B Common Stock                                    Accumulated
                                          ------------------------------------------   Additional                          Other
                                           Number       Par      Number       Par       Paid In       Accumulated      Comprehensive
                                          of Shares    Value    of Shares    Value      Capital         Deficit        Income (Loss)
                                          ------------------------------------------------------------------------------------------
<S>                                      <C>         <C>       <C>         <C>        <C>            <C>              <C>
January 1, 2001                            45,957     $ 459      9,164      $   92     $ 979,461      $ (432,910)      $ (11,976)
Net loss                                                                                                (285,213)
Common stock issued                           298         3                                6,771
Dividends accrued on
  preferred stocks                                                                       (26,492)
Accretion on preferred stock                                                                 (95)
Recapitalization upon
  reorganization                          (46,255)     (462)    (9,164)        (92)      328,715
Distribution of Pegasus
  Development Corporation
  to parent in reorganization                                                           (114,800)
Contribution of Pegasus
  Broadband
  Communications by
  parent in reorganization                                                                (2,930)
Distribution of guard band
  licenses to parent                                                                     (95,427)
Contribution of parent's
  stock in acquiring
  subscribers                                                                              1,431
Unrealized loss on
  marketable equity
  securities, net of income
  tax benefit of $5,042                                                                                                   (8,226)
Reclassification adjustment
  for realized loss on
  marketable equity
  securities, net of income
  tax of $12,998                                                                                                          21,207
                                          ------------------------------------------------------------------------------------------
December 31, 2001                               -         -          -           -     1,076,634        (718,123)          1,005
Net loss                                                                                                (109,429)
Dividends accrued on
  preferred stock                                                                        (23,457)
Accretion on preferred stock                                                                 (95)
Distributions to parent                                                                 (149,172)
Reclass of prior contribution
  from parent to note
  payable to parent                                                                       (1,431)
Cancellation of company's
  preferred stock owned by
  parent along with related
  dividends and interest on
  dividends                                                                                9,951
Unrealized loss on
  marketable equity
  securities                                                                                                              (4,931)
Reclassification
  adjustment for realized
  loss on marketable
  equity securities,
  inclusive of income tax
  expense of $616                                                                                                          3,926
                                          ------------------------------------------------------------------------------------------
December 31, 2002                               -         -          -           -       912,430        (827,552)              -
Net loss                                                                                                (136,655)
Dividends accrued on
  preferred stock                                                                        (11,729)
Accretion on
preferred stock                                                                           (1,052)
Contributions from parent                                                                  9,869
                                          ------------------------------------------------------------------------------------------
December 31, 2003                               -     $   -          -      $    -     $ 909,518      $ (964,207)      $       -
                                          ==========================================================================================
</TABLE>

<PAGE>
<TABLE>
<CAPTION>
                                              Treasury Stock
                                          ----------------------           Total Common
                                           Number                          Stockholders's
                                          of Shares         Cost          Equity (Deficit)
                                          ------------------------------------------------
<S>                                       <C>            <C>               <C>
January 1, 2001                                15         $ (695)           $  534,431
Net loss                                                                      (285,213)
Common stock issued                                                              6,774
Dividends accrued on
  preferred stocks                                                             (26,492)
Accretion on preferred stock                                                       (95)
Recapitalization upon
  reorganization                              (15)           695               328,856
Distribution of Pegasus
  Development Corporation
  to parent in reorganization                                                 (114,800)
Contribution of Pegasus
  Broadband
  Communications by
  parent in reorganization                                                      (2,930)
Distribution of guard band
  licenses to parent                                                           (95,427)
Contribution of parent's
  stock in acquiring
  subscribers                                                                    1,431
Unrealized loss on
  marketable equity
  securities, net of income
  tax benefit of $5,042                                                         (8,226)
Reclassification adjustment
  for realized loss on
  marketable equity
  securities, net of income
  tax of $12,998                                                                21,207
                                          --------------------------------------------
December 31, 2001                               -              -               359,516
Net loss                                                                      (109,429)
Dividends accrued on
  preferred stock                                                              (23,457)
Accretion on preferred stock                                                       (95)
Distributions to parent                                                       (149,172)
Reclass of prior contribution
  from parent to note
  payable to parent                                                             (1,431)
Cancellation of company's
  preferred stock owned by
  parent along with related
  dividends and interest on
  dividends                                                                      9,951
Unrealized loss on
  marketable equity
  securities                                                                    (4,931)
Reclassification
  adjustment for realized
  loss on marketable
  equity securities,
  inclusive of income tax
  expense of $616                                                                3,926
                                          --------------------------------------------
December 31, 2002                               -              -                84,878
Net loss                                                                      (136,655)
Dividends accrued on
  preferred stock                                                              (11,729)
Accretion on
preferred stock                                                                 (1,052)
Contributions from parent                                                        9,869
                                          --------------------------------------------
December 31, 2003                               -         $    -            $  (54,689)
                                          ============================================
</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,
                                                                 2003              2002             2001
                                                             ------------      -----------      ------------
<S>                                                         <C>               <C>              <C>
Cash flows from operating activities:
   Net loss                                                  $   (136,655)     $   (109,429)    $   (285,213)
   Adjustments to reconcile net loss to net cash provided
     by (used for) operating activities:
     Loss (gain) on extinguishments of debt                           510           (16,688)           2,912
     (Gain) loss on derivative instruments                         (1,210)           (2,962)           4,160
     Depreciation and amortization                                168,585           179,017          270,441
     Amortization of debt discount, premium, and deferred
       financing fees                                              26,689            26,408           24,393
     Noncash incentive compensation                                 4,429             1,719            2,096
     Gain on sale of broadcast television stations                (10,347)                -                -
     Bad debt expense                                               9,105            23,809           36,511
     Deferred income taxes                                              -           (29,830)        (122,721)
     Impairment losses recognized                                     829             5,788           34,205
     Payments for broadcast television programming rights          (2,733)           (5,075)          (4,629)
     Patronage capital programming expense offset                 (14,475)          (22,686)         (25,063)
     Other                                                          2,065             5,825            5,988
     Change in current assets and liabilities:
       Accounts receivable                                          1,918               675          (48,732)
       Inventory                                                       34             8,115            7,301
       Deferred subscriber acquisition costs                      (21,046)          (31,086)         (19,421)
       Prepaid expenses                                               845             4,759               92
       Taxes payable                                                    -                 -          (29,620)
       Accounts payable and accrued expenses                      (18,294)           (4,601)           7,424
       Accrued interest                                            19,639            11,335           (1,285)
       Other current assets and liabilities, net                      331               382             (713)
                                                             ------------      ------------     ------------
   Net cash provided by (used for) operating activities            30,219            45,475         (141,874)
                                                             ------------      ------------     ------------
Cash flows from investing activities:
   Direct broadcast satellite equipment capitalized               (21,549)          (26,431)         (20,830)
   Other capital expenditures                                      (2,257)           (3,343)         (21,916)
   Purchases of intangible assets                                    (144)                -          (11,928)
   Proceeds from sales of broadcast television stations            21,593                 -                -
   Purchases of parent's common stock                              (6,041)           (1,927)               -
   Other                                                              789               970             (889)
                                                             ------------      ------------     ------------
   Net cash used for investing activities                          (7,609)          (30,731)         (55,563)
                                                             ------------      ------------     ------------
Cash flows from financing activities:
   Proceeds from notes issued                                           -                 -          175,000
   Borrowings on term loan facilities                             395,500            63,156                -
   Repayments of term loan facilities                            (239,824)           (3,065)         (37,750)
   Repayment of notes                                             (67,895)                -                -
   Net (repayments of) borrowings on revolving credit
     facility                                                           -           (80,000)           8,000
   Proceeds from note payable to parent                                 -           112,301                -
   Repayments of note payable to parent                           (18,092)          (58,482)               -
   Repayments of other long term debt                              (2,656)           (6,002)          (7,585)
   Purchases of outstanding notes                                       -           (25,468)               -
   Cash received upon exchange of notes                             1,948                 -                -
   Restricted cash                                                (59,902)              764             (916)
   Debt financing costs                                           (17,623)             (464)          (9,423)
   Distributions to parent                                              -          (148,795)               -
   Other                                                              (99)              (16)             100
                                                             ------------      ------------     ------------
   Net cash (used for) provided by financing activities            (8,643)         (146,071)         127,426
                                                             ------------      ------------     ------------
Net increase (decrease) in cash and cash equivalents               13,967          (131,327)         (70,011)
Cash and cash equivalents, beginning of year                       13,023           144,350          214,361
                                                             ------------      ------------     ------------
Cash and cash equivalents, end of year                       $     26,990      $     13,023     $    144,350
                                                             ============      ============     ============
</TABLE>
           See accompanying notes to consolidated financial statements

                                      F-6
<PAGE>
                     PEGASUS SATELLITE COMMUNICATIONS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. The Company

General

         Pegasus Satellite Communications, Inc. ("Pegasus Satellite") is a
direct subsidiary of Pegasus Communications Corporation ("Pegasus
Communications"). Pegasus Satellite is a holding company, has issued debt and
preferred stock, and is the parent company of Pegasus Media & Communications,
Inc. ("Pegasus Media"). Pegasus Media has debt outstanding under a credit
agreement and has separate subsidiaries that conduct our direct broadcast
satellite business and substantially all of our broadcast television business.

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

         Unless the context otherwise indicates, all references to "we," "us,"
and "our" refer to Pegasus Satellite together with its direct and indirect
subsidiaries.

Significant Risks and Uncertainties

         We have a history of losses principally due to the substantial amounts
incurred for interest expense and amortization expense associated with
intangible assets. Consolidated net losses were $136.7 million, $109.4 million,
and $285.2 million for 2003, 2002, and 2001, respectively. Consolidated interest
and amortization expenses were $167.8 million and $116.5 million, respectively,
for 2003, $148.0 million and $117.4 million, respectively, for 2002, $136.2
million and $245.4 million, respectively, for 2001.

         We are highly leveraged. At December 31, 2003, we had a combined
carrying amount of long term debt, including the portion that is current, and
mandatorily redeemable preferred stock outstanding, including associated accrued
and unpaid interest, of $1.7 billion. We dedicate a substantial portion of cash
to pay amounts associated with debt. In 2003, 2002, and 2001, we paid interest
of $118.8 million, $111.0 million, and $113.2 million, respectively. Because we
hold the principal operations of Pegasus Communications, Pegasus Communications
relies on us as a source of cash to primarily meet its operating, financing, and
investing needs. Our high leverage makes us more vulnerable to adverse economic
and industry conditions and limits our flexibility in planning for, or reacting
to, changes in our business and the industries in which we operate. Our ability
to make payments on and to refinance indebtedness and redeemable preferred stock
outstanding and to fund operations, planned capital expenditures, and other
activities and to fund preferred stock requirements depends on our ability to
generate cash in the future. Our ability to generate cash depends on the success
of our business strategy, prevailing economic conditions, regulatory risks,
competitive activities by other parties, the business strategies of DIRECTV,
Inc. and the National Rural Telecommunications Cooperative, equipment
strategies, technological developments, levels of programming costs and
subscriber acquisition costs, levels of interest rates, and financial, business,
and other factors that are beyond our control. We cannot assure that our
business will generate sufficient cash flow from operations or that alternative
financing will be available to us in amounts sufficient to fund the needs
previously specified. Our indebtedness and preferred stock contain numerous
covenants that, among other things, generally limit the ability to incur
additional indebtedness and liens, issue other securities, make certain payments
and investments, pay dividends, transfer cash, dispose of assets, and enter into
other transactions, and impose limitations on the activities of our
subsidiaries. Failure to make debt payments or comply with covenants could
result in an event of default that, if not cured or waived, could adversely
impact us.

                                      F-7
<PAGE>
                     PEGASUS SATELLITE COMMUNICATIONS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

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

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

                                      F-8
<PAGE>
                     PEGASUS SATELLITE COMMUNICATIONS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

         Dividends on all of our 12-3/4% series preferred stock series are in
arrears (see Note 5 for further information).

Reliance on DIRECTV, Inc.

         Our principal operating business is the direct broadcast satellite
business. For 2003, 2002, and 2001, revenues for this business were 96%, 96%,
and 97%, respectively, of total consolidated revenues, and operating expenses
for this business were 92%, 92%, and 93%, respectively, of total consolidated
operating expenses. Total assets of the direct broadcast satellite business were
91% and 93% of total consolidated assets at December 31, 2003 and December 31,
2002, respectively. As a distributor of DIRECTV, we may be adversely affected by
any material adverse changes in the assets, financial condition, programming,
technological capabilities, or services of DIRECTV, Inc.

         We are in material litigation with DIRECTV, Inc. An outcome in this
litigation that is unfavorable to us could have a material adverse impact on our
direct broadcast satellite business. Our litigation with DIRECTV, Inc. may have
a bearing on our estimation of the useful lives of our direct broadcast
satellite rights assets. (See Note 14 for information regarding this
litigation.)

Direct Broadcast Satellite Sales and Distribution

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

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

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

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

                                      F-9
<PAGE>
                     PEGASUS SATELLITE COMMUNICATIONS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

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

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

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

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

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

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

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

                                      F-10
<PAGE>
                     PEGASUS SATELLITE COMMUNICATIONS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

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

2. Summary of Significant Accounting Policies

Basis of Presentation

         The financial statements include the accounts of Pegasus Satellite and
its subsidiaries on a consolidated basis. All intercompany transactions and
balances have been eliminated. Since Pegasus Satellite's common stock is wholly
owned by its parent company, computations of per common share amounts are not
required nor presented. Prior year amounts have been reclassified where
appropriate to conform to the current year classification for comparative
purposes.

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

Use of Estimates in the Preparation of Financial Statements

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

Cash and Cash Equivalents

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

                                      F-11
<PAGE>
                     PEGASUS SATELLITE COMMUNICATIONS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Trade Receivables and Related Allowance for Doubtful Accounts

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

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

NRTC Patronage Distributions

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

                                      F-12
<PAGE>
                     PEGASUS SATELLITE COMMUNICATIONS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Property and Equipment

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

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

Intangible Assets

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

Impairment of Long Lived Assets

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

                                      F-13
<PAGE>
                     PEGASUS SATELLITE COMMUNICATIONS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Deferred Financing Costs

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

Broadcast Television Assets Sale/Leaseback Transaction

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

Revenues

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

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

                                      F-14
<PAGE>
                     PEGASUS SATELLITE COMMUNICATIONS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

Subscriber Acquisition Costs and Advertising Expenses

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

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

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

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

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

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


                                      F-15
<PAGE>
                     PEGASUS SATELLITE COMMUNICATIONS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Other Subscriber Related Expenses

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

Broadcast Television Barter Transactions

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

Deferred Income Taxes

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

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

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

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

Dividends and Accretion on Mandatorily Redeemable Cumulative Preferred Stock

         Dividends accrued and unpaid associated with Pegasus Satellite's
12-3/4% series mandatorily redeemable cumulative preferred stock are recorded as
a liability separate from the liquidation preference value of the stock. The
liquidation preference value of this series is recorded as a separate liability.
The discount at initial issuance from its full liquidation preference value is
initially recorded at the amount of the discounted cash proceeds or
consideration received. The difference between the carrying amount and the full
liquidation preference value is amortized to interest expense and to the
carrying amount of the preferred stock over the period that ends with the date
that the stock first becomes redeemable, at which time the carrying amount of
the stock will equal its full liquation par value. The amortization of the
discount is recorded to interest expense because the 12-3/4% preferred stock is
classified as a liability.

                                      F-16
<PAGE>
                     PEGASUS SATELLITE COMMUNICATIONS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Concentration of Credit Risk

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

New Accounting Pronouncements

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

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

KB Prime Media Companies

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

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

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

                                      F-17
<PAGE>
                     PEGASUS SATELLITE COMMUNICATIONS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

Pegasus Communications

         Pegasus Satellite has acquired from unaffiliated parties 657,604 shares
of Pegasus Communications' Class A common stock. At December 31, 2003, the
carrying amount of the shares was $8.0 million.

         In addition to its investment in Pegasus Satellite, Pegasus
Communications and its subsidiaries other than Pegasus Satellite hold two Ka
band satellite licenses granted by the Federal Communications Commission
("FCC"), hold intellectual property rights licensed from Personalized Media
Communications L.L.C., hold FCC licenses to provide terrestrial communications
services in the 700 MHZ spectrum, are developing a business to provide broadband
internet access in rural areas, and provide management services to Pegasus
Satellite. At December 31, 2003, the carrying value of the foregoing licenses
and intellectual property held by subsidiaries of Pegasus Communications other
than Pegasus Satellite was $158.5 million. At December 31, 2003, Pegasus
Communications and its subsidiaries other than Pegasus Satellite also held $55.9
million of cash, had a note receivable from Pegasus Satellite with a balance of
$45.7 million and owned an aggregate of $115.7 million of redeemable preferred
stock and related dividends outstanding at Pegasus Satellite.

         At December 31, 2003, Pegasus Satellite's maximum exposure to loss as a
result of its investment in Pegasus Communications is $8.0 million, representing
the carrying amount of the shares of Class A common stock of Pegasus
Communications.

3. Property and Equipment

         Property and equipment, along with the applicable estimated useful life
of each category, consisted of the following at December 31, 2003 and 2002 (in
thousands):
<TABLE>
<CAPTION>
                                                                          2003                 2002
                                                                         -------             -------
<S>                                                                     <C>                 <C>
Towers, antennas, and related equipment (7 to 20 years)................  $ 7,494             $ 6,844
Television broadcasting and production equipment (7 to 10 years).......   17,201              16,922
Equipment, furniture, and fixtures (5 to 10 years).....................   33,245              32,433
Direct broadcast satellite equipment capitalized (3 years).............   65,778              56,280
Building and improvements (up to 40 years).............................   16,993              16,497
Land...................................................................      536                 536
Other..................................................................    2,241               3,841
                                                                         -------             -------
                                                                         143,488             133,353
Accumulated depreciation...............................................  (75,071)            (63,402)
                                                                         -------             -------
Property and equipment, net............................................  $68,417             $69,951
                                                                         =======             =======
</TABLE>

         Total depreciation expense was $25.2 million, $25.9 million, and $15.1
million for 2003, 2002, and 2001, respectively. Depreciation expense associated
with direct broadcast satellite equipment capitalized was $18.0 million, $16.3
million, and $5.4 million for 2003, 2002, and 2001, respectively.


                                      F-18
<PAGE>
                     PEGASUS SATELLITE COMMUNICATIONS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

4.      Intangible Assets and Goodwill

         In conjunction with adopting Statement of Financial Accounting
Standards No. 142 "Goodwill and Other Intangible Assets" in the first quarter
2002, effective on January 1, 2002, we reassessed the estimated useful lives of
our direct broadcast satellite rights assets to expire in November 2016. Prior
to our reassessment, our broadcast satellite rights assets had estimated useful
lives of 10 years from the date we obtained the rights. As a result of our
reassessment, we extended the estimated useful lives of the unamortized carrying
amount of these assets at January 1, 2002 to approximately 15 years from that
date. As a result of the change in useful life, amortization expense for
broadcast satellite rights was $110.5 million in 2002 compared to $236.7 million
in 2001. The lives of our broadcast satellite rights are subject to litigation.
(See Note 14 for information regarding this litigation.)

         The term "intangible asset or assets" means an intangible asset or
assets other than goodwill. Intangible assets, along with the applicable
estimated useful life of each category, consisted of the following at December
31, 2003 and 2002 (in thousands):
<TABLE>
<CAPTION>
                                                                          2003                2002
                                                                       ----------          ----------
<S>                                                                   <C>                 <C>
Assets subject to amortization:
    Cost:
       Direct broadcast satellite rights (remaining life of 13
         years at December 31, 2003)...............................    $2,289,137          $2,289,068
       Other (2 to 40 years) ......................................        48,242              48,179
                                                                       ----------          ----------
                                                                        2,337,379           2,337,247
                                                                       ----------          ----------
    Accumulated amortization:
       Direct broadcast satellite rights...........................       862,903             752,396
       Other.......................................................        37,879              32,396
                                                                       ----------          ----------
                                                                          900,782             784,792
                                                                       ----------          ----------
Net assets subject to amortization.................................     1,436,597           1,552,455
Assets not subject to amortization:
    Broadcast television licenses..................................        12,419              12,419
                                                                       ----------          ----------
Intangible assets, net.............................................    $1,449,016          $1,564,874
                                                                       ==========          ==========
</TABLE>

         Total amortization expense was $116.0 million, $117.4 million, $245.4
million, and $187.1 million for 2003, 2002, and 2001, respectively.

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

         A reconciliation of net loss, as reported in arriving at the net loss,
as adjusted for the effects of applying FAS 142 for 2001 is as follows (in
thousands):
<TABLE>
<CAPTION>
                                                                            2001
                                                                          --------
<S>                                                                       <C>
Net loss, as reported..............................................       $(285,213)
Add back goodwill amortization.....................................             436
Add back amortization on broadcast television licenses.............             411
Adjust amortization for change in useful life of direct broadcast
  satellite rights assets..........................................          71,935
                                                                          ---------
Net loss, as adjusted..............................................       $(212,431)
                                                                          =========
</TABLE>


                                      F-19
<PAGE>
                     PEGASUS SATELLITE COMMUNICATIONS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

         The estimated aggregate amount of amortization expense for intangible
assets subject to amortization for each of the next five years based on the
balance of these assets at December 31, 2003 is $115.9 million, $113.9 million,
$111.2 million, $110.5 million, and $110.5 million, respectively.

5. Mandatorily Redeemable Preferred Stock

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

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

         The combined balance of the 12-3/4% series at December 31, 2003 was
$224.6 million, consisting of $177.7 million of mandatorily redeemable preferred
stock and $46.9 million of accrued and unpaid dividends in other noncurrent
liabilities, compared to the balance of the series at December 31, 2002 of
$199.0 million in redeemable preferred stock. The change was due to dividends
accrued of $23.5 million and accretion of discount of $2.1 million. The
liquidation value of the series at December 31, 2003 was $230.9 million.

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

                                      F-20
<PAGE>
                     PEGASUS SATELLITE COMMUNICATIONS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

         As permitted by the certificate of designation for this series, the
board of directors has the discretion to declare or not to declare any scheduled
quarterly dividends for this series. The board of directors has not declared any
of the scheduled semiannual dividends for this series since January 1, 2002.
Dividends in arrears at December 31, 2003 were $35.2 million, with accrued
interest thereon of $5.2 million. An additional $11.7 million of dividends
payable on January 1, 2004 were not declared or paid and became in arrears on
that date. Dividends not declared accumulate in arrears and incur interest at a
rate of 14.75% per year until paid.

         At December 31, 2003, the number of shares of 12-3/4% series
outstanding for Pegasus Satellite was 183,978, of which 92,156 were owned by
Pegasus Communications. Of the liquidation preference value, accrued dividends,
dividends in arrears, and interest on dividends in arrears at December 31, 2003
for this series, the following amounts were associated with Pegasus
Communications ownership interest in the series: $92.2 million; $23.4 million;
$17.6 million; and $2.6 million, respectively. Of the dividends not declared on
January 1, 2004, $5.9 were associated with Pegasus Communications' ownership
interest.

6. Long Term Debt

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

Note payable to Pegasus Communications, interest is variable;
    principal due June 2005.......................................                  45,724                 55,250

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

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

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

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

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

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

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

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

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

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

Other note due 2004 with stated interest of 6.75%.................                      25                  2,674
                                                                                ----------             ----------
                                                                                 1,425,603              1,335,862
Less current maturities...........................................                   3,025                  5,631
                                                                                ----------             ----------
Long term debt....................................................              $1,422,578             $1,330,231
                                                                                ==========             ==========
</TABLE>


                                      F-21
<PAGE>
                     PEGASUS SATELLITE COMMUNICATIONS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

         In July 2003, Pegasus Media entered into a new letter of credit
facility with a bank for a maximum amount of $59.0 million that terminates in
July 2004. Letters of credit issued are in favor of amounts owed to the National
Rural Telecommunications Cooperative by subsidiaries of Pegasus Media. We pay an
annual fee of 1.75% prorated quarterly of the amount of letters of credit
outstanding for this facility. Outstanding letters of credit are collateralized
by cash provided by us in an amount equal to 105% of the letters of credit
outstanding. We are entitled to all earnings earned by the cash collateral. Cash
collateral provided by us is reported as restricted cash within current assets
on the consolidated balance sheets. The aggregate amount of letters of credit
outstanding under this facility at December 31, 2003 was $59.0 million. The
amount of restricted cash for this facility was $61.9 million at December 31,
2003.

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

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

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

                                      F-22
<PAGE>
                     PEGASUS SATELLITE COMMUNICATIONS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

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

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

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

                                      F-23
<PAGE>
                     PEGASUS SATELLITE COMMUNICATIONS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

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

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

                                      F-24
<PAGE>
                     PEGASUS SATELLITE COMMUNICATIONS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

         All principal on Pegasus Satellite's promissory note to Pegasus
Communications is due at maturity of the note. In January 2004, the due date of
the note was extended from June 2005 to June 2007. The interest rate on the note
is based on the interest rate with margins incurred with respect to Pegasus
Media's term loan facilities, plus an additional 1%. Interest is added to
principal quarterly. Principal of the note may be repaid in whole or in part at
any time without penalty, and amounts repaid may be reborrowed. The weighted
average variable rate of interest on principal outstanding under this note was
5.69% and 6.31% at December 31, 2003 and 2002, respectively.

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

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

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

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

         Scheduled maturities of long term debt at their stated maturity values
and principal amounts and repayment of principal outstanding under all credit
facilities based on amounts outstanding at December 31, 2003 for the next five
years are $3.0 million in 2004, $223.6 million in 2005, $522.5 million in 2006,
$247.3 million in 2007, and $0 in 2008. In January 2004, the due date of Pegasus
Satellite's note payable to Pegasus Communications with outstanding principal at
December 31, 2003 of $45.7 million was extended from June 2005 to June 2007.

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

7. Leases

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

                                      F-25
<PAGE>
                     PEGASUS SATELLITE COMMUNICATIONS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

8. Other Operating Expenses

         Other operating expenses for 2003, 2002, and 2001 included expenses
associated with the DIRECTV, Inc. litigation of $12.3 million, $12.4 million,
and $21.4 million, respectively. (See Note 14 for information concerning this
litigation.)

9. Impairments

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

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

10. Income Taxes

         Following is a summary of income taxes for 2003, 2002, and 2001 (in
thousands):
<TABLE>
<CAPTION>
                                                                2003             2002              2001
                                                               ------          -------           --------
<S>                                                            <C>             <C>               <C>
State and local - current (expense) benefit..........          $ (174)         $ (207)           $    753
                                                               ------          -------           --------
State - deferred:
   Net operating loss
    carryforwards....................................               -            2,738              5,992
   Extinguishment of debt............................               -             (501)                87
   Other.............................................               -              116              3,078
                                                               ------          -------           --------
     Total state deferred............................               -            2,353              9,157
                                                               ------          -------           --------
Federal - deferred:
   Net operating loss
    carryforwards....................................               -           31,946             69,912
   Extinguishment of debt............................               -           (5,840)             1,019
   Other.............................................               -            1,371             35,966
                                                               ------          -------           --------
     Total federal deferred..........................               -           27,477            106,897
                                                               ------          -------           --------
Net benefit attributable to continuing operations....            (174)          29,623            116,807
Income taxes associated with other items:
   Deferred benefit for discontinued operations......               -                -              6,667
   Deferred benefit for unrealized loss on marketable
    equity securities................................               -                -              5,042
   Deferred tax associated with reclassification of
    realized loss on marketable equity
    securities.......................................               -              616            (12,998)
                                                               ------          -------           --------
     Total income tax (expense) benefit recorded.....          $ (174)         $30,239           $115,518
                                                               ======          =======           ========
</TABLE>

                                      F-26
<PAGE>
                     PEGASUS SATELLITE COMMUNICATIONS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

         Following were the deferred income tax assets and liabilities at
December 31, 2003 and 2002 (in thousands):
<TABLE>
<CAPTION>
                                                                                       2003               2002
                                                                                      -------            -------
<S>                                                                                  <C>                <C>
Deferred tax assets:
   Current assets and liabilities............................................         $ 1,517            $ 4,454
   Excess of tax basis over book basis - marketable equity securities........          27,378             27,378
   Excess of tax basis over book basis - notes exchanged.....................           3,726                  -
   Excess of tax basis over book basis - other...............................              (5)               455
   Loss carryforwards........................................................         395,066            361,222
   Other.....................................................................             867                  -
                                                                                      -------            -------
       Total assets..........................................................         428,549            393,509
                                                                                      -------            -------
Deferred tax liabilities:
   Excess of book basis over tax basis - property and equipment..............          (2,186)            (2,859)
   Excess of book basis over tax basis - amortizable intangible assets.......        (354,668)          (367,730)
   Other.....................................................................            (148)                 -
                                                                                      -------            -------
       Total liabilities.....................................................        (357,002)          (370,589)
                                                                                      -------            -------
Net deferred tax assets .....................................................          71,547             22,920
Valuation allowance..........................................................         (71,547)           (22,920)
                                                                                      -------            -------
Net deferred tax balance.....................................................         $     -            $     -
                                                                                      =======            =======
</TABLE>

         No deferred income tax benefit or expense was recorded for 2003 because
we were in a net deferred income tax asset position throughout the year against
which a full valuation allowance was applied. We believed that a valuation
allowance sufficient to bring the deferred income tax asset balance to zero at
December 31, 2003 was necessary because, based on our history of losses, it was
more likely than not that the benefit of the deferred income tax asset will not
be realized. Excluding the expense for state income taxes payable, our effective
income tax rate for continuing operations for 2003 was zero. The effective
income tax rate for 2002 had been impacted by valuation allowances recorded
during 2002.

         Following is a reconciliation of the federal statutory income tax rate
to our effective income tax rate attributable to continuing operations for 2003,
2002, and 2001:
<TABLE>
<CAPTION>

                                                            2003           2002            2001
                                                           ------         ------          ------
<S>                                                       <C>            <C>            <C>
Statutory rate.......................................       35.00%         35.00%         35.00%
Effect of valuation allowance........................      (30.59)        (17.14)             -
Other................................................       (4.41)          2.68          (7.67)
                                                           ------         ------          -----
Effective tax rate...................................           -%         20.54%         27.33%
                                                           ======         ======          =====
</TABLE>

         At December 31, 2003, we had net operating loss carryforwards for
income tax purposes of $1.0 billion available to offset future taxable income
that expire beginning 2004 through 2023.

11. Supplemental Cash Flow Information

         Following are significant noncash investing and financing activities
for 2003, 2002, and 2001 (in thousands):
<TABLE>
<CAPTION>
                                                                                      2003         2002           2001
                                                                                    -------       -------        -------
<S>                                                                                 <C>           <C>            <C>
Preferred stock dividends accrued on preferred stock............................    $23,457       $23,552        $26,587

Payment of 12-3/4% series preferred stock dividends with like kind shares.......          -        11,026         20,109

 Value of common stock warrants issued by Pegasus Communications in association
   with debt issued by Pegasus Satellite and recorded as debt
   discount by Pegasus Satellite................................................      8,784             -              -

Cancellation of 12-3/4% series preferred stock contributed by PCC...............          -         9,951              -
</TABLE>

                                      F-27
<PAGE>
                     PEGASUS SATELLITE COMMUNICATIONS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

         For 2003, 2002, and 2001, we paid cash interest of $118.8 million,
$111.0 million, and $113.2 million, respectively. We paid no federal income
taxes in 2003, 2002, and 2001. The amount paid for state income taxes was not
significant in each of 2003, 2002, and 2001.

12. Discontinued Operations

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

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

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

                                      2003            2002           2001
                                    ------          -------        ---------
Revenues                            $1,533          $ 8,325        $   7,861
Pretax income (loss)                 9,955           (5,292)         (17,544)

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

13. Financial Instruments

         The carrying amount and fair value of our long term debt and redeemable
preferred stock at December 31, 2003 and 2002 were as follows (in thousands):
<TABLE>
<CAPTION>
                                                                      2003                         2002
                                                           ---------------------------- ---------------------------
                                                             Carrying        Fair         Carrying        Fair
                                                               Value         Value         Value         Value
                                                           ---------------------------- ------------- -------------
<S>                                                        <C>            <C>            <C>             <C>
Long term debt (including current portion)...........      $1,425,603     $1,400,978     $1,335,862      $911,337
Mandatorily redeemable preferred stock...............         224,583        211,705        199,022        59,199
</TABLE>

         Not all of our debt is traded. Fair values of our preferred stock,
public notes, and certain term loans were based on the latest available
determinable trade prices for those that have trading activity and an estimate
of trade prices based on our comparable instruments for those that do not have
trading activity. The fair value of the note payable to Pegasus Communications
was considered to be equal to its carrying amount because the variable interest
rate associated with the note approximates the market variable interest rates
associated with our term loans subject to such rates. Other debt included in the
table was not significant and its fair value was assumed to be equal to its
carrying amount.

                                      F-28
<PAGE>
                     PEGASUS SATELLITE COMMUNICATIONS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

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

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

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

14. Commitments and Contingencies

Legal Matters

DIRECTV, Inc. Litigation

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


                                      F-29
<PAGE>
                     PEGASUS SATELLITE COMMUNICATIONS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

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

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

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

                                      F-30
<PAGE>
                     PEGASUS SATELLITE COMMUNICATIONS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

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

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

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

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

                                      F-31
<PAGE>
                     PEGASUS SATELLITE COMMUNICATIONS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

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

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

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

                                      F-32
<PAGE>
                     PEGASUS SATELLITE COMMUNICATIONS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

Seamless Marketing Litigation

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

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

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

Other Legal Matters

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


                                      F-33
<PAGE>
                     PEGASUS SATELLITE COMMUNICATIONS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Broadcast Television Programming Rights

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

15. Related Party Transactions

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

         Pegasus Media has local marketing agreements with three broadcast
television stations for which the KB Prime Media Companies own the FCC licenses.
These arrangements permit us to program these stations and realize the benefit
or cost savings for the programming and the collecting of revenues from two or
more stations in a television market where the FCC's ownership rules would
otherwise prohibit outright ownership. We pay an aggregate of $11 thousand per
month pursuant to these arrangements collectively.

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

         At December 31, 2002, Pegasus Satellite held 657,604 shares of Pegasus
Communications' Class A common stock with a carrying amount of $8.0 million that
is included in other noncurrent assets.

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

                                      F-34
<PAGE>
                     PEGASUS SATELLITE COMMUNICATIONS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

16. Industry Segments

         Our only reportable segment at December 31, 2003 was our direct
broadcast satellite business. Our direct broadcast satellite business provides
multichannel DIRECTV services in rural areas of the United States on a
subscription basis. Audio and video programming provided 89%, 92%, and 93% of
the total direct broadcast satellite business revenues in 2003, 2002, and 2001,
respectively. Information on the direct broadcast satellite business' revenue
and how it contributed to our consolidated loss from continuing operations
before income taxes for each period reported is as presented on the statements
of operations. The direct broadcast satellite business derived all of its
revenues from external customers for each period presented. Capital expenditures
for the direct broadcast satellite business were $22.3 million, $28.2 million,
and $37.0 million for 2003, 2002, and 2001, respectively. Capital expenditures
for all other operations were $1.5 million, $1.6 million, and $5.7 million for
2003, 2002, and 2001, respectively. Identifiable total assets for direct
broadcast satellite business were $1.6 billion and $1.7 billion at December 31,
2003 and 2002, respectively. Identifiable total assets for all other operations
were $168.4 million and $121.2 million at December 31, 2003 and 2002,
respectively. Our chief operating decision maker uses the measure "Direct
broadcast satellite operating profit (loss) before depreciation and
amortization," as adjusted for special items, to evaluate our direct broadcast
satellite business segment. This is calculated as the direct broadcast satellite
business' net operating revenue less its operating expenses (excluding
depreciation and amortization), as derived from the statements of operations, as
adjusted for the special item of $4.5 million for a contract termination fee
within other subscriber related expenses in the statement of operations and
comprehensive loss. The contract termination fee was initially accrued in 2002
and increased other subscriber related expenses. The accrual for this fee was
reversed in the second quarter 2003 because the related contract was amended to
eliminate the fee and decreased other subscriber related expenses. The
calculation of the measure for 2003 adds back the reversal of the fee and for
2002 deducts the initial accrual of the fee.

17. Quarterly Information (Unaudited)
    (in thousands)
<TABLE>
<CAPTION>

                                                                               Quarter Ended
                                                   March 31,         June 30,          September 30,        December 31,
                                                     2003              2003                2003                2003
                                                   --------          --------            --------            --------
<S>                                                <C>               <C>                 <C>                 <C>
Net revenues.................................      $212,830          $213,964            $214,453            $220,680
Income from operations.......................           258             4,612                  53              12,951
Net loss.....................................       (29,043)          (33,681)            (39,534)            (34,397)

                                                   March 31,         June 30,          September 30,        December 31,
                                                     2002              2002                2002                2002
                                                   --------          --------            --------            --------
Net revenues.................................      $221,219           $224,010            $224,587            $226,544
(Loss) income from operations................        (3,998)             3,540              (2,876)                802
Net loss.....................................       (25,460)           (23,520)            (24,165)            (36,284)
</TABLE>

18. Subsequent Events

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


                                      F-35
<PAGE>

PEGASUS COMMUNICATIONS CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 2003, 2002, and 2001
(In thousands)
<TABLE>
<CAPTION>
                                     Balance at        Additions         Additions
                                    Beginning of      Charged To        Charged To                         Balance at
          Description                  Period          Expenses       Other Accounts      Deductions      End of Period
<S>                                <C>                <C>              <C>               <C>             <C>
         Allowance for
       Doubtful Accounts
       -----------------
           Year 2003                   $ 7,221          $ 9,105                           $12,333 (a)        $ 3,993
           Year 2002                     6,016           23,809                            22,604 (a)          7,221
           Year 2001                     3,303           36,511                            33,798 (a)          6,016


  Valuation Allowance for Net
  Deferred Income Tax Assets
  --------------------------
           Year 2003                   $22,920          $48,627                                              $71,547
           Year 2002                                     22,920                                               22,920
</TABLE>

(a) Amounts written off, net of recoveries.


                                      S-1