<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, 1999
                                      OR

           / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                     THE SECURITIES EXCHANGE ACT OF 1934.
               For the transition period from_______ to _______
                        Commission File Number 0-21389

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

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

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


       Registrant's telephone number, including area code: (888) 438-7488
                                 --------------
          Securities registered pursuant to section 12(b) of the Act:
                                     None
          Securities registered pursuant to section 12(g) of the Act:

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

     Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No___

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

     The aggregate market value of the voting stock (Class A Common Stock) held
by non-affiliates of the Registrant as of the close of business on February 29,
2000 was approximately $1,789,932,200 based on the average bid and asked prices
of the Class A Common Stock on such date on the Nasdaq National Market.
(Reference is made to the paragraph captioned "Calculation of Aggregate Market
Value of Nonaffiliate Shares" of "Part II, Item 5 herein for a statement of
assumptions upon which this calculation is based.)

     Number of shares of each class of the registrant's common stock
outstanding as of February 29, 2000:

             Class A, Common Stock, $0.01 par value     15,905,844
             Class B, Common Stock, $0.01 par value      4,581,900

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


<TABLE>
<CAPTION>
                                                                                                          Page
                                                                                                         ------
<S>         <C>                                                                                          <C>
                                                      PART I
Item 1.     Business ..................................................................................     2
Item 2.     Properties ................................................................................    25
Item 3.     Legal Proceedings .........................................................................    25
Item 4.     Submission of Matters to a Vote of Security Holders .......................................    26

                                                      PART II
Item 5.     Market for the Registrant's Common Equity and Related Stockholder Matters .................    27
Item 6.     Selected Financial Data ...................................................................    30
Item 7.     Management's Discussion and Analysis of Financial Condition and Results of Operations .....    32
Item 7A.    Quantitative and Qualitative Disclosures About Market Risk ................................    43
Item 8.     Financial Statements and Supplementary Data ...............................................    43
Item 9.     Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ......    43

                                                     PART III
Item 10.    Directors and Executive Officers of the Registrant ........................................    44
Item 11.    Executive Compensation ....................................................................    47
Item 12.    Security Ownership of Certain Beneficial Owners and Management ............................    51
Item 13.    Certain Relationships and Related Transactions ............................................    54
                                                      PART IV
Item 14.    Exhibits, Financial Statement Schedules, and Reports on Form 8-K ..........................    59
</TABLE>

                                       1
<PAGE>

                                     PART I

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

     The information is this Report assumes the completion of the acquisition
of Golden Sky Holdings, Inc. and other pending acquisitions described in "Item
1: Business -- Recent Completed and Pending Transactions," unless otherwise
noted.


ITEM 1: BUSINESS

General

     Pegasus is:

   o The largest independent distributor of DIRECTV(R) with 1.1 million
     subscribers at February 29, 2000. We have the exclusive right to
     distribute DIRECTV digital broadcast satellite services to over 7.2
     million rural households in 41 states. We distribute DIRECTV through the
     Pegasus retail network, a network in excess of 2,500 independent
     retailers.

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

   o One of the fastest growing media companies in the United States. We have
     increased our revenues at a compound growth rate of 89% per annum since
     our inception in 1991.

Direct Broadcast Satellite Television

     The introduction of direct broadcast satellite receivers is widely
regarded as the most successful introduction of a consumer electronics product
in U.S. history, surpassing the rollout of color televisions, videocassette
recorders and compact disc players. According to a recent Paul Kagan study, in
1998 direct broadcast satellite was the fastest growing multichannel television
service in the country, capturing almost two out of every three new subscribers
to those services. There are currently three nationally branded direct
broadcast satellite programming services: DIRECTV, Primestar and EchoStar. At
December 31, 1999, there were 11.5 million direct broadcast satellite
subscribers in the United States:

   o 6.7 million DIRECTV subscribers, including approximately 5.2 million
     subscribers served by DIRECTV itself, 1.1 million subscribers served by
     Pegasus and Golden Sky and 400,000 subscribers served by the approximately
     100 other DIRECTV rural affiliates;

   o 1.4 million Primestar subscribers; and

   o 3.4 million EchoStar subscribers.

All three direct broadcast satellite programming services are digital satellite
services, and therefore require that a subscriber install a satellite receiving
antenna or dish and a digital receiver. DIRECTV and EchoStar require a
satellite dish of approximately 18 inches in diameter that may be installed by
the consumer without professional assistance. Primestar requires a dish of
approximately 36 inches in diameter that generally must


                                       2
<PAGE>

be professionally installed. The market shares of DIRECTV, Primestar and
EchoStar among all direct broadcast satellite subscribers nationally are
currently 58%, 12% and 30%, respectively. The Carmel Group has estimated that
the number of direct broadcast satellite subscribers will grow to 21.1 million
by 2003.


     Hughes completed the acquisition of Primestar's medium-power direct
broadcast satellite business on May 22, 1999, and completed the acquisition of
related high-power satellite assets on June 8, 1999. Hughes is currently
operating Primestar only during a transition period while it converts Primestar
subscribers to DIRECTV subscribers. At the time of the acquisition, we
estimated that there were approximately 250,000 Primestar subscribers in our
DIRECTV exclusive territories who could become our subscribers if they choose
to receive DIRECTV programming.


DIRECTV


     DIRECTV is a service of Hughes Electronics, a subsidiary of General Motors
Corporation. DIRECTV offers in excess of 200 entertainment channels of near
laser disc quality video and compact disc quality audio programming. DIRECTV
currently transmits via four high-power Ku band satellites. We believe that
DIRECTV's extensive line-up of cable networks, pay-per-view movies and events
and sports packages, including the exclusive "NFL Sunday Ticket," have enabled
DIRECTV to capture a majority market share of existing direct broadcast
satellite subscribers and will continue to drive strong subscriber growth for
DIRECTV services in the future. DIRECTV added 1.6 million new subscribers in
1999.


DIRECTV Rural Affiliates


     Prior to the launch of DIRECTV's programming service, Hughes Electronics,
which was succeeded by its subsidiary DIRECTV, entered into an agreement with
the National Rural Telecommunications Cooperative authorizing the National
Rural Telecommunications Cooperative to offer its members and affiliates the
opportunity to acquire exclusive rights to distribute DIRECTV programming
services in rural areas of the United States. The National Rural
Telecommunications Cooperative is a cooperative organization whose members and
affiliates are engaged in the distribution of telecommunications and other
services in predominantly rural areas of the United States. Approximately 250
National Rural Telecommunications Cooperative members and affiliates acquired
such exclusive rights, thereby becoming DIRECTV rural affiliates. The DIRECTV
exclusive territories acquired by DIRECTV's rural affiliates include
approximately 9.0 million rural households. Pegasus was the largest of the
original DIRECTV rural affiliates, acquiring a DIRECTV exclusive territory of
approximately 500,000 homes in four New England states. Since 1996 we have
increased our DIRECTV exclusive territories to approximately 7.2 million homes
through the completed or pending acquisitions of approximately 150 other
DIRECTV rural affiliates, including the completed acquisition of Digital
Television Services, Inc., with which we merged in 1998, and the pending
acquisition of Golden Sky Holdings, Inc.


Pegasus Rural Focus and Strategy


     We believe that direct broadcast satellite and other digital satellite
services will achieve disproportionately greater consumer acceptance in rural
areas than in metropolitan areas. Direct broadcast satellite services have
already achieved a penetration of more than 22% in rural areas of the United
States, as compared to approximately 5% in metropolitan areas.


     Our long-term goal is to become an integrated provider of direct broadcast
satellite and other digital satellite services for the 79.8 million people,
32.3 million homes and 3.1 million businesses located in rural areas of the
United States. To accomplish our goal, we are pursuing the following strategy:


   o Continue to Grow Our Rural Subscriber Base by Aggressively Marketing
     DIRECTV. Pegasus currently serves in excess of 1.1 million DIRECTV
     subscribers, which represents a penetration of approximately 15.7%. Our
     rate of growth has accelerated as we have increased our scale and expanded
     the Pegasus network of independent retailers.


                                       3
<PAGE>

   o Continue to Acquire Other DIRECTV Rural Affiliates. We currently own
     approximately 80% of the DIRECTV exclusive territories held by DIRECTV's
     rural affiliates. We have had an excellent track record of acquiring
     DIRECTV rural affiliates and believe that we have a competitive advantage
     in acquiring additional DIRECTV rural affiliates. We base this belief on
     our position as the largest DIRECTV rural affiliate, our access to the
     capital markets and our strong reputation in the direct broadcast
     satellite industry. We will continue to pursue our strategy of acquiring
     other DIRECTV rural affiliates.


   o Continue to Develop the Pegasus Retail Network. We have established the
     Pegasus network of independent retailers in order to distribute DIRECTV in
     our DIRECTV exclusive territories. Our consolidation of DIRECTV's rural
     affiliates has enabled us to expand the Pegasus retail network to over
     2,500 independent retailers in 41 states. We believe that the Pegasus
     retail network is one of the few sales and distribution channels for
     digital satellite services with broad and effective reach in rural areas
     of the U.S. We intend to further expand the Pegasus retail network in
     order to increase the penetration of DIRECTV in rural areas and to enable
     us to distribute additional digital satellite services that will
     complement our distribution of DIRECTV.


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


Satellite Services in Rural Areas


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


     There are approximately 79.8 million people, 32.3 million households and
3.1 million businesses located in rural areas of the United States. Rural areas
therefore represent a large and attractive market for direct broadcast satellite
and other digital satellite services. Approximately 65% of all U.S. direct
broadcast satellite subscribers reside in rural areas. It is likely that future
digital satellite services, such as soon to be launched digital audio services
and satellite broadband multimedia services, will also achieve disproportionate
success in rural areas as compared to metropolitan areas.


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


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


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


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


                                       4
<PAGE>

Consolidation of DIRECTV Rural Affiliates

     When DIRECTV was launched in 1994, small DIRECTV rural affiliates held
approximately 95% of the DIRECTV rural affiliate exclusive territories. In
1996, Pegasus first acquired another DIRECTV rural affiliate, thereby beginning
a process of consolidation that has significantly changed the composition of
DIRECTV's rural affiliates. Since 1996, Pegasus, Golden Sky Systems have
acquired approximately 150 DIRECTV rural affiliates. Today, Pegasus represents
80% of the DIRECTV exclusive territories held by DIRECTV's rural affiliates,
including 21% held by Golden Sky, and the approximately 100 remaining rural
affiliates total 20%. Pegasus believes that consolidation among DIRECTV's rural
affiliates will continue.

     As of February 29, 2000, we distributed DIRECTV in the following DIRECTV
exclusive territories:



        Exclusive             Total
         DIRECTV             Homes in        Total
       Territories          Territory     Subscribers     Penetration
------------------------   -----------   -------------   ------------
Northeast ..............      751,745         87,176        11.6%
Central ................    1,138,651        169,197        14.9%
Southeast ..............    1,327,517        241,014        18.2%
Midwest ................    1,323,406        197,273        14.9%
Central Plains .........      623,104         94,228        15.1%
Texas ..................      793,708        147,227        18.5%
West ...................    1,229,234        193,374        15.7%
                            ---------        -------        ----
   Total ...............    7,187,365      1,129,489        15.7%
                            =========      =========        ====


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


The Pegasus Retail Network

     The Pegasus retail network is a network of over 2,500 independent
satellite, consumer electronics and other retailers serving rural areas. We
began the development of the Pegasus retail network in 1995 in order to
distribute DIRECTV in our original DIRECTV exclusive territories in New
England. We have expanded this network into 41 states as a result of our
acquisitions of DIRECTV rural affiliates since 1996. Today, the Pegasus retail
network is one of the few sales and distribution channels available to digital
satellite service providers seeking broad and effective distribution in rural
areas throughout the continental United States.

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

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

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

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


                                       5
<PAGE>

Broadcast Television


     Our operating strategy in broadcast television is focused on:

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

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

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

     We have purchased or launched TV stations affiliated with the "emerging
networks" of Fox, the WB and UPN, because, while affiliates of these networks
generally have lower revenue shares than stations affiliated with ABC, CBS and
NBC, we believe that they will experience growing audience ratings and
therefore afford us greater opportunities for increasing their revenue share.
We have entered into local marketing agreements in markets where we already own
a station because they provide additional opportunities for increasing revenue
share with limited additional operating expenses. However, the FCC has recently
adopted rules which in most instances would prohibit us from expanding in our
existing markets through local marketing agreements and may require us to
modify or terminate our existing agreements. We have entered into local
marketing agreements to program one station as an affiliate of Fox, two
stations as affiliates of the WB network and one station as an affiliate of
UPN. We plan to program an additional station pursuant to a local marketing
agreement in 2000, if permitted by the FCC.

     The following table sets forth general information for each of Pegasus'
stations.



<TABLE>
<CAPTION>
                                                        Station
           Station               Acquisition Date     Affiliation       Market Area       DMA (1)     Households (2)
-----------------------------   ------------------   -------------   -----------------   ---------   ---------------
<S>                             <C>                  <C>             <C>                 <C>         <C>
WDBD-40 .....................      May 1993               Fox           Jackson, MS         89          306,000
WDSI-61 .....................      May 1993               Fox           Chattanooga, TN     84          327,000
WGFL-53 (3) .................      (3)                    WB            Gainesville, FL     165         104,000
WOLF-56/WILF-53 (4) .........      May 1993               Fox           Northeastern PA     51          555,000
WSWB-38 (4) .................      (4)                    WB            Northeastern PA     51          555,000
WPXT-51 .....................      January 1996           Fox           Portland, ME        80          355,000
WPME-35 (5) .................      (5)                    UPN           Portland, ME        80          355,000
WTLH-49/WFXU (6) ............      March 1996             Fox           Tallahassee, FL     109         104,000
</TABLE>

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

(2) Represents total homes in a designated market area for each television
    station as estimated by Broadcast Investment Analysts.


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


(4) WILF and WWLF until November 1998 had simulcast the programming of WOLF. In
    November 1998, the station then known as WOLF (Channel 38) was sold to KB
    Prime Media LLC. That station has changed its call letters to WSWB, and is
    now programmed by Pegasus pursuant to a local marketing agreement as an
    affiliate of the WB network. The station formerly know as WWLF changed its
    call letters to WOLF, and simulcasts Fox programming on WILF.


(5) Pegasus began programming WPME in August 1997 pursuant to a local marketing
    agreement as an affiliate of UPN.


(6) Pegasus programs WFXU pursuant to a local marketing agreement. WFXU has
    simulcast the programming of WTLH since July 1998.


                                       6
<PAGE>
Cable Television
     We own and operate a cable system serving areas of western, southwestern
and northwestern Puerto Rico. Our Puerto Rico cable system serves franchised
areas of approximately 170,000 households and serves approximately 55,000
subscribers.

     We have entered into a letter of intent to sell the assets of our cable
system business in Puerto Rico to a subsidiary of Centennial Cellular
Corporation for $170.0 million in cash, subject to certain adjustments. The
sale of this cable system is subject to the negotiation of a definitive
agreement, third-party approvals, including regulatory approvals, and other
customary conditions. The sale is also subject to approval by our board of
directors. We cannot assure you that these conditions will be satisfied and
that the sale will be consummated.

Recent Completed and Pending Transactions

     Completed Transactions
     Completed Direct Broadcast Satellite Acquisitions. From January 1, 2000
through March 1, 2000, we completed five acquisitions for DIRECTV distribution
rights in rural areas of California, Indiana, Illinois, Oregon and South
Dakota. In the aggregate, the consideration for the completed direct broadcast
satellite acquisitions was $23.5 million in cash, $22.5 million in Series D
junior converible participating preferred stock, $10.0 million in Series E
junior convertible participating preferred stock, $39.7 million in Pegasus'
Class A common stock, $200,000 in promissory notes and $381,000 in assumed net
liabilities. The territories covered by these transactions include
approximately 355,800 households, including approximately 17,800 seasonal
residences and 35,600 business locations and 42,800 subscribers. In January
2000, we completed an acquisition for DIRECTV distribution rights in rural
areas of Michigan that was effective December 14, 1999. In the aggregate, the
total consideration for this direct broadcast satellite acquisition was
$707,000 in cash, $5.7 million in Series B junior convertible participating
preferred stock, $315,000 in promissory notes and $61,000 in assumed net
liabilities. The territories covered by this transaction include approximately
27,700 households, including approximately 1,400 seasonal residences and 2,800
business locations and 3,700 subscribers.

     Convertible Preferred Stock Offering. On January 25, 2000, Pegasus
completed an offering of $300.0 million in liquidation amount of its 61/2%
Series C convertible preferred stock. Dividends on the Series C convertible
preferred stock will be payable in cash or, at Pegasus' option, in Class A
common stock. Each share of Series C convertible preferred stock is convertible
at any time into the number of whole shares of our Class A common stock equal
to the stated liquidation preference of $100 per share divided by an initial
conversion price of $127.50 per share, subject to adjustment if certain events
should occur. Pegasus may redeem the Series C convertible preferred stock at
any time beginning on February 1, 2003 at redemption prices set forth in the
certificate of designation. In addition, from August 1, 2001 to February 1,
2003, Pegasus may redeem the Series C convertible preferred stock at a
redemption premium of 105.525% of the stated liquidation preference, plus
accumulated and unpaid dividends, if any, if the trading price of Pegasus'
Class A common stock equals or exceeds $191.25 for a specified trading period.
In the event of a change of control of Pegasus, holders of Series C convertible
preferred stock will have a one-time option to convert such holder's shares
into Class A common stock at a conversion price equal to the greater of (1) the
market price of our Class A common stock at the change of control date or (2)
$68.00 per share. In lieu of issuing Class A common stock, we may, at our
option, make a cash payment equal to the market value of the shares. Pegasus
plans to use the net proceeds of the offering for working capital and general
corporate purposes.

     Investment in Personalized Media Communications, LLC and Licensing of
Patents. On January 13, 2000, Pegasus made an investment in Personalized Media
Communications, LLC, an advanced communications technology company. A
subsidiary of Personalized Media granted to Pegasus an exclusive license for
use of Personalized Media's patent portfolio in the distribution of satellite
services from specified orbital locations. Mary C. Metzger, Chairman of
Personalized Media and a member of Pegasus' board of directors, and John C.
Harvey, Managing Member of Personalized Media and Ms. Metzger's husband, own a
majority of and control Personalized Media.

     Pegasus acquired preferred interests of Personalized Media for
approximately $14.3 million cash, 200,000 shares of Pegasus' Class A common
stock and Pegasus' agreement, subject to certain conditions, to issue warrants
to purchase 1.0 million shares of Pegasus' Class A common stock at an exercise
price of $90.00 per share and with a term of ten years. See Item 13: Certain
Relationships and Related Transactions.

                                       7
<PAGE>

     Pegasus Media & Communications Credit Facility. On January 14, 2000,
Pegasus Media & Communications, Inc., a wholly-owned subsidiary of Pegasus,
entered into a $500.0 million credit facility. The new Pegasus Media &
Communications credit facility replaced the previous Pegasus Media &
Communications and Digital Television Services credit facilities. Pegasus Media
& Communications can use borrowings under the credit facility for acquisitions
and general corporate purposes. In connection with the closing of the new
Pegasus Media & Communications credit facility, Digital Television Services was
merged with and into a subsidiary of Pegasus Media & Communications.

     Pending Transactions

     Merger with Golden Sky Holdings, Inc. On January 10, 2000, Pegasus entered
into a definitive merger agreement with Golden Sky Holdings, Inc. Golden Sky is
the second largest independent provider of DIRECTV. It operates in 24 states
and its territories include approximately 1.9 million households and 350,500
subscribers. In connection with the merger, Pegasus will issue up to 6.5
million of its Class A common stock, subject to certain downward adjustments,
including sales by the Golden Sky stockholders of their stock to Pegasus for up
to $25.0 million in cash, and will assume certain liabilities and incur merger
costs, resulting in aggregate consideration for the Golden Sky transaction
estimated to be $1.3 billion at the time the definitive agreement was signed.
The transaction is subject to the fulfillment of customary conditions,
including the (1) obtaining of all requisite consents or approvals by any
governmental authority or third parties, including the expiration or
termination of the waiting period under Hart-Scott-Rodino Antitrust
Improvements Act of 1976; (2) approval of the merger proposal by our
stockholders and Golden Sky's stockholders; (3) absence of a material adverse
change with respect to the other party; and (4) absence of certain litigation
or related actions affecting the other party. Pegasus' shareholder meeting is
scheduled for March 22, 2000. In connection with the acquisition of Golden Sky,
the voting agreement among Mr. Pagon and certain existing Pegasus shareholders
will be amended and restated. See Item 13; Certain Relationships and Related
Transactions.

     Pending Direct Broadcast Satellite Acqusitions. As of March 1, 2000,
without giving effect to the Golden Sky acquisition, we have entered into
letters of intent or definitive agreements to acquire DIRECTV distribution
rights in rural areas of three states. In the aggregate, the consideration for
these pending direct broadcast satellite acquisitions is $15.7 million in cash.
The territories covered by the letters of intent or definitive agreements
include approximately 81,500 television households, including approximately
4,100 seasonal residences and 8,200 business locations and 7,900 subscribers.
The closings of these acquisitions are subject to negotiation of definitive
agreements, third-party approvals and other customary conditions. We cannot
assure you that these conditions will be satisfied.

     Sale of Puerto Rico Cable System. We have entered into a letter of intent
to sell the assets of our cable system in Puerto Rico. See -- Cable Television.


Competition

     Our direct broadcast satellite business faces competition from other
current or potential multichannel programming distributors, including other
direct broadcast satellite operators, direct-to-home providers, cable
operators, wireless cable operators, Internet and local and long-distance
telephone companies, which may be able to offer more competitive packages or
pricing than we or DIRECTV can provide. In addition, the direct broadcast
satellite industry is still evolving and recent or future competitive
developments could adversely affect us.

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

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

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


                                       8
<PAGE>

Employees

     As of December 31, 1999, we had 1,006 full-time and 347 part-time
employees. We also had 8 general managers, 48 department managers and 12
corporate managers as of this date. We are not a party to any collective
bargaining agreements, and we consider our relations with our employees to be
good.

Executive Officers of the Registrant

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

Direct Broadcast Satellite Agreements, Licenses, Local Marketing Agreements and
Cable Franchises

     Direct Broadcast Satellite Agreements

     Prior to the launch of the first DIRECTV satellite in 1993, Hughes entered
into various agreements intended to assist it in the introduction of DIRECTV
services, including agreements with RCA/Thomson for the development and
manufacture of direct broadcast satellite reception equipment and with USSB for
the sale of five transponders on the first satellite. In an agreement concluded
in 1994, Hughes offered members and affiliates of the National Rural
Telecommunications Cooperative the opportunity to become the exclusive
providers of certain direct broadcast satellite services using the DIRECTV
satellites at the 101- W orbital location, generally including DIRECTV
programming, to specified residences and commercial subscribers in rural areas
of the U.S. The National Rural Telecommunications Cooperative is a cooperative
organization whose members and affiliates are engaged in the distribution of
telecommunications and other services in predominantly rural areas of the U.S.
National Rural Telecommunications Cooperative members and affiliates that
participated in its 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 National Rural
Telecommunications Cooperative members and affiliates comprise approximately
9.0 million television households and were initially acquired for aggregate
commitment payments exceeding $100 million.

     We are an affiliate of the National Rural Telecommunications Cooperative,
participating through agreements in its direct broadcast satellite program.The
agreement between Hughes (and DIRECTV as its successor) and National
Rural Telecommunications Cooperative, and related agreements between the
National Rural Telecommunications Cooperative and its participating members and
affiliates, provide those members and affiliates with substantial rights and
benefits from distribution in their service areas of the 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. In addition, the participating members and
affiliates are required to reimburse DIRECTV for their allocable shares of
certain common expenses, such as programming, satellite-specific costs and
expenses associated with the billing and authorization systems, and to remit to
DIRECTV a 5% fee on subscription revenues.

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

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

   o to provide certain other services over the DIRECTV satellites; and

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

     The financial terms of the right of first refusal are likely to be the
subject of negotiation and Pegasus is unable to predict whether substantial
additional expenditures by the National Rural Telecommunications Cooperative
will be required in connection with the exercise of such right of first
refusal.

     The agreements between the National Rural Telecommunications Cooperative
and participating National Rural Telecommunications Cooperative members and
affiliates terminate when the DIRECTV satellites are removed from their orbital
location at the end of their lives. If the satellites are removed earlier than
June 2004, the tenth anniversary of the commencement of DIRECTV services,
Pegasus will receive a prorated refund of its original purchase price for the
DIRECTV rights. Our agreements with the National Rural Telecommunications
Cooperative may also be terminated as follows:


                                       9
<PAGE>

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

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

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

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

     The National Rural Telecommunications Cooperative has adopted a policy
requiring any party acquiring DIRECTV distribution rights from a National Rural
Telecommunications Cooperative member or affiliate to post a letter of credit
to secure payment of National Rural Telecommunications Cooperative's billings
if the acquiring person's monthly payments to the National Rural
Telecommunications Cooperative, including payments on account of the acquired
territory, exceeds a specified amount. Pursuant to this policy, Pegasus or its
subsidiaries have posted letters of credit of approximately $23.7 million in
connection with completed direct broadcast satellite acquisitions. Although
this requirement can be expected to reduce somewhat our acquisition capacity
inasmuch as it ties up capital that could otherwise be used to make
acquisitions, we expect this reduction to be manageable. There can be no
assurance, however, that the National Rural Telecommunications Cooperative will
not in the future seek to institute other policies, or to change this policy,
in ways that would be material to us.

     Broadcast Television

     FCC Licensing. The broadcast television industry is subject to regulation
by the FCC pursuant to the Communications Act of 1934, as amended. Approval by
the FCC is required for the issuance, renewal, transfer and assignment of
broadcast station operating licenses. Television license terms are generally
eight years. While in the vast majority of cases such licenses are renewed by
the FCC, there can be no assurance that our licenses or the licenses for the TV
stations that we program pursuant to local marketing agreements will be renewed
at their expiration dates or that such renewals will be for full terms. The
licenses with respect to TV stations WOLF/WILF, WPXT, WDSI, WTLH and WDBD are
scheduled to expire on August 1, 2007, April 1, 2007, August 1, 2005, April 1,
2005, and June 1, 2005, respectively. The licenses with respect to WSWB, WFXU,
WGFL and WPME, stations we program pursuant to local marketing agreements,
expire on August 1, 2007, February 1, 2005, February 1, 2005 and April 1, 2007,
respectively.

     Fox Affiliation Agreement. Our network affiliation agreements with the Fox
Broadcasting Company formally expired on January 30, 1999, except for the
affiliation agreement for television station WTLH, which is scheduled to expire
on December 31, 2000. Except in the case of WTLH, we currently broadcast Fox
programming under arrangements between Pegasus and Fox which have generally
conformed in practice to such affiliation agreements. Negotiations with Fox are
continuing, and we believe that we will enter into new affiliation agreements
on satisfactory terms with no disruption in programming. If we are mistaken in
this belief, the loss of the ability to carry Fox programming could have a
material and adverse effect on our broadcast television operations.


                                       10
<PAGE>

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


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


     WTLH's station affiliation agreement with Fox expires December 31, 2000,
but is renewable for two successive two-year periods, at the discretion of Fox
and upon acceptance by Pegasus. Fox may terminate the station affiliation
agreement upon:


   o a change in any material aspect of the station's operation, including its
     transmitter location, power, frequency, programming format or hours of
     operation, with 30 days written notice;


   o acquisition by Fox, directly or indirectly, of a significant ownership
     and/or controlling interest in any television station in the same market,
     with 60 days written notice;


   o assignment or attempted assignment by Pegasus of the station affiliation
     agreement, with 30 days written notice;


   o three or more unauthorized preemptions of Fox programming within a
     12-month period, with 30 days written notice; or


   o WTLH deciding not to accept a change in Fox operations applicable to Fox
     affiliates generally.


Either Fox or WTLH may terminate the station affiliation agreement upon
occurrence of a force majeure event which substantially interrupts Fox's
ability to provide programming or the station's ability to broadcast the
programming.


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


     The term of the station affiliation agreement with UPN expires January 15,
2001, and automatically renews for a three-year period unless either party has
given written notice to the other party of its election not to renew. UPN may
terminate the station affiliation agreement upon prior written notice in the
event of:


                                       11
<PAGE>

   o a material reduction or modification of WPME's transmitter location,
     power, frequency, programming format or hours of operation;

   o any assignment or transfer of control of the station's license; or

   o three or more unauthorized preemptions of UPN programming by the station
     during any 12-month period, which have actually occurred or which UPN
     reasonably believes will occur.


Either UPN or Pegasus may terminate the station affiliation agreement upon the
occurrence of a force majeure event that causes UPN substantially to fail to
provide programming or Pegasus substantially to fail to broadcast UPN's
programming, for either four consecutive weeks or an aggregate of six weeks in
any 12-month period.


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


     Local Marketing Agreements. In the past, the FCC rules precluded the
ownership of more than one television station in a market, unless such stations
were operated as a satellite of a primary station. In recent years, in a number
of markets across the country, certain television owners entered into
agreements to provide the bulk of the broadcast programming on stations owned
by other licensees, and to retain the advertising revenues generated from such
programming. Such agreements are commonly referred to as local marketing
agreements. Local marketing agreements were not considered attributable
interests under the FCC's old multiple ownership rules.


     In August 1999, the FCC revised its attribution and multiple ownership
rules. The new rules generally provide that television local marketing
agreements are attributable if the programmer owns a station in the same market
as the station it is programming pursuant to a local marketing agreement. Local
marketing agreements entered into on or after November 5, 1996 must comply with
the new ownership rules by August 5, 2001 or such local marketing agreements
will terminate. Local marketing agreements entered into before November 5,
1996, will be grandfathered until the conclusion of the FCC's 2004 biennial
review. The new rules also generally allow one entity to own two television
stations in the same market if there would be eight full-power commercial and
non-commercial television stations in the market after the combination, or if
the acquired station is economically distressed and could not be built or
operated without combining with another station in the market. In certain
cases, parties with grandfathered local marketing agreements may rely on the
circumstances at the time the local marketing agreement was entered into in
advancing any proposal for co-ownership of the stations. The markets in which
Pegasus programs a second station pursuant to a local marketing agreement do
not have eight full-power commercial and non-commercial television stations.
Pegasus has not yet filed any application to acquire any of the stations with
which it has local marketing agreements based on a showing of economic
distress, and cannot predict the outcome of such a filing should one be made.
Pegasus' local marketing agreements with WSWB and WFXU were entered into after
November 5, 1996. The local marketing agreement with WPME was entered into
prior to November 5, 1996. The local marketing agreement with WGFL was entered
into after November 5, 1996. However, Pegasus does not own other stations in
the WGFL market, and thus the WGFL local marketing agreement is not currently
affected by these changes. Petitions for reconsideration of the new rules,
including a petition submitted by Pegasus, are currently pending before the
FCC. We cannot predict the outcome of these petitions.


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


     Pegasus programs WPME (Portland, Maine), WGFL (Gainesville, Florida), WSWB
(Northeastern Pennsylvania), and WFXU (Tallahassee, Florida) through the use of
local marketing agreements, but there can


                                       12
<PAGE>

be no assurance that the licensees of such stations will not unreasonably
exercise their right to preempt the programming of Pegasus, or that the
licensees of such stations will continue to maintain the transmission
facilities of the stations in a manner sufficient to broadcast a high quality
signal over the station. As the licensee must also maintain all of the
qualifications necessary to be a licensee of the FCC, and as the principals of
the licensee are not under the control of Pegasus, there can be no assurances
that these licenses will be maintained by the entities which currently hold
them.

     Cable Franchises

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

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

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


Legislation and Regulation

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

     On November 29, 1999, Congress enacted the Satellite Home Viewer
Improvement Act of 1999, which amended the Satellite Home Viewer Act. This Act,
for the first time, 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 as regards the availability of television broadcast
programming.

     Direct Broadcast Satellite

     Unlike a common carrier, such as a telephone company, or a cable operator,
direct broadcast satellite operators such as DIRECTV are free to set prices and
serve customers according to their business judgment, without rate of return or
other regulation or the obligation not to discriminate among customers.
However, there are laws and regulations that affect DIRECTV and, therefore,
affect Pegasus. As an operator of a privately owned U.S. satellite system,
DIRECTV is subject to the regulatory jurisdiction of the FCC, primarily with
respect to:

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

   o avoidance of interference with radio stations; and

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

                                       13
<PAGE>

As a distributor of television programming, DIRECTV is also affected by numerous
other laws and regulations. The Telecommunications Act clarifies that the FCC
has exclusive jurisdiction over direct-to-home satellite services and that
criminal penalties may be imposed for piracy of direct-to-home satellite
services. The Telecommunications Act also offers direct-to-home operators relief
from private and local government-imposed restrictions on the placement of
receiving antennae. In some instances, direct-to-home operators have been unable
to serve areas due to laws, zoning ordinances, homeowner association rules, or
restrictive property covenants banning the installation of antennae on or near
homes. The FCC has promulgated rules designed to implement Congress' intent by
prohibiting any restriction, including zoning, land use or building regulation,
or any private covenant, homeowners' association rule, or similar restriction on
property within the exclusive use or control of the antenna user where the user
has a direct or indirect ownership interest in the property, to the extent it
impairs the installation, maintenance or use of a 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 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. Finally, the Telecommunications Act required that
multichannel video programming distributors such as direct-to-home operators
fully scramble or block channels providing indecent or sexually explicit adult
programming. If a multichannel video programming distributor could not fully
scramble or block such programming, it was required to restrict transmission to
those hours of the day when children are unlikely to view the programming (as
determined by the FCC). Rules adopted by the FCC implementing the scrambling
provision became effective on May 18, 1997. However, on December 28, 1998, the
requirement to scramble sexually explicit programming was ruled unconstitutional
by the U.S. District Court in Wilmington, Delaware. This decision was appealed
to the U.S. Supreme Court and a decision is expected this year.


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


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

     The Satellite Home Viewer Improvement Act of 1999 ("SHVIA"), enacted by
Congress late last year, amends the Copyright Act and the Communications Act in
order to clarify the terms and conditions under which a DBS operator may
retransmit local and distant broadcast television stations to subscribers. The
new law was intended to promote the ability of satellite services to compete
with cable television systems and to resolve disputes that had arisen between
broadcasters and satellite carriers regarding the delivery of broadcast
television station programming to satellite service subscribers.


                                       14
<PAGE>

     The SHVIA creates a new "statutory" copyright license applicable to the
retransmission of local broadcast television stations to DBS subscribers.
Although there is no royalty payment obligation associated with this new
license, eligibility for the license is conditioned on the satellite carrier's
compliance with the applicable Communications Act provisions and FCC rules
governing the retransmission of 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 the SHVIA provide
that, until May 29, 2000, a DBS operator is permitted to retransmit a broadcast
television station to satellite subscribers in the station's local market
without the station's consent. However, after May 29, 2000, the satellite
provider must have obtained the station's express consent and failure to comply
with this requirement could subject a satellite provider to substantial
liability. The FCC is currently considering the adoption of rules governing the
retransmission consent process, including rules prohibiting a broadcast
television station from entering into exclusive retransmission consent
agreements or from failing to engage in good faith negotiations for
retransmission consent.

     In addition, beginning January 1, 2002, a satellite provider that
retransmits at least one broadcast television station to subscribers residing in
the station's local television market pursuant to the statutory copyright
license will be required to retransmit upon request all other broadcast
television stations located in that market.

     In a future rulemaking, the FCC will promulgate "must carry" rules on
satellite carriers similar to those imposed on cable systems. The lengthy
transition period for "must carry" is expected to place satellite carriers in a
comparable position to cable operators.

     Other provisions contained in the SHVIA address the retransmisison by a
satellite service provider of a broadcast television station to subscribers who
reside outside the local market of the station being retransmitted. A DBS
provider may retransmit such "distant" broadcast stations affiliated with the
national broadcast television networks to those subscribers meeting certain
specified eligibility criteria which the FCC is directed to implement. The
primary determinant of a subscribers 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. The SHVIA also directs the FCC to adopt rules that
would subject the satellite retransmission of certain distant stations to
program "blackout" rules similar to rules currently applicable to the
retransmisison of distant broadcast television stations by cable systems.

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

     The final outcome of ongoing and future FCC rulemakings cannot yet be
determined. Any regulatory changes could adversely affect Pegasus' operations.
Must carry requirements could cause the displacement of possibly more
attractive programming.


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

     Broadcast Television


     The ownership, operation and sale of television stations, including those
licensed to our subsidiaries, are subject to the jurisdiction of the FCC under
authority granted it pursuant to the Communications Act. Matters subject to FCC
oversight include, but are not limited to,


     o the assignment of frequency bands for broadcast television;


     o the approval of a television station's frequency, location and operating
       power;


     o the issuance, renewal, revocation or modification of a television
       station's FCC license;

                                       15
<PAGE>

     o the approval of changes in the ownership or control of a television
       station's licensee;

     o the regulation of equipment used by television stations; and

     o the adoption and implementation of regulations and policies concerning
       the ownership, operation and employment practices of television stations.


The FCC has the power to impose penalties, including fines or license
revocations, upon a licensee of a television station for violations of the
FCC's rules and regulations. The following is a brief summary of certain
provisions of the Communications Act and of specific FCC regulations and
policies affecting broadcast television. Reference should be made to the
Communications Act, FCC rules and the public notices and rulings of the FCC for
further information concerning the nature and extent of FCC regulation of
broadcast television stations.


     License Renewal. Television station licenses are granted for a maximum
allowable period of eight years and are renewable thereafter for additional
eight year periods. The FCC may revoke or deny licenses, after a hearing, for
serious violations of its regulations, and it may impose fines on licensees for
less serious infractions. Petitions to deny renewal of a license may be filed
on or before the first day of the last month of a license term. Generally,
however, in the absence of serious violations of FCC rules or policies, license
renewal is expected in the ordinary course. The FCC will grant a license
renewal if the FCC finds that the station seeking renewal has served the public
interest, convenience and necessity, that there have been no serious violations
by the licensee of the Communications Act or the rules and regulations of the
FCC, and that there have been no other violations by the licensee of the
Communications Act or the rules and regulations of the FCC that, when taken
together, would constitute a pattern of abuse. The licenses with respect to TV
stations WOLF/WILF, WPXT, WDSI, WTLH and WDBD are scheduled to expire on August
1, 2007, April 1, 2007, August 1, 2005, April 1, 2005 and June 1, 2005,
respectively. The licenses with respect to WSWB, WFXU and WGFL, stations
Pegasus programs pursuant to local marketing agreements, expire on August 1,
2007, February 1, 2005 and February 1, 2005, respectively. The other television
station Pegasus programs, WPME, has a license application pending at the FCC.


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


     Attribution Rules. The FCC generally applies its ownership limits to
"attributable" interests held by an individual, corporation, partnership or
other association. In the case of corporations holding, or through subsidiaries
controlling, broadcast licenses, the interests of officers, directors and those
who, directly or indirectly, have the right to vote 5% or more of the
corporation's stock (or 20% or more of such stock in the case of insurance
companies, investment companies and bank trust departments that are passive
investors) are generally attributable, except that, in general, no minority
voting stock interest will be attributable if there is a single holder of more
than 50% of the outstanding voting power of the corporation.


     The FCC recently adopted a new rule, known as the equity-debt plus rule,
that causes certain creditors or investors to be attributable owners of a
station, regardless of whether there is a single majority stockholder or other
applicable exception to the FCC's attribution rules. Under this new rule, a
major programming supplier -- any programming supplier that provides more than
15% of the station's weekly programming hours -- or same-market media entity
will be an attributable owner of a station if the supplier or same-market media
entity holds debt or equity, or both, in the station that is greater than 33%
of the value of the station's total debt plus equity. For purposes of this
rule, equity includes all stock, whether voting or nonvoting, and equity held
by insulated limited partners in a limited partnership. Debt includes all
liabilities, whether long-term or short-term.


     Alien Ownership Restrictions. The Communications Act restricts the ability
of foreign entities to own or hold interests in broadcast licenses. Foreign
governments, representatives of foreign governments, non-citizens


                                       16
<PAGE>

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

     Multiple Ownership Rules. FCC rules limit the number of television
stations any one entity can acquire or own. The FCC's television national
multiple ownership rule limits the combined audience of television stations in
which an entity may hold an attributable interest to 35% of total U.S. audience
reach. Under the FCC's new local television ownership rules, a party may own
two television stations in a market if:

   o there is no Grade B overlap between the stations;

   o if the stations are in two different Nielsen designated market areas; or

   o if the market containing both stations contains at least eight
     separately-owned full-power television stations, and both stations are not
     among the top four rated stations in the market.

In addition, a party may request a waiver of the rule to acquire a second
station in the market if the station to be acquired is economically distressed
or unbuilt and there is no party who does not own a local television station
who would purchase the station for a reasonable price.

     Cross-Ownership Rules. The FCC's cross-ownership rules generally permit a
party to own a combination of up to two television stations and six radio
stations depending on the number of other, independent media voices in the
market. A "media voice" includes each independently owned and operating full
power television station, each independently owned and operating radio station,
and each independently owned daily newspaper with a circulation exceeding 5% of
the households in the market. In addition, all cable systems operating in the
market are counted as one voice. In addition, the Telecommunications Act
eliminates the statutory prohibition against the ownership of television
stations and cable systems in the same geographic market, although FCC rules
prohibiting such ownership are still in place.

     Programming and Operation. The Communications Act requires broadcasters to
serve the "public interest." Broadcast station licensees are required to
present programming that is responsive to local community problems, needs and
interests and to maintain certain records demonstrating such responsiveness.
Complaints from viewers concerning a station's programming often will be
considered by the FCC when it evaluates license renewal applications, although
such complaints may be filed at any time and generally may be considered by the
FCC at any time. The FCC has initiated a proceeding to clarify the public
interest obligations of broadcasters, although we cannot predict the outcome of
such proceeding. Stations also must follow various FCC rules that regulate,
among other things, political advertising, sponsorship identifications, the
advertisements of contests and lotteries, programming directed to children,
obscene and indecent broadcasts, television violence, closed captioning and
technical operations, including limits on radio frequency radiation. The FCC
recently adopted rules to require broadcast licensees to create equal
employment opportunity outreach programs and maintain records and make filings
with the FCC evidencing such efforts.

     Must Carry and Retransmission Consent. The Communications Act requires
each television broadcaster to make an election to exercise either certain
"must carry" or, alternatively, "retransmission consent" rights in connection
with its carriage by cable systems in the station's local market. If a
broadcaster chooses to exercise its must carry rights, it may demand carriage
on a specified channel on cable systems within its defined market. Must carry
rights are not absolute, and their exercise is dependent on variables such as
the number of activated channels on, and the location and size of, the cable
system and the amount of duplicative


                                       17
<PAGE>

programming on a broadcast station. Under certain circumstances, a cable system
may decline carriage of a given station. If a broadcaster chooses to exercise
its retransmission consent rights, it may prohibit cable systems from carrying
its signal, or permit carriage under a negotiated compensation arrangement. The
FCC's must carry requirements took effect in June 1993. Pegasus' stations
exercised retransmission consent rights in 1993 and 1996 and either elected
retransmission consent or must carry in 1999. Television stations must make a
new election between must carry and retransmission consent rights every three
years. The next required election date is October 1, 2002.

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

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


     The FCC required that affiliates of ABC, CBS, Fox and NBC in the top ten
television markets begin digital broadcasting by May 1, 1999, and that
affiliates of these networks in markets 11 through 30 begin digital
broadcasting by November 1999. All other commercial stations are required to
begin digital broadcasting by May 1, 2002. The FCC's plan calls for the digital
television transition period to end in the year 2006 at which time the FCC
expects that television broadcasters will have ceased broadcasting on their
non-digital channels, allowing that spectrum to be recovered by the government
for other uses. Under the Balanced Budget Act signed into law by President
Clinton, however, the FCC is authorized to extend the December 31, 2006
deadline for reclamation of a television station's non-digital channel if, in
any given case:


   o one or more television stations affiliated with one of the four major
     networks in a market are not broadcasting digitally, and the FCC
     determines that the station(s) has (have) "exercised due diligence" in
     attempting to convert to digital broadcasting;


   o less than 85% of the television households in the station's market
     subscribe to a multichannel video service (cable, wireless cable or direct
     broadcast satellite) that carries at least one digital channel from each
     of the local stations in that market; or


   o less than 85% of the television households in the station's market can
     receive digital signals off the air using either a set-top converter box
     for an analog television set or a new digital television set.


The Balanced Budget Act also directs the FCC to auction the non-digital
channels by September 30, 2002 even though they are not to be reclaimed by the
government until at least December 31, 2006. The Balanced Budget Act also
permits broadcasters to bid on the non-digital channels in cities with
populations greater than 400,000 provided the channels are used for digital
television. The FCC has opened separate proceedings to consider the surrender
of existing television channels and how those frequencies will be used after
they are eventually recovered from television broadcasters and to what extent
the cable must-carry requirements will apply to digital television signals.


     In addition, the digital order restricts current stations' abilities to
relocate transmitter sites and otherwise change technical facilities in any
manner that could impact proposed digital television stations. This may


                                       18
<PAGE>

preclude the improvement of the facilities of certain stations owned or
programmed by Pegasus. The order also allotted digital television stations at
the current analog transmitter sites. Changes in the location of digital
stations are dependent on the lack of interference to other digital and analog
stations. Pegasus has filed applications with the FCC for digital television
construction permits for all of its stations.


     Implementation of digital television will improve the technical quality of
television signals receivable by viewers. Under certain circumstances, however,
conversion to digital operation may reduce a station's geographic coverage area
or result in some increased interference. The FCC's digital television
allotment plan also results in current UHF stations having considerably less
signal power within their service areas than present VHF stations that move to
digital television channels. While the 1998 orders of the FCC present current
UHF stations with some options to overcome this power disparity, it is unknown
at this time whether Pegasus will be able to benefit from these options.
Implementation of digital television will also impose substantial additional
costs on television stations because of the need to replace equipment and
because some stations will need to operate at higher utility costs. The FCC has
also proposed imposing new public interest requirements on television licensees
in exchange for their receipt of digital television channels. A petition has
been filed at the FCC, supported by a number of television broadcast licensees
including Pegasus, questioning whether the digital transmission system standard
adopted by the FCC is adequate to provide acceptable service to television
viewers, or whether television broadcasters should be free to adopt another
standard. Thus far, the FCC has not acted on this petition. We cannot predict
what future actions the FCC might take with respect to digital television, nor
can we predict the effect of the FCC's present digital television
implementation plan or such future actions on our business.


     Pending or Proposed Legislation and FCC Rulemakings. The FCC has initiated
a proceeding seeking comment on whether the public interest would be served by
establishing limits on the amount of commercial matter broadcast by television
stations. The FCC also is conducting a rulemaking proceeding concerning the
implementation of a Class A low power television service, which would afford
qualifying low power stations certain rights accorded to full power stations.
Other matters which could affect our broadcast properties include technological
innovations affecting the mass communications industry and technical allocation
matters, including assignment by the FCC of channels for additional broadcast
stations, low-power television stations and wireless cable systems and their
relationship to and competition with full power television service, as well as
possible spectrum fees or other changes imposed on broadcasters for the use of
their channels. The ultimate outcome of these pending proceedings cannot be
predicted at this time.


     The Congress and the FCC have considered in the past and may consider and
adopt in the future:


   o other changes to existing laws, regulations and policies or


   o new laws, regulations and policies regarding a wide variety of matters
     that could affect, directly or indirectly, the operation, ownership, and
     profitability of Pegasus' broadcast stations, result in the loss of
     audience share and advertising revenues for these stations or affect the
     ability of Pegasus to acquire additional broadcast stations or finance
     such acquisitions.


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


     Cable Television


     The Communications Act, as amended by The Cable Communications Policy Act
of 1984, Cable Television Consumer Protection and Competition Act of 1992, and
the Telecommunications Act of 1996. The Communications Act as amended,
establishes uniform national standards and guidelines for the regulation of
cable systems. Among other things, the


                                       19
<PAGE>

Communications Act affirms the right of franchising authorities (state or
local, depending on the practice in individual states) to award one or more
franchises within their jurisdictions. It also prohibits non-grandfathered
cable systems from operating without a franchise in such jurisdictions.

     The Communications Act provides for regulation with respect to, among
other things:

     o cable system rates for basic services;

     o programming access and exclusivity arrangements;

     o access to cable channels by unaffiliated programming services;

     o leased access terms and conditions;

     o horizontal and vertical ownership of cable systems;

     o customer service requirements;

     o franchise renewals;

     o television broadcast signal carriage and retransmission consent;

     o technical standards;

     o subscriber privacy;

     o consumer protection issues;

     o cable equipment compatibility;

     o obscene or indecent programming; and


     o cable system requirements that subscribers subscribe to tiers of service
       other than basic service as a condition of purchasing premium services.


Additionally, the legislation encourages competition with existing cable
systems by allowing municipalities to own and operate their own cable systems
without having to obtain a franchise; preventing franchising authorities from
granting exclusive franchises or unreasonably refusing to award additional
franchises covering an existing cable system's service area. The Communications
Act also precludes video programmers affiliated with cable television companies
from favoring those operators over competitors and requires such programmers to
sell their programming to other multichannel video distributors. This provision
limits the ability of cable program suppliers to offer exclusive programming
arrangements to cable television companies. The FCC, the principal federal
regulatory agency with jurisdiction over cable television, has adopted many
regulations to implement the provisions of the Communications Act.


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


     Congress and the FCC have frequently revisited the subject of cable
television regulation and may do so again. Future legislative and regulatory
changes could adversely affect Pegasus' operations.




                                       20
<PAGE>

     Cable Rate Regulation

     Under the Communications Act, rate regulation is precluded wherever a cable
operator faces "effective competition." Although cable operators are presumed
not to be subject to effective competition, an operator can rebut this
presumption by demonstrating that it meets any one of four separate tests: (i)
fewer than 30 percent of the households in the franchise area subscribe (the
"low penetration" test); (ii) at least two competing multichannel video
providers offer service to at least 50 percent of the franchise area and the
number of households subscribing to providers other than the largest provider
exceeds 15 percent of the franchise households; (iii) a municipally-owned cable
system offers service to at least 50 percent of the franchise households; and
(iv) a local exchange carrier offers "comparable" video programming services to
subscribers in the franchise area by a means other than direct broadcast
satellite. The FCC has found that all of Pegasus' cable television systems are
subject to effective competition under the "low penetration" standard and
therefore are not currently subject to rate regulation.

     Indecent Programming on Leased Access Channels. FCC regulations pursuant
to the Communications Act permit cable operators to restrict or refuse the
carriage of indecent programming on so-called "leased access" channels, i.e.,
channels the operator must set aside for commercial use by persons unaffiliated
with the operator. Operators were also permitted to prohibit indecent
programming on public access channels. In June 1996, the Supreme Court ruled
unconstitutional the indecency prohibitions on public access programming as
well as the "segregate and block" restriction on indecent leased access
programming.

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

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

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


                                       21
<PAGE>

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

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

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

     The Telecommunications Act replaces the FCC's video dialtone rules with an
"open video system" plan by which wireline competitors can provide cable service
with decreased regulatory burdens. Open video systems complying with the FCC
open video system regulations will receive relaxed oversight. Only the program
access, negative option billing prohibition, subscriber privacy, Equal
Employment Opportunity, public education and government access requirements,
must-carry and retransmission consent provisions of the Communications Act will
apply to entities providing an open video system. Rate regulation, customer
service provisions, leased access and equipment compatibility will not apply.
Local franchising authorities may require open video system operators to pay
"franchise fees" only to the extent that the open video system provider or its
affiliates provide cable services over the open video system. Such fees may not
exceed the franchise fees charged to cable operators in the area, and the open
video service provider may pass through the fees as a separate subscriber bill
item. Open video system operators will be subject to local franchising
authorities. A general right-of-way management regulations, and local
franchising authorities may require the open video service operator to obtain
local authorizations to provide service.

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

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

     Cable Cross-Ownership. The Telecommunications Act eliminates statutory
restrictions on broadcast/cable cross-ownership, including broadcast
network/cable restrictions, but leaves in place existing FCC regulations
prohibiting local cross-ownership between television stations and cable
systems. The Telecommunications Act leaves in place existing restrictions on
cable cross-ownership with satellite master antenna television and multichannel
multi-point distribution systems facilities, but lifts those restrictions where
the cable operator is subject to effective competition. In January 1995,
however, the FCC adopted regulations which permit cable operators to own and
operate satellite master antenna television systems within their franchise
area, provided that such operation is consistent with local cable franchise
requirements.

     Regulation of Signal Carriage. The Communications Act grants broadcasters
a choice of must carry right or retransmission consent rights. The rules
adopted by the FCC generally provided for mandatory


                                       22
<PAGE>

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

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

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


     Copyright Licensing. Cable systems are subject to federal copyright
licensing covering carriage of broadcast signals. In exchange for making
semi-annual payments to a federal copyright royalty pool and meeting certain
other obligations, cable operators obtain a statutory license to certain
retransmit broadcast signals. Bills have been introduced in Congress over the
past several years that would eliminate or modify the cable statutory license.
The Communications Act's retransmission consent provisions expressly provide
that retransmission consent agreements between television stations and cable
operators do not obviate the need for cable operators to obtain a copyright
license for the programming carried on each broadcaster's signal.

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

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

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


                                       23
<PAGE>

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

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

     The foregoing does not purport to describe all present and proposed
federal, state and local regulations and legislation relating to the cable
industry. Other existing federal regulations, copyright licensing and, in many
jurisdictions, state and local franchise requirements currently are the subject
of a variety of judicial proceedings, legislative hearings and administrative
and legislative proposals which could change, in varying degrees, the manner in
which cable systems operate. Neither the outcome of these proceedings nor the
impact upon the cable industry or Pegasus' cable systems can be predicted at
this time.

     Inside Wiring. In a 1997 order, the FCC established rules that require an
incumbent cable operator upon expiration or termination of a multiple dwelling
unit service contract to sell, abandon, or remove "home run" wiring that was
installed by the cable operator in a multiple dwelling unit building. These
inside wiring rules will assist building owners in their attempts to replace
existing cable operators with new video programming providers who are willing
to pay the building owner a higher fee. Additionally, the FCC has proposed
abrogating all exclusive multiple dwelling unit contracts held by cable
operators, but at the same time allowing competitors to cable to enter into
exclusive multiple dwelling unit service contracts.

     Internet Service Regulation. Although there is no significant federal
regulation of cable system delivery of Internet services at the current time,
and the FCC issued a report to Congress in January 1999 finding no immediate
need to impose such regulation, this situation may change as cable systems
expand their broadband delivery of Internet services. In particular, proposals
have been advanced at the FCC that would require cable operators to provide
access to unaffiliated internet service providers and online service providers.
Certain Internet service providers also are attempting to use existing
commercial leased access provisions of the Telecommunications Act to gain access
to cable system delivery. Finally, some local franchising authorities have
imposed or are considering the imposition of mandatory Internet access
requirements as part of cable franchise renewals or transfer approvals.

     Other FCC Regulations. In addition to the FCC regulations noted above,
there are other FCC regulations covering such areas as:

   o equal employment opportunity;

   o  customer privacy;

   o programming practices -- including, among other things, syndicated
     program exclusivity, network program nonduplication, local sports
     blackouts, indecent programming, lottery programming, political
     programming, sponsorship identification, and children's programming
     advertisements;

   o registration of cable systems and facilities licensing;

   o maintenance of various records and public inspection files;

   o frequency usage;

   o lockbox availability;

   o antenna structure notification;

                                       24
<PAGE>

    o tower marking and lighting;


    o consumer protection and customer service standards;


    o technical standards; and


    o consumer electronics equipment compatibility.


ITEM 2: PROPERTIES


     Our corporate headquarters are located in Bala Cynwyd, Pennsylvania. In
February 2000, we purchased our corporate headquarters building for $12.5
million, with mortgage financing of approximately $8.8 million.


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


ITEM 3: LEGAL PROCEEDINGS


     DIRECTV/NRTC Litigation. On June 3, 1999, the National Rural
Telecommunications Cooperative filed a lawsuit in federal court against DIRECTV
seeking a court order to enforce the National Rural Telecommunications
Cooperative's contractual rights to obtain from DIRECTV certain premium
programming formerly distributed by United States Satellite Broadcasting
Company, Inc. for exclusive distribution by the National Rural
Telecommunications Cooperative's members and affiliates in their rural markets.
The National Rural Telecommunications Cooperative also sought a temporary
restraining order preventing DIRECTV from marketing the premium programming in
such markets and requiring DIRECTV to provide the National Rural
Telecommunications Cooperative with the premium programming for exclusive
distribution in those areas. The court, in an order dated June 17, 1999, denied
the National Rural Telecommunications Cooperative a preliminary injunction on
such matters, without deciding the underlying claims. On July 22, 1999, DIRECTV
responded to the National Rural Telecommunications Cooperative's continuing
lawsuit by rejecting the National Rural Telecommunications Cooperative's claims
to exclusive distribution rights and by filing a counterclaim seeking judicial
clarification of certain provisions of DIRECTV's contract with the National
Rural Telecommunications Cooperative. In particular, DIRECTV contends in its
counterclaim that the term of DIRECTV's contract with the National Rural
Telecommunications Cooperative is measured solely by the orbital life of DBS-1,
the first DIRECTV satellite launched into orbit at the 101o W orbital location,
without regard to the orbital lives of the other DIRECTV satellites at the 101o
W orbital location. DIRECTV also alleges in its counterclaim that the National
Rural Telecommunications Cooperative's right of first refusal, which is
effective at the end of the term of DIRECTV's contract with the National Rural
Telecommunications Cooperative, does not provide for certain programming and
other rights comparable to those now provided under the contract. On September
8, 1999, the court denied a motion by DIRECTV to dismiss certain of the
National Rural Telecommunications Cooperative's claims, leaving all of the
causes of action asserted by the National Rural Telecommunications Cooperative
at issue.


     On September 9, 1999, the National Rural Telecommunications Cooperative
filed a response to DIRECTV's counterclaim contesting DIRECTV's interpretations
of the end of term and right of first refusal provisions. On August 26, 1999,
the National Rural Telecommunications Cooperative filed a separate lawsuit in
federal court against DIRECTV claiming that DIRECTV had failed to provide to
the National Rural Telecommunications Cooperative its share of launch fees and
other benefits that DIRECTV and its affiliates have received relating to
programming and other services. On November 15, 1999, the court granted a
motion by DIRECTV and dismissed a portion of the National Rural
Telecommunications Cooperative's lawsuit regarding launch fees and other
benefits. In particular, the court dismissed the tort claim asserted by the
National Rural Telecommunications Cooperative, but left in place the remaining
claims asserted by the


                                       25
<PAGE>

National Rural Telecommunications Cooperative. The court also consolidated that
lawsuit with the other pending National Rural Telecommunications
Cooperative/DIRECTV lawsuit. The court set various discovery and motion
deadlines for the spring and summer of 2000 but did not set a trial date.

     On December 29, 1999, DIRECTV filed a motion for partial summary judgment.
The motion seeks a court order that the National Rural Telecommunications
Cooperative's right of first refusal, effective at the termination of DIRECTV's
contract with the National Rural Telecommunications Cooperative, does not
include programming services and is limited to 20 program channels of
transponder capacity. The hearing date on DIRECTV's motion was vacated by the
court pending resolution of certain procedural issues raised by a new lawsuit
we and Golden Sky filed against DIRECTV, discussed below. The court has not yet
set a trial date on the merits of the motion for partial summary judgment.

     On January 10, 2000, we and Golden Sky filed a class action lawsuit in
federal court in Los Angeles against DIRECTV as representatives of a proposed
class that would include all members and affiliates of the National Rural
Telecommunications Cooperative that are distributors of DIRECTV. The complaint
contains causes of action for various torts, common counts and declaratory
relief based on DIRECTV's failure to provide the National Rural
Telecommunications Cooperative with premium programming, thereby preventing the
National Rural Telecommunications Cooperative from providing this programming
to the class members and affiliates. The claims are also based on DIRECTV's
position with respect to launch fees and other benefits, term and rights of
first refusal. The complaint seeks monetary damages and a court order regarding
the rights of the National Rural Telecommunications Cooperative and its members
and affiliates.

     On February 10, 2000, we and Golden Sky filed an amended complaint which
added new tort claims against DIRECTV for interference with plaintiffs'
relationships with manufacturers, distributors and dealers of direct broadcast
satellite equipment. We and Golden Sky also withdrew the class action
allegations to allow a new class action to be filed on behalf of the members
and affiliates of the National Rural Telecommunications Cooperative. The
outcome of this litigation and the litigation filed by the National Rural
Telecommunications Cooperative could have a material adverse effect on our
direct broadcast satellite business.

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

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


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

     No matters were submitted to a vote of our stockholders during the fourth
quarter of 1999.

                                       26
<PAGE>

                                    PART II


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


Price Range of Class A Common Stock

     Our Class A common stock is traded on the Nasdaq National Market under the
symbol "PGTV." The sale prices reflect inter-dealer quotations, do not include
retail markups, markdowns or commission, and do not necessarily represent
actual transactions. We urge you to obtain current market quotations. The stock
prices listed below represent the high and low closing sale prices of the Class
A common stock, as reported on the Nasdaq National Market since January 1,
1998.



                                         Price Range of
                                              Common
                                              Stock
                                       -------------------
                                         High        Low
                                       --------   --------
       Year Ended December 31, 1998:
       First Quarter ...............    26         19 7/8
       Second Quarter ..............    25 5/8     20 7/8
       Third Quarter ...............    25         15 7/8
       Fourth Quarter ..............    25 1/2     10 5/8
       Year Ended December 31, 1999:
       First Quarter ...............    28 7/8     21 3/16
       Second Quarter ..............    50 1/2     27 7/8
       Third Quarter ...............    46         37
       Fourth Quarter ..............   102 3/4     42 1/2


     The closing sale price of the Class A common stock was $128 3/8 on March
8, 2000. As of March 8, 2000, Pegasus had 143 shareholders of record.


Dividend Policy

     Common Stock: Pegasus has not paid any cash dividends on its Class A
common stock and does not anticipate paying cash dividends on its common stock
in the foreseeable future. Our policy is to retain cash for operations and
expansion. Payment of cash dividends on the common stock is restricted by
Pegasus' publicly held debt securities and preferred stock. Our ability to
obtain cash from our subsidiaries with which to pay cash dividends is also
restricted by the subsidiaries' publicly held debt securities and bank
agreements.

     Preferred Stock: We are allowed to pay dividends on our Series C
convertible preferred stock by issuing shares of our Class A common stock
instead of paying cash, and until July 1, 2002, we are allowed to pay dividends
on our Series A preferred stock by issuing more shares of that stock instead of
paying cash. We expect to issue shares of our Class A common stock and Series A
preferred stock to pay these dividends, and in any event our publicly held debt
securities do not permit us to pay cash dividends on our Series A preferred
stock until July 1, 2002. We are also obligated to pay cash dividends of $1.4
million per year in the aggregate on our Series B, Series D and Series E junior
convertible participating preferred stock. These payments are subject to
compliance with outstanding indentures and the certificate of designation with
respect to the Series A preferred stock.


Calculation of Aggregate Market Value of Nonaffiliate Shares


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


                                       27
<PAGE>

Recent Sales of Unregistered Securities


     All sales for the period covered by this Report have been previously
reported by Pegasus on its Quarterly Reports on Form 10-Q for the quarters
ended March 31, 1999, June 30, 1999 and September 30, 1999 with the following
exceptions:


     1. On November 19, 1999, Pegasus exchanged its 12.5% Series A senior notes
due 2007 for Digital Television Services, Inc.'s outstanding 12.5% Series B
senior subordinated notes due 2007 of which $155.0 million in principal amount
at maturity were outstanding. Pegasus' 12.5% Series A notes due 2007 have
substantially the same terms and provisions as Digital Television Services,
Inc's 12.5% Series B senior subordinated notes due 2007. These transactions
were effected by Pegasus in reliance upon exemptions from registration under
the Securities Act of 1933 as provided in Rule 144A and Regulation S.


     2. On December 16, 1999, Pegasus issued 7,500 shares of its Class A common
stock upon the exercise of a warrant previously issued on August 10, 1998 in
connection with an acquisition of DIRECTV rights and related assets from an
independent provider of DIRECTV in certain rural portions of Oregon. The
exercise price of the warrant was $21.8604, resulting in consideration of
$163,953 being received by Pegasus. In issuing these shares, Pegasus relied
upon the exemption from registration set forth in Section 4(2) of the
Securities Act.


     3. On January 4, 2000, in connection with the acquisition by merger of
Carr Rural TV, Inc., Pegasus issued 5,707 shares of Series B junior convertible
participating preferred stock with a liquidation preference of $1,000 per share
convertible, at $61.596873, into approximately 92,651 shares of Class A common
stock. These transactions were effected by Pegasus in reliance upon exemptions
from registration under the Securities Act as provided in Section 4(2) thereof.
Each certificate issued for unregistered securities contained a legend stating
that the securities have not been registered under the Securities Act and
setting forth the restrictions on the transferability and the sale of the
securities. None of the transactions involved a public offering.


     4. On January 6, 2000, Pegasus issued 5,000 shares of its Class A common
stock upon the exercise of a warrant previously issued in May 1998 in
connection with an acquisition of DIRECTV rights and related assets from an
independent provider of DIRECTV in certain rural portions of Oregon. The
exercise price of the warrant was $24.2653, resulting in consideration of
$121,326 being received by Pegasus. In issuing these shares, Pegasus relied
upon the exemption from registration set forth in Section 4(2) of the
Securities Act.


     5. On January 13, 2000, in partial consideration for the acquisition of
preferred interests of Personalized Media Communications, LLC, Pegasus issued
200,000 shares of Pegasus' Class A common stock and agreed, subject to certain
conditions, to issue warrants to purchase 1.0 million shares of Pegasus' Class
A common stock at an exercise price of $90.00 per share and with a term of ten
years. These transactions were effected by Pegasus in reliance upon exemptions
from registration under the Securities Act of 1933 as provided in Section 4(2)
thereof. Each certificate issued for unregistered securities contained a legend
stating that the securities have not been registered under the Securities Act
and setting forth the restrictions on the transferability and the sale of the
securities. None of the transactions involved a public offering.


     6. On January 25, 2000, Pegasus completed a private offering of $300.0
million in liquidation amount of its 61/2% Series C convertible preferred
stock. The Series C convertible preferred stock was issued to Donaldson, Lufkin
& Jenrette Securities Corporation, Bear, Stearns & Co. Inc., Banc of America
Securities LLC, Deutsche Bank Securities Inc. and CIBC World Markets Corp., as
initial purchasers in a transaction exempt from the registration requirements
of the Securities Act pursuant to Regulation D. The initial purchasers then
sold the Series C convertible preferred stock to a limited number of
institutional investors in transactions exempt from the registration
requirements of the Securities Act pursuant to Rule 144A thereof. Discounts and
commissions of approximately 3.0% of the offering were paid to the initial
purchasers in connection with the issuance of the Series C convertible
preferred stock.


     Each share of Series C convertible preferred stock is convertible at any
time into the number of whole shares of our Class A common stock equal to the
stated liquidation preference of $100 per share divided by an


                                       28
<PAGE>

initial conversion price of $127.50 per share, subject to adjustment if certain
events should occur. Pegasus may redeem the Series C convertible preferred
stock at any time beginning on February 1, 2003 at redemption prices set forth
in the certificate of designation. In addition, from August 1, 2001 to February
1, 2003, Pegasus may redeem the Series C convertible preferred stock at a
redemption premium of 105.525% of the stated liquidation preference, plus
accumulated and unpaid dividends, if any, if the trading price of Pegasus'
Class A common stock equals or exceeds $191.25 for a specified trading period.
In the event of a change of control of Pegasus, holders of Series C convertible
preferred stock will have a one-time option to convert such holder's shares
into Class A common stock at a conversion price equal to the greater of (1) the
market price of our Class A common stock at the change of control date or (2)
$68.00 per share. In lieu of issuing Class A common stock, we may, at our
option, make a cash payment equal to the market value of the shares. Pegasus
plans to use the net proceeds of the offering for working capital and general
corporate purposes.

     7. On February 1, 2000, in partial consideration for the acquisition of
assets of South Coast Satellite Cooperative, Inc., Pegasus issued 22,500 shares
of Series D junior convertible participating preferred stock with a liquidation
preference of $1,000 per share convertible, at $102.40755, into approximately
219,711 shares of Class A common stock. These transactions were effected by
Pegasus in reliance upon exemptions from registration under the Securities Act
as provided in Section 4(2) thereof. Each certificate issued for unregistered
securities contained a legend stating that the securities have not been
registered under the Securities Act and setting forth the restrictions on the
transferability and the sale of the securities. None of the transactions
involved a public offering.

     8. On February 14, 2000, in connection with the acquisition by merger of
Unlimited Visions, Inc., trading as Skyquest, Pegasus issued 436,592 shares of
Class A common stock. In addition, on February 14, 2000, in partial
consideration for the acquisition of assets of Kennebec CATV Company, Pegasus
issued warrants to purchase 1,500 shares of Class A common stock at an exercise
price of $92.23 per share, expiring on February 15, 2005. These transactions
were effected by Pegasus in reliance upon exemptions from registration under
the Securities Act as provided in Section 4(2) thereof. Each certificate issued
for unregistered securities contained a legend stating that the securities have
not been registered under the Securities Act and setting forth the restrictions
on the transferability and the sale of the securities. None of the transactions
involved a public offering.

     9. On February 25, 2000, in partial consideration for the acquisition of
assets of Casco Communications Inc., Pegasus issued 10,000 shares of Series E
junior convertible participating preferred stock with a liquidation preference
of $1,000 per share convertible, at $99.7667, into approximately 100,234 shares
of Class A common stock. These transactions were effected by Pegasus in
reliance upon exemptions from registration under the Securities Act as provided
in Section 4(2) thereof. Each certificate issued for unregistered securities
contained a legend stating that the securities have not been registered under
the Securities Act and setting forth the restrictions on the transferability
and the sale of the securities. None of the transactions involved a public
offering.


                                       29
<PAGE>
ITEM 6: SELECTED FINANCIAL DATA

     The selected historical consolidated financial data have been derived from
Pegasus' audited consolidated financial statements which have been audited by
PricewaterhouseCoopers LLP. The information should be read in conjunction with
the consolidated financial statements, related notes thereto and Management's
Discussion and Analysis of Financial Condition and Results of Operations, which
are included elsewhere herein. The statement of operating data reflects net
revenues and operating expenses from our continuing operations. The results of
operations from the entire cable segment have been classified as discontinued
and certain amounts for 1995 through 1998 have been restated. The paragraphs
following the table provide an explanation of certain portions of it.
<TABLE>
<CAPTION>
                                                                            Years Ended December 31,
                                                                            ------------------------
Statement of Operating Data:                                                    1995         1996
                                                                             (Dollars in thousands,
                                                                             except per share data)
Net revenues:
<S>                                                                         <C>          <C>
 DBS .....................................................................   $   1,469     $  5,829
 Broadcast ...............................................................      20,073       28,604
                                                                             ---------     --------
  Total net revenues .....................................................      21,542       34,433
Operating expenses:
 DBS
  Programming, technical and general and administrative ..................       1,379        4,312
  Marketing and selling ..................................................          --          646
  Incentive compensation .................................................           9          146
  Depreciation and amortization ..........................................         640        1,786
 Broadcast
  Programming, technical and general and administrative ..................      10,181       13,903
  Marketing and selling ..................................................       3,789        4,851
  Incentive compensation .................................................         415          691
  Depreciation and amortization ..........................................       2,934        4,041
 Corporate expenses ......................................................       1,364        1,429
 Corporate depreciation and amortization .................................         492          988
 Other expense, net ......................................................          15          139
                                                                             ---------     --------
  Income (loss) from operations ..........................................         324        1,501
Interest expense .........................................................      (4,135)      (8,885)
Interest income ..........................................................         362          218
                                                                             ---------     --------
 Loss from continiuing operations before income taxes, equity loss and
  extraordinary items ....................................................      (3,449)      (7,166)
Provision (benefit) for income taxes .....................................          10         (145)
Equity in net loss of unconsolidated affiliate ...........................          --           --
                                                                             ---------     --------
 Loss from continuing operations before extraordinary items ..............      (3,459)      (7,021)
Discontinued operations:
 Income (loss) from discontinued operations of cable
  segment, net of income taxes ...........................................      (4,698)      (2,703)
 Gain on sale of discontinued operations, net of income taxes ............          --           --
                                                                             ---------     --------
 Loss before extraordinary items .........................................      (8,157)      (9,724)
Extraordinary gain (loss) from extinguishment of debt, net ...............      10,211         (250)
                                                                             ---------     --------
 Net income (loss) .......................................................       2,054       (9,974)
 Preferred stock dividends ...............................................          --           --
                                                                             ---------     --------
 Net income (loss) applicable to common shares ...........................   $   2,054    ($  9,974)
                                                                             =========     ========
Loss per common share:
  Loss from continuing operations ........................................                 $   1.13)
  Income (loss) from discontinued operations .............................                   ( 0.43)
  Gain on sale of discontinued operations ................................                       --
                                                                                           --------
  Loss before extraordinary items ........................................                   ( 1.56)
  Extraordinary item .....................................................                   ( 0.04)
                                                                                           --------
  Loss per common share ..................................................                 $   1.60)
                                                                                           ========
  Weighted average shares outstanding (000's) ............................                    6,240
                                                                                           ========
Other Data:
Pre-marketing cash flow from continuing operations:
 DBS .....................................................................   $      90     $  1,517
 Broadcast ...............................................................       6,103        9,850
                                                                             ---------     --------
 Total pre-marketing cash flow from continuing operations ................   $   6,193     $ 11,367
                                                                             =========     ========
Location cash flow from continuing operations ............................   $   6,193     $ 10,721
Operating cash flow from continuing operations ...........................       4,829        9,292
Capital expenditures .....................................................       2,640        6,294
Net cash provided by (used for):
 Operating activities ....................................................       5,783        3,059
 Investing activities ....................................................      (6,047)     (81,179)
 Financing activities ....................................................      10,859       74,727
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                                                                     Years Ended December 31,
                                                                            ------------------------------------------
Statement of Operating Data:                                                    1997           1998           1999
                                                                             (Dollars in thousands, except per share
                                                                                               data)
Net revenues:
<S>                                                                         <C>           <C>            <C>
 DBS .....................................................................    $  38,254     $ 147,142      $ 286,353
 Broadcast ...............................................................       31,876        34,311         36,415
                                                                              ---------     ---------      ---------
  Total net revenues .....................................................       70,130       181,453        322,768
Operating expenses:
 DBS
  Programming, technical and general and administrative ..................       26,042       102,419        201,158
  Marketing and selling ..................................................        5,973        45,706        117,774
  Incentive compensation .................................................          795         1,159          1,592
  Depreciation and amortization ..........................................       17,042        59,077         82,744
 Broadcast
  Programming, technical and general and administrative ..................       15,672        18,056         22,812
  Marketing and selling ..................................................        5,704         5,993          6,304
  Incentive compensation .................................................          298           177             57
  Depreciation and amortization ..........................................        3,754         4,557          5,144
 Corporate expenses ......................................................        2,256         3,614          5,975
 Corporate depreciation and amortization .................................        1,353         2,105          3,119
 Other expense, net ......................................................          630         1,409          1,995
                                                                              ---------     ---------      ---------
  Income (loss) from operations ..........................................       (9,389)      (62,819)      (125,906)
Interest expense .........................................................      (14,275)      (44,559)       (64,904)
Interest income ..........................................................        1,508         1,586          1,356
                                                                              ---------     ---------      ---------
 Loss from continiuing operations before income taxes, equity loss and
  extraordinary items ....................................................      (22,156)     (105,792)      (189,454)
Provision (benefit) for income taxes .....................................          168          (901)        (8,892)
Equity in net loss of unconsolidated affiliate ...........................           --            --           (201)
                                                                              ---------     ---------      ---------
 Loss from continuing operations before extraordinary items ..............      (22,324)     (104,891)      (180,763)
Discontinued operations:
 Income (loss) from discontinued operations of cable
  segment, net of income taxes ...........................................          257         1,047          2,128
 Gain on sale of discontinued operations, net of income taxes ............        4,451        24,727             --
                                                                              ---------     ---------      ---------
 Loss before extraordinary items .........................................      (17,616)      (79,117)      (178,635)
Extraordinary gain (loss) from extinguishment of debt, net ...............       (1,656)           --         (6,178)
                                                                              ---------     ---------      ---------
 Net income (loss) .......................................................      (19,272)      (79,117)      (184,813)
 Preferred stock dividends ...............................................       12,215        14,764         16,706
                                                                              ---------     ---------      ---------
 Net income (loss) applicable to common shares ...........................   ($  31,487)   ($  93,881)    ($ 201,519)
                                                                              =========     =========      =========
Loss per common share:
  Loss from continuing operations ........................................    $    3.50)    $    8.46)     $   10.46)
  Income (loss) from discontinued operations .............................         0.03          0.07           0.11
  Gain on sale of discontinued operations ................................         0.45          1.75             --
                                                                              ---------     ---------      ---------
  Loss before extraordinary items ........................................       ( 3.02)       ( 6.64)       ( 10.35)
  Extraordinary item .....................................................       ( 0.17)           --        (  0.33)
                                                                              ---------     ---------      ---------
  Loss per common share ..................................................    $    3.19)    $    6.64)     $   10.68)
                                                                              =========     =========      =========
  Weighted average shares outstanding (000's) ............................        9,858        14,130         18,875
                                                                              =========     =========      =========
Other Data:
Pre-marketing cash flow from continuing operations:
 DBS .....................................................................    $  12,212     $  44,723      $  85,195
 Broadcast ...............................................................       10,500        10,262          7,299
                                                                              ---------     ---------      ---------
 Total pre-marketing cash flow from continuing operations ................    $  22,712     $  54,985      $  92,494
                                                                              =========     =========      =========
Location cash flow from continuing operations ............................    $  16,739     $   9,279     ($  25,280)
Operating cash flow from continuing operations ...........................       14,483         5,665        (31,255)
Capital expenditures .....................................................        9,929        12,400         14,784
Net cash provided by (used for):
 Operating activities ....................................................        8,478       (21,962)       (88,879)
 Investing activities ....................................................     (142,109)     (101,373)      (133,981)
 Financing activities ....................................................      169,098       133,791        208,808

</TABLE>

                                       30
<PAGE>


<TABLE>
<CAPTION>
                                                                               As of December 31,
                                                        ----------------------------------------------------------------
                                                           1995         1996         1997         1998          1999
                                                                             (Dollars in thousands)
<S>                                                     <C>          <C>          <C>          <C>          <C>
Balance Sheet Data:
Cash and cash equivalents ...........................    $21,856      $  8,582     $ 45,269     $ 75,985     $  42,832
Working capital (deficiency) ........................     17,566         6,430       32,347       37,889        (4,936)
Total assets ........................................     95,770       173,680      380,862      886,310       945,332
Total debt (including current) ......................     82,896       115,575      208,355      559,029       684,414
Total liabilities ...................................     95,521       133,354      239,234      699,144       862,725
Redeemable preferred stock ..........................         --            --      111,264      126,028       142,734
Minority interest ...................................         --            --        3,000        3,000         3,000
Total common stockholders' equity (deficit) .........        249        40,326       27,364       58,138       (63,127)
</TABLE>

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


     o interest and income taxes;
     o depreciation and amortization and corporate overhead;
     o extraordinary and non-recurring items;
     o non-cash charges, such as incentive compensation under our restricted
       stock plan and 401(k) plans;
     o results of discontinued operations; and
     o DBS subscriber acquisition costs, which are sales and marketing expenses
       incurred to acquire new DBS subscribers.


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


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


   o people who follow our industry frequently use them as measures of
     financial performance and ability to pay debt service; and
   o they are measures that we, our lenders and investors use to monitor our
     financial performance and debt leverage.


                                       31
<PAGE>

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

     The following discussion of the financial condition and results of
operations of Pegasus should be read in conjunction with the consolidated
financial statements and related notes which are included elsewhere herein.
This Report contains certain forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
discussed herein.


GENERAL

     Pegasus Communications Corporation is:

   o The largest independent provider of DIRECTV with 771,000 subscribers at
     February 29, 2000, on an actual basis, without giving effect to the Golden
     Sky acquisition. We have the exclusive right to distribute DIRECTV digital
     broadcast satellite services to 5.2 million rural households in 36 states.
     We distribute DIRECTV through the Pegasus retail network, a network in
     excess of 2,500 independent retailers.

   o The owner or programmer of ten TV stations affiliated with either Fox,
     UPN or the WB and the owner of a large cable system in Puerto Rico serving
     approximately 55,000 subscribers.

   o We have increased our revenues at a compound growth rate of 89% per annum
     since our inception in 1991.

     DBS revenues are principally derived from monthly customer subscriptions
and pay-per-view services. Broadcast revenues are derived from the sale of
broadcast airtime to local and national advertisers.

     In January 2000, we entered into a letter of intent to sell the assets of
our entire cable system business in Puerto Rico to a subsidiary of Centennial
Cellular Corporation for $170.0 million in cash, subject to certain
adjustments. The closing of this sale is anticipated to occur during the third
quarter of 2000 and is subject to the negotiation of a definitive agreement,
third-party approvals, including regulatory approvals, and other customary
conditions. The sale is also subject to approval by Pegasus' board of
directors. Accordingly, the results of our cable segment have been presented as
discontinued operations in our consolidated statements of operations.

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

   o interest;

   o income taxes;

   o depreciation and amortization;

   o non-cash charges;

   o corporate overhead;

   o extraordinary and non-recurring items;

   o results of discontinued operations; and

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

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

     Pre-marketing cash flow from continuing operations and location cash flow
from continuing operations are not, and should not be considered, alternatives
to income from operations, net income, net cash provided by operating
activities or any other measure for determining our operating performance or
liquidity, as determined under generally accepted accounting principles.
Pre-marketing cash flow from continuing


                                       32
<PAGE>

operations and location cash flow from continuing operations also do not
necessarily indicate whether our cash flow will be sufficient to fund working
capital, capital expenditures, or to react to changes in Pegasus' industry or
the economy generally. We believe that pre-marketing cash flow from continuing
operations and location cash flow from continuing operations are important,
however, for the following reasons:

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

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

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


RESULTS OF OPERATIONS


Year ended December 31, 1999 compared to the year ended December 31, 1998


     Total net revenues from continuing operations in 1999 were $322.8 million,
an increase of $141.3 million, or 78%, compared to total net revenues of $181.5
million in 1998. The increase in total net revenues in 1999 was primarily due
to an increase in DBS revenues of $139.2 million attributable to acquisitions
and to internal growth in Pegasus' DBS subscriber base. Total operating
expenses from continuing operations in 1999 were $448.7 million, an increase of
$204.4 million, or 84%, compared to total operating expenses of $244.3 million
in 1998. The increase was primarily due to an increase of $194.9 million in
operating expenses attributable to the growth in Pegasus' DBS business.

     Total corporate expenses from continuing operations, including corporate
depreciation and amortization, were $9.1 million in 1999, an increase of $3.4
million, or 59%, compared to $5.7 million in 1998. The increase in corporate
expenses is primarily attributable to the growth in Pegasus' business. The
increase in corporate depreciation and amortization is primarily due to
amortization of deferred financing costs associated with the issuance of $100.0
million of senior notes in November 1998.

     Other expenses from continuing operations were $2.0 million in 1999, an
increase of $586,000, or 42%, compared to other expenses of $1.4 million in
1998. The increase is primarily due to increased investor relations activities,
board related costs and development costs.

     Interest expense from continuing operations was $64.9 million in 1999, an
increase of $20.3 million, or 46%, compared to interest expense of $44.6
million in 1998. The increase in interest expense is primarily due to interest
on Pegasus' $100.0 million senior notes issued in November 1998 and an increase
in bank borrowings and seller notes associated with Pegasus' DBS acquisitions.
Interest income from continuing operations was $1.4 million in 1999, a decrease
of $229,000, or 14%, compared to interest income of $1.6 million in 1998. The
decrease in interest income is due to lower average cash balances in 1999
compared to 1998.

     The benefit for income taxes from continuing operations amounted to $8.9
million in 1999, an increase of $8.0 million, compared to a benefit of $901,000
in 1998. The increase is primarily attributable to the amortization of the
deferred tax liability that originated from the acquisition of Digital
Television Services, Inc. in April 1998.

     Equity in the net loss of an unconsolidated affiliate, resulting from an
investment in Pegasus PCS Partners, LP in August 1999, amounted to $201,000 for
the year ended December 31, 1999.

     Income from discontinued operations of the cable segment, net of income
taxes, was $2.1 million in 1999, an increase of $1.1 million, or 103%, compared
to $1.0 million in 1998. The increase is primarily attributable to the
acquisition of the Aguadilla, Puerto Rico cable system effective March 31,
1999. Pegasus had approximately 55,000 cable subscribers at December 31, 1999
compared to 28,800 at December 31, 1998.

     Pegasus sold its remaining New England cable systems in 1998 for $30.1
million resulting in a gain on the sale of discontinued operations, net of
income taxes, of $24.7 million.


                                       33
<PAGE>

     Extraordinary loss from the extinguishment of debt was $6.2 million in
1999. In November 1999, Pegasus exchanged $155.0 million in principal amount of
its' senior notes due 2007 for $155.0 million in principal amount of
outstanding senior subordinated notes due 2007 of its subsidiaries, Digital
Television Services, Inc. and DTS Capital, Inc. Accordingly, the deferred
financing costs related to the senior subordinated notes due 2007 of its
subsidiaries were written off. No such refinancings occurred in 1998.

     Preferred stock dividends were $16.7 million in 1999, an increase of $1.9
million, or 13%, compared to $14.8 million in preferred stock dividends in
1998. The increase is attributable to a greater number of shares of Pegasus'
preferred stock outstanding in 1999 compared to 1998 as the result of payment
of dividends in kind.

     DBS

     During 1999, Pegasus acquired, through acquisitions, approximately 39,000
subscribers and the exclusive DIRECTV distribution rights to approximately
336,000 households in rural areas of the United States. At December 31, 1999,
Pegasus had exclusive DIRECTV distribution rights to 4.9 million households and
702,000 subscribers as compared to 4.6 million households and 435,000
subscribers at December 31, 1998. Pegasus had 7.2 million households and 1.1
million subscribers at December 31, 1999, including pending acquisitions (which
include the acquisition of Golden Sky). At December 31, 1998, subscribers would
have been 733,000, including pending and completed acquisitions. Subscriber
penetration increased from 10.3% at December 31, 1998 to 15.3% at December 31,
1999, including pending and completed acquisitions.

     Total DBS net revenues were $286.4 million in 1999, an increase of $139.2
million, or 95%, compared to DBS net revenues of $147.1 million in 1998. The
increase is primarily due to an increase in the average number of subscribers
in 1999 compared to 1998. The average monthly revenue per subscriber was $43.94
in 1999 compared to $41.63 in 1998. Pro forma DBS net revenues, including
pending acquisitions at December 31, 1999 (which include the acquisition of
Golden Sky), were $434.8 million, an increase of $134.3 million, or 45%,
compared to pro forma DBS net revenues of $300.5 million in 1998.

     Programming, technical, and general and administrative expenses were
$201.2 million in 1999, an increase of $98.7 million, or 96%, compared to
$102.4 million in 1998. The increase is attributable to significant growth in
subscribers and territory in 1999. As a percentage of revenue, programming,
technical, and general and administrative expenses were 70.2% in 1999 compared
to 69.6% in 1998.

     Subscriber acquisition costs were $117.8 million, an increase of $72.1
million compared to $45.7 million in 1998. Gross subscriber additions were
337,300 in 1999 compared to 132,700 in 1998. The total subscriber acquisition
costs per gross subscriber addition were $349 in 1999 compared to $344 in 1998.


     Incentive compensation, which is calculated based on increases in pro
forma location cash flow, was $1.6 million in 1999, an increase of $433,000, or
37%, compared to $1.2 million in 1998. The increase resulted from a larger gain
in pro forma location cash flow during 1999 as compared to 1998.

     Depreciation and amortization was $82.7 million in 1999, an increase of
$23.7 million, or 40%, compared to $59.1 million in 1998. The increase in
depreciation and amortization is primarily due to an increase in the fixed and
intangible asset base as the result of DBS acquisitions that occurred in 1998
and 1999.

     Broadcast

     In 1999, Pegasus owned or programmed ten broadcast television stations in
six markets. Two new stations were launched during the second half of 1998 and
one new station was launched in December 1999. Total net broadcast revenues in
1999 were $36.4 million, an increase of $2.1 million, or 6%, compared to net
broadcast revenues of $34.3 million in 1998. The increase was primarily
attributable to an increase of $1.6 million in net broadcast revenues from the
four stations that began operations in 1997 and 1998.

     Programming, technical, and general and administrative expenses were $22.8
million in 1999, an increase of $4.8 million, or 26%, compared to $18.1 million
in 1998. The increase is primarily due to higher programming costs in 1999 and
an increase in news related expenses associated with the launch of
self-produced news in our Portland, Maine and Chattanooga, Tennessee markets.


                                       34
<PAGE>

     Marketing and selling expenses were $6.3 million in 1999, an increase of
$311,000, or 5%, compared to $6.0 million in 1998. The increase in marketing
and selling expenses was due to an increase in promotional costs associated
with the launch of the new stations and news programs.

     Incentive compensation, which is calculated based on increases in pro
forma location cash flow, was $57,000 in 1999, a decrease of $120,000, or 68%,
compared to $177,000 in 1998. The decrease resulted from a lower gain in pro
forma location cash flow during 1999 as compared to 1998.

     Depreciation and amortization was $5.1 million in 1999, an increase of
$587,000, or 13%, compared to $4.6 million in 1998. The increase is due to
capital expenditures associated with the launch of the new stations and our
news initiative.

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

     Total net revenues from continuing operations in 1998 were $181.5 million,
an increase of $111.3 million, or 159%, compared to total net revenues of $70.1
million in 1997. The increase in total net revenues in 1998 was primarily due
to an increase in DBS revenues of $108.9 million attributable to acquisitions
and to internal growth in Pegasus' DBS subscriber base. Total operating
expenses from continuing operations in 1998 were $244.3 million, an increase of
$164.8 million, or 207%, compared to total operating expenses of $79.5 million
in 1997. The increase was primarily due to an increase of $158.5 million in
operating expenses attributable to the growth in Pegasus' DBS business.

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

     Other expenses from continuing operations were $1.4 million in 1998, an
increase of $779,000, or 124%, compared to other expenses of $630,000 in 1997.
The increase is primarily due to increased investor relations activities and
other board related costs.

     Interest expense from continuing operations was $44.6 million in 1998, an
increase of $30.3 million, or 212%, compared to interest expense of $14.3
million in 1997. The increase in interest expense is primarily due to a full
year's interest on Pegasus' $115.0 million senior notes and an increase in bank
borrowings and seller notes associated with Pegasus' DBS acquisitions. Interest
income from continuing operations was $1.6 million in 1998, an increase of
$77,000, or 5%, compared to interest income of $1.5 million in 1997. The
increase in interest income is due to greater average cash balances in 1998
compared to 1997.

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

     Income from discontinued operations of the cable segment, net of income
taxes, was $1.0 million in 1998, an increase of $791,000, or 308%, compared to
$257,000 in 1997. The increase is primarily attributable to a decrease in
interest expense in 1998 compared to 1997 as a result of the sale of Pegasus'
existing New England cable systems effective July 1, 1998. In September 1998,
Hurricane Georges swept through Puerto Rico damaging Pegasus' cable system.
Prior to the hurricane, Pegasus had approximately 29,000 subscribers. At
December 31, 1998, Pegasus had approximately 28,800 subscribers compared to
27,300 subscribers in 1997.

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

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


                                       35
<PAGE>

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

     DBS

     Pegasus' DBS business experienced significant growth in 1998. During 1998,
Pegasus acquired approximately 217,000 subscribers and the exclusive DIRECTV
distribution rights to approximately 2.4 million households in rural areas of
the United States. At December 31, 1998, Pegasus had exclusive DIRECTV
distribution rights to 4.6 million households and 435,000 subscribers as
compared to 2.2 million households and 132,000 subscribers at December 31,
1997. Subscriber penetration increased from 6.7% at December 31, 1997 to 10.3%
at December 31, 1998, including pending and completed acquisitions.

     Total DBS net revenues were $147.1 million in 1998, an increase of $109.0
million, or 285%, compared to DBS net revenues of $38.3 million in 1997. The
increase is primarily due to an increase in the average number of subscribers
in 1998 compared to 1997. Pegasus' 1998 DBS acquisitions represented $70.4
million, or 65%, of the $109.0 million increase in DBS net revenues. The
average monthly revenue per subscriber was $41.63 in 1998 compared to $40.72 in
1997.

     Programming, technical, and general and administrative expenses were
$102.4 million in 1998, an increase of $76.4 million, or 293%, compared to
$26.0 million in 1997. The increase is attributable to significant growth in
subscribers and territory in 1998. Pegasus' 1998 DBS acquisitions represented
$45.7 million, or 60%, of the $76.4 million increase in programming, technical,
and general and administrative expenses. As a percentage of revenue,
programming, technical, and general and administrative expenses were 69.6% in
1998 compared to 68.1% in 1997.

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

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

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

     Broadcast

     In 1998, Pegasus owned or programmed nine broadcast television stations in
six markets. Two new stations were launched during the second half of 1998.
Total net broadcast revenues in 1998 were $34.3 million, an increase of $2.4
million, or 8%, compared to net broadcast revenues of $31.9 million in 1997.
The increase was primarily attributable to an increase of $1.3 million in net
broadcast revenues from stations that began operations in 1997 and a $558,000
increase in barter revenue. Net broadcast revenues from the two stations
launched in 1998 were minimal.

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

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


                                       36
<PAGE>

     Incentive compensation, which is calculated based on increases in pro
forma location cash flow, was $177,000 in 1998, a decrease of $120,000, or 40%,
compared to $298,000 in 1997. The decrease resulted from a lower gain in pro
forma location cash flow during 1998 as compared to 1997.

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


LIQUIDITY AND CAPITAL RESOURCES

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

     Pre-marketing cash flow from continuing operations increased by
approximately $37.5 million, or 68%, for the year ended December 31, 1999 as
compared to the same period in 1998. Pre-marketing cash flow from continuing
operations increased as a result of:

   o a $40.5 million, or 90%, increase in DBS pre-marketing cash flow of which
     $13.3 million, or 33%, was due to an increase in same territory
     pre-marketing cash flow and $27.2 million or 67% was attributable to
     territories acquired in 1998 and 1999; and

   o a $3.0 million, or 29%, decrease in broadcast location cash flow as the
     result of a $2.6 million, or 25%, decrease in same station location cash
     flow and a $406,000 decrease attributable to the three new stations
     launched in July 1998, November 1998 and December 1999.

     During the year ended December 31, 1999, $54.5 million of cash on hand at
the beginning of the year, together with $208.8 million of net cash provided by
Pegasus' financing activities, was used to fund operating activities of
approximately $88.9 million and other investing activities of $134.0 million.
Investing activities consisted of:

   o the purchase of a cable system serving Aguadilla, Puerto Rico and
     neighboring communities for approximately $42.1 million;

   o the acquisition of DBS assets from fifteen independent DIRECTV providers
     during 1999 for approximately $64.6 million;

   o the purchase of a building for broadcast operations in our Northeastern
     Pennsylvania market for approximately $1.8 million;

   o broadcast expenditures associated with the launch of self-produced news
     in our Portland, Maine and Chattanooga, Tennessee markets totaling
     approximately $1.0 million;

   o broadcast expenditures in connection with our new station in Jackson,
     Mississippi and other construction costs for $708,000;

   o DBS facility upgrades of approximately $4.5 million;

   o the expansion, enhancements and capitalized costs of the Puerto Rico
     cable system amounting to approximately $6.1 million, including $213,000
     related to hurricane damage;

   o payments of programming rights amounting to $3.5 million;

   o proceeds from the sale of DBS assets to an independent DIRECTV provider
     of $509,000;

   o new business development costs of $373,000;

   o investment in affiliate of $4.8 million; and

   o other capital expenditures and intangibles totaling $5.0 million.

                                       37
<PAGE>

   Financing activities consisted of:

   o the issuance of approximately 3.8 million shares of Class A common stock
     resulting in net proceeds to Pegasus of approximately $77.7 million;

   o net borrowings on bank credit facilities totaling $130.3 million;

   o the repayment of approximately $14.5 million of long-term debt, primarily
     sellers' notes and capital leases;

   o net restricted cash draws of approximately $18.1 million for interest
     payments and $1.0 million in connection with the acquisition of the
     Aguadilla, Puerto Rico cable system;

   o capitalized costs relating to Pegasus' financings of approximately $3.6
     million; and

   o the repurchase of Class A common stock in treasury of $187,000.

     As of December 31, 1999, cash on hand amounted to $40.5 million plus
restricted cash of $2.4 million.

     Pre-marketing cash flow from continuing operations increased by
approximately $32.3 million, or 142%, for the year ended December 31, 1998 as
compared to the same period in 1997. Pre-marketing cash flow from continuing
operations increased as a result of:

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

   o a $238,000, or 2%, decrease in broadcast location cash flow as the result
     of a $110,000, or 1%, decrease in same station location cash flow and a
     $128,000 decrease attributable to the four new stations launched in August
     1997, October 1997, July 1998 and November 1998.

     During the year ended December 31, 1998, proceeds from the sale of
Pegasus' remaining New England cable systems amounted to $30.1 million, which
together with $44.0 million of cash on hand at the beginning of the year, $3.3
million of cash acquired from acquisitions and $133.8 million of net cash
provided by Pegasus' financing activities, was used to fund operating
activities of approximately $22.0 million and other investing activities of
$134.8 million. Investing activities, net of cash acquired from acquisitions
and proceeds from the sale of the New England cable systems, consisted of:

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

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

   o DBS facility upgrades of approximately $1.2 million;

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

   o payments of programming rights amounting to $2.6 million;

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

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

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

   Financing activities consisted of:

   o the $100.0 million 93/4% senior notes offering resulting in proceeds to
     Pegasus of approximately $96.8 million;


                                       38
<PAGE>

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

     As defined in the certificate of designation governing Pegasus' Series A
preferred stock and the indentures governing Pegasus' senior notes, Pegasus is
required to provide adjusted operating cash flow data for Pegasus and its
restricted subsidiaries on a consolidated basis where adjusted operating cash
flow is defined as "for the four most recent fiscal quarters for which internal
financial statements are available, operating cash flow of such person and its
restricted subsidiaries less DBS cash flow for the most recent four-quarter
period plus DBS cash flow for the most recent quarterly period, multiplied by
four." Operating cash flow is income from operations before income taxes,
depreciation and amortization, interest expense, extraordinary items and
non-cash charges. Although adjusted operating cash flow is not a measure of
performance under generally accepted accounting principles, we believe that
location cash flow, operating cash flow and adjusted operating cash flow are
accepted within our business segments as generally recognized measures of
performance and are used by analysts who report publicly on the performance of
companies operating in such segments. Restricted subsidiaries carries the same
meaning as in the certificate of designation. Digital Television Services,
Inc., among certain other of Pegasus' subsidiaries, are not included in the
definition of restricted subsidiaries and, accordingly, their operating results
are not included in the adjusted


                                       39
<PAGE>

operating cash flow data provided below. Pro forma for the acquisition of the
Aguadilla, Puerto Rico cable system, the three completed DBS acquisitions
occurring in the fourth quarter of 1999 and the sale of our New England cable
systems, as if such acquisitions/disposition occurred on January 1, 1999,
adjusted operating cash flow would have been approximately $75.1 million as
follows:



<TABLE>
<CAPTION>
                                                                                             Four Quarters Ended
                                                                                              December 31, 1999
                                      (in thousands)                                        --------------------
<S>                                                                                         <C>
Revenues .................................................................................        $244,645
Direct operating expenses, excluding depreciation, amortization and other non-cash
 charges .................................................................................         164,997
                                                                                                  --------

Income from operations before incentive compensation, corporate expenses, depreciation and
 amortization and other non-cash charges .................................................          79,628
Corporate expenses .......................................................................           4,569
                                                                                                  --------
Adjusted operating cash flow .............................................................        $ 75,059
                                                                                                  ========
</TABLE>

Financings

     In 1999, Pegasus Media & Communications maintained a $180.0 million
senior, reducing revolving credit facility. Borrowings under the credit
facility were available for acquisitions, subject to the approval of the
lenders in certain circumstances, working capital, capital expenditures and for
general corporate purposes. As of December 31, 1999, $142.5 million was
outstanding under its $180.0 million credit facility. The credit facility was
amended and restated in January 2000.

     In 1999, Digital Television Services maintained a $70.0 million senior,
reducing revolving credit facility and a $20.0 million senior term credit
facility. Borrowings under the credit facilities were available to refinance
certain indebtedness and for acquisitions, subject to the approval of the
lenders in certain circumstances, working capital, capital expenditures and for
general corporate purposes. As of December 31, 1999, $61.7 million was
outstanding and standby letters of credit amounting to $10.4 million were
issued under its $90.0 million credit facilities, including $2.6 million
collateralizing certain outstanding sellers' notes. The credit facilities were
refinanced in January 2000 with the first amended and restated Pegasus Media &
Communications credit facility.

     In March 1999, Pegasus completed its secondary public offering in which it
sold approximately 3.6 million shares of its Class A common stock to the public
at a price of $22.00 per share, resulting in net proceeds to Pegasus of
approximately $74.9 million. Pegasus applied $49.9 million of the net proceeds
to pay down indebtedness under the Pegasus Media & Communications credit
facility and $25.0 million towards the acquisition of the cable system serving
Aguadilla, Puerto Rico and neighboring communities.

     In December 1999, Pegasus entered into a $35.5 million interim letter of
credit facility. As of December 31, 1999, $35.5 million of standby letters of
credit were issued under the credit facility, including $19.5 million
collateralizing certain outstanding sellers' notes.

     In January 2000, Pegasus Media & Communications entered into a first
amended and restated credit facility, which consists of a $225.0 million senior
revolving credit facility which expires in 2004 and a $275.0 million senior
term credit facility which expires in 2005. This new credit facility amends
Pegasus Media & Communications' existing $180.0 million senior, reducing
revolving credit facility. The new credit facility is collateralized by
substantially all of the assets of Pegasus Media & Communications and its
subsidiaries and is subject to certain financial covenants as defined in the
loan agreement, including a debt to adjusted cash flow covenant. Borrowings
under the new Pegasus Media & Communications credit facility can be used for
acquisitions and general corporate purposes.

     Commensurate with the closing of the new Pegasus Media & Communications
credit facility, Pegasus borrowed $275.0 million under the term loan,
outstanding balances under Pegasus Media & Communications' existing $180.0
million senior, reducing revolving credit facility, Digital Television
Services' existing $90.0 million credit facilities and Pegasus' existing $35.5
million interim letter of credit facility were repaid and commitments under
Digital Television Services' existing $90.0 million credit facilities and
Pegasus' existing $35.5 million interim letter of credit facility were
terminated. Additionally, in connection with the closing of the new Pegasus
Media & Communications credit facility, Digital Television Services was merged
with and into a subsidiary of Pegasus Media & Communications.


                                       40
<PAGE>

     In January 2000, Pegasus completed an offering of 3,000,000 shares of its
6.5% Series C convertible preferred stock, with a liquidation preference of
$100 per share plus any accrued but unpaid dividends. Each share of 6.5% Series
C convertible preferred stock will initially be convertible at the option of
the holder into 0.7843 shares of Pegasus' Class A common stock. Pegasus may
redeem the 6.5% Series C convertible preferred stock on or after August 1,
2001, subject to certain conditions, at redemption prices set forth in the
certificate of designation, plus accumulated and unpaid dividends, if any.

     Pegasus believes that it has adequate resources to meet its working
capital, maintenance capital expenditure and debt service obligations for at
least the next twelve months. However, Pegasus is highly leveraged and our
ability in the future to repay our existing indebtedness will depend upon the
success of our business strategy, prevailing economic conditions, regulatory
matters, levels of interest rates and financial, business and other factors
that are beyond our control. We cannot assure you that we will be able to
generate the substantial increases in cash flow from operations that we will
need to meet the obligations under our indebtedness. Furthermore, our
agreements with respect to our indebtedness contain numerous covenants that,
among other things, restrict our ability to:

     o pay dividends and make certain other payments and investments;

     o borrow additional funds;

     o create liens; and

     o sell our assets.

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

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

Year 2000

     The year 2000 issue is a general term used to describe the various
problems that may result from the improper processing of dates and
date-sensitive calculations by computers and other equipment as the year 2000
is approached and reached. An issue exists for all companies that rely on
computers. This issue involves computer programs and applications that were
written using two digits rather than four to identify the applicable year, and
could result in systems failures or miscalculations. We have completed an
assessment of and taken corrective measures to mitigate the potential adverse
effects the year 2000 issue may have on our operations. Costs in connection
with any modifications to make our systems compliant have not been and are not
expected to be material. We are not currently aware of any operational or
technical problems as a result of the change to the year 2000 and will continue
to monitor the potential adverse impact of the year 2000 issue on our business;
however, there can be no assurance that the year 2000 issue will not have a
material adverse impact on our financial condition or our results of operations
in the future.

Dividend Policy

     As a holding company, Pegasus' ability to pay dividends is dependent upon
the receipt of dividends from its direct and indirect subsidiaries. Pegasus
Media & Communiations' credit facility and publicly held debt securities
restricts it from paying dividends to Pegasus. In addition, Pegasus' ability to
pay dividends and to incur indebtedness are subject to certain restrictions
contained in Pegasus' publicly held debt securities, in the terms of Pegasus'
Series A preferred stock and by Pegasus Media & Communications' credit facility
and publicly held debt securities.

Seasonality

     Pegasus' revenues vary throughout the year. As is typical in the broadcast
television industry, Pegasus' first quarter generally produces the lowest
revenues for the year and the fourth quarter generally produces the


                                       41
<PAGE>

highest revenues for the year. Pegasus' operating results in any period may be
affected by the incurrence of advertising and promotion expenses that do not
necessarily produce commensurate revenues in the short-term until the impact of
such advertising and promotion is realized in future periods.

Inflation

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


NEW ACCOUNTING PRONOUNCEMENTS

     In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No. 133"). As a result of the subsequent
issuance of SFAS No. 137, SFAS No. 133 is now effective for fiscal years
beginning after June 15, 2000. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments and for hedging activities. We
do not expect that the adoption of SFAS No. 133 will have a material effect on
our business, financial position or results of operations.


OTHER

     In January 2000, Pegasus entered into an agreement and plan of merger to
acquire Golden Sky Holdings, Inc. for up to 6.5 million shares of Pegasus'
Class A common stock and the assumed net liabilities of Golden Sky Holdings,
Inc. As of February 29, 2000, Golden Sky Holdings, Inc.'s operations consisted
of providing DIRECTV services to approximately 350,500 subscribers in certain
rural areas of 24 states in which Golden Sky Holdings, Inc. holds the exclusive
rights to provide such services. Upon completion of the acquisition of Golden
Sky Holdings, Inc., it will become a wholly owned subsidiary of Pegasus.

     In January 2000, Pegasus made an investment in Personalized Media
Communications, LLC, an advanced communications technology company, of
approximately $111.8 million, which consisted of $14.3 million in cash, 200,000
shares of Pegasus' Class A common stock (amounting to $18.8 million) and
Pegasus' agreement, subject to certain conditions, to issue warrants to
purchase 1.0 million shares of Pegasus' Class A common stock at an exercise
price of $90.00 per share and with a term of ten years. The fair value of the
warrants to be issued was estimated using the Black-Scholes pricing model and
is approximately $78.8 million. A subsidiary of Personalized Media
Communications, LLC granted to Pegasus an exclusive license for use of
Personalized Media Communications, LLC's patent portfolio in the distribution
of satellite services from specified orbital locations.


                                       42
<PAGE>

ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     Information about Pegasus' market sensitive financial instruments is
provided below and constitutes a "forward-looking statement." Pegasus' major
market risk exposure is changing interest rates that relate to its credit
facilities, debt obligations and preferred stock. Pegasus' objective in
managing its exposure to interest rate changes is to limit the impact of
interest rate changes on earnings and cash flow and to lower its overall
borrowing costs. Pegasus has entered into interest rate protection agreements
on its credit facilities to limit its exposure to market interest rate
fluctuations.

     Pegasus Media & Communications maintained a $180.0 million senior,
reducing revolving credit facility. As of December 31, 1999, $142.5 million was
outstanding. Interest on the credit facility is calculated on either the bank's
base rate or LIBOR, plus an applicable margin. The credit facility was amended
and restated in January 2000.

     Digital Television Services maintained a $70.0 million senior, reducing
revolving credit facility and a $20.0 million senior term credit facility. As
of December 31, 1999, $42.7 million was outstanding and stand-by letters of
credit amounting to $10.4 million were issued under its $70.0 million revolving
credit facility. As of December 31, 1999, $19.0 million was outstanding under
its $20.0 million term credit facility. Interest on the credit facilities is
calculated at either the bank's base rate or the Eurodollar Rate, plus an
applicable margin. The credit facilities were refinanced in January 2000 with
the first amended and restated Pegasus Media & Communications credit facility.

     In January 2000, Pegasus Media & Communications entered into a first
amended and restated credit facility, which consists of a $225.0 million senior
revolving credit facility and a $275.0 million senior term credit facility.
Availability of borrowings under the revolving credit facility will reduce by
specified amounts quarterly commencing on March 31, 2001 through maturity. The
term credit facility is to be repaid in specified amounts quarterly commencing
on March 31, 2001, with the balance due at maturity. Interest on the credit
facility is calculated on either the bank's base rate or LIBOR, plus an
applicable margin. The revolving credit facility expires in October 2004, and
the term credit facility expires in April 2005.

     Commensurate with the closing of the first amended and restated Pegasus
Media & Communications credit facility, Pegasus Media & Communications borrowed
$275.0 million under the term loan, outstanding balances under Pegasus Media &
Communications' existing $180.0 million credit facility and Digital Television
Services' existing $90.0 million credit facilities were repaid and commitments
under Digital Television Services' credit facilities were terminated.

     As of December 31, 1999, Pegasus estimated the fair value of its debt and
preferred stock to be approximately $708.0 million and $149.9 million,
respectively, using quoted market prices. The market risk associated with
Pegasus' debt and preferred stock is the potential increase in fair value
resulting from a decrease in interest rates. A 10% decrease in assumed interest
rates would increase the fair value of Pegasus' debt and preferred stock to
approximately $717.5 million and $153.9 million, respectively.


ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The information required by this item is set forth on pages F-1 through
F-24.


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

     None.

                                       43
<PAGE>

                                   PART III


ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

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




<TABLE>
<CAPTION>
              Name                  Age                               Position
              ----                  ---                               --------
<S>                                <C>     <C>
Marshall W. Pagon ..............    44     Chairman of the Board, President and Chief Executive Officer
Robert N. Verdecchio ...........    43     Senior Vice President, Chief Financial Officer, Treasurer,
                                           Assistant Secretary and Director
Ted S. Lodge ...................    43     Senior Vice President, Chief Administrative Officer, General
                                           Counsel, Secretary and Director Designee
Howard E. Verlin ...............    38     Vice President and Assistant Secretary
Nicholas A. Pagon ..............    43     Vice President
M. Kasin Smith .................    39     Vice President and Acting Chief Financial Officer
Michael C. Brooks ..............    55     Director
Harry F. Hopper III ............    46     Director
James J. McEntee, III ..........    42     Director
Mary C. Metzger ................    54     Director
William P. Phoenix .............    42     Director
Riordon B. Smith ...............    39     Director
Donald W. Weber ................    63     Director
Robert F. Benbow ...............    64     Director Designee
William P. Collatos ............    45     Director Designee
</TABLE>

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

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

     Ted S. Lodge has served as Senior Vice President, Chief Administrative
Officer, General Counsel and Assistant Secretary of Pegasus since July 1, 1996.
In June 1997, Mr. Lodge became Pegasus' Secretary. From June 1992 through June
1996, Mr. Lodge practiced law with the law firm of Lodge & Company. During that
period, Mr. Lodge was engaged by Pegasus as its outside legal counsel in
connection with various matters. Mr. Lodge is expected to be elected a director
of Pegasus, as one of Mr. Pagon's designees, at the time of the special meeting
in connection with the Golden Sky acquisition.


                                       44
<PAGE>

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

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

     M. Kasin Smith served as a financial analyst of Pegasus from September
1998 through February 1999 and has served as Vice President of Finance since
February 1999 and Acting Chief Financial Officer since August 1999. From May
1997 through September 1998, Mr. Smith served as a General Manager, Northwest
region, of SkyView World Media Group, a master system operator for DIRECTV.
From November 1996 to May 1997, Mr. Smith was Director of Finance for Sky Zone
Media Access, LLC, a distributor of DIRECTV to apartments and multiple dwelling
units. From 1993 to November 1996, Mr. Smith served as a manager at
PricewaterhouseCoopers LLP. Mr. Smith is a certified public accountant and has
over 8 years of public accounting experience.

     Michael C. Brooks has been a director of Pegasus since April 27, 1998. From
February 1997 until April 27, 1998, Mr. Brooks had been a director of Digital
Television Services, Inc. He has been a general partner of J.H. Whitney & Co., a
venture capital firm, since January 1985. Mr. Brooks is also a director of Media
Matrix, an Internet audience measurement company, SunGuard Data Systems Inc., a
computer services company, USinternetworking, Inc., a web-based applications
hosting company, and several private companies. Mr. Brooks is serving as a
director of Pegasus as Whitney's designee to the board of directors and has
informed Pegasus that he intends to resign from the Pegasus board at the time of
the special meeting in connection with the Golden Sky acquisition.

     Harry F. Hopper III has been a director of Pegasus since April 27, 1998.
From June 1996 until April 27, 1998, Mr. Hopper had been a director of Digital
Television Services, Inc., or a manager of its predecessor, Digital Television
Services, LLC. Mr. Hopper is a Managing Director of Columbia Capital
Corporation and Columbia Capital LLC, which he joined in January 1994. Columbia
Capital is a venture capital firm with an investment focus on communications
services, network infrastructure and technologies and electronic commerce. Mr.
Hopper is also a director of eBiz.Net, Inc., a web-hosting company, Pacific
Internet Exchange Corporation, an Internet peering and data center company,
Xemod, Inc., a producer of next-generation linear power amplifiers,
Singleshop.com, Inc., a business-to-business, outsourced Internet shopping
platform, and Broadslate Networks, Inc., a digital subscriber line service
provider. Mr. Hopper is serving as a director of Pegasus as Columbia's designee
to the board of directors.

     James J. McEntee, III has been a director of Pegasus since October 8,
1996. Mr. McEntee has been a member of the law firm of Lamb, Windle & McErlane,
P.C. for the past eight years and a principal of that law firm for the past six
years. Mr. McEntee is one of the directors designated as an independent
director under the voting agreement.

     Mary C. Metzger has been a director of Pegasus since November 14, 1996.
Ms. Metzger has been Chairman of Personalized Media Communications LLC and its
predecessor company, Personalized Media Communications Corp. since February
1989. Ms. Metzger has also been Managing Director of Video Technologies
International, Inc. since June 1986. Ms. Metzer is one of the directors
designated as an independent director under the voting agreement. She is also a
designee of Personalized Media under the agreement between Pegasus and
Personalized Media. See Item 13: Certain Relationships and Related
Transactions.

     William P. Phoenix has been a director of Pegasus since June 17, 1998. He
is a Managing Director of CIBC World Markets Corp. and co-head of its Credit
Capital Markets Group. Mr. Phoenix is also a member of CIBC World Markets
Corp.'s credit investment and risk committees. Prior to joining CIBC World
Markets Corp. in 1995, Mr. Phoenix had been a Managing Director of Canadian
Imperial Bank of Commerce with


                                       45
<PAGE>

management responsibilities for the bank's acquisition finance, mezzanine
finance and loan workout and restructuring businesses. Mr. Phoenix joined
Canadian Imperial Bank of Commerce in 1982. Mr. Phoenix is one of the directors
designated as an independent director under the voting agreement.

     Riordon B. Smith has been a director of Pegasus since April 27, 1998. From
February 1997 until April 27, 1998, Mr. Smith had been a director of Digital
Television Services, Inc., or a manager of its predecessor, Digital Television
Services, LLC. Mr. Smith is a Senior Vice President of Fleet Private Equity
Co., Inc., which he joined in 1990. Fleet Private Equity Co., Inc. is a private
equity fund with an investment focus in media and information,
telecommunications, healthcare services, industrial manufacturing and business
services. Mr. Smith also serves as a director of FreeRide.com LLC, a provider
of online loyalty programs and direct marketing services, The MVL Group, Inc.,
a provider of custom market research and data collection services, HASCO
International, Inc., a direct marketer of in-hospital infant portraits, and
Root Communications Group, L.P., an operator of radio stations in the
Southeast. Mr. Smith is serving as a director of Pegasus as Fleet's designee to
the board of directors.

     Donald W. Weber has been a director of Pegasus since its incorporation and
a director of Pegasus Media & Communications since November 1995. Until its
acquisition by Pegasus in November 1997, Mr. Weber had been the President and
Chief Executive Officer of ViewStar Entertainment Services, Inc., a National
Rural Telecommunications Cooperative affiliate that distributed DIRECTV
services in North Georgia, from August 1993 to November 1997. Mr. Weber is
currently a member of the boards of directors of Powertel, Inc., a provider of
wireless communications service, Knology Holdings, Inc., a provider of
broadband communications service, Headhunter.net an online employment
recruiter, and HIE, Inc., a producer of healthcare software, which are
publicly-traded companies. Mr. Weber is one of the directors designated as an
independent director under the voting agreement.

     Robert F. Benbow will be designated as a director by Alta Communications
under the amended and restated voting agreement. Mr. Benbow has been a director
of Golden Sky and its predecessors since February 1997. 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. Additionally, he serves as a director of Diginet Americas,
Inc., a fixed wireless local loop service provider throughout South America, of
Advanced Telcom Group, Inc., a competitive local exchange carrier, and of
Preferred Networks, Inc., a public paging company.

     William P. Collatos will be designated as a director by Spectrum Equity
Investors under the amended and restated voting agreement. Mr. Collatos has
been a director of Golden Sky and its predecessors since March 1997. He is a
managing general partner of Spectrum Equity Investors, a private equity
investment firm focused on the communications services, networking
infrastructure, electronic commerce and media industries, which he founded in
1993. He serves as director of Galaxy Telecom, GP, the general partner of
Galaxy Telecom, L.P., which owns, operates and develops cable television
systems, ITXC Corp., a global provider of Internet-based voice, fax and
voice-enabled services, and JazzTel, a competitive local exchange provider
based in Madrid, Spain.


                                       46
<PAGE>

Section 16(a) Beneficial Ownership Reporting Compliance

     Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires Pegasus' executive officers and directors and persons
who own more than ten percent of a registered class of Pegasus' equity
securities (collectively, the "reporting persons") to file reports of ownership
and changes in ownership with the Securities and Exchange Commission and to
furnish Pegasus with copies of these reports. Based on Pegasus' review of the
copies of these reports received by it, and written representations, if any,
received from reporting persons with respect to the filing of reports on Form
3, 4 and 5, Pegasus believes that all filings required to be made by the
reporting persons for 1999 were made on a timely basis for 1999 with the
following exception: a Form 4 for Nicholas A. Pagon, an executive officer of
Pegasus, reporting the grant in December 1998 of options to purchase 40,000
shares of Class A common stock was filed in April 1999. The grant should have
been reported on a Form 4 filed in January 1999 or a Form 5 filed in February
1999.

ITEM 11: EXECUTIVE COMPENSATION

     The following table sets forth certain information for Pegasus' last three
fiscal years concerning the compensation paid to the Chief Executive Officer
and to each of Pegasus' four most highly compensated officers. The most highly
compensated officers are those whose total annual salary and bonus for the
fiscal year ended December 31, 1999 exceeded $100,000.


<TABLE>
<CAPTION>
                                                                 Annual
                                                              Compensation
                                               -------------------------------------------
                                                                               Other
                                                                               Annual
         Name             Principal Position    Year        Salary        Compensation(1)
        ------          ---------------------  ------      --------      -----------------
<S>                     <C>                    <C>     <C>               <C>
Marshall W. Pagon       President and Chief    1999       $ 274,743             --
                        Executive Officer      1998       $ 200,000             --
                                               1997       $ 200,000             --
Robert N. Verdecchio    Senior VP and Chief    1999       $ 188,717          $50,000
                        Financial Officer      1998       $ 150,000             --
                                               1997       $ 150,000             --
Ted S. Lodge            Senior VP, Chief       1999       $ 164,647          $50,000
                        Administrative
                        Officer                1998       $ 150,000             --
                        and General Counsel    1997       $ 150,000             --
Howard E. Verlin        VP, Satellite and      1999       $ 155,974          $45,000
                        Cable Television       1998       $ 135,000             --
                                               1997       $ 135,000             --
Nicholas A. Pagon       Vice President         1999       $ 133,442             --
                                               1998       $  13,666(5)          --

</TABLE>
<PAGE>


<TABLE>
<CAPTION>
                                Long-Term
                           Compensation Awards
                        --------------------------
                         Restricted    Securities
                            Stock      Underlying       All Other
         Name             Award(2)       Options     Compensation(3)
        ------          ------------  ------------  ----------------
<S>                     <C>           <C>             <C>
Marshall W. Pagon         $124,978      190,000       $60,096(4)
                          $ 77,161       85,000       $67,274(4)
                          $100,558       85,000       $63,228(4)
Robert N. Verdecchio      $ 49,967       70,000       $ 6,380
                          $ 38,580       40,000       $12,720
                          $ 50,279       40,000       $ 9,500
Ted S. Lodge              $ 54,068       85,000       $ 3,600
                          $ 30,864       60,000       $ 9,263
                          $ 40,223       40,000       $ 1,800
Howard E. Verlin          $ 99,974       95,000       $ 1,620
                          $110,125       40,000       $ 5,480
                          $100,558       40,000       $ 1,685
Nicholas A. Pagon               --       45,000            --
                                --       40,000            --
</TABLE>

------------
(1) Pursuant to Pegasus' restricted stock plan, an executive officer may elect
    to receive a portion of the award in the form of cash. The amounts listed
    in this column reflect the cash portion of discretionary awards granted
    under the restricted stock plan.
(2) During fiscal 1999, an aggregate of 3,164, 2,531, 2,685 and 3,670 shares
    were granted to Messrs. Marshall Pagon, Verdecchio, Lodge and Verlin,
    respectively. Based upon the closing price of the Class A common stock on
    December 31, 1999 of $97.75 per share, the shares awarded to Messrs.
    Marshall Pagon, Verdecchio, Lodge and Verlin during fiscal 1999 had a
    value of $309,281, $247,405, $262,459, and $358,743, respectively, on
    December 31, 1999. All awards made during fiscal 1999 were fully vested on
    the date of grant. Generally, awards made under Pegasus' restricted stock
    plan were based upon years of service with Pegasus from date of initial
    employment. As a consequence, all awards made to Messrs. Marshall Pagon,
    Verdecchio and Verlin were fully vested in 1997 and 1998 on the date of
    grant. During 1997, 9,090, 4,545, and 9,090 shares issued to Messrs.
    Marshall Pagon, Verdecchio, and Verlin were fully vested on March 21,
    1997, the date they were granted. During 1998, 3,609, 1,804 and 5,152
    shares issued to Messrs. Marshall Pagon, Verdecchio and Verlin were fully
    vested on February 17, 1998, the date they were granted. Mr. Lodge's
    employment with Pegasus began on July 1, 1996. Mr. Lodge's awards granted
    in fiscal 1998 were vested as to 34% on July 1, 1998, an additional 33% on
    July 1, 1999 and the remaining 33% on July 1, 2000.
(3) Unless otherwise indicated, the amounts listed represent Pegasus'
    contributions under its 401(k) plans.
(4) Of the amounts listed for Marshall W. Pagon in each of the years of 1999,
    1998 and 1997, $53,728, represents the actuarial benefit to Mr. Pagon of
    premiums paid by Pegasus in connection with the split dollar agreement
    entered into by Pegasus with the trustees of insurance trust established
    by Mr. Pagon. See Item 13: Certain Relationships and Related Transactions
    -- Split Dollar Agreement. The remainder represents Pegasus' contributions
    under its 401(k) plans.
(5)  Nicholas A. Pagon became an employee of Pegasus on November 5, 1998.

                                       47
<PAGE>

     Pegasus granted options to employees to purchase a total of 727,346 shares
during 1999. 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.


                             Option Grants in 1999
<TABLE>
<CAPTION>
                                                                                         Potential Realizable Value
                                                                                           at Assumed Annual Rates
                                                                                               of Stock Price
                                                                                                Appreciation
                                                Individual Grants                              for Option Term
                             --------------------------------------------------------   -----------------------------
                                             % of Total
                               Number of      Options
                              Securities     Granted to
                              Underlying     Employees      Exercise
                                Options      in Fiscal     Price Per      Expiration
           Name                 Granted         Year         Share           Date             5%             10%
          ------             ------------   -----------   -----------   -------------   -------------   -------------
<S>                          <C>            <C>           <C>           <C>             <C>             <C>
Marshall W. Pagon ........     95,000       13.1%         $ 39.500         5/4/2009      $2,359,927     $ 5,980,519
                               95,000       13.1%         $ 80.875       12/17/2009      $4,831,876     $12,244,923
Robert N. Verdecchio .....     45,000        6.2%         $ 39.500         5/4/2009      $1,117,860     $ 2,832,877
                               25,000        3.4%         $ 80.875       12/17/2009      $1,271,546     $ 3,222,348
Howard E. Verlin .........     45,000        6.2%         $ 39.500         5/4/2009      $1,117,860     $ 2,832,877
                               50,000        6.9%         $ 80.875       12/17/2009      $2,543,093     $ 6,444,696
Ted S. Lodge .............     45,000        6.2%         $ 39.500         5/4/2009      $1,117,860     $ 2,832,877
                               40,000        5.5%         $ 80.875       12/17/2009      $ 2034,474     $ 5,155,757
Nicholas A. Pagon ........     20,000        2.7%         $ 39.500         5/4/2009      $  496,827     $ 1,259,057
                               25,000        3.4%         $ 80.875       12/17/2009      $1,271,546     $ 3,222,348
</TABLE>

     The table below shows aggregated stock option exercises by the named
executive officers in 1999 and 1999 year-end values. In-the-money options,
which are listed in the last two columns, are those in which the fair market
value of the underlying securities exceeds the exercise price of the option.
The closing price of Pegasus' Class A common stock on December 31, 1999 was
$97.75 per share.

      Aggregated Option Exercises in 1999 and 1999 Year-End Option Values

<TABLE>
<CAPTION>
                                                                     Number of                Value of Unexercised
                                                                Unexercised Options           In-the-Money Options
                                                                 at Fiscal Year-End            at Fiscal Year-End
                                                              ------------------------   ------------------------------
                                     Shares
                                  Acquired on       Value      Execis-     Unexercis-       Exercis-       Unexercis-
             Name                   Exercise      Realized       able         able            able            able
            ------               -------------   ----------   ---------   ------------   -------------   --------------
<S>                              <C>             <C>          <C>         <C>            <C>             <C>
Marshall W. Pagon ............        0             --         76,500        283,500      $6,200,750      $14,812,375
Robert N. Verdecchio .........        0             --         38,180        111,820      $3,107,115      $ 6,466,010
Howard E. Verlin .............        0             --         38,180        136,820      $3,107,115      $ 6,887,885
Ted S. Lodge .................        0             --         48,180        136,820      $3,872,115      $ 7,484,135
Nicholas A. Pagon ............        0             --          8,000         77,000      $  581,000      $ 3,910,875
</TABLE>

Compensation of Directors

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

     On May 5, 1999, James J. McEntee, III, Mary C. Metzger, Donald W. Weber,
William P. Phoenix, Harry F. Hopper III, Michael C. Brooks, and Riordon B.
Smith, who were then all of Pegasus' nonemployee directors, each received
options to purchase 5,000 shares of Class A common stock under Pegasus' stock
option plan. Each option vests in annual installments of 2,500 shares, was
issued at an exercise price of $39.50 per share -- the closing price of the
Class A common stock at the time of the grant -- and is


                                       48
<PAGE>

exercisable until the tenth anniversary from the date of grants. On December
17, 1999, James J. McEntee, III, Mary C. Metzger, Donald W. Weber, William P.
Phoenix, Harry F. Hopper III, Michael C. Brooks, and Riordon B. Smith, who were
then all of Pegasus' nonemployee directors, each received options to purchase
5,000 shares of Class A common stock under Pegasus' stock option plan. Each
option vests in annual installments of 2,500 shares, was issued at an exercise
price of $80.875 per share -- the closing price of the Class A common stock at
the time of the grant -- and is exercisable until the tenth anniversary from
the date of grant.

Compensation Committee Interlocks and Insider Participation

     During 1999, the board of directors generally made decisions concerning
executive compensation of executive officers. The board included Marshall W.
Pagon, the President and Chief Executive Officer of Pegasus, and Robert N.
Verdecchio, Pegasus' Senior Vice President and Chief Financial Officer. A
special stock option committee, however, made certain decisions regarding
option grants under the stock option plan. Both the stock option plan and
restricted stock plan are discussed below.

Incentive Program

General

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

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

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

<TABLE>
<CAPTION>
                                         Component                                             Amount
                                        -----------                                          ---------
<S>                                                                                          <C>
Restricted stock grants to general managers based on the increase in annual location cash
 flow of individual business units .......................................................    6 Cents
Restricted stock grants to department managers based on the increase in annual location
 cash flow of individual business units ..................................................    6 Cents
Restricted stock grants to corporate managers (other than executive officers) based on the
 company-wide increase in annual location cash flow ......................................    3 Cents
Restricted stock grants to employees selected for special recognition ....................    5 Cents
Restricted stock grants under the 401(k) plans for the benefit of all eligible employees
 and allocated pro-rata based on wages ...................................................   10 Cents
                                                                                             ---------
Total ....................................................................................   30 Cents
</TABLE>

                                       49
<PAGE>

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

   o special recognition awards.

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

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

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

Restricted Stock Plan

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

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

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

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

   o discretionary restricted stock awards.

     Restricted stock awards other than special recognition awards vest 34%
after two years of service with Pegasus, 67% after three years of service and
100% after four years of service. Special recognition awards are fully vested
on the date of the grant. Effective December 18, 1998, grantees may elect to
receive certain types of awards under the restricted stock plan in the form of
an option rather than stock subject to a vesting schedule.

Stock Option Plan

     The Pegasus Communications 1996 Stock Option Plan became effective in
September 1996 and terminates in September 2006. Under the stock option plan,
up to 1,300,000 shares of Class A common stock are available for the granting
of nonqualified stock options and options qualifying as incentive stock options
under Section 422 of the Internal Revenue Code. Effective December 18, 1998,
all Pegasus employees are eligible to receive non-qualified stock options and
incentive stock options under the stock option plan. No employee, however, may
be granted options covering more than 550,000 shares of Class A common stock
under the stock option plan. Directors of Pegasus who are not employees of
Pegasus are eligible to receive non-qualified stock options under the stock
option plan. Currently, seven non-employee directors are eligible to receive
options under the stock option plan. The stock option plan provides for
discretionary option grants made by a board committee or the full board. In
addition, as of December 18, 1998 each full time employee of Pegasus who is not
an executive officer is eligible to receive a grant of an option to purchase
100 shares of Class A common stock under the stock option plan.


                                       50
<PAGE>

401(k) Plans


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


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


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


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


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


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


ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT


     The following table sets forth share information as of March 6, 2000,
regarding the beneficial ownership of the Class A common stock and Class B
common stock by:


   o each stockholder known to Pegasus to be the beneficial owner, as defined
     in Rule 13d-3 under the Securities Exchange Act of 1934, of more than 5%
     of the Class A common stock and Class B common stock, based upon Pegasus'
     records or the records of the SEC;


   o each director of Pegasus;


   o each person who will be elected to Pegasus' board of directors upon
     consummation of the acquisition of Golden Sky;


   o each of the top five most highly compensated officers whose total annual
     salary and bonus or the fiscal year ended December 31, 1999 exceeded
     $100,000; and


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

                                       51
<PAGE>

     Holders of Class A common stock are entitled to one vote per share on all
matters submitted to a vote of stockholders generally, and holders of Class B
common stock are entitled to ten votes per share. Shares of Class B common
stock are convertible into shares of Class A common stock on a one-for-one
basis, and accordingly, holders of Class B common stock are deemed to own the
same number of shares of Class A common stock. Pegasus Communications Holdings,
Inc., two of its subsidiaries and Pegasus Capital, L.P. hold in the aggregate
all shares of Class B common stock, representing on a fully diluted basis 21.8%
of the common stock, and without giving effect to the voting agreement, 73.6 %
of the combined voting power of all voting stock. Without giving effect to the
voting agreement, Marshall W. Pagon is deemed to be the beneficial owner of all
of the Class B common stock; the table gives effect to the voting agreement.
The outstanding capital stock of Pegasus Communications Holdings, Inc. consists
of 64,119 shares of Class A voting common stock and 5,000 shares of non-voting
stock, all of which are beneficially owned by Marshall W. Pagon.


     Unless otherwise provided, the address of each natural person is c/o
Pegasus Communications Management Company, 225 City Line Avenue, Suite 200,
Bala Cynwyd, Pennsylvania 19004.



<TABLE>
<CAPTION>
                                                               Pegasus Class A
                                                                Common Stock
               Name and address of                              Beneficially
                Beneficial Owner                                    Owned
               -------------------                -----------------------------------------
                                                         Shares                    %
                                                        --------                 -----
<S>                                               <C>                             <C>
Marshall W. Pagon(1) ...........................      5,528,751(2)(3)(4)          26.7
Robert N. Verdecchio ...........................        345,052(4)(5)(6)           2.2
Howard E. Verlin ...............................        123,198(5)(7)               *
Ted S. Lodge ...................................        116,699(8)                  *
Nicholas A. Pagon ..............................         23,941(9)                  *
James J. McEntee, III ..........................         18,670(10)                 *
Mary C. Metzger ................................        213,000(11)                1.3
Donald W. Weber ................................        175,920(12)                1.1
William P. Phoenix .............................          2,670(13)                 *
Harry F. Hopper III ............................        198,668(14)                1.3
Michael C. Brooks ..............................         33,716(15)                 *
Riordon B. Smith ...............................      5,528,751(3)(16)            26.7
Harron Communications Corp.(17) ................        852,110                    5.4
T. Rowe Price Associates, Inc. and related
 entities(18) ..................................      1,400,000                    8.8
Wellington Management Company, LLP(19) .........      1,600,000                   10.1
PAR Capital Management, Inc.(20) ...............        950,000                    6.0
Fleet Venture Resources, Inc. and related
 entities(21) ..................................      5,528,751(3)                26.7
Robert F. Benbow(22) ...........................             --                     --
William P. Collatos(22) ........................             --                     --
Putnam Investments, Inc.(23) ...................      1,970,586                   12.4
Directors and executive officers as a group(24)
 (consists of 13 persons) ......................      6,660,376                   31.7


</TABLE>
<PAGE>

<TABLE>
<CAPTION>
                                                       Pegasus Class B
                                                        Common Stock
               Name and address of                      Beneficially           Voting
                Beneficial Owner                            Owned              Power
               -------------------                -------------------------  ---------
                                                        Shares          %        %
                                                       --------       -----  ---------
<S>                                               <C>                 <C>       <C>
Marshall W. Pagon(1) ...........................       4,581,900(3)    100      75.5
Robert N. Verdecchio ...........................              --        --        *
Howard E. Verlin ...............................              --        --        *
Ted S. Lodge ...................................              --        --        *
Nicholas A. Pagon ..............................              --        --        *
James J. McEntee, III ..........................              --        --        *
Mary C. Metzger ................................              --        --        *
Donald W. Weber ................................              --        --        *
William P. Phoenix .............................              --        --        *
Harry F. Hopper III ............................              --        --        *
Michael C. Brooks ..............................              --        --        *
Riordon B. Smith ...............................       4,581,900(3)    100      75.5
Harron Communications Corp.(17) ................              --        --       1.4
T. Rowe Price Associates, Inc. and related
 entities(18) ..................................              --        --       2.3
Wellington Management Company, LLP(19) .........              --        --       2.6
PAR Capital Management, Inc.(20) ...............              --        --       1.5
Fleet Venture Resources, Inc. and related
 entities(21) ..................................       4,581,900(3)    100      75.5
Robert F. Benbow(22) ...........................              --        --       --
William P. Collatos(22) ........................              --        --       --
Putnam Investments, Inc.(23) ...................              --        --       --
Directors and executive officers as a group(23)
 (consists of 13 persons) ......................       4,581,900       100      76.9
</TABLE>

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


 (1) Pegasus Capital, L.P. holds 1,217,348 shares of Class B common stock. Mr.
     Pagon is the sole shareholder of the general partner of Pegasus Capital,
     L.P. and is deemed to be the beneficial owner of these shares. All of the
     3,364,552 remaining shares of Class B common stock are owned by Pegasus
     Communications Holdings, Inc. and two of its subsidiaries. All the capital
     stock of Pegasus Communications Holdings, Inc. are held by Pegasus
     Communications Limited Partnership. Mr. Pagon controls Pegasus
     Communications Limited Partnership by reason of his ownership of all the
     outstanding voting stock of the sole general partner of a limited
     partnership that is, in turn, the sole general partner in Pegasus
     Communications Limited Partnership. Therefore, apart from the voting
     agreement described in note 3 below, Mr. Pagon is the beneficial owner of
     100% of Class B common stock with sole voting and investment power over
     all such shares.


                                       52
<PAGE>
 (2) Includes 4,581,900 shares of Class B common stock, which are convertible
     into shares of Class A common stock on a one-for-one basis and 186,911
     shares of Class A common stock which are issuable upon the exercise of the
     vested portion of outstanding stock options.

 (3) The following persons are parties to a voting agreement:
     o Marshall W. Pagon;
     o Pegasus, Pegasus Capital, L.P., Pegasus Communications Holdings, Inc.,
       Pegasus Scranton Offer Corp, and Pegasus Northwest Offer Corp;
     o Fleet Venture Resources, Inc., Fleet Equity Partners VI, L.P., Chisholm
       Partners III, L.P. and Kennedy Plaza Partners (which are discussed in
       note 21 below).

     The voting agreement provides that these parties vote all shares held by
     them in the manner specified in the voting agreement. As a consequence of
     being parties to the voting agreement, each of these parties is deemed to
     have shared voting power over certain shares beneficially owned by them in
     the aggregate for the purposes specified in the voting agreement.
     Therefore, the parties to the voting agreement are each deemed to be the
     beneficial owner with respect to 4,581,900 shares of Class B common stock
     and 5,528,751 shares of Class A common stock, including 4,581,900 shares of
     Class A common stock issuable upon conversion of the all outstanding shares
     of Class B common stock.

 (4) This includes 120,009 shares of Class A common stock held in Pegasus'
     401(k) plan, over which Messrs. Pagon and Verdecchio share voting power in
     their capacities as co-trustees.

 (5) On March 26, 1997, the SEC declared effective a registration statement
     filed by Pegasus, which would permit Messrs. Verdecchio and Verlin to sell
     certain shares of their Class A common stock subject to certain vesting
     and other restrictions. Messrs. Verdecchio and Verlin have sole voting and
     investment power over their shares, subject to certain vesting
     restrictions.

 (6) This includes 88,770 shares of Class A common stock which are issuable
     upon the exercise of the vested portion of outstanding stock options.

 (7) This includes 71,500 shares of Class A common stock which are issuable
     upon the exercises of the vested portion of outstanding stock options.

 (8) This includes 1,500 shares of Class A common stock owned by Mr. Lodge's
     wife, for which Mr. Lodge disclaims beneficial ownership, and 109,770
     shares of Class A common stock which are issuable upon the exercise of the
     vested portion of outstanding stock options.

 (9) This includes 18,000 shares of Class A common stock which are issuable
     upon the exercise of the vested portion of outstanding stock options.

(10) This includes 12,670 shares of Class A common stock which are issuable
     upon the exercise of the vested portion of outstanding stock options and
     1,000 shares held beneficially by Mr. McEntee's wife, for which Mr.
     McEntee disclaims beneficial ownership.

(11) This includes 200,000 shares of Class A common stock received in the
     investment of Pegasus in Personalized Media & Communications, LLC, of
     which Ms. Metzger is Chairman. See Item 13: Certain Relationships and
     Related Transactions -- Investment in Personalized Media Communications,
     LLC and Licensing of Patents. Also includes 9,500 shares of Class A common
     stock, which are issuable upon the exercise of the vested portion of the
     outstanding stock options.

(12) This includes 15,885 shares of Class A common stock issuable upon the
     exercise of the vested portion of outstanding stock options.

(13) This consists of 2,670 shares of Class A common stock issuable upon the
     exercise of the vested portion of outstanding stock options.

(14) This includes 2,670 shares of Class A common stock issuable upon the
     exercise of the vested portion of outstanding stock options, and 4,750
     shares held by the Hopper Family Foundation, of which Mr. Hopper is a
     trustee and officer. The address of this person is c/o Columbia Capital
     Corporation, 201 N. Union Street, Suite 300, Alexandria, Virginia
     22314-2642.

(15) This includes 2,670 shares of Class A common stock issuable upon the
     exercise of the vested portion of outstanding stock options. The address
     of this person is 177 Broad Street, Stamford, Connecticut 06901.

(16) The information for Mr. Smith includes all shares of Class A common stock
     held by Fleet Venture Resources, Inc. and its related entities, as
     described below in note 21. Mr. Smith is a Senior Vice

                                       53
<PAGE>

     President of each of the managing general partners of Fleet Equity Partners
     VI, a Senior Vice President of Fleet Venture Resources, a Senior Vice
     President of the corporation that is the general partner of the partnership
     that is the general partner of Chisholm Partners III, and a partner of
     Kennedy Plaza Partners. As a Senior Vice President of Fleet Growth
     Resources II, Inc. and Silverado IV Corp., the two general partners of
     Fleet Equity Partners, and as a Senior Vice President of Fleet Venture
     Resources and Silverado III Corp., the general partner of the partnership
     Silverado III, L.P., which is the general partner of Chisholm Partners III,
     and as a partner of Kennedy Plaza Partners, Mr. Smith disclaims beneficial
     ownership for all shares held directly by those entities, except for his
     pecuniary interest therein. The information for Mr. Smith also includes
     2,500 shares of Class A common stock, which are issuable upon the exercise
     of the vested portion of outstanding stock options. The address of this
     person is 50 Kennedy Plaza, RI MO F12C, Providence, Rhode Island 02903.

(17) The address of Harron Communications Corp. is 70 East Lancaster Avenue,
     Frazer, Pennsylvania 19355.

(18) The address of T. Rowe Price Associates is 100 East Pratt St., Baltimore,
     Maryland 21202.

(19) The address of Wellington Management Company is 75 State Street, Boston,
     Massachusetts 02109.

(20) The address of this entity is Suite 1600, One Financial Center, Boston,
     Massachusetts 02111.

(21) This includes the following number of shares of Class A common stock held
     by the designated entity: Fleet Venture Resources, Inc. (351,186); Fleet
     Equity Partners VI, L.P. (150,479); Chisholm Partners III, L.P. (127,611);
     and Kennedy Plaza Partners (8,155). The address of each of these entities
     is 50 Kennedy Plaza, RI MO F12C, Providence, Rhode Island 02903.

(22) This is a designee for director who will become a director upon completion
     of the Golden Sky Merger.

(23) This includes the following number of shares of Class A common stock held
     by the designated entity: Putnam Investments, Inc. (985,293); Putnam
     Investment Management, Inc. (709,193); and The Putnam Advisory Company,
     Inc. (276,100). The address of these entities is One Post Office Square,
     Boston, MA 02109.

(24) See notes 1, 2 and 4 with respect to Mr. Marshall W. Pagon, notes 4, 5, 6,
     7, 8, and 9 with respect to Messrs. Verdecchio, Verlin, Lodge and Nicholas
     A. Pagon, notes 10, 11, 12, 13, 14, 15 and 16 with respect to Ms. Metzger
     and Messrs. McEntee, Phoenix, Hopper, Brooks and Smith, and note 3 with
     respect to the voting agreement currently in place. Also includes 100
     shares of Class A common stock, which are issuable upon the vested portion
     of outstanding stock options.

ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Split Dollar Agreement

     In December 1996, Pegasus entered into a split dollar agreement with the
trustees of an insurance trust established by Marshall W. Pagon. Under the
split dollar agreement, Pegasus agreed to pay a portion of the premiums for
certain life insurance policies covering Mr. Pagon owned by the insurance
trust. The agreement provides that Pegasus will be repaid for all amounts it
expends for such premiums, either from the cash surrender value or the proceeds
of the insurance policies. The actuarial benefit to Mr. Pagon of premiums paid
by Pegasus amounted to $53,728 in each of the years of 1997, 1998 and 1999.

Relationship with W.W. Keen Butcher and Affiliated Entities

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


                                       54
<PAGE>

     Pegasus amended its agreement with W.W. Keen Butcher and his affiliated
entities in the fourth quarter of 1999 to increase the amount of collateral
that Pegasus will maintain for bank loans to Mr. Butcher and the affiliated
entities. Under the amendment, Pegasus will maintain collateral for up to $8.0
million in principal amount such bank loans. Mr. Butcher and the affiliated
entities must continue to contribute the proceeds from these bank loans to one
or more entities owned by Mr. Butcher for acquisition of television broadcast
stations to be programmed by Pegasus pursuant to local marketing agreements.

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

     On July 2, 1998, Pegasus assigned to one of the Butcher companies its
option to acquire the FCC license for television station WFXU, which
rebroadcasts WTLH pursuant to a local marketing agreement with Pegasus. The
Butcher company paid Pegasus $50,000 for the option. In May 1999, the Butcher
company purchased the station and assumed the obligations under the local
marketing agreement with Pegasus. The Butcher company borrowed the $50,000
under the loan collateral arrangement, and granted Pegasus an option to
purchase the station on essentially the same terms described above for WOLF.
The local marketing agreement provides for a reimbursement of expenses by
Pegasus and a term of five years, with one automatic five-year renewal.

     Pegasus currently provides programming under a local marketing agreement
to television station WPME. Under the local marketing agreement, Pegasus also
holds an option to purchase WPME. One of the Butcher companies expects to
acquire WPME and the FCC license from the current owner in the near future. The
Butcher company would continue the local marketing agreement with Pegasus and
Pegasus would retain its option to acquire WPME. Pegasus believes that the WOLF
and WFXU transactions were done at fair value and that any future transactions
that may be entered into with the Butcher companies or similar entities,
including the WPME transaction as described, will also be done at fair value.


Acquisition of Digital Television Services, Inc.

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

     In connection with the merger, Pegasus issued approximately 5.5 million
shares of its Class A common stock to the stockholders of Digital Television
Services and assumed approximately $159 million of liabilities. Pegasus also
granted registration rights to certain of Digital Television Service's
stockholders, including Columbia Capital Corporation, Columbia DBS, Inc.,
Whitney Equity Partners, L.P., Fleet Venture Resources, Inc. and its affiliates
and Harry F. Hopper III. Mr. Hopper received shares of Class A common stock in
the Digital Television Services merger and has an ownership interest in
Columbia Capital Corporation, which received 429,812 shares. As a result of the
Digital Television Services merger and the voting agreement described below,
Michael C. Brooks, Harry F. Hopper, III and Riordon B. Smith were elected to
Pegasus' board of directors.


                                       55
<PAGE>

Voting Agreement

     On April 27, 1998, in connection with the Digital Television Services
merger, Pegasus, Marshall W. Pagon and a number of partnerships and
corporations controlled by him, and Fleet Venture Resources, Fleet Equity
Partners, Chisholm Partners III, L.P., Kennedy Plaza Partners, Whitney Equity
Partners, Columbia Capital Corporation and Columbia DBS, Inc. entered into a
voting agreement. The voting agreement covers all shares of Class B common
stock and other voting securities of Pegasus held at any time by Mr. Pagon and
his controlled entities and shares of Class A common stock received in the
Digital Television Services merger by Chisholm and the Fleet entities, Columbia
and Whitney. It provides that holders of such shares vote their respective
shares in the manner specified in the voting agreement. In particular, the
voting agreement establishes that Pegasus' board of directors will consist
initially of nine members: three independent directors, three directors
designated by Mr. Pagon and one director to be designated by each of Chisholm
Partners III, L.P., Columbia Capital Corporation and Whitney Equity Partners.
The voting agreement also provides that the committees of the board of
directors will consist of an audit committee, a compensation committee and a
nominating committee. Each committee shall consist of one independent director,
one director designated by Mr. Pagon and one director designated by a majority
of the directors designated by Chisholm Partners III, L.P., Columbia Capital
Corporation and Whitney Equity Partners. As a result of the voting agreement,
the parties to the agreement have sufficient voting power without the need for
the vote of any other shareholder, to elect the entire board of directors.
James J. McEntee, III, Mary C. Metzger, William P. Phoenix and Donald W. Weber
are serving as independent directors of Pegasus. Marshall W. Pagon and Robert
N. Verdecchio are serving as directors of Pegasus as designees of Mr. Pagon.
Harry F. Hopper III is serving as a director of Pegasus as a designee of
Columbia Capital Corporation; Michael C. Brooks is serving as a director of
Pegasus as a designee of Whitney Equity Partners; and Riordon B. Smith is
serving as a director of Pegasus as a designee of Chisholm Partners III, L.P.
When the transaction is completed, the existing voting agreement with certain
of Pegasus' stockholders will be amended to increase the board of directors to
eleven members, to give certain of Golden Sky's stockholders the right to
designate two directors, and to give Mr. Marshall Pagon the right to designate
four directors. See Item 1: Business -- Recent Completed and Pending
Transactions -- Pending Transactions -- Merger with Golden Sky Holdings, Inc.

     The voting agreement terminates with respect to any covered share upon the
sale or transfer of any such share to any person other than a permitted
transferee. In addition, the right of Chisholm Partners III, L.P., Columbia
Capital Corporation and Whitney Equity Partners to designate a director
terminates when the Fleet entities, Columbia Capital Corporation and certain of
its owners, and Whitney Equity Partners cease owning one-half of the shares
originally received by each of them in the Digital Television Services merger
or in certain other circumstances. Whitney distributed shares it owned to its
partners in 1999 and, thus, has lost its right to designate a director under
the voting agreement. Columbia Capital Corporation and its subsidiaries and
owners have sold more than one-half of the shares originally received by them.
Columbia Capital Corporation has therefore also lost its right to designate a
director under the voting agreement.


Communications License Re-Auction

     Pegasus PCS Partners, a company owned and controlled by Marshall W. Pagon,
holds personal communications system licenses in Puerto Rico. We have made an
approximately $4.8 million investment in Pegasus PCS Partners. Pegasus itself
did not meet the qualification criteria for the FCC's re-auction in which
Pegasus PCS Partners acquired certain of its licenses.


CIBC World Markets Corp. and Affiliates

     William P. Phoenix is a Managing Director of CIBC World Markets Corp. CIBC
World Markets and its affiliates have provided various services to Pegasus and
its subsidiaries since the beginning of 1997. CIBC World Markets has
historically performed a number of services for Pegasus, including serving as
one of the initial purchasers in Pegasus' January 2000 Rule 144A offering of
$300.0 million in aggregate liquidation preference of Series C convertible
preferred stock. In this capacity, CIBC World Markets received customary
underwriting discounts and commissions.


                                       56
<PAGE>

   CIBC World Markets has also performed the following services for Pegasus:

   o provided a fair market value appraisal in connection with the merger of
     Digital Television Services, Inc. into a wholly-owned subsidiary of
     Pegasus and the designation of Digital Television Services as a restricted
     subsidiary;

   o acted as a dealer manager in connection with an offer by Pegasus to
     exchange its 121/2% Series A senior notes due 2007 for senior subordinated
     notes of Digital Television Services and DTS Capital, Inc. and a related
     consent solicitation;

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

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

   o acted as lender in connection with the Pegasus Media & Communications
     credit facility;

   o provided a fairness opinion in connection with this merger;

   o acted as Administrative Agent in connection with a credit facility of
     Digital Television Services; and

   o acted as underwriter in Pegasus' 1999 equity offering.

     In addition, CIBC World Markets has agreed to purchase, subject to
definitive documentation, any and all Golden Sky notes tendered in response to
Golden Sky's offer to purchase such notes. CIBC World Markets will receive fees
of approximately $1.0 million under this arrangement.

     In the first two months of 2000 and during 1999, for services rendered,
Pegasus or its subsidiaries paid to CIBC World Markets an aggregate of $3.4
million and $940,000, respectively, in fees. Pegasus believes that all fees
paid to CIBC World Markets in connection with the transactions described above
were customary. Pegasus anticipates that it or its subsidiaries may engage the
services of CIBC World Markets in the future, although no such engagement is
currently contemplated.

Investment in Personalized Media Communications, LLC and Licensing of Patents

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

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

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


                                       57
<PAGE>

     Pegasus acquired preferred interests of Personalized Media for
approximately $14.3 million in cash, 200,000 shares of Pegasus' Class A common
stock and Pegasus' agreement, subject to certain conditions, to issue warrants
to purchase 1.0 million shares of Pegasus' Class A common stock at an exercise
price of $90.00 per share and with a term of ten years. After certain periods
of time, Personalized Media may redeem the preferred interests, and Pegasus may
require the redemption of preferred interests, in consideration for
Personalized Media's transfer to Pegasus of Personalized Media's ownership
interest in its wholly-owned subsidiary that holds the exclusive license from
Personalized Media for the rights that are licensed to Pegasus. Pegasus may
also be required to make an additional payment to Personalized Media if certain
contingencies occur that Pegasus believes are unlikely to occur. Because of the
speculative nature of the contingencies, it is not possible to estimate the
amount of any such additional payments, but in some cases it could be material.
As part of the transaction, Personalized Media will be entitled to designate
one nominee to serve on Pegasus' board of directors. Mary C. Metzger is
currently serving as Personalized Media's designee.


Other Transactions

     In 1999, Pegasus loaned $199,999 to Nicholas A. Pagon, Pegasus' Vice
President of Broadcast Operations, bearing interest at the rate of 6% per
annum, with the principal amount due on the fifth anniversary of the date of
the promissory note. Mr. Pagon is required to use half of the proceeds of the
loan to purchase shares of Class A common stock, and the loan is collateralized
by those shares. The balance of the loan proceeds may be used at Mr. Pagon's
discretion.


                                       58
<PAGE>

                                    PART IV


ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K


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


       (1) Financial Statements

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


       (2) Financial Statement Schedules


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


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


       (3) Exhibits



<TABLE>
<CAPTION>
Exhibit
Number     Description of Document
--------   -----------------------
<S>        <C>
 2.1       Agreement and Plan of Merger dated January 10, 2000, as amended on January 25, 2000, by
           and among Pegasus, Golden Sky and certain stockholders of Pegasus and Golden Sky (which is
           incorporated by reference to Exhibit 2.1 to Pegasus' Registration Statement on Form S-4 (File
           No. 333-31080)).

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

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

 3.1       Certificate of Incorporation of Pegasus, as amended (which is incorporated by reference herein
           to Exhibit 3.1 to Pegasus' Form 10-Q dated August 13, 1999).

 3.2       By-Laws of Pegasus, as amended, (which is incorporated by reference to Exhibit 3.1 to
           Pegasus' Form 10-Q dated May 14, 1998).

 3.3       Certificate of Designation, Preferences and Relative, Participating, Optional and Other Special
           Rights of Preferred Stock and Qualifications, Limitations and Restrictions Thereof of 12.75%
           Series A Cumulative Exchangeable Preferred Stock which is incorporated by reference to
           Exhibit 3.3 to Pegasus' Registration Statement on Form S-1 (File No. 333-23595).

 3.4       Certificate of Designation, Preferences and Rights of Series B Junior Convertible Participating
           Preferred Stock (which is incorporated by reference to Exhibit 3.4 to Pegasus' Registration
           Statement on Form S-4 (File No. 333-31080)).

 3.5       Certificate of Designation, Preferences and Relative, Participating, Optional and Other Special
           Rights of Preferred Stock and Qualifications, Limitation and Restrictions Thereof of 61/2%
           Series C Convertible Preferred Stock (which is incorporated by reference to Exhibit 3.5 to
           Pegasus' Registration Statement on Form S-4 (File No. 333-31080)).

 3.6       Certificate of Designation, Preferences and Rights of Series D Junior Convertible Participating
           Preferred Stock (which is incorporated by reference to Exhibit 3.6 to Pegasus' Registration
           Statement on Form S-4 (File No. 333-31080)).
</TABLE>

                                       59
<PAGE>


<TABLE>
<CAPTION>
Exhibit
Number       Description of Document
----------   -----------------------
<S>          <C>
 3.7*        Certificate of Designation, Preferences and Rights of Series E Junior Convertible Participating
             Preferred Stock.

 4.1         Indenture, dated as of July 7, 1995, by and among Pegasus Media & Communications, Inc., the
             Guarantors (as this term is defined in the Indenture), and First Fidelity Bank, National
             Association, as Trustee, relating to the 121/2% Series B Senior Subordinated Notes due 2005
             (including the form of Notes and Subsidiary Guarantee) (which is incorporated herein by
             reference to Exhibit 4.1 to Pegasus Media & Communications, Inc.'s Registration Statement on
             Form S-4 (File No. 33-95042)).

 4.2         Form of 121/2% Series B Senior Subordinated Notes due 2005 (included in Exhibit 4.1 above).

 4.3         Form of Subsidiary Guarantee with respect to the 121/2% Series B Senior Subordinated Notes
             due 2005 (included in Exhibit 4.1 above).

 4.4         Indenture by and between Pegasus and First Union National Bank, as trustee, relating to the
             Exchange Notes (which is incorporated herein by reference to Exhibit 4.4 to Pegasus'
             Registration Statement on Form S-1 (File No. 333-18739)).

 4.5         Indenture, dated as of October 21, 1997, by and between Pegasus Communications Corporation
             and First Union National Bank, as trustee, relating to the 95/8% Senior Notes due 2005 (which
             is incorporated by reference herein to Exhibit 4.1 to Amendment No. 1 to Pegasus' Form 8-K
             dated September 8, 1997).

 4.6         Indenture, dated as of November 30, 1998, by and between Pegasus Communications
             Corporation and First Union National Bank, as trustee, relating to the 93/4% Senior Notes due
             2006 (which is incorporated by reference to Exhibit 4.6 to Pegasus' Registration Statement on
             Form S-3 (File No. 333-70949)).

 4.7         Indenture, dated as of November 19, 1999, by and between Pegasus and First Union National
             Bank, as Trustee, relating to the 121/2% Senior Notes due 2007 (which is incorporated by
             reference to Exhibit 4.1 to Pegasus' Registration Statement on Form S-4 (File No. 333-94231)).

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

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

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

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

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

                                       60
<PAGE>


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

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

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

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

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

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

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

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

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

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

 10.16+      Pegasus Restricted Stock Plan (as amended and restated generally effective as of December 18,
             1998) (which is incorporated by reference to Exhibit 10.2 to Pegasus' Form 10-Q dated August
             13, 1999).

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

                                       61
<PAGE>


<TABLE>
<CAPTION>
Exhibit
Number        Description of Document
-----------   -----------------------
<S>           <C>
10.18 +       Pegasus Communications 1996 Stock Option Plan (as amended and restated effective as of
              April 23, 1999) (which is incorporated by reference to Exhibit 10.1 to Pegasus' Form 10-Q
              dated August 13, 1999).

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

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

10.21         Class B Preferred Unit Subscription Agreement between Pegasus Communications Corporation
              and Personalized Media Communications, L.L.C. dated January 10, 2000 (which is incorporated
              by reference to Exhibit 10.3 to Pegasus' Registration Statement on Form S-4 (File No.
              333-31080)).

10.22         Amendment No. 1, dated January 24, 2000, to the Class B Preferred Unit Subscription
              Agreement between Pegasus Communications Corporation and Personalized Media
              Communications, L.L.C. dated January 10, 2000 (which is incorporated by reference to Exhibit
              10.9 to Pegasus' Registration Statement on Form S-4 (File No. 333-31080)).

10.23         Patent License Agreement dated January 13, 2000 between PMC Satellite Development, L.L.C.
              and Personalized Media Communications L.L.C. (which is incorporated by reference to Exhibit
              10.4 to Pegasus' Registration Statement on Form S-4 (File No. 333-31080)).

10.24         Second Amended and Restated Operating Agreement of Personalized Media Communications,
              L.L.C. dated January 13, 2000 between Pegasus Communications Corporation and Personalized
              Media Communications L.L.C. (which is incorporated by reference to Exhibit 10.5 to Pegasus'
              Registration Statement on Form S-4 (File No. 333-31080)).

10.25         Series PMC Warrant Agreement dated January 13, 2000 between Pegasus Communications
              Corporation and Personalized Media Communications, L.L.C. (which is incorporated by
              reference to Exhibit 10.6 to Pegagus' Registration Statement on Form S-4 (File No.
              333-31080)).

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

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

10.28         Patent License Agreement dated January 13, 2000 between PMC Satellite Development, L.L.C.
              and Pegasus Development Corporation (which is incorporated by reference to Exhibit 10.10 to
              Pegasus' Registration Statement on Form S-4 (File No. 333-31080)).

10.29*        Renewal Franchise Agreement dated as of March 19, 1999, granted to Pegasus Cable Television
              of San German, Inc. to build and operate cable television systems for the municipalities of
              Aguadilla, Aguada, Quebradillas, Moca and Isabela.

21.1*         Subsidiaries of Pegasus.

23.1*         Consent of PricewaterhouseCoopers LLP.

24.1*         Powers of Attorney (included in Signatures and Powers of Attorney).
</TABLE>

                                       62
<PAGE>


<TABLE>
<CAPTION>
Exhibit
Number     Description of Document
--------   -----------------------
<S>        <C>
27.1       Financial Data Schedule (which is incorporated by reference to Exhibit 27.1 to Pegasus'
           Registration Statement on Form S-4 (File No. 333-31080)).
</TABLE>

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

   (b) Reports on Form 8-K.

        On January 12, 2000, Pegasus filed a Current Report on Form 8-K dated
      January 12, 2000 reporting under Item 5 its intention to offer its Series
      C Convertible Preferred Stock in a private offering.

        On January 12, 2000, Pegasus filed a Current Report on Form 8-K dated
      November 19, 1999 reporting under Item 5 the following events: (i) the
      completion of an offer to exchange $155.0 million in principal amount of
      Pegasus' 121/2% Series A Senior Notes due 2007 for $155.0 million in
      principal amount of outstanding Senior Subordinated Notes due 2007 of its
      subsidiaries, Digital Television Services, Inc. and DTS Capital, Inc.
      (ii) the results of Pegasus' fourth quarter; (iii) Pegasus entering into
      a merger agreement with Golden Sky Holdings, Inc., the second largest
      independent distributor of DIRECTV programming; (iv) information relating
      to other pending Direct Broadcast Satellite acquisitions; (v) the
      completion of certain direct broadcast satellite acquisitions that had
      been made from October 1, 1999 through January 10, 2000; (vi) Pegasus'
      investment in Personalized Media Communications, LLC; (vii) Pegasus
      entering into a letter of intent to sell its cable system in Puerto Rico;
      (viii) the intention of Pegasus Media & Communications, a wholly-owned
      subsidiary, to enter into a new credit facility; and (ix) certain
      information regarding the litigation with DIRECTV.

        On February 2, 2000, Pegasus filed Amendment No. 1 to its Current
      Report on Form 8-K dated November 19, 1999 to report updated information
      relating to the consummation of its private offering of $300.0 million in
      liquidation preference of its Series C Convertible Preferred Stock.
      Amendment No. 1 included under Item 7 certain financial statements
      relating to Pegasus' proposed merger with Golden Sky Holdings, Inc.

        On February 16, 2000, Pegasus filed Amendment No. 2 to its Current
      Report on Form 8-K dated November 19, 1999, as amended by Amendment No. 1
      filed on February 2, 2000 to report updated information regarding the
      litigation with DIRECTV and to amend and replace certain information in
      Item 7 with the filing of a new exhibit 99.3.


                                       63
<PAGE>
                       SIGNATURES AND POWERS OF ATTORNEY

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

                                     PEGASUS COMMUNICATIONS CORPORATION



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

Date: March 9, 2000

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

     Pursuant to the requirements of the Securities Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<S>                                                  <C>                                   <C>

            /s/ Marshall W. Pagon                    Chairman of the Board, Chief          March 9, 2000
--------------------------------------------         Executive Officer and President
              Marshall W. Pagon
        (Principal Executive Officer)

          /s/ Robert N. Verdecchio                   Senior Vice President and Director    March 9, 2000
--------------------------------------------
           Robert N. Verdecchio


           /s/ M. Kasin Smith                        Vice President and Acting Chief       March 9, 2000
--------------------------------------------         Financial Officer
              M. Kasin Smith
(Principal Financial and Accounting Officer)


           /s/ Michael C. Brooks                     Director                              March 9, 2000
-------------------------------------------
              Michael C. Brooks


          /s/ Harry F. Hopper III                    Director                              March 9, 2000
------------------------------------------
            Harry F. Hopper III

       /s/ James J. McEntee, III                     Director                              March 9, 2000
------------------------------------------
           James J. McEntee, III


           /s/ Mary C. Metzger                       Director                              March 9, 2000
------------------------------------------
              Mary C. Metzger


          /s/ William P. Phoenix                     Director                              March 9, 2000
------------------------------------------
            William P. Phoenix


          /s/ Donald W. Weber                        Director                              March 9, 2000
------------------------------------------
              Donald W. Weber


            /s/ Riordon B. Smith                     Director                              March 9, 2000
-----------------------------------------
              Riordon B. Smith

</TABLE>
                                       64
<PAGE>

                      PEGASUS COMMUNICATIONS CORPORATION
                         INDEX TO FINANCIAL STATEMENTS



<TABLE>
<CAPTION>
                                                                                              Page
                                                                                             -----
<S>                                                                                          <C>
Report of PricewaterhouseCoopers LLP .....................................................    F-2
Consolidated Balance Sheets as of December 31, 1998 and 1999 .............................    F-3
Consolidated Statements of Operations for the years ended December 31, 1997,
  1998 and 1999...........................................................................    F-4
Consolidated Statements of Changes in Total Equity (Deficit) for the years ended
 December 31, 1997, 1998 and 1999 ........................................................    F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1997,
  1998 and 1999...........................................................................    F-6
Notes to Consolidated Financial Statements ...............................................    F-7
</TABLE>

                                      F-1
<PAGE>

                       REPORT OF INDEPENDENT ACCOUNTANTS



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


In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations and changes in total equity (deficit) and
of cash flows present fairly, in all material respects, the financial position
of Pegasus Communications Corporation and its subsidiaries at December 31, 1998
and 1999, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
accounting standards generally accepted in the United States which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.




PRICEWATERHOUSECOOPERS LLP



Philadelphia, Pennsylvania
February 11, 2000

                                      F-2
<PAGE>

                      Pegasus Communications Corporation
                          Consolidated Balance Sheets
                            (Dollars in thousands)



<TABLE>
<CAPTION>
                                                                              December 31,     December 31,
                                                                                  1998             1999
                                                                             --------------   -------------
<S>                                                                          <C>              <C>
                                  ASSETS
Current assets:
 Cash and cash equivalents ...............................................     $   54,505      $   40,453
 Restricted cash .........................................................         21,479           2,379
 Accounts receivable, less allowance of $567 and $1,410, respectively ....         20,882          31,984
 Inventory ...............................................................          5,427          10,020
 Program rights ..........................................................          3,157           4,373
 Deferred taxes ..........................................................          2,603             536
 Prepaid expenses and other ..............................................          1,207           4,597
                                                                               ----------      ----------
   Total current assets ..................................................        109,260          94,342
Property and equipment, net ..............................................         34,067          44,415
Intangible assets, net ...................................................        729,406         760,637
Program rights ...........................................................          3,428           5,732
Deferred taxes ...........................................................          9,277          30,371
Investment in affiliate ..................................................             --           4,598
Deposits and other .......................................................            872           5,237
                                                                               ----------      ----------
   Total assets ..........................................................     $  886,310      $  945,332
                                                                               ==========      ==========
                           LIABILITIES AND TOTAL EQUITY
Current liabilities:
 Current portion of long-term debt .......................................     $   14,399      $   15,488
 Accounts payable ........................................................          4,795           8,999
 Accrued interest ........................................................         17,465          11,592
 Accrued satellite programming, fees and commissions .....................         22,681          37,885
 Accrued expenses ........................................................          9,599          14,139
 Amounts due seller ......................................................             --           6,729
 Current portion of program rights payable ...............................          2,432           4,446
                                                                               ----------      ----------
   Total current liabilities .............................................         71,371          99,278
Long-term debt ...........................................................        544,629         668,926
Program rights payable ...................................................          2,472           4,211
Deferred taxes ...........................................................         80,672          90,310
                                                                               ----------      ----------
   Total liabilities .....................................................        699,144         862,725
                                                                               ----------      ----------
Commitments and contingent liabilities ...................................             --              --
Minority interest ........................................................          3,000           3,000
Preferred Stock; $0.01 par value; 5.0 million shares authorized ..........             --              --
Series A Preferred Stock; $0.01 par value; 143,684 shares authorized;
 119,369 and 135,073 issued and outstanding ..............................        126,028         142,734
Common stockholders' equity (deficit):
 Class A Common Stock; $0.01 par value; 50.0 million shares authorized;
   11,315,809 and 15,216,510 issued and outstanding ......................            113             152
 Class B Common Stock; $0.01 par value; 15.0 million shares authorized;
   4,581,900 issued and outstanding ......................................             46              46
 Non-Voting Common Stock; $0.01 par value; 20.0 million shares
   authorized ............................................................             --              --
 Additional paid-in capital ..............................................        173,871         237,566
 Deficit .................................................................       (115,892)       (300,704)
 Class A Common Stock in treasury, at cost; 4,253 shares .................             --            (187)
                                                                               ----------      ----------
   Total common stockholders' equity (deficit) ...........................         58,138         (63,127)
                                                                               ----------      ----------
   Total liabilities and stockholders' equity (deficit) ..................     $  886,310      $  945,332
                                                                               ==========      ==========
</TABLE>

          See accompanying notes to consolidated financial statements

                                      F-3
<PAGE>

                      Pegasus Communications Corporation
                     Consolidated Statements of Operations
                 (Dollars in thousands, except per share data)



<TABLE>
<CAPTION>
                                                                                    Years Ended December 31,
                                                                          --------------------------------------------
                                                                              1997            1998            1999
                                                                          ------------   -------------   -------------
<S>                                                                       <C>            <C>             <C>
Net revenues:
 DBS ..................................................................     $ 38,254       $ 147,142       $ 286,353
 Broadcast ............................................................       31,876          34,311          36,415
                                                                            --------       ---------       ---------
   Total net revenues .................................................       70,130         181,453         322,768
Operating expenses:
 DBS
   Programming, technical, general and administrative .................       26,042         102,419         201,158
   Marketing and selling ..............................................        5,973          45,706         117,774
   Incentive compensation .............................................          795           1,159           1,592
   Depreciation and amortization ......................................       17,042          59,077          82,744
 Broadcast
   Programming, technical, general and administrative .................       15,672          18,056          22,812
   Marketing and selling ..............................................        5,704           5,993           6,304
   Incentive compensation .............................................          298             177              57
   Depreciation and amortization ......................................        3,754           4,557           5,144
 Corporate expenses ...................................................        2,256           3,614           5,975
 Corporate depreciation and amortization ..............................        1,353           2,105           3,119
 Other expense, net ...................................................          630           1,409           1,995
                                                                            --------       ---------       ---------
    Loss from operations ..............................................       (9,389)        (62,819)       (125,906)
Interest expense ......................................................      (14,275)        (44,559)        (64,904)
Interest income .......................................................        1,508           1,586           1,356
                                                                            --------       ---------       ---------
 Loss from continuing operations before income taxes, equity loss
   and extraordinary items ............................................      (22,156)       (105,792)       (189,454)
Provision (benefit) for income taxes ..................................          168            (901)         (8,892)
Equity in net loss of unconsolidated affiliate ........................           --              --            (201)
                                                                            --------       ---------       ---------
 Loss from continuing operations before extraordinary items ...........      (22,324)       (104,891)       (180,763)
Discontinued operations:
 Income from discontinued operations of cable segment, net of
   income taxes .......................................................          257           1,047           2,128
 Gain on sale of discontinued operations, net of income taxes .........        4,451          24,727              --
                                                                            --------       ---------       ---------
 Loss before extraordinary items ......................................      (17,616)        (79,117)       (178,635)
Extraordinary loss from extinquishment of debt, net ...................       (1,656)             --          (6,178)
                                                                            --------       ---------       ---------
 Net loss .............................................................      (19,272)        (79,117)       (184,813)
 Preferred stock dividends ............................................       12,215          14,764          16,706
                                                                            --------       ---------       ---------
 Net loss applicable to common shares .................................    ($ 31,487)     ($  93,881)     ($ 201,519)
                                                                            ========       =========       =========
Basic and diluted earnings per common share:
 Loss from continuing operations ......................................     $  (3.50)      $   (8.46)      $  (10.46)
 Income from discontinued operations ..................................         0.03            0.07            0.11
 Gain on sale of discontinued operations ..............................         0.45            1.75              --
                                                                            --------       ---------       ---------
 Loss before extraordinary items ......................................        (3.02)          (6.64)         (10.35)
 Extraordinary loss ...................................................        (0.17)             --          ( 0.33)
                                                                            --------       ---------       ---------
 Net loss .............................................................     $  (3.19)      $   (6.64)      $  (10.68)
                                                                            ========       =========       =========
 Weighted average shares outstanding (000's) ..........................        9,858          14,130          18,875
                                                                            ========       =========       =========
</TABLE>

          See accompanying notes to consolidated financial statements

                                      F-4
<PAGE>

                      Pegasus Communications Corporation
         Consolidated Statements of Changes in Total Equity (Deficit)
                                (In thousands)



<TABLE>
<CAPTION>
                                                                   Common Stock
                                                    Series A   --------------------   Additional
                                                   Preferred      Number      Par       Paid-In
                                                     Stock      of Shares    Value      Capital
                                                  -----------  -----------  -------  ------------
<S>                                               <C>          <C>          <C>      <C>
Balances at January 1, 1997 ....................         --        9,245     $ 92     $  57,736
Net loss .......................................
Issuance of Class A Common Stock due to:
 Acquisitions ..................................                     958       10        15,188
 Incentive compensation and awards .............                     119        1         1,307
Issuance of Series A Preferred Stock due to:
 Unit Offering .................................   $100,000
 Paid and accrued dividends ....................     12,215                             (12,215)
Issuance of warrants due to:
 Acquisitions ..................................                                          1,068
 Unit Offering .................................       (951)                                951
                                                   --------       ------     ----     ---------
Balances at December 31, 1997 ..................    111,264       10,322      103        64,035
Net loss .......................................
Issuance of Class A Common Stock due to:
 Acquisitions ..................................                   5,509       55       119,641
 Incentive compensation and awards .............                      67        1         1,414
Issuance of Series A Preferred Stock due to:
 Paid and accrued dividends ....................     14,764                             (14,764)
Issuance of warrants and options due to:
 Acquisitions ..................................                                          3,545
                                                   --------       ------     ----     ---------
Balances at December 31, 1998 ..................    126,028       15,898      159       173,871
Net loss .......................................
Issuance of Class A Common Stock due to:
 Secondary Offering ............................                   3,616       36        74,857
 Acquisitions ..................................                      12       --           550
 Exercise of warrants and options ..............                     220        2         2,781
 Incentive compensation and awards .............                      52        1         1,399
Issuance of Series A Preferred Stock due to:
 Paid and accrued dividends ....................     16,706                             (16,706)
Issuance of warrants due to:
 Acquisitions ..................................                                            814
Repurchase of Class A Common Stock .............
                                                   --------       ------     ----     ---------
Balances at December 31, 1999 ..................   $142,734       19,798     $198     $ 237,566
                                                   ========       ======     ====     =========

</TABLE>
<PAGE>


<TABLE>
<CAPTION>

                                                                     Treasury Stock             Total
                                                     Retained    -----------------------        Common
                                                     Earnings       Number                  Stockholders'
                                                    (Deficit)     of Shares      Cost      Equity (Deficit)
                                                  -------------  -----------  ----------  -----------------
<S>                                               <C>            <C>          <C>         <C>
Balances at January 1, 1997 ....................   ($  17,502)       --             --        $  40,326
Net loss .......................................      (19,272)                                  (19,272)
Issuance of Class A Common Stock due to:
 Acquisitions ..................................                                                 15,198
 Incentive compensation and awards .............                                                  1,308
Issuance of Series A Preferred Stock due to:
 Unit Offering .................................
 Paid and accrued dividends ....................                                                (12,215)
Issuance of warrants due to:
 Acquisitions ..................................                                                  1,068
 Unit Offering .................................                                                    951
                                                   ----------     -----         ------        ---------
Balances at December 31, 1997 ..................      (36,774)       --             --           27,364
Net loss .......................................      (79,117)                                  (79,117)
Issuance of Class A Common Stock due to:
 Acquisitions ..................................                                                119,696
 Incentive compensation and awards .............                                                  1,415
Issuance of Series A Preferred Stock due to:
 Paid and accrued dividends ....................                                                (14,764)
Issuance of warrants and options due to:
 Acquisitions ..................................                                                  3,545
                                                   ----------     -----         ------        ---------
Balances at December 31, 1998 ..................     (115,891)       --             --           58,139
Net loss .......................................     (184,813)                                 (184,813)
Issuance of Class A Common Stock due to:
 Secondary Offering ............................                                                 74,893
 Acquisitions ..................................                                                    550
 Exercise of warrants and options ..............                                                  2,783
 Incentive compensation and awards .............                                                  1,400
Issuance of Series A Preferred Stock due to:
 Paid and accrued dividends ....................                                                (16,706)
Issuance of warrants due to:
 Acquisitions ..................................                                                    814
Repurchase of Class A Common Stock .............                      4         ($ 187)            (187)
                                                   ----------     -----         ------        ---------
Balances at December 31, 1999 ..................   ($ 300,704)        4         ($ 187)      ($  63,127)
                                                   ==========     =====         ======        =========
</TABLE>

          See accompanying notes to consolidated financial statements

                                      F-5
<PAGE>

                      Pegasus Communications Corporation

                     Consolidated Statements of Cash Flows
                            (Dollars in thousands)



<TABLE>
<CAPTION>
                                                                            Years Ended December 31,
                                                                 ----------------------------------------------
                                                                      1997            1998            1999
                                                                 -------------   -------------   --------------
<S>                                                              <C>             <C>             <C>
Cash flows from operating activities:
 Net loss ....................................................    ($  19,272)     ($  79,117)      ($ 184,813)
 Adjustments to reconcile net loss to net cash provided
  (used) by operating activities:
  Extraordinary loss on extinguishment of debt, net ..........         1,656              --            6,178
  Depreciation and amortization ..............................        27,792          70,731           97,989
  Program rights amortization ................................         1,716           2,366            3,686
  Accretion on discount of bonds and seller notes ............           394           1,320            1,446
  Stock incentive compensation ...............................         1,274           1,452            2,002
  Gain on disposal of assets .................................            --              --              (78)
  Gain on sale of cable systems ..............................        (4,451)        (24,727)              --
  Equity in net loss of unconsolidated affiliate .............            --              --              201
  Bad debt expense ...........................................         1,142           2,851            8,369
  Deferred income taxes ......................................           200            (896)          (8,892)
  Change in assets and liabilities:
   Accounts receivable .......................................        (5,608)         (6,464)         (18,982)
   Inventory .................................................          (116)         (3,105)          (4,422)
   Prepaid expenses and other ................................           305            (244)          (3,315)
   Accounts payable and accrued expenses .....................         5,834           9,747           21,985
   Accrued interest ..........................................         2,585           4,372           (5,873)
   Capitalized subscriber acquisition costs ..................        (4,515)             --               --
   Deposits and other ........................................          (458)           (248)          (4,360)
                                                                   ---------       ---------        ---------
  Net cash provided (used) by operating activities ...........         8,478         (21,962)         (88,879)
                                                                   ---------       ---------        ---------
Cash flows from investing activities:
  Acquisitions ...............................................      (133,886)       (109,340)        (106,907)
  Cash acquired from acquisitions ............................           379           3,284                5
  Capital expenditures .......................................        (9,929)        (12,400)         (14,784)
  Purchase of intangible assets ..............................        (3,034)        (10,489)          (4,552)
  Payments for programming rights ............................        (2,584)         (2,561)          (3,452)
  Proceeds from sale of assets ...............................            --              --              509
  Proceeds from sale of cable system .........................         6,945          30,133               --
  Investment in affiliate ....................................            --              --           (4,800)
                                                                   ---------       ---------        ---------
 Net cash used for investing activities ......................      (142,109)       (101,373)        (133,981)
                                                                   ---------       ---------        ---------
Cash flows from financing activities:
  Proceeds from long-term debt ...............................       115,000         100,000               --
  Repayments of long-term debt ...............................          (320)        (14,572)         (14,291)
  Borrowings on bank credit facilities .......................        94,726         108,800          180,900
  Repayments of bank credit facilities .......................      (124,326)        (64,400)         (50,600)
  Restricted cash ............................................        (1,220)          7,541           19,100
  Debt issuance costs ........................................       (10,237)         (3,179)          (3,608)
  Capital lease repayments ...................................          (337)           (399)            (183)
  Proceeds from issuance of Class A Common Stock .............            --              --           82,334
  Proceeds from issuance of Series A Preferred Stock .........       100,000              --               --
  Underwriting and stock offering costs ......................        (4,188)             --           (4,657)
  Repurchase of Class A Common Stock .........................            --              --             (187)
                                                                   ---------       ---------        ---------
 Net cash provided by financing activities ...................       169,098         133,791          208,808
                                                                   ---------       ---------        ---------
Net increase (decrease) in cash and cash equivalents .........        35,467          10,456          (14,052)
Cash and cash equivalents, beginning of year .................         8,582          44,049           54,505
                                                                   ---------       ---------        ---------
Cash and cash equivalents, end of year .......................     $  44,049       $  54,505        $  40,453
                                                                   =========       =========        =========
</TABLE>

          See accompanying notes to consolidated financial statements

                                      F-6
<PAGE>

                      PEGASUS COMMUNICATIONS CORPORATION

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. The Company:

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

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

2. Summary of Significant Accounting Policies:

Basis of Presentation:

     The accompanying consolidated financial statements include the accounts of
Pegasus and all of its subsidiaries. All intercompany transactions and balances
have been eliminated. Certain amounts for 1997 and 1998 have been reclassified
for comparative purposes.

Use of Estimates in the Preparation of Financial Statements:

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

Cash and Cash Equivalents:

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

Restricted Cash:

     The Company had restricted cash held in escrow of approximately $21.5
million and $2.4 million at December 31, 1998 and 1999, respectively. At
December 31, 1998, $18.9 million was to fund interest payments on the DTS
Notes, $1.6 million was to collateralize certain outstanding loans and $1.0
million was held in escrow for the purchase of a cable system serving
Aguadilla, Puerto Rico. At December 31, 1999, $2.4 million is to collateralize
certain outstanding loans.

Inventories:

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

Long-Lived Assets:

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

Property and Equipment:

     Property and equipment are stated at cost. The cost and related
accumulated depreciation of assets fully depreciated, sold, retired or
otherwise disposed of are removed from the respective accounts and any
resulting


                                      F-7
<PAGE>

                      PEGASUS COMMUNICATIONS CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  -- (Continued)


2. Summary of Significant Accounting Policies:  -- (Continued)

gains or losses are included in the statement of operations. For cable
television systems, initial subscriber installation costs including material,
labor and overhead costs of the hookup are capitalized as part of the
distribution facilities. The costs of disconnection and reconnection are
charged to expense. Satellite equipment that is leased to customers is stated
at cost.

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


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


Intangible Assets:

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

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


          Network affiliation agreements .........      40 years
          Goodwill ...............................      40 years
          DBS rights .............................      10 years
          Broadcast licenses .....................       7 years
          Other intangibles ...................... 2 to 14 years


Revenue:

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

     The Company obtains a portion of its TV programming through its network
affiliations with Fox, UPN and WB and also through independent producers. The
Company does not make any direct payments for this programming. Instead, the
Company retains a portion of the available advertisement spots to sell on its
own account. Barter programming revenue and the related expense are recognized
when the advertisements sold by the networks or independent producers are
broadcast. Gross barter amounts of $7.5 million, $8.1 million and $7.6 million
for 1997, 1998 and 1999, respectively, are included in Broadcast revenue and
programming expense in the accompanying consolidated statements of operations.

Advertising Costs:

     Advertising costs are charged to operations in the period incurred and
totaled approximately $3.6 million, $14.0 million and $23.3 million for the
years ended December 31, 1997, 1998 and 1999, respectively.


                                      F-8
<PAGE>

                      PEGASUS COMMUNICATIONS CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  -- (Continued)


2. Summary of Significant Accounting Policies:  -- (Continued)

Program Rights:

     The Company enters into agreements to show motion pictures and syndicated
programs on television. The Company records the right and associated
liabilities for those films and programs when they are currently available for
showing. These rights are recorded at the lower of unamortized cost or
estimated net realizable value and are amortized on the straight-line method
over the license period, which approximates amortization based on the estimated
number of showings during the contract period. Amortization of $1.7 million,
$2.4 million and $3.7 million is included in Broadcast programming expense for
the years ended December 31, 1997, 1998 and 1999, respectively. The obligations
arising from the acquisition of film rights are recorded at the gross amount.
Payments for the contracts are made pursuant to the contractual terms over
periods which are generally shorter than the license periods.

Income Taxes:

     The Company accounts for income taxes utilizing the asset and liability
approach, whereby deferred tax assets and liabilities are recorded for the tax
effect of differences between the financial statement carrying values and tax
bases of assets and liabilities. A valuation allowance is recorded for deferred
taxes where it appears more likely than not that the Company will not be able
to recover the deferred tax asset. MCT Cablevision, LP, a subsidiary of the
Company, is treated as a partnership for federal and state income tax purposes
but taxed as a corporation for Puerto Rico income tax purposes.

Concentration of Credit Risk:

     Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of trade receivables, cash
and cash equivalents.

     Concentrations of credit risk with respect to trade receivables are
limited due to the large number of customers comprising the Company's customer
base and their dispersion across different businesses and geographic regions.
As of December 31, 1998 and 1999, the Company had no other significant
concentrations of credit risk.

Reliance on DIRECTV:

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

New Accounting Pronouncements:

     In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No. 133"). As a result of the subsequent
issuance of SFAS No. 137 in July 1999, SFAS No. 133 is now effective for fiscal
years beginning after June 15, 2000. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments and for hedging activities. The
Company does not expect the adoption of SFAS No. 133 to have a material effect
on our business, financial position or results of operations.


                                      F-9
<PAGE>

                      PEGASUS COMMUNICATIONS CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  -- (Continued)


3. Property and Equipment:

     Property and equipment consist of the following (in thousands):



<TABLE>
<CAPTION>
                                                     December 31,     December 31,
                                                         1998             1999
                                                    --------------   -------------
<S>                                                 <C>              <C>
  Reception and distribution facilities .........     $  20,713        $  32,179
  Transmitter equipment .........................        17,728           16,940
  Equipment, furniture and fixtures .............         8,530           12,491
  Building and improvements .....................         3,410            7,951
  Land ..........................................         1,229            1,618
  Vehicles ......................................         1,112            2,122
  Other equipment ...............................         5,894            3,500
                                                      ---------        ---------
                                                         58,616           76,801
  Accumulated depreciation ......................       (24,549)         (32,386)
                                                      ---------        ---------
  Net property and equipment ....................     $  34,067        $  44,415
                                                      =========        =========

</TABLE>

     Depreciation expense amounted to $5.7 million, $6.2 million and $7.9
million for the years ended December 31, 1997, 1998 and 1999, respectively.

4. Intangibles:

     Intangible assets consist of the following (in thousands):



<TABLE>
<CAPTION>
                                                             December 31,     December 31,
                                                                 1998             1999
                                                            --------------   -------------
<S>                                                         <C>              <C>
DBS rights ..............................................     $  712,232      $  793,040
Deferred financing costs ................................         33,763          32,927
Franchise costs .........................................         31,158          71,657
Goodwill ................................................         28,033          28,033
Broadcast licenses and affiliation agreements.. .........         19,062          20,436
Consultancy and non-compete agreements ..................          7,023           7,964
Other deferred costs ....................................         13,121          16,873
                                                              ----------      ----------
                                                                 844,392         970,930
Accumulated amortization ................................       (114,986)       (210,293)
                                                              ----------      ----------
Net intangible assets ...................................     $  729,406      $  760,637
                                                              ==========      ==========
</TABLE>

     Amortization expense amounted to $22.1 million, $64.5 million and $90.1
million for the years ended December 31, 1997, 1998 and 1999, respectively.

5. Equity Investment in Affiliate:

     Pegasus Development Corporation ("PDC"), a subsidiary of Pegasus, has a
93% investment in Pegasus PCS Partners, LP ("PCS") which is accounted for by
the equity method. PCS, a jointly owned limited partnership, acquires, owns,
controls and manages wireless licenses. Pegasus PCS, Inc. is the sole general
partner of PCS and is controlled by Marshall W. Pagon, the Company's President
and Chief Executive Officer. PDC's share of undistributed losses of PCS
included in continuing operations was a loss of $201,000 for 1999. PDC's total
investment in PCS at December 31, 1999 was $4.6 million.

6. Common Stock:

     In March 1999, Pegasus completed a secondary public offering in which it
sold approximately 3.6 million shares of its Class A Common Stock to the public
at a price of $22 per share, resulting in net proceeds to the Company of $74.9
million.


                                      F-10
<PAGE>

                      PEGASUS COMMUNICATIONS CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  -- (Continued)


6. Common Stock:  -- (Continued)

     On June 21, 1999, the Company amended Pegasus' Certificate of
Incorporation, increasing the number of authorized shares of Class A Common
Stock from 30.0 million to 50.0 million and authorizing 20.0 million shares of
Non-Voting Common Stock, par value $0.01 per share.

     During 1999, the Company repurchased 4,253 shares of its Class A Common
Stock for $186,822. The shares, which are held in treasury, were surrendered by
employees to satisfy withholding obligations under the Company's restricted
stock plan. The Company applies the cost method in accounting for treasury
stock.

     As of December 31, 1998 and 1999, the Company had three classes of Common
Stock: Class A Common Stock, Class B Common Stock and Non-Voting Common Stock.
Holders of Class A Common Stock and Class B Common Stock are entitled to one
vote per share and ten votes per share, respectively.

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

7. Preferred Stock:

     As of December 31, 1998 and 1999, the Company had 5.0 million shares of
Preferred Stock authorized of which 126,978 and 143,684 shares have been
designated as 12.75% Series A Cumulative Exchangeable Preferred Stock (the
"Series A Preferred Stock").

     The Company had approximately 119,369 and 135,073 shares of Series A
Preferred Stock issued and outstanding at December 31, 1998 and 1999,
respectively. In December, 1999 the Board of Directors declared a dividend on
the Series A Preferred Stock in the aggregate of approximately 8,611 shares of
Series A Preferred Stock, payable on January 1, 2000. Each whole share of
Series A Preferred Stock has a liquidation preference of $1,000 per share (the
"Liquidation Preference"). Cumulative dividends, at a rate of 12.75% are
payable semi-annually on January 1 and July 1. Dividends may be paid, occurring
on or prior to January 1, 2002, at the option of the Company, either in cash or
by the issuance of additional shares of Series A Preferred Stock. Subject to
certain conditions, the Series A Preferred Stock is exchangeable in whole, but
not in part, at the option of the Company, for Pegasus' 12.75% Senior
Subordinated Exchange Notes due 2007 (the "Exchange Notes"). The Exchange Notes
would contain substantially the same redemption provisions, restrictions and
other terms as the Series A Preferred Stock. Pegasus is required to redeem all
of the Series A Preferred Stock outstanding on January 1, 2007 at a redemption
price equal to the Liquidation Preference thereof, plus accrued dividends.

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

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


                                      F-11
<PAGE>

                      PEGASUS COMMUNICATIONS CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  -- (Continued)


8. Long-Term Debt:

     Long-term debt consists of the following (in thousands):



<TABLE>
<CAPTION>
                                                                                 December 31,     December 31,
                                                                                     1998             1999
                                                                                --------------   -------------
<S>                                                                             <C>              <C>
Series B Senior Notes payable by Pegasus, due 2005, interest at 9.625%,
 payable semi-annually in arrears on April 15 and October 15 ................      $115,000         $115,000
Series B Senior Notes payable by Pegasus, due 2006, interest at 9.75%,
 payable semi-annually in arrears on June 1 and December 1 ..................       100,000          100,000
Series A Senior Notes payable by Pegasus, due 2007, interest at 12.5%,
 payable semi-annually in arrears on February 1 and August 1 ................            --          155,000
Senior six-year $180.0 million revolving credit facility, payable by PM&C,
 interest at PM&C's option at either the bank's base rate plus an
 applicable margin or LIBOR plus an applicable margin (8.25% at
 December 31, 1999) .........................................................        27,500          142,500
Senior six-year $70.0 million revolving credit facility, payable by DTS,
 interest at DTS' option at either the bank's base rate plus an applicable
 margin or the Eurodollar Rate plus an applicable margin (10.04% at
 December 31, 1999) .........................................................        26,800           42,700
Senior six-year $20.0 million term loan facility, payable by DTS, interest at
 DTS' option at either the bank's base rate plus an applicable margin or
 the Eurodollar Rate plus an applicable margin (10.75% at December 31,
 1999) ......................................................................        19,600           19,000
Series B Notes payable by PM&C, due 2005, interest at 12.5%, payable
 semi-annually in arrears on January 1 and July 1, net of unamortized
 discount of $2.6 million and $2.2 million as of December 31, 1998 and
 1999, respectively .........................................................        82,378           82,776
Series B Notes payable by DTS, due 2007, interest at 12.5%, payable
 semi-annually in arrears on February 1 and August 1, net of unamortized
 discount of $1.8 million as of December 31, 1998 ...........................       153,215               --
Mortgage payable, due 2000, interest at 8.75% ...............................           455              431
Sellers' notes, due 2000 to 2005, interest at 3% to 8% ......................        33,538           26,648
Capital leases and other ....................................................           543              359
                                                                                   --------         --------
                                                                                    559,029          684,414
Less current maturities .....................................................        14,399           15,488
                                                                                   --------         --------
Long-term debt ..............................................................      $544,629         $668,926
                                                                                   ========         ========
</TABLE>

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

     DTS maintains a $70.0 million senior revolving credit facility and a $20.0
million senior term credit facility (collectively, the "DTS Credit Facility")
which expires in 2003 and is collateralized by substantially all of the assets
of DTS and its subsidiaries. The DTS Credit Facility is subject to certain
financial covenants as defined in the loan agreement, including a debt to
adjusted cash flow covenant. As of December 31, 1999, $10.4 million of stand-by
letters of credit were issued pursuant to the DTS Credit Facility, including
$2.6 million collateralizing certain of the Company's outstanding sellers'
notes.

     PM&C maintains a $180.0 million senior revolving credit facility (the
"PM&C Credit Facility") which expires in 2003 and is collateralized by
substantially all of the assets of PM&C and its subsidiaries. The PM&C Credit
Facility is subject to certain financial covenants as defined in the loan
agreement, including a debt to adjusted cash flow covenant.


                                      F-12
<PAGE>

                      PEGASUS COMMUNICATIONS CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  -- (Continued)


8. Long-Term Debt:  -- (Continued)

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

     In November 1999, Pegasus exchanged its 12.5% Series A senior notes due
2007 (the "12.5% Series A Notes") for DTS' outstanding 12.5% Series B senior
subordinated notes due 2007 (the "DTS Series B Notes"), of which $155.0 million
in principal amount at maturity were outstanding (the "DTS Exchange Offer").
The 12.5% Series A Notes have substantially the same terms and provisions as
the DTS Series B Notes. Deferred financing fees related to the DTS Series B
Notes were written off, resulting in an extraordinary loss of approximately
$6.2 million on the refinancing transaction.

     In December 1999, Pegasus entered into a $35.5 million interim letter of
credit facility (the "PCC Credit Facility"). As of December 31, 1999, $35.5
million of stand-by letters of credit were issued pursuant to the PCC Credit
Facility, including $19.5 million collateralizing certain of the Company's
outstanding sellers' notes.

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

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

     At December 31, 1999, maturities of long-term debt and capital leases are
as follows (in thousands):


  2000 .......................    $ 15,488
  2001 .......................       9,752
  2002 .......................       3,550
  2003 .......................      59,848
  2004 .......................     142,800
  Thereafter .................     452,976
                                  --------
                                  $684,414
                                  ========




                                      F-13
<PAGE>

                      PEGASUS COMMUNICATIONS CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  -- (Continued)


9. Earnings Per Common Share:

Calculation of basic and diluted earnings per common share:

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



<TABLE>
<CAPTION>
                                                               1997            1998            1999
                                                          -------------   -------------   --------------
<S>                                                       <C>             <C>             <C>
Net loss applicable to common shares ..................     ($ 31,487)      ($ 93,881)      ($ 201,519)
                                                             --------        --------        ---------
Weighted average common shares outstanding ............         9,858          14,130           18,875
                                                             --------        --------        ---------
Total shares used for calculation of basic earnings per
 common share .........................................         9,858          14,130           18,875
Stock options .........................................            --              --               --
                                                             --------        --------        ---------
Total shares used for calculation of diluted earnings
 per common share .....................................         9,858          14,130           18,875
                                                             --------        --------        ---------
</TABLE>

     Basic earnings per share amounts are based on net loss after deducting
preferred stock dividend requirements divided by the weighted average number of
Class A, Class B and Non-Voting Common Stock outstanding during the year.

     For the years ended December 31, 1997, 1998 and 1999, net loss per common
share was determined by dividing net loss, as adjusted by the aggregate amount
of dividends on the Company's Series A Preferred Stock, approximately $12.2
million, $14.8 million and $16.7 million, respectively, by applicable shares
outstanding.

     Securities that have not been issued and are antidilutive amounted to
approximately 582,000 shares in 1997, 1.3 million shares in 1998 and 1.8
million shares in 1999.

10. Leases:

     The Company leases certain studios, towers, utility pole attachments, and
occupancy of underground conduits and headend sites under operating leases. The
Company also leases office space, vehicles and various types of equipment
through separate operating lease agreements. The operating leases expire at
various dates through 2004. Rent expense for the years ended December 31, 1997,
1998 and 1999 was $1.1 million, $1.6 million and $2.3 million, respectively.
The Company leases equipment under long-term leases and has the option to
purchase the equipment for a nominal cost at the termination of the leases. The
related obligations are included in long-term debt. Property and equipment at
December 31 include the following amounts for leases that have been capitalized
(in thousands):



                                                   1998        1999
                                                 --------   ---------
  Equipment, furniture and fixtures ..........    $  662     $  320
  Vehicles ...................................       541        422
                                                  ------     ------
                                                   1,203        742
  Accumulated depreciation ...................      (562)      (322)
                                                  ------     ------
    Total ....................................    $  641     $  420
                                                  ======     ======




                                      F-14
<PAGE>

                      PEGASUS COMMUNICATIONS CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  -- (Continued)


10. Leases:  -- (Continued)

     Future minimum lease payments on noncancellable operating and capital
leases at December 31, 1999 are as follows (in thousands):



<TABLE>
<CAPTION>
                                                                 Operating     Capital
                                                                   Leases      Leases
                                                                -----------   --------
<S>                                                             <C>           <C>
2000 ........................................................      $1,899       $192
2001 ........................................................       1,629        153
2002 ........................................................       1,108         58
2003 ........................................................         682          2
2004 ........................................................         609         --
Thereafter ..................................................          15         --
                                                                   ------       ----
Total minimum payments ......................................      $5,942        405
                                                                   ======
Less: amount representing interest ..........................                     46
                                                                                ----
Present value of net minimum lease payments including current
 maturities of $161 .........................................                   $359
                                                                                ====
</TABLE>

11. Income Taxes:

     The following is a summary of the components of income taxes from
continuing operations (in thousands):



<TABLE>
<CAPTION>
                                                         1997        1998           1999
                                                        ------   ------------   ------------
<S>                                                     <C>      <C>            <C>
   Federal -- deferred ..............................              ($ 1,071)      ($ 9,388)
   State and local -- current .......................    $168           170            496
                                                         ----       -------        -------
      Provision (benefit) for income taxes ..........    $168      ($   901)      ($ 8,892)
                                                         ====       =======        =======

</TABLE>

     The deferred income tax assets and liabilities recorded in the
consolidated balance sheets at December 31, 1998 and 1999 are as follows (in
thousands):



<TABLE>
<CAPTION>
                                                                       1998           1999
                                                                   ------------   ------------
<S>                                                                <C>            <C>
Assets:
   Receivables .................................................     $    216       $    536
   Excess of tax basis over book basis from tax gain recognized
    upon incorporation of subsidiaries .........................        2,112             --
   Loss carryforwards ..........................................       56,700        125,856
   Other .......................................................          973             --
                                                                     --------       --------
    Total deferred tax assets ..................................       60,001        126,392
                                                                     --------       --------
Liabilities:
 Excess of book basis over tax basis of property, plant and
   equipment ...................................................        1,907          4,383
   Excess of book basis over tax basis of amortizable intangible
    assets .....................................................       78,765         85,927
                                                                     --------       --------
    Total deferred tax liabilities .............................       80,672         90,310
                                                                     --------       --------
 Net deferred tax assets (liabilities) .........................      (20,671)        36,082
                                                                     --------       --------
    Valuation allowance ........................................      (48,121)       (95,485)
                                                                     --------       --------
   Net deferred tax liabilities ................................    ($ 68,792)     ($ 59,403)
                                                                     ========       ========
</TABLE>

                                      F-15
<PAGE>

                      PEGASUS COMMUNICATIONS CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  -- (Continued)


11. Income Taxes:  -- (Continued)

     The Company has recorded a valuation allowance to reflect the estimated
amount of deferred tax assets which may not be realized due to the expiration
of the Company's net operating loss carryforwards and portions of other
deferred tax assets related to prior acquisitions. The valuation allowance
increased primarily as the result of net operating loss carryforwards generated
during 1999, which may not be utilized.

     At December 31, 1999, the Company has net operating loss carryforwards of
approximately $331.2 million which are available to offset future taxable
income and expire through 2018.

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



<TABLE>
<CAPTION>
                                                          1997          1998          1999
                                                      -----------   -----------   -----------
<S>                                                   <C>           <C>           <C>
  U.S. statutory federal income tax rate ..........       34.00%        35.00%        35.00%
  Valuation allowance .............................      (34.38)       (34.40)       (30.24)
  Other ...........................................        1.43          0.70            --
                                                         ------        ------        ------
  Effective tax rate ..............................        1.05%         1.30%         4.76%
                                                         ======        ======        ======

</TABLE>

12. Supplemental Cash Flow Information:

     Significant noncash investing and financing activities are as follows (in
thousands):



<TABLE>
<CAPTION>
                                                                             Years ended December 31,
                                                                        ----------------------------------
                                                                           1997        1998         1999
                                                                        ---------   ----------   ---------
<S>                                                                     <C>         <C>          <C>
Barter revenue and related expense ..................................    $ 7,520     $  8,078     $ 7,598
Acquisition of program rights and assumption of related
 program payables ...................................................      3,453        4,630       7,205
Acquisition of plant under capital leases ...........................        529           37          --
Capital contribution and related acquisition of intangibles .........     15,198      123,241       1,364
Minority interest and related acquisition of intangibles ............      3,000           --          --
Notes payable and related acquisition of intangibles ................      7,114      219,889       6,467
Series A Preferred Stock dividend and reduction of paid-in
 capital ............................................................     12,215       14,763      16,706
Deferred taxes, net and related acquisition of intangibles ..........         --       82,934          29
</TABLE>

     For the years ended December 31, 1997, 1998 and 1999 the Company paid cash
for interest in the amount of $13.5 million, $35.3 million and $70.8 million,
respectively. The Company paid no federal income taxes for the years ended
December 31, 1997, 1998 and 1999.

13. Acquisitions:

     In 1998, the Company acquired (exclusive of the acquisition of DTS), from
26 independent DIRECTV providers, the rights to provide DIRECTV programming in
certain rural areas of the United States and the related assets in exchange for
total consideration of approximately $132.1 million, which consisted of $109.3
million in cash, 37,304 shares of the Company's Class A Common Stock (amounting
to $900,000), warrants to purchase a total of 25,000 shares of the Company's
Class A Common Stock (amounting to $222,000), $20.4 million in promissory notes
and $1.3 million in assumed net liabilities.

     On April 27, 1998, the Company acquired DTS, which holds the rights to
provide DIRECTV programming in certain rural areas of eleven states, in
exchange for total consideration of approximately $363.9 million, which
consisted of approximately 5.5 million shares of the Company's Class A Common
Stock (amounting to $118.8 million), options and warrants to purchase a total
of 224,038 shares of the Company's Class A Common Stock (amounting to $3.3
million), approximately $158.9 million in assumed net liabilities and
approximately $82.9 million of a deferred tax liability.


                                      F-16
<PAGE>

                      PEGASUS COMMUNICATIONS CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  -- (Continued)


13. Acquisitions:  -- (Continued)

     In 1999, the Company acquired, from fifteen independent DIRECTV providers,
the rights to provide DIRECTV programming in certain rural areas of the United
States and the related assets in exchange for total consideration of
approximately $79.5 million, which consisted of $64.6 million in cash, 12,339
shares of PCC's Class A Common Stock (amounting to $550,000), warrants to
purchase a total of 25,000 shares of PCC's Class A Common Stock (amounting to
$814,000), $6.5 million in promissory notes, $6.7 million in accrued expenses
and $365,000 in assumed net liabilities.

     The Company's 1999 acquisitions of rights to provide DIRECTV programming
were not significant, and accordingly, the pro forma impact of those
acquisitions has not been presented. Unaudited pro forma net revenues from
continuing operations, unaudited net loss and unaudited net loss applicable to
common shares for the year ended December 31, 1998 approximated $225.8 million,
$124.9 million and $149.0 million, respectively. This unaudited pro forma
information reflects the Company's 1998 acquisitions of rights to provide
DIRECTV programming and the disposition of the Cable segment as if each such
DBS territory and the Cable segment had been acquired or sold as of the
beginning of 1998 and includes the impact of certain adjustments, such as the
depreciation of fixed assets, amortization of intangibles, interest expense,
preferred stock dividends and related income tax effects. This information does
not purport to be indicative of what would have occurred had the
acquisitions/disposition been made on that date or of results which may occur
in the future.

14. Discontinued Operations:

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

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

     Effective March 31, 1999, the Company purchased a cable system serving
Aguadilla, Puerto Rico and neighboring communities for approximately $42.1
million in cash. The Aguadilla cable system is contiguous to the Company's
other Puerto Rico cable system and the Company has consolidated the Aguadilla
cable system with its existing cable system.

     On January, 10, 2000, the Company entered into a letter of intent to sell
its remaining Cable operations for $170.0 million in cash, subject to certain
adjustments. The Company anticipates closing this sale during the third quarter
of 2000. Accordingly, the results of operations from the entire Cable segment
have been classified as discontinued with prior years restated.

     Net revenues and income from discontinued operations were as follows (in
thousands):


<TABLE>
<CAPTION>
                                                            Years Ended December 31,
                                                      ------------------------------------
                                                                  (unaudited)
                                                         1997         1998         1999
                                                      ----------   ----------   ----------
<S>                                                   <C>          <C>          <C>
  Net revenues ....................................    $16,688      $13,767      $21,158
  Income from operations ..........................      2,077          648        2,110
  Provision for income taxes ......................         32            5           --
  Income from discontinued operations .............        257        1,047        2,128
  Gain on sale of discontinued operations .........      4,451       24,727           --

</TABLE>



                                      F-17
<PAGE>

                      PEGASUS COMMUNICATIONS CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  -- (Continued)


15. Financial Instruments:


     The carrying values and fair values of the Company's financial instruments
at December 31, 1999 consisted of (in thousands):



<TABLE>
<CAPTION>
                                                          1998                       1999
                                                ------------------------   ------------------------
                                                 Carrying        Fair       Carrying        Fair
                                                   Value        Value         Value        Value
                                                ----------   -----------   ----------   -----------
<S>                                             <C>          <C>           <C>          <C>
  Long-term debt, including current portion .    $559,029     $583,460      $684,414     $707,988
  Series A Preferred Stock ..................     126,028      126,978       142,734      149,871

</TABLE>

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


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



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


16. Warrants:


     In 1998, in connection with the acquisition of DBS properties, the Company
issued warrants to purchase approximately 182,000 shares of Class A Common
Stock at exercise prices between $14.64 and $24.26 per share. These warrants
are exercisable through October 10, 2007. At December 31, 1999, warrants to
purchase approximately 119,000 shares of Class A Common Stock have been
exercised. The fair value of the warrants issued was estimated using the
Black-Scholes pricing model and was approximately $2.7 million. The value
assigned to these warrants increased the carrying amount of the DBS rights
acquired and was effected by an increase in paid-in-capital.


     In 1999, in connection with the acquisition of DBS properties, the Company
issued warrants to purchase 25,000 shares of Class A Common Stock at an
exercise price of $24.18 per share. These warrants are exercisable through
April 13, 2004. At December 31, 1999, none of these warrants had been
exercised. The fair value of the warrants issued was estimated using the
Black-Scholes pricing model and was approximately $814,000. The value assigned
to these warrants increased the carrying amount of the DBS rights acquired and
was effected by an increase in paid-in-capital.


17. Employee Benefit Plans:


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


Stock Option Plan


     The Stock Option Plan provides for the granting of nonqualified and
qualified options to purchase a maximum of 1,300,000 shares (subject to
adjustment to reflect stock dividends, stock splits, recapitalizations and
similar changes in the capitalization of Pegasus) of Class A Common Stock of
the Company. The Stock Option Plan terminates in September 2006. As of December
31, 1999, options to purchase an aggregate of approximately 1.3 million shares
of Class A Common Stock at exercise prices between $11.00 and $80.88 were
outstanding. All options granted under the Stock Option Plan have been granted
at fair market value at the time of grant.


                                      F-18
<PAGE>

                      PEGASUS COMMUNICATIONS CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  -- (Continued)


17. Employee Benefit Plans:  -- (Continued)

     The following table summarizes information about the Company's stock
options outstanding at December 31, 1999:



<TABLE>
<CAPTION>
                        Outstanding         Weighted          Exercisable         Weighted
     Range of           at 12/31/99          Average          at 12/31/99         Average
  Exercise Price      (in thousands)     Exercise Price     (in thousands)     Exercise Price
------------------   ----------------   ----------------   ----------------   ---------------
<S>                  <C>                <C>                <C>                <C>
 $        11-$19             242            $  11.37              124            $  11.66
           20-29             338               22.51              186               22.87
           30-39             372               39.48               25               39.50
           40-49              50               42.32               --                  --
           80-81             315               80.88               --                  --
 ---------------             ---            --------              ---            --------
 $        11-$81           1,317            $  39.97              335            $  19.97
 ===============           =====            ========              ===            ========
</TABLE>

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

     The fair value of options was estimated using the Black-Scholes option
pricing model with the following weighted average assumptions for 1997, 1998
and 1999:



<TABLE>
<CAPTION>
                                                1997          1998          1999
                                            -----------   -----------   -----------
<S>                                         <C>           <C>           <C>
Risk-free interest rate .................     6.35%         5.11%         5.56%
Dividend Yield ..........................     0.00%         0.00%         0.00%
Volatility Factor .......................    0.403         0.479         0.536
Weighted average expected life ..........   5 years       4.5 years     4.4 years
</TABLE>

     Pro forma net losses for 1997, 1998 and 1999 would have been $31.7
million, $94.7 million and $205.2 million, respectively; pro forma net losses
per common share for 1997, 1998 and 1999 would have been $3.22, $6.70 and
$10.87, respectively. The weighted average fair value of options granted were
$4.99, $11.19 and $26.74 for 1997, 1998 and 1999, respectively.

     The following table summarizes stock option activity over the past three
years:



<TABLE>
<CAPTION>
                                                                           Weighted
                                                         Number of         Average
                                                           Shares       Exercise Price
                                                       -------------   ---------------
<S>                                                    <C>             <C>
  Outstanding at January 1, 1997 ...................         3,385        $  14.00
  Granted ..........................................       220,000           11.00
                                                         ---------        --------
  Outstanding at December 31, 1997 .................       223,385           11.05
  Granted ..........................................       418,842           21.23
                                                         ---------        --------
  Outstanding at December 31, 1998 .................       642,227           17.69
  Granted ..........................................       797,346           55.58
  Exercised ........................................       (83,577)          18.99
  Canceled or expired ..............................       (38,667)          37.09
                                                         ---------        --------
  Outstanding at December 31, 1999 .................     1,317,329        $  39.97
                                                         =========        ========
  Options exercisable at December 31, 1997 .........         3,385        $  14.00
  Options exercisable at December 31, 1998 .........       143,728           15.09
  Options exercisable at December 31, 1999 .........       334,807           19.97
</TABLE>



                                      F-19
<PAGE>

                      PEGASUS COMMUNICATIONS CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  -- (Continued)


17. Employee Benefit Plans:  -- (Continued)

Restricted Stock Plan


     The Restricted Stock Plan provides for the granting of four types of
restricted stock awards representing a maximum of 350,000 shares (subject to
adjustment to reflect stock dividends, stock splits, recapitalizations and
similar changes in the capitalization of Pegasus) of Class A Common Stock of
the Company to eligible employees who have completed at least one year of
service. Restricted stock received under the Restricted Stock Plan vests based
on years of service with the Company and are fully vested for employees who
have four years of service with the Company, with the exception of special
recognition awards which are fully vested on the date of grant. The Restricted
Stock Plan terminates in September 2006. As of December 31, 1999, approximately
184,000 shares of Class A Common Stock had been granted under the Restricted
Stock Plan. The expense for this plan amounted to $823,000, $763,000 and
$819,000 in 1997, 1998 and 1999, respectively.

401(k) Plans

     Substantially all Company employees who, as of the enrollment date under
the 401(k) plans, have completed at least one year of service with the Company
are eligible to participate in one of the 401(k) plans. Participants may make
salary deferral contributions of 2% to 6% of their salary to the 401(k) plans.

     The Company may make three types of contributions to the 401(k) plans,
each allocable to a participant's account if the participant completes at least
1,000 hours of service in the applicable plan year, and is employed on the last
day of the applicable plan year. Discretionary Company contributions and
Company matches of employee salary deferral contributions and rollover
contributions are made in the form of Class A Common Stock, or in cash used to
purchase Class A Common Stock. The Company has authorized and reserved for
issuance up to 205,000 shares of Class A Common Stock in connection with the
401(k) plans. Company contributions to the 401(k) plans are subject to
limitations under applicable laws and regulations. All employee contributions
to the 401(k) plans are fully vested at all times and all Company
contributions, if any, vest based on years of service with the Company and are
fully vested for employees who have four years of service with the Company. A
participant also becomes fully vested in Company contributions to the 401(k)
plans upon attaining age 65 or upon his or her death or disability. The expense
for these plans amounted to $451,000, $689,000 and $1.2 million in 1997, 1998
and 1999, respectively.

18. Commitments and Contingent Liabilities:


Legal Matters:

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

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

     In the opinion of management, the ultimate liability with respect to the
aforementioned claims and matters will not have a material adverse effect on
the consolidated operations, liquidity, cash flows or financial position of the
Company.

     The Company is a rural affiliate of the National Rural Telecommunications
Cooperative ("NRTC"). 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. The Company's
ability to distribute DIRECTV programming services is dependent upon agreements
between the NRTC and Hughes and between the Company and the NRTC.


                                      F-20
<PAGE>

                      PEGASUS COMMUNICATIONS CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  -- (Continued)


18. Commitments and Contingent Liabilities:  -- (Continued)

     On June 3, 1999, the NRTC filed a lawsuit in federal court against DIRECTV
seeking a court order to enforce the NRTC's contractual rights to obtain from
DIRECTV certain premium programming formerly distributed by United States
Satellite Broadcasting Company, Inc. for exclusive distribution by the NRTC's
members and affiliates in their rural markets. On July 22, 1999, DIRECTV
responded to the NRTC's continuing lawsuit by rejecting the NRTC's claims to
exclusive distribution rights and by filing a counterclaim seeking judicial
clarification of certain provisions of DIRECTV's contract with the NRTC. In
particular, DIRECTV contends in its counterclaim that the term of DIRECTV's
contract with the NRTC is measured solely by the orbital life of DBS-1, the
first DIRECTV satellite launched into orbit at the 101o W orbital location,
without regard to the orbital lives of the other DIRECTV satellites at the 101o
W orbital location. DIRECTV also alleges in its counterclaim that the NRTC's
right of first refusal, which is effective at the end of the term of DIRECTV's
contract with the NRTC, does not provide for certain programming and other
rights comparable to those now provided under the contract.

     On August 26, 1999, the NRTC filed a separate lawsuit in federal court
against DIRECTV claiming that DIRECTV has failed to provide to the NRTC its
share of launch fees and other benefits that DIRECTV and its affiliates have
received relating to programming and other services. On September 9, 1999, the
NRTC filed a response to DIRECTV's counterclaim contesting DIRECTV's
interpretations of the end of term and right of first refusal provisions.

     On January 10, 2000, the Company and Golden Sky Systems, Inc. ("Golden
Sky", a subsidiary of Golden Sky Holdings, Inc.) filed a lawsuit in federal
court against DIRECTV which contains causes of action for various torts, common
counts and declaratory relief based on DIRECTV's failure to provide the NRTC
with premium programming, thereby preventing the NRTC from providing this
programming to the Company and Golden Sky. The claims are also based on
DIRECTV's position with respect to launch fees and other benefits, term and
rights of first refusal. The complaint seeks monetary damages and a court order
regarding the rights of the NRTC and its members and affiliates.

     Management is not currently able to predict the outcome of the DIRECTV
litigation matters or the effect such outcome will have on the consolidated
operations, liquidity, cash flows or financial position of the Company.

Commitments:

     The Company has entered into a multi-year agreement with a provider of
integrated marketing, information and transaction services to provide customer
relationship management services which will significantly increase the
Company's existing call center capacity. The initial term of the agreement ends
on December 31, 2004. Beginning January 1, 2000, the Company must pay minimum
fees to the provider as follows (in thousands):


                                               Annual
                                               Minimum
  Year                                          Fees
--------                                     ----------
  2000 ...................................    $12,600
  2001 ...................................     18,216
  2002 ...................................     20,250
  2003 ...................................     20,250
  2004. ..................................     20,250
                                              -------
  Total minimum payments .................    $91,566
                                              =======

Program Rights:

     The Company has entered into agreements totaling $7.4 million as of
December 31, 1999 for film rights and programs that are not yet available for
showing at December 31, 1999, and accordingly, are not recorded by the Company.
At December 31, 1999, the Company has commitments for future program rights of
approximately $3.3 million, $1.4 million, $214,000 and $87,000 in 2000, 2001,
2002 and 2003.


                                      F-21
<PAGE>

                      PEGASUS COMMUNICATIONS CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  -- (Continued)


19. Related Party Transactions:

     The Company entered into an arrangement in 1998 with W.W. Keen Butcher
(the stepfather of Marshall W. Pagon, the Company's President and Chief
Executive Officer, and Nicholas A. Pagon, a Vice President of Pegasus), certain
entities controlled by him (the "KB Companies") and the owner of a minority
interest in one of the KB Companies, under which the Company agreed to provide
and maintain collateral for up to $4.0 million in principal amount of bank
loans to Mr. Butcher and the minority owner. The agreement was recently amended
to increase the amount of collateral that the Company will maintain for such
loans to up to $8.0 million. Mr. Butcher and the minority owner must lend or
contribute the proceeds of those bank loans to one or more of the KB Companies
for the acquisition of television broadcast stations to be operated by the
Company pursuant to local marketing agreements. As of December 31, 1998 and
1999, the Company had provided collateral of $1.6 million and $2.4 million
pursuant to this arrangement, respectively, which is included as restricted
cash on the Company's consolidated balance sheets.

     William P. Phoenix, a director of Pegasus since June 1998, is a managing
director of CIBC World Markets Corporation ("CIBC"). CIBC and its affiliates
have provided various services to the Company since the beginning of 1997,
including serving as one of the initial purchasers in the 9.75% Senior Notes
Offering, providing a fair market value appraisal in connection with the
contribution to Pegasus of certain assets between related parties, providing
fairness opinions in connection with an acquisition and certain intercompany
transactions, acting as a standby purchaser in connection with DTS' offer to
repurchase the DTS Notes as a result of the change of control arising by
Pegasus' acquisition of DTS, acting as a dealer manager in connection with the
DTS Exchange Offer, issuing letters of credit pursuant to the PCC Credit
Facility and acting as an Administrative Agent in connection with the DTS
Credit Facility. Total fees and expenses were approximately $3.3 million and
$940,000 for the years ended December 31, 1998 and 1999, respectively.

     In 1999, Pegasus loaned $199,999 to Nicholas A. Pagon, Pegasus' Vice
President of Broadcast Operations, bearing interest at the rate of 6% per
annum, with the principal amount due on the fifth anniversary of the date of
the promissory note. Mr. Pagon is required to use half of the proceeds of the
loan to purchase shares of Class A Common Stock, and the loan is collateralized
by those shares. The balance of the loan proceeds may be used at Mr. Pagon's
discretion.


20. Industry Segments:

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

     All of the Company's revenues are derived from external customers. Capital
expenditures for the Company's DBS segment were $506,000, $2.0 million and $3.6
million for 1997, 1998 and 1999, respectively. Capital expenditures for the
Company's Broadcast segment were $6.4 million, $6.8 million and $4.1 million
for 1997, 1998 and 1999, respectively. Capital expenditures for the Company's
discontinued Cable segment were $2.9 million, $2.0 million and $5.6 million for
1997, 1998 and 1999, respectively. All other capital expenditures for 1997,
1998 and 1999 were at the corporate level. Identifiable total assets for the
Company's DBS segment were $715.6 million and $701.9 million as of December 31,
1998 and 1999, respectively. Identifiable total assets for the Company's
Broadcast segment were $67.1 million and $70.6 million as of December 31, 1998
and 1999, respectively. Identifiable total assets for the Company's
discontinued Cable segment were $47.0 million and $86.5 million as of December
31, 1998 and 1999, respectively. All other identifiable assets as of December
31, 1998 and 1999 were at the corporate level.


21. Subsequent Events (unaudited):

     In January 2000, the Company entered into a an agreement and plan of
merger to acquire Golden Sky Holdings, Inc. ("GSH"), for approximately 6.5
million shares of the Company's Class A Common Stock and


                                      F-22
<PAGE>

                      PEGASUS COMMUNICATIONS CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  -- (Continued)


21. Subsequent Events (unaudited): -- (Continued)

the assumed net liabilities of GSH. As of December 31, 1999, GSH's operations
consisted of providing DIRECTV services to approximately 345,200 subscribers in
certain rural areas of 24 states in which GSH holds the exclusive rights to
provide such services. Upon completion of the acquisition of GSH, GSH will
become a wholly owned subsidiary of Pegasus.


     In January 2000, the Company made an investment in Personalized Media
Communications, LLC ("PMC"), an advanced communications technology company, of
approximately $111.8 million, which consisted of $14.3 million in cash, 200,000
shares of the Company's Class A Common Stock (amounting to $18.8 million) and
Pegasus' agreement, subject to certain conditions, to issue warrants to
purchase 1.0 million shares of the Company's Class A Common Stock at an
exercise price of $90.00 per share and with a term of ten years. The fair value
of the warrants to be issued was estimated using the Black-Scholes pricing
model and is approximately $78.8 million. A subsidiary of PMC granted to
Pegasus an exclusive license for use of PMC's patent portfolio in the
distribution of satellite services from specified orbital locations. Mary C.
Metzger, Chairman of PMC and a member of the Company's board of directors, and
John C. Harvey, Managing Member of PMC and Ms. Metzger's husband, own a
majority of and control PMC.


     In January 2000, PM&C entered into a first amended and restated credit
facility, which consists of a $225.0 million senior revolving credit facility
which expires in 2004 and a $275.0 million senior term credit facility which
expires in 2005 (collectively, the "New PM&C Credit Facility"). The New PM&C
Credit Facility amends the PM&C Credit Facility, is collateralized by
substantially all of the assets of PM&C and its subsidiaries and is subject to
certain financial covenants as defined in the loan agreement, including a debt
to adjusted cash flow covenant. Borrowings under the New PM&C Credit Facility
can be used for acquisitions and general corporate purposes.


     Commensurate with the closing of the New PM&C Credit Facility, the Company
borrowed $275.0 million under the term loan, outstanding balances under the
PM&C Credit Facility, the DTS Credit Facility, and the PCC Credit Facility were
repaid and commitments under the DTS Credit Facility and the PCC Credit
Facility were terminated. Additionally, in connection with the closing of the
New PM&C Credit Facility, DTS was merged with and into a subsidiary of PM&C.


     In January 2000, Pegasus issued 5,707 shares of its Series B junior
convertible participating preferred stock, with a liquidation preference of
$1,000 per share plus any accrued but unpaid dividends (the "Series B Preferred
Stock"), as part of an acquisition of DIRECTV distribution rights from an
independent DIRECTV provider. Each share of Series B Preferred Stock will
initially be convertible at the option of the holder into 16.24 shares of the
Company's Class A Common Stock.


     In January 2000, Pegasus completed an offering of 3,000,000 shares of its
6.5% Series C convertible preferred stock, with a liquidation preference of
$100 per share plus any accrued but unpaid dividends (the "Series C Preferred
Stock"). Each share of Series C Preferred Stock will initially be convertible
at the option of the holder into 0.7843 shares of the Company's Class A Common
Stock. Pegasus may redeem the Series C Preferred Stock on or after August 1,
2001, subject to certain conditions, at redemption prices set forth in the
certificate of designation, plus accumulated and unpaid dividends, if any.


     In February 2000, Pegasus issued 22,500 shares of its Series D junior
convertible participating preferred stock, with a liquidation preference of
$1,000 per share plus any accrued but unpaid dividends (the "Series D Preferred
Stock"), as part of an acquisition of DIRECTV distribution rights from an
independent DIRECTV provider. Each share of Series D Preferred Stock will
initially be convertible at the option of the holder into 9.77 shares of the
Company's Class A Common Stock.


     As of February 11, 2000, the Company acquired, from two independent
DIRECTV providers, the rights to provide DIRECTV programming in certain rural
areas of California, Indiana and Oregon and the related


                                      F-23
<PAGE>

                      PEGASUS COMMUNICATIONS CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  -- (Continued)


assets in exchange for total consideration of approximately $35.0 million,
which consisted of $11.9 million in cash, 22,500 shares of the Company's Series
D Preferred Stock (amounting to $22.5 million), $200,000 in promissory notes,
payable over two years, and $381,000 in assumed net liabilities.

22. Quarterly Information (unaudited):

     The net revenues and loss from operations data provided in the tables
below are from continuing operations and therefore will not necessarily agree
to quarterly information previously reported.



<TABLE>
<CAPTION>
                                                                          Quarter Ended
                                                  -------------------------------------------------------------
                                                    March 31,      June 30,      September 30,     December 31,
                                                      1999           1999             1999             1999
                                                  ------------   ------------   ---------------   -------------
                                                              (in thousands, except per share data)
<S>                                               <C>            <C>            <C>               <C>
1999
----
 Net revenues .................................     $ 66,285       $ 73,740         $ 84,668         $ 98,075
 Loss from operations .........................      (27,218)       (30,546)         (39,788)         (28,354)
 Loss before extraordinary items ..............      (45,925)       (48,672)         (56,432)         (44,312)
 Net loss applicable to common shares .........      (45,925)       (48,672)         (56,432)         (50,490)

Basic and diluted earnings per share:
 Loss from operations .........................     $   1.66)      $   1.56)        $   2.02)        $   1.44)
 Loss before extraordinary items ..............       ( 2.81)        ( 2.48)          ( 2.86)          ( 2.24)
 Net loss .....................................       ( 2.81)        ( 2.48)          ( 2.86)          ( 2.56)

</TABLE>

     For the fourth quarter of 1999, the Company had an extraordinary loss of
approximately $6.2 million or $0.32 per share in connection with the DTS
Exchange Offer.


<TABLE>
<CAPTION>
                                                                          Quarter Ended
                                                  -------------------------------------------------------------
                                                    March 31,      June 30,      September 30,     December 31,
                                                      1998           1998             1998             1998
                                                  ------------   ------------   ---------------   -------------
                                                              (in thousands, except per share data)
<S>                                               <C>            <C>            <C>               <C>
1998
----
 Net revenues .................................     $ 24,389       $ 42,162         $ 52,659         $ 62,243
 Loss from operations .........................       (7,053)        (9,967)         (18,993)         (26,806)
 Loss before extraordinary items ..............      (15,936)       (22,804)         (10,752)         (44,389)
 Net loss applicable to common shares .........      (15,936)       (22,804)         (10,752)         (44,389)

Basic and diluted earnings per share:
 Loss from operations .........................     $   0.68)      $   0.70)        $   1.19)        $   1.69)
 Loss before extraordinary items ..............       ( 1.54)        ( 1.59)          ( 0.68)          ( 2.79)
 Net loss .....................................       ( 1.54)        ( 1.59)          ( 0.68)          ( 2.79)

</TABLE>

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

                                      F-24
<PAGE>

                       REPORT OF INDEPENDENT ACCOUNTANTS



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

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



PRICEWATERHOUSECOOPERS LLP



Philadelphia, Pennsylvania
February 11, 2000

                                      S-1
<PAGE>

PEGASUS COMMUNCATIONS CORPORATION
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 1997, 1998 and 1999
(Dollars in thousands)




<TABLE>
<CAPTION>
                            Balance at      Additions        Additions                          Balance at
                             Beginning     Charged To       Charged To                            End of
Description                  of Period      Expenses      Other Accounts       Deductions         Period
<S>                        <C>            <C>            <C>                <C>                <C>
Allowance for
Uncollectible
Accounts Receivable
 Year 1997                   $    243       $  1,142         $    --           $   1,066(b)     $    319
 Year 1998                   $    319       $  2,851         $   183(a)        $   2,786(b)     $    567
 Year 1999                   $    567       $  8,369         $    --           $   7,526(b)     $  1,410

Valuation Allowance for
Deferred Tax Assets
 Year 1997                   $ 10,684       $  7,584         $    --           $   4,971        $ 13,297
 Year 1998                   $ 13,297       $ 41,070         $    --           $   6,246        $ 48,121
 Year 1999                   $ 48,121       $ 69,500         $    --           $  22,136        $ 95,485

</TABLE>

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

                                      S-2