<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 [NO FEE REQUIRED]

     For the transition period from __________ to __________

Commission file number:  0-21317


                        TCI SATELLITE ENTERTAINMENT, INC.
             ------------------------------------------------------
             (Exact name of Registrant as specified in its charter)

           State of Delaware                                 84-1299995
   ---------------------------------                   ----------------------
     (State or other jurisdiction                        (I.R.S. Employer
   of incorporation or organization)                   Identification Number)

 7600 East Orchard Road, Suite 330 South
      Englewood, Colorado                                       80111
   ---------------------------------                   ----------------------
(Address of principal executive offices)                      (Zip Code)

     Registrant's telephone number, including area code: (303) 268-5400

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

     Securities registered pursuant to Section 12(g) of the Act:
          Series A Common Stock, par value $1.00 per share
          Series B Common Stock, par value $1.00 per share

     Indicated 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, and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [ ] No

     Indicated 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
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendments to this Form 10-K. __X__

     The aggregate market value of the voting stock held by nonaffiliates of TCI
Satellite Entertainment, Inc. computed by reference to the last sales price of
such stock, as of the close of trading on February 29, 2000, was approximately
$850,935,134.

     The number of shares outstanding of TCI Satellite Entertainment, Inc.'s
common stock as of February 29, 2000 was:

          Series A Common Stock - 62,894,446 shares; and
          Series B Common Stock - 8,465,224 shares.
<PAGE>

                        TCI SATELLITE ENTERTAINMENT, INC.
                         1999 ANNUAL REPORT ON FORM 10-K

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                 PAGE
                                                                 ----
<S>                                                             <C>
PART I

Item 1.  Business                                                  I-1

Item 2.  Properties                                               I-11

Item 3.  Legal Proceedings                                        I-11

Item 4.  Submission of Matters to a Vote of Security Holders      I-12

PART II

Item 5.  Market for Registrant's Common Equity and
           Related Stockholder Matters                            II-1

Item 6.  Selected Financial Data                                  II-2

Item 7.  Management's Discussion and Analysis of Financial
           Condition and Results of Operations                    II-3

Item 8.  Financial Statements and Supplementary Data              II-7

Item 9.  Changes in and Disagreements with Accountants
           on Accounting and Financial Disclosure                 II-7

PART III

Item 10. Directors and Executive Officers of the Registrant      III-1

Item 11. Executive Compensation                                  III-4

Item 12. Security Ownership of Certain Beneficial Owners
           and Management                                       III-10

Item 13. Certain Relationships and Related Transactions         III-14

PART IV

Item 14. Exhibits, Financial Statements and Financial Statement
           Schedules and Reports on Form 8-K                      IV-1


</TABLE>

<PAGE>

PART I

ITEM 1.  BUSINESS

(a)  INTRODUCTION

     Since its formation in 1996, TCI Satellite Entertainment, Inc. ("TSAT" or
     the "Company") has undergone a number of significant changes in its
     business. This Annual Report incorporates, for TSAT and its subsidiaries,
     consolidated audited balance sheets as of December 31, 1999 and 1998, and
     audited statements of income (loss) and cash flows for each of the three
     fiscal years ended December 31, 1999, 1998 and 1997, as well as certain
     selected financial data for each of the five fiscal years ended December
     31, 1999, 1998, 1997, 1996 and 1995. In order to help the reader to
     understand the financial information presented herein, this Annual Report
     briefly describes the business of TSAT and its predecessors over such five
     year period, as well as certain material transactions affecting TSAT during
     such period.

     On March 16, 2000, the Company completed its previously announced
     transactions with Liberty Media Corporation ("Liberty Media"). As a result
     of such transactions, the Company became the managing member (through its
     wholly-owned subsidiaries) of two new limited liability companies
     (collectively, the "Liberty Joint Ventures"), through which the Company
     holds interests in a number of satellite and related businesses. The
     Company also acquired from Liberty Media beneficial ownership in over
     5,000,000 shares of Sprint Corporation PCS common stock, having a market
     value of approximately $330 million as of March 24, 2000, in exchange for
     the issuance by the Company to Liberty Media of (i) Series A Preferred
     Stock of the Company with a liquidation value of $150 million and (ii)
     Series B Preferred Stock of the Company with a liquidation value of
     $150 million. The Series B Preferred Stock is convertible into Series B
     Common Stock of the Company at a conversion price of $8.84 per share,
     subject to adjustment, and prior to conversion represents approximately
     85% of the voting power of the Company. The Company currently intends to
     leverage its capital position and interests in the Liberty Joint Ventures
     to pursue strategic opportunities worldwide in the distribution of internet
     data and other content via satellite and related businesses and is
     actively seeking to develop or acquire an operating business related to,
     or complementary with, such strategy.

(b)  HISTORY OF THE BUSINESS

     THE SPIN-OFF. TSAT was incorporated in Delaware in November 1996. Prior to
     the Spin-off (as defined below), the Company was wholly owned by
     Tele-Communications, Inc. ("TCI"), which, through various subsidiaries, was
     engaged in the business of distributing PRIMESTAR satellite television
     services, a medium power digital satellite service, from December 1990
     until the consummation of the Spin-off.

     TSAT was formed to own and operate certain businesses of TCI
     Communications, Inc. ("TCIC"), a subsidiary of TCI, constituting TCI's
     collective interest ("TCI SATCO") in the digital satellite business. On
     December 4, 1996 (the "Spin-off Date"), TCI distributed (the "Spin-off"),
     as a dividend, all of the issued and outstanding TSAT Common Stock to the
     holders of record of shares of Tele-Communications, Inc., Series A TCI
     Group Common Stock, $1.00 par value per share (the "Series A TCI Group
     Stock"), and Tele-Communications, Inc., Series B TCI Group Common Stock,
     $1.00 par value per share (the "Series B TCI Group Stock" and, together
     with the Series A TCI Group Stock, the "TCI Group Stock"), on the basis of
     one share of the Series A Common Stock for each ten shares of Series A TCI
     Group Stock, and one share of Series B Common Stock for each ten shares of
     Series B TCI Group Stock. References herein to the "Company" may, as the
     context requires, refer to (i) TCI SATCO prior to the Spin-off Date and
     (ii) TSAT and its consolidated subsidiaries on and after the Spin-off Date.

     PRIMESTAR BY TCI. From December 4, 1996 until March 31, 1998, TSAT marketed
     and distributed the PRIMESTAR programming service under the brand names
     "PRIMESTAR By TCI" and "PRIMESTAR By TSAT" and owned an aggregate 20.86%
     partnership interest in PRIMESTAR

                                      I-1
<PAGE>

     Partners L.P. (now known as Phoenixstar Partners L.P.) ("Phoenixstar
     Partners"), which owned and operated the PRIMESTAR-Registered Trademark-
     service. In addition, the Company, through its wholly-owned subsidiary,
     Tempo Satellite, Inc. ("Tempo"), held a construction permit (the "FCC
     Permit") issued by the Federal Communications Commission ("FCC"),
     authorizing construction of a high power direct broadcast satellite
     ("DBS") system consisting of two or more satellites delivering DBS service
     in 11 frequencies at the 119DEG. W.L. orbital position. Tempo was a party
     to a satellite construction agreement (the "Satellite Construction
     Agreement") with Space Systems/Loral, Inc. ("Loral") pursuant to which
     Tempo arranged for the construction of two high power direct broadcast
     satellites (the "Tempo Satellites"). On March 8, 1997, one of the Tempo
     Satellites ("Tempo DBS-1") was launched into geosynchronous orbit. The
     other Tempo Satellite ("Tempo DBS-2") served as a ground spare for Tempo
     DBS-1.

     THE PRIMESTAR ROLL-UP. On March 6, 1998, the TSAT stockholders voted to
     approve a proposal to adopt the provisions of certain agreements and the
     transactions contemplated thereby, collectively referred to herein as the
     "Roll-up Plan". The Roll-up Plan was a two-step transaction comprising
     the Restructuring and the proposed TSAT Merger, as described below.

     Effective April 1, 1998 (the "Closing Date") and pursuant to (i) a Merger
     and Contribution Agreement dated as of February 6, 1998 (the "Restructuring
     Agreement"), among TSAT, PRIMESTAR, Inc. (now known as Phoenixstar, Inc.)
     ("Phoenixstar"), Time Warner Entertainment Company, L.P. ("TWE"),
     Advance/Newhouse Partnership ("Newhouse"), Comcast Corporation ("Comcast"),
     Cox Communications, Inc. ("Cox"), MediaOne of Delaware, Inc. ("MediaOne")
     and GE American Communications, Inc. ("GE Americom") and (ii) an Asset
     Transfer Agreement dated as of February 6, 1998 (the "TSAT Asset Transfer
     Agreement"), between TSAT and Phoenixstar, a business combination (the
     "Restructuring") was consummated. In connection with the Restructuring,
     TSAT contributed and transferred to Phoenixstar (the "TSAT Asset Transfer")
     all of TSAT's assets and liabilities except (i) the capital stock of Tempo,
     (ii) the consideration received by TSAT in the Restructuring and (iii) the
     rights and obligations of TSAT under certain agreements with Phoenixstar
     and others. In addition, the business of Phoenixstar Partners and the
     business of distributing PRIMESTAR-Registered Trademark- programming
     service of each of TWE, Newhouse, Comcast, Cox and affiliates of MediaOne
     were consolidated into Phoenixstar. As part of the Roll-up Plan, TSAT and
     Phoenixstar also entered into an Agreement and Plan of Merger dated as of
     February 6, 1998 (the "TSAT Merger Agreement"), providing for the merger of
     TSAT with and into Phoenixstar, with Phoenixstar as the surviving
     corporation (the "TSAT Merger").

     In connection with the TSAT Asset Transfer, Phoenixstar assumed all of
     TSAT's indebtedness on the Closing Date, and TSAT received from Phoenixstar
     such number of shares of Class A Common Stock of Phoenixstar ("Phoenixstar
     Class A Common Stock") and Class B Common Stock of Phoenixstar
     ("Phoenixstar Class B Common Stock" and together with the Phoenixstar Class
     A Common Stock, "Phoenixstar Common Stock"), respectively, as equals the
     number of shares of Series A Common Stock of TSAT ("Series A Common Stock")
     and Series B Common Stock of TSAT ("Series B Common Stock"), respectively,
     issued and outstanding on the Closing Date, in accordance with the
     Restructuring Agreement and the TSAT Asset Transfer Agreement. In addition,
     TSAT received one share of Phoenixstar Class A Common Stock for each share
     of Series A Common Stock issuable at the Closing Date ("Issuable TSAT
     Shares") pursuant to certain TSAT stock options, restricted stock awards
     and other arrangements. TSAT received 66.3 million shares of Phoenixstar
     Class A Common Stock and 8.5 million shares of Phoenixstar Class B Common
     Stock, and as a result, owned approximately 37% of the outstanding shares
     of common equity of Phoenixstar at the closing of the Restructuring,
     representing approximately 38% of the combined voting power of such common
     equity. The outstanding shares of Series A Common Stock and Series B
     Common Stock remain outstanding and were not directly affected by the
     Restructuring.

     As a result of the TSAT Asset Transfer, as of March 31, 1998, TSAT became a
     holding company, with no substantial assets or liabilities other than (i)
     100% of the outstanding capital stock of Tempo,

                                      I-2
<PAGE>

     (ii) its ownership interest in Phoenixstar, and (iii) its rights and
     obligations under certain agreements with Phoenixstar and others.

     THE HUGHES TRANSACTIONS. On January 22, 1999, the Company announced that
     the Company, Tempo, Phoenixstar and Phoenixstar Partners had reached an
     agreement (the "Hughes High Power Agreement") with Hughes Electronics
     Corporation ("Hughes"), a subsidiary of General Motors Corporation, to sell
     (i) Tempo DBS-1 and Tempo DBS-2 (ii) Tempo's 119DEG. W.L. orbital location
     license (the "FCC License") and (iii) Phoenixstar's rights to use Tempo's
     direct broadcast satellite ("DBS") system (the "Tempo Rights" and
     collectively, the "Tempo High Power Assets") to Hughes, for aggregate
     consideration valued at $500 million (the "Hughes High Power Transaction").
     Due to the fact that regulatory approval was required to transfer Tempo
     DBS-1 and the FCC License to Hughes, the Hughes High Power Transaction was
     to be completed in two steps.

     Effective March 10, 1999, the first closing of the Hughes High Power
     Transaction (the "First Closing") was consummated whereby Hughes acquired
     Tempo DBS-2 and Phoenixstar's option to acquire Tempo DBS-2 (the "Tempo
     DBS-2 Option") for aggregate consideration of $150 million. Such
     consideration was comprised of the following: (i) $9.75 million paid to
     Phoenixstar for the Tempo DBS-2 Option (including any amounts allocable to
     Phoenixstar Partners in consideration of the termination and relinquishment
     of the Tempo Rights), (ii) $750,000 paid to TSAT to exercise the Tempo
     DBS-2 Option and (iii) the assumption by Hughes of $139.5 million due to
     Phoenixstar Partners from TSAT in exchange for Tempo DBS-2. In connection
     with the First Closing, the Company and Phoenixstar terminated the TSAT
     Merger Agreement.

     The FCC approved the transfer of the FCC License to Hughes on May 28, 1999,
     and the second closing under the Hughes High Power Agreement was
     consummated effective June 4, 1999. In the second closing, Hughes acquired
     Tempo DBS-1 and related assets, including all rights of Tempo with respect
     to the FCC License, for aggregate consideration of $350 million comprised
     of (i) $22.75 million paid by Hughes to Phoenixstar and Phoenixstar
     Partners for the transfer to Hughes of that portion of the Tempo Purchase
     Option allocable to the Tempo DBS-1 and the termination of that portion of
     the Tempo Capacity Option allocable to Tempo DBS-1, (the "Tempo DBS-1
     Option") (ii) $1.75 million paid by Hughes to Tempo to exercise the Tempo
     DBS-1 Option; and (iii) the assumption and payment by Hughes of the
     remainder of the Tempo Reimbursement Obligation, in the amount of $325.5
     million.

     The carrying value of Tempo DBS-1 was approximately $239 million at the
     time of the second closing. In addition, Phoenixstar agreed to forgive
     amounts due from Tempo not assumed by Hughes in the amount of $9.346
     million.

     In a separate transaction (the "Hughes Medium Power Transaction") completed
     on April 28, 1999 (the "Hughes Closing Date"), Phoenixstar sold to Hughes,
     Phoenixstar's medium-power DBS business and assets for $1.1 billion in cash
     and 4.871 million shares of General Motors Class H common stock ("GMH
     Stock") valued at approximately $258 million on the date of closing. The
     foregoing purchase price was subject to adjustments for working capital at
     the date of closing, which subsequently totaled approximately $9.9 million.
     Phoenixstar retained responsibility for the payment of certain obligations
     not assumed by Hughes, and the payment of costs, estimated not to exceed
     $180 million at December 31, 1999, associated with the termination of
     certain vendor and service contracts and lease agreements not assumed by
     Hughes. Affiliates of stockholders of Phoenixstar, other than the Company,
     and an affiliate of Tele-Communications, Inc. ("TCI") have committed to
     make funds available to Phoenixstar, up to an aggregate of $1,013.3 million
     to fund such payments. Through December 31, 1999, approximately $467.3
     million of such commitments have been funded to Phoenixstar, and $382.6
     million of such commitments expired undrawn.

     In connection with their approval of the Hughes Medium Power Transaction
     and other transactions, the stockholders of Phoenixstar approved the
     payment to TSAT of consideration in the form of 1.407

                                      I-3
<PAGE>

     million shares of GMH Stock (the "Phoenixstar Payment"), subject to the
     terms and conditions set forth in an agreement (the "Phoenixstar Payment
     Agreement") dated as of January 22, 1999. In consideration of the
     Phoenixstar Payment, the Company agreed to approve the Hughes Medium Power
     Transaction and Hughes High Power Transaction as a stockholder of
     Phoenixstar, to modify certain agreements to facilitate the Hughes High
     Power Transaction, and to issue Phoenixstar a share appreciation right (the
     "TSAT GMH SAR") with respect to the shares of GMH Stock received as the
     Phoenixstar Payment, granting Phoenixstar the right to any market price
     appreciation in such GMH Stock during the one-year period following the
     date of issuance, over an agreed strike price of $47.00. Pursuant to the
     Phoenixstar Payment Agreement, the Company has also agreed to forego any
     liquidating distribution or other payment that may be made in respect of
     the outstanding shares of Phoenixstar upon any dissolution and winding-up
     of Phoenixstar, or otherwise in respect of Phoenixstar's existing equity
     and, subject to the approval of the Company's stockholders, to transfer its
     shares in Phoenixstar to the other Phoenixstar stockholders. On the Hughes
     Closing Date, the Company received 1.407 million shares of GMH Stock from
     Phoenixstar in satisfaction of the Phoenixstar Payment.

     The TSAT GMH SAR is secured by a first priority pledge and security
     interest in the underlying shares of GMH Stock, and both the TSAT GMH SAR
     and such pledge and security interest have been pledged by Phoenixstar for
     the benefit of certain holders of share appreciation rights issued by
     Phoenixstar with respect to shares of GMH Stock (the "Phoenixstar GMH
     SARs"). The shares of GMH Stock issued to TSAT pursuant to the Phoenixstar
     Payment Agreement are subject to certain restrictions on transfer during
     the first year after the closing of the Hughes Medium Power Transaction,
     and TSAT will be entitled (together with Phoenixstar) to certain
     registration rights with respect to such shares following the expiration of
     such one-year period.

(c)  CURRENT BUSINESS

     HOLDING COMPANY. As a result of the Hughes Medium Power Transaction and
     Hughes High Power Transaction, the Company is no longer engaged in the
     direct-to-home satellite television business through Phoenixstar and Tempo.
     The Company is planning to take advantage of its industry expertise and
     relationships and tax loss carryforward in various future business
     opportunities.

     LIBERTY MEDIA TRANSACTIONS. On March 16, 2000, the Company completed a
     transaction with Liberty Media in which Liberty Media purchased shares
     of cumulative preferred stock of the Company in exchange for Liberty
     Media's economic interest in 5,084,745 shares of Sprint Corporation PCS
     common stock, valued at over $333 million as of March 24, 2000.

     The Company issued Series A 12% Cumulative Preferred Stock with a
     liquidation value of $150 million ("Series A Preferred Stock") and
     Series B 8% Cumulative Convertible Voting Preferred Stock with a
     liquidation value of $150 million ("Series B Preferred Stock" and
     together with the Series A Preferred Stock, the "Preferred Stock"). The
     Preferred Stock is senior to all other classes and series of capital
     stock of the Company. The Series A Preferred Stock does not have voting
     rights and is not convertible into common stock. The holders of the
     Series B Preferred stock have voting rights representing, in the
     aggregate, approximately 85% of the total voting power of the Company
     (after giving effect to such issuance) and will vote together with the
     holders of all other classes or series of voting stock of the Company,
     except as required by law. In addition, the Series B Preferred stock is
     convertible at the option of the holder into shares of Series B Common
     Stock at a conversion price of $8.84 per share of Series B Common Stock,
     subject to adjustments as described in the Certificate of Designation
     for the Series B Preferred Stock.

     Concurrently with the investment by Liberty Media in the Company, the
     Company and Liberty Media formed a new joint venture to hold and manage
     interests in entities engaged globally in the distribution of internet data
     and other content via satellite and related businesses. Liberty Media

                                      I-4
<PAGE>

     contributed interests in XM Satellite Radio Holdings, Inc., iSky, Inc.,
     LSAT Astro LLC and the Sky Latin America satellite businesses in exchange
     for an 89.41% ownership interest in the joint venture. The Company
     contributed its interest in Jato Communications Corp. and General Motors
     Class H Common Stock in exchange for a 10.59% ownership interest in the
     joint venture. The Company will manage the business and affairs of the
     venture, which has been named Liberty Satellite, LLC.

     In a related transaction, the Company paid Liberty Media $60 million in the
     form of an unsecured promissory note in exchange for a 13.99% ownership
     interest in LSAT Astro LLC, a limited liability company that owns an
     approximate 31.5% interest in ASTROLINK International LLC. The remaining
     86.01% of LSAT Astro LLC was contributed by Liberty Media to Liberty
     Satellite, LLC, as indicated above.

     OTHER BUSINESS. Effective February 1, 2000, the Company entered into a
     Management Agreement with Phoenixstar pursuant to which the Company is
     managing Phoenixstar's affairs in exchange for a monthly management fee of
     $45,000.

     In July 1999, the Company negotiated a preliminary agreement (the "Asvan
     Agreement") with Asvan Technology, LLC ("Asvan"). The Asvan Agreement
     provides for Asvan to transfer certain assets to the Company's
     subsidiary, TSAT Technologies, Inc. ("Technologies Sub") in exchange for
     a 20% equity interest in Technologies Sub and for the Company to contribute
     a maximum of $3,000,000 in exchange for an 80% equity interest in
     Technologies Sub. The Asvan Agreement contemplates that Technologies Sub
     will perform research and development related to certain emerging
     technologies.

     Certain statements in this Annual Report on Form 10-K constitute
     "forward-looking statements" within the meaning of the Private Securities
     Litigation Reform Act of 1995. Such forward-looking statements involve
     known and unknown risks, uncertainties and other important factors that
     could cause the actual results, performance or achievements of the Company,
     or industry results, to differ materially from any future results,
     performance or achievements express or implied by such forward-looking
     statements. Such risks, uncertainties and other factors include, among
     others: general economic and business conditions and industry trends; the
     continued strength of the multichannel video programming distribution
     industry and the satellite services industry and the growth of satellite
     delivered television programming; uncertainties inherent in proposed
     business strategies and development plans; future financial performance,
     including availability, terms and deployment of capital; the ability of
     vendors to deliver required equipment, software and services; availability
     of qualified personnel; changes in, or the failure or the inability to
     comply with, government regulation, including, without limitation,
     regulations of the FCC, and adverse outcomes from regulatory proceedings;
     changes in the nature of key strategic relationships with partners and
     joint venturers; competitor responses to the Company's products and
     services, and the overall market acceptance of such products and services,
     including acceptance of the pricing of such products and services; reliance
     on software programs used by the Company or its suppliers containing
     problems related to the Year 2000; and other factors referenced in this
     Report. These forward-looking statements (and such risks, uncertainties and
     other factors) speak only as of the date of this Report. The Company
     expressly disclaims any obligation or undertaking to disseminate any
     updates or revisions to any forward-looking statement contained herein to
     reflect any change in the Company's expectations with regard thereto or any
     change in events, conditions or circumstances on which any such statement
     is based.

(d)  FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS

     Not applicable.


                                      I-5
<PAGE>

(e)   NARRATIVE DESCRIPTION OF BUSINESS

INTRODUCTION

During the periods prior to the Hughes Closing Date on April 28, 1999,
covered by the financial statements and selected financial data included in
this report, the Company was engaged, directly and through Phoenixstar and
Phoenixstar Partners, in the PRIMESTAR-Registered Trademark- satellite
business described below and related high power satellite efforts of Tempo
Satellite, Inc., a wholly-owned subsidiary of the Company. Since the
consummation of the Hughes transactions described herein, the Company has not
been engaged directly or indirectly in the PRIMESTAR-Registered Trademark- or
Tempo businesses. Since the Hughes Closing Date, "PRIMESTAR" has been a
registered trademark of Hughes.

THE PRIMESTAR-Registered Trademark- SERVICE

Prior to the Hughes Closing Date, Phoenixstar was a leading provider of
digital satellite services in the U.S. Phoenixstar owned and operated the
PRIMESTAR-Registered Trademark-digital satellite business, which was the
second largest digital satellite business and the eighth largest multichannel
video programming distribution business in the U.S., measured by the number
of subscribers as of December 31, 1998.

PRIMESTAR-Registered Trademark- offered a medium power satellite service with
over 160 channels of digital video and audio programming throughout the
continental United States. The medium power service was transmitted via GE-2,
which is owned by GE Americom and located at the 85DEG. W.L. orbital
position. The PRIMESTAR-Registered Trademark- medium power service served
approximately 2.3 million subscribers as of December 31, 1998.

PRIMESTAR-Registered Trademark- included a variety of advertiser-supported
networks (sometimes referred to as "basic cable" channels), a broad selection
of movie services, national and regional sports packages and other premium
services, and multiplexed pay-per-view programming. Phoenixstar secured its
rights to broadcast such programming via satellite by entering into
non-exclusive affiliation agreements with programming vendors. In addition to
video services, PRIMESTAR-Registered Trademark- included digital audio
services and regional weather services covering ten regions of the country.

Pursuant to an Amended and Restated Memorandum between GE Americon and
Phoenixstar (the "GE-2 Agreement"), GE Americom provided Phoenixstar with
service on 24 transponders on GE-2. Phoenixstar was entitled to non-preemptible
service on 18 of the transponders on GE-2 and preemptible service on six
transponders. Preemptible transponders are transponders that may be reassigned
to restore service to protected customers if such protected customers experience
transponder or satellite failure. Phoenixstar received "orbital location
protected service" on all 24 of its transponders, meaning that if there was a
failure of GE-2, Phoenixstar would have been entitled to restore the lost
service on another GE Americom medium power satellite, GE-3, which was
successfully launched on September 4, 1997 into the same 85DEG. W.L. orbital
position used by GE-2. Even in those circumstances, the six preemptible
transponders, although protected, would have remained preemptible.

Phoenixstar used proprietary authorization, encryption and digital
compression technology developed by an affiliate of General Instruments
Corporation ("GI"). Uplinking, encoding and compression services were
provided by National Digital Television Center, Inc., a subsidiary of TCI
("NDTC"), under a Master Digital Transmission Agreement between NDTC and
Phoenixstar.

PROGRAMMING. At December 31, 1998, Phoenixstar offered consumers programming
packages with 76 to 100 channels of audio and video programming depending upon
the package. Each of the packages included a monthly programming guide. Most of
Phoenixstar's customers rented their equipment for an additional $3 - $10
monthly charge, which included free maintenance and customer service.

                                      I-6
<PAGE>

As of December 31, 1998, PRIMESTAR-Registered Trademark- also offered 15
channels of pay-per-view movies and events; a regional sports tier and other
sports packages that provided expanded coverage of regular-season,
out-of-market sports events; and niche services such as PBS and east and west
coast feeds of ABC, NBC, CBS and FOX (to those subscribers unable to receive
such networks through local affiliates). Such offerings were made on an a la
carte basis.

Phoenixstar contracted with and billed its residential and commercial
subscribers directly for PRIMESTAR-Registered Trademark- service. Most
residential subscribers could terminate their service at any time upon notice
to Phoenixstar. Commercial subscribers' service contracts automatically
renewed for successive terms unless the commercial subscribers provided 90
days' prior written notice to Phoenixstar of their intent to terminate their
service at the end of the current term. In addition, commercial customers
could terminate the contract prior to the expiration of the contractual term
by paying a cancellation fee. Satellite reception equipment reclaimed from
terminating subscribers was tested, refurbished as necessary and placed back
into service.

DISTRIBUTION. Phoenixstar distributed PRIMESTAR-Registered Trademark-
services through multiple distribution channels, including sales agents,
full-service providers, telemarketing agents and consumer retail outlets,
such as RadioShack-Registered Trademark-. Phoenixstar had sales agents, (the
"Sales Agents"), each of which had extensive experience distributing C-band
direct-to-home ("DTH") satellite equipment. Sales Agents generally did not
sell directly to customers, but recruited, trained and maintained a network
of sub-agents comprised generally of full-service independent satellite
retailers. The sub-agents sold PRIMESTAR-Registered Trademark- services on
behalf of Phoenixstar and installed, serviced and maintained customer
premises equipment for Phoenixstar's subscribers. Authorization of new
customers was provided by Phoenixstar's call center(s). Sales Agents were
responsible for maintaining their sub-agents' inventories of home satellite
dishes ("HSD") and other customer premises equipment, which were provided by
Phoenixstar on consignment.

Phoenixstar also contracted with independent contractors who had experience
in distributing and servicing DTH satellite equipment ("Full-Service
Providers"or "FSPs") to engage them to sell, install and service their own
accounts. The FSPs solicited potential subscribers by making door-to-door
sales calls, setting up booths at special events and otherwise marketing the
PRIMESTAR-Registered Trademark- service to customers in target markets in
their authorized distribution areas. FSPs also installed and serviced
customers obtained through retail outlets and call centers.

Phoenixstar paid the Sales Agents and FSPs commissions on equipment leased or
sold, as well as an installation reimbursement to cover the cost of each new
installation. The Sales Agents and FSPs also received a residual sales
commission for a contractually determined period of time (generally five years).
Sales Agents were responsible for compensating their sub-agents.

Phoenixstar operated a call center, located in Englewood, Colorado to take
subscription orders and provide both sales support and customer service. In
addition, Phoenixstar obtained call center support services from TCIC's Boise,
Idaho call center (the "Boise Call Center"), as well as call centers operated on
behalf of Phoenixstar by unaffiliated third parties. The call centers offered
customers around-the-clock telephone support for sales, installation,
authorization and billing, as well as for repair and customer service.

Phoenixstar also distributed its services through certain national consumer
electronics retailers, including Radio Shack. Pursuant to Phoenixstar's
national agreement with Radio Shack, Radio Shack was compensated based on the
number of installations generated. Phoenixstar's distribution network was
further supported by local market retailers, such as hardware stores and
convenience stores, which promoted Phoenixstar's services and further
assisted Phoenixstar in its distribution efforts.

EQUIPMENT AND INSTALLATION. Unlike other digital satellite television services,
Phoenixstar did not require consumers to purchase or finance the equipment
needed to receive its programming. Phoenixstar provided the HSD, satellite
receiver and remote control to subscribers for a monthly rental fee ($3 - $10
per month at December 31, 1998), which included ongoing maintenance and service
at no additional charge. The

                                      I-7
<PAGE>

monthly equipment rental fee was normally included in a service package that
included various levels of basic and premium programming. Satellite receivers
were manufactured by GI, and packaged by GI with remote controls, and HSDs were
manufactured by multiple vendors.

In addition to monthly fees for programming and the purchase or lease of
equipment, Phoenixstar generally charged new subscribers an installation fee
ranging from $49 to $99.

HIGH POWER SATELLITES

TEMPO DBS SYSTEM. The Company, through Tempo, held the FCC Permit, authorizing
construction of a high power DBS system consisting of two or more satellites
delivering DBS service in 11 frequencies at the 119DEG. W.L. orbital position.
The 119DEG. W.L. orbital position is generally visible to HSDs throughout the
entire continental U.S. Tempo was also a party to the Satellite Construction
Agreement with Loral, pursuant to which Tempo arranged for the construction of
Tempo DBS-1 and Tempo DBS-2 and had an option to purchase up to three additional
satellites. As constructed, each Tempo Satellite could operate in either "single
transponder" mode (with 32 transponders broadcasting at 113 watts per channel)
or in "paired transponder" mode (with 16 transponders broadcasting at 220 watts
per channel).

Tempo DBS-1 was outfitted with an antenna designed for operation at the 119DEG.
W.L. orbital location and was launched into geosynchronous orbit on March 8,
1997. During 1997, Loral notified Tempo of nine separate occurrences of power
reductions on Tempo DBS-1. In addition, Loral notified Tempo of two additional
power reductions that occurred on March 29, 1999 and April 2, 1999.

TEMPO OPTION. In February 1990, Tempo entered into an option agreement (the
"Tempo Option Agreement") with Phoenixstar Partners, granting Phoenixstar
Partners the right and option (the "Tempo Capacity Option"), upon exercise,
to purchase or lease 100% of the capacity of the DBS system to be built,
launched and operated by Tempo pursuant to the FCC Permit. Under the Tempo
Option Agreement, upon the exercise of the Tempo Capacity Option, Phoenixstar
Partners was obligated to pay Tempo $1 million (the "Exercise Fee") and to
lease or purchase the entire capacity of the DBS system, with the purchase
price (or aggregate lease payments) for such capacity sufficient to cover the
costs of constructing, launching and operating such DBS system. In connection
with the Tempo Capacity Option and certain related matters, Tempo and
Phoenixstar Partners subsequently entered into two letter agreements (the
"Tempo Letter Agreements"), which provided for, among other things, the
funding by Phoenixstar Partners of milestone and other payments due under the
Satellite Construction Agreement, and certain related costs, through advances
by Phoenixstar Partners to Tempo ("PRIMESTAR Advances"). Phoenixstar Partners
financed such advances to Tempo through borrowings under a bank credit
facility (the "Partnership Credit Facility"), which is in turn supported by
letters of credit arranged for by affiliates of the partners of Phoenixstar
Partners (other than GE Americom). At December 31, 1998, the aggregate
funding provided to Tempo by Phoenixstar Partners was $469.5 million, and the
balance due under the Partnership Credit Facility was $575 million, including
amounts borrowed to pay interest charges. The Tempo Letter Agreements
permitted Phoenixstar to apply its advances to Tempo against any payments
(other than the Exercise Fee) due under the Tempo Capacity Option with
respect to its purchase or lease of satellite capacity.

On February 7, 1997, the Partners Committee of Phoenixstar Partners adopted a
resolution (i) affirming that Phoenixstar Partners had unconditionally exercised
the Tempo Capacity Option, (ii) approving the proposed launch of Tempo DBS-1
into the 119DEG. W.L. orbital position and the use of Tempo DBS-2 as a spare or
back-up for Tempo DBS-1, pending other deployment or disposition as determined
by Phoenixstar Partners, and (iii) authorizing the payment by Phoenixstar
Partners to Tempo of the Exercise Fee and other amounts in connection with the
Tempo Capacity Option and the Tempo Letter Agreements, including funding of
substantially all construction and related costs relating to the Tempo
Satellites not previously funded by the Phoenixstar Partners.

                                      I-8
<PAGE>

As described above, the Company entered into the Hughes High Power Agreement,
which provided for the sale of the Tempo Satellites, the 119DEG. W.L. orbital
location license and PRIMESTAR's right to use Tempo's high power DBS system to
Hughes for aggregate consideration of $500 million. In connection with the
Hughes High Power Transaction, Hughes agreed to assume, and to satisfy and
discharge, $465 million of Tempo's obligation to Phoenixstar Partners for the
PRIMESTAR Advances, and Phoenixstar Partners agreed to forgive the remaining
balance. In addition, Phoenixstar terminated its rights under the Tempo Capacity
Option to lease or purchase 100% of the capacity of the Tempo DBS system.

(f)    REGULATORY MATTERS

GENERAL. Pursuant to the Communications Act of 1934, as amended (the
"Communications Act"), the FCC regulates the use of radio spectrum in the United
States. United States DBS licensees and permittees are subject to the regulatory
authority of the FCC. Although the non-technical aspects of DBS operations are
generally subject to less regulation than other communications services; some
regulations do apply. In addition, the FCC has proposed to adopt regulations
that will affect DBS licensees and permittees.

TEMPO FCC PERMITS AND LICENSES. Prior to June 4, 1999, Tempo was the holder
of the FCC Permit, which authorized construction of a high power DBS system
consisting of two or more satellites delivering DBS service in 11 frequencies
at the 119DEG. W.L. orbital location. As the holder of a DBS permit, Tempo
was subject to FCC jurisdiction and review primarily for: (i) authorization
of individual satellites (i.e. meeting minimum financial, legal, and
technical standards) and earth stations, (ii) avoiding interference with
other radio frequency transmitters, (iii) complying with the rules the FCC
has established specifically for holders of U.S. DBS authorizations and (iv)
complying with applicable provisions of the Communications Act.

Under the FCC Permit, the time by which the Tempo Satellites were to be
operational was due to expire in May 1998. On April 3, 1998, Tempo filed a
request with the FCC for an extension of that deadline pending FCC review of
(i) TSAT's request for consent to the transfer of control of Tempo to
Phoenixstar (the "Transfer Application") and (ii) Phoenixstar's application
(in connection with a subsequently terminated transaction between Phoenixstar
and ASkyB, a proposed joint venture between MCI and the News Corporation
Ltd.) for consent to the assignment to Phoenixstar of the high power DBS
authorizations and certain assets owned by MCI Communications, Inc. (the
"Assignment Application").

On April 30, 1998, the FCC determined that Tempo's satellite at 119DEG. W.L. was
not operational. It did find, however, that an extension of time was warranted
for that orbital location and granted an extension to Tempo for 119DEG. W.L.
Such extension was granted until six months after the FCC determination on the
Transfer Application and Assignment Application, with the condition that Tempo
not enter into a lease agreement with Phoenixstar or any similar lease
arrangement prior to the FCC's decision on the Transfer Application and the
Assignment Application. In addition, Tempo voluntarily surrendered its permit
for 166DEG. W.L. Effective November 19, 1998, Phoenixstar voluntarily withdrew
the Assignment Application.


                                      I-9
<PAGE>

ANTITRUST DECREE. Phoenixstar Partners and the parties named in the actions
described below were subject to the jurisdiction of the U.S. District Court for
the Southern District of New York to ensure compliance with an antitrust consent
decree. In United States v. PRIMESTAR Partners, L.P., et al., 93 Civ. 3919 (SDNY
1993) (the "Federal Decree"), Phoenixstar Partners and such parties agreed to
refrain from










































                                      I-10
<PAGE>

(i) enforcing any provisions of the Phoenixstar Partnership Agreement that
affect the availability, price, terms or conditions of sale of programming to
any provider of multichannel subscription television, or (ii) entering into
certain other agreements restricting the availability of programming services.
The Company was not named as a defendant in the above action, but may have been
subject to certain provisions of the Federal Decree as a successor-in-interest
to TCI K-1, Inc. and United Artists K-1 Investments, Inc., indirect subsidiaries
of TCI that were original partners in Phoenixstar Partners and named defendants
in the action. The Company believes that it is currently in compliance with the
Federal Decree in all material respects and that the Federal Decree does not
currently have a material adverse effect on the Company or its operations.

(g)  OTHER

During 1999, the Company purchased approximately $200,000 in equipment to be
used in research and development activities, in addition to approximately
$200,000 in research and development activities included in operations.
Amounts expended in 1998 and 1997 were insignificant.

There is no one customer or affiliated group of customers to whom sales are made
in an amount that exceeds 10% of the Company's revenue.

Compliance with federal, state and local provisions that have been enacted or
adopted regulating the discharge of material into the environment or otherwise
relating to the protection of the environment has had no material effect upon
the capital expenditures, results of operations or competitive position of the
Company.

As of December 31, 1999, the Company had approximately 7 employees.

(h) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES

    Not applicable.

ITEM 2. PROPERTIES.

The Company owns no real estate. The Company has entered into noncancellable
operating leases for two facilities in Englewood, Colorado with expiration dates
in February and December 2001. The Company believes that such facilities are
adequate for its business operations for the foreseeable future.

ITEM 3. LEGAL PROCEEDINGS.

There are no material pending legal proceedings to which the Company is a party
or to which any of its property is subject, except as follows:

In a civil action entitled DANIEL BOONE, OZARK HEARTLAND ELECTRONICS, INC. V.
RADIO SHACK, ET AL, pending in the United States District Court, Western
District, Springfield Division, Missouri, Civil Action No.
99-3109-CV-S-RGC-ECF, plaintiff alleges that the Company and other defendants
(i) entered into a vertical resale price maintenance agreement with Radio
Shack, in violation of Sherman Act Section 1, and (ii) tortiously interfered
with plaintiff's contractual relationship with Radio Shack when they
requested that Radio Shack terminate plaintiff's right to market
PRIMESTAR-Registered Trademark- products. The Company has denied any
liability to the plaintiffs and is vigorously contesting the claims asserted
in the complaint. Phoenixstar has a contractual obligation to indemnify the
Company for liability, if any, arising out of this matter.

In a civil action entitled TCI SATELLITE ENTERTAINMENT, INC. ET AL V. BOARD OF
EQUALIZATION OF MONTEZUMA COUNTY, pending in the Court of Appeals for the State
of Colorado, Case No. 99-CA-0975, the Board of Equalization of Montezuma County
(the "Montezuma Board") has appealed a ruling by the Colorado State Board of
Assessment Appeals that the Montezuma Board violated administrative, statutory
and judicial mandates in denying the Company and Phoenixstar personal property
tax exemptions found in Colorado

                                      I-11
<PAGE>

Revised Statutes Section 39-3-119.5. The Colorado Court of Appeals has received
briefs and heard oral arguments and the parties are awaiting a ruling.
Phoenixstar has a contractual obligation to indemnify the Company for
liability, if any, arising out of this matter.

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

        None


                                       I-12
<PAGE>

PART II.

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

Shares of the Company's Series A Common Stock and Series B Common Stock trade
over-the-counter on the OTC Bulletin Board under the symbols "TSATA" and
"TSATB", respectively. The following table sets forth the range of high and
low sale prices in U.S. dollars of shares of Series A Common Stock and Series
B Common Stock for the period indicated. The prices have been rounded up to
the nearest eighth, and do not include retail markups, markdowns, or
commissions.

<TABLE>
<CAPTION>

                                 SERIES A                    SERIES B
                        ---------------------------  ------------  ------------
                           HIGH            LOW          HIGH           LOW
                        ------------   ------------  ------------  ------------
<S>                     <C>            <C>           <C>           <C>
   1999
    First quarter          3 3/4           1/2          4 3/4           1
    Second quarter         5 5/8           5/8          5 3/4           1
    Third quarter          5 1/8            3           5 1/4           3
    Fourth quarter          20            3 3/4          19           3 5/8

   1998
    First quarter          8 1/8          5 1/2         7 1/8         4 3/4
    Second quarter         8 1/8          4 3/4         9 1/8           5
    Third quarter            6            2 7/8         5 5/8         1 5/8
    Fourth quarter         2 1/2           3/4          2 5/8          7/8

</TABLE>

As of February 29, 2000, there were approximately 4,567 and 271 record holders
of the Series A Common Stock and Series B Common Stock, respectively (which
amounts do not include the number of shareholders whose shares are held of
record by banks, brokerage houses or other institutions but include each such
institution as one shareholder).

The Company has not paid cash dividends on its Series A Common Stock and Series
B Common Stock and has no present intention of so doing. Payment of cash
dividends, if any, in the future will be determined by the Company's Board of
Directors in light of its earnings, financial condition and other relevant
considerations. As a holding company, the Company's ability to pay cash
dividends is dependent on its ability to receive cash dividends, loans and
advances from its subsidiaries and its ability to monetize its beneficial
ownership of approximately 5,000,000 shares of PCS stock.


                                       II-1
<PAGE>

ITEM 6. SELECTED FINANCIAL DATA

Selected financial data related to the Company's financial condition and results
of operations for the five years ended December 31, 1999 are summarized as
follows (such information should be read in conjunction with the accompanying
consolidated financial statements of the Company).

<TABLE>
<CAPTION>

                                                        YEARS ENDED DECEMBER 31,
                                          --------------------------------------------------------
                                            1999       1998(1)      1997        1996       1995
                                          --------    --------    --------    --------    --------
                                                amounts in thousands, except per share amounts
<S>                                       <C>         <C>         <C>         <C>         <C>
Summary Statement of
   Operations Data:
   Revenue                                $     --     168,500     561,990     417,461     208,903
   Operating, selling, general
     and administrative expenses
     and stock compensation                (12,160)   (158,810)   (489,947)   (410,390)   (214,117)
   Depreciation (2)                            (23)    (65,105)   (243,642)   (191,355)    (55,488)
                                          --------    --------    --------    --------    --------

         Operating loss                    (12,183)    (55,415)   (171,599)   (184,284)    (60,702)

   Gain on sale of satellites (5)           13,712          --          --          --          --

   Interest expense, net (3)                  (140)    (14,177)    (47,992)     (2,023)         --

   Share of losses of Phoenixstar, Inc.         --    (369,231)         --          --          --

   Share of losses of
     Phoenixstar Partners                       --      (5,822)    (20,473)     (3,275)     (8,969)
   Interest income                             146          20       2,519          --          --
   Other, net (6)                           66,143        (641)       (796)      3,641         306
   Income tax (expense) benefit               (416)         --          --      45,937      21,858
                                          --------    --------    --------    --------    --------
         Net earnings (loss)              $ 67,262    (445,266)   (238,341)   (140,004)    (47,507)
                                          ========    ========    ========    ========     =======
   Basic and diluted earnings
     (loss) per common share (4)          $   0.97       (6.58)      (3.58)      (2.11)       (.72)
                                          ========    ========    ========    ========     =======

</TABLE>
<TABLE>
<CAPTION>
                                                                DECEMBER 31,
                                          --------------------------------------------------------
                                            1999       1998(1)      1997        1996        1995
                                          --------    --------    --------    --------    --------
                                                                amounts in thousands

<S>                                       <C>         <C>         <C>         <C>         <C>
Summary Balance Sheet Data:
   Property and equipment, net            $    275     463,133   1,121,937   1,107,654     889,220
   Investment in, and related
     advances to, Phoenixstar Partners          --          --      11,093      32,240      17,963
   Investments in Jato Communications
     and General Motors                    140,101          --          --          --          --
   Total assets                            143,197     463,133   1,204,856   1,180,273     933,443
   Due to Phoenixstar, Inc.                     --     469,498     463,133     457,685     382,900
   Debt (3)                                  3,044          --     418,729     247,230          --
   Stock appreciation                       74,513          --          --          --          --
     right liabilities
   Equity (deficit)                         64,727      (6,365)    136,269     372,358     483,584

</TABLE>

(1)  The Restructuring was consummated on April 1, 1998. In connection
     therewith, TSAT contributed and transferred to Phoenixstar all of its
     assets and liabilities except for assets and liabilities related to the
     high power DBS system being constructed by Tempo.

(2)  Effective October 1, 1996, the Company (i) changed the method used to
     depreciate its subscriber installation costs, and (ii) reduced the
     estimated useful life of certain satellite reception equipment. The
     inception-to-date effect of the change in depreciation method aggregated
     $55,304,000 and was recorded during the fourth quarter of 1996, and the
     effect of the reduction in estimated useful life was accounted for on a
     prospective basis.

                                       II-2
<PAGE>

(3)  Effective December 31, 1996, TSAT entered into a bank credit facility with
     initial commitments of $350 million. In addition, on February 20, 1997,
     TSAT issued senior subordinated notes and senior subordinated discount
     notes with aggregate principal amounts at maturity of $475 million.

     On November 19, 1999, TSAT entered into a Loan Agreement with the Bank
     of America for the following facilities (i) Facility A Commitment of
     $5,000,000; (ii) Facility B commitment of $15,000,000; and (iii) Facility C
     commitment of $5,000,000. Upon the "Collateral Pledge Perfection Date"
     as defined in the Agreement, the undrawn portions of Facility C expires
     and the Facility A commitment increases to $10,000,000. At December 31,
     1999, $3,044,000 had been drawn on Facility C at an interest rate of
     10.5% per annum. The unused Facility A, Facility B and Facility C amounts
     are charged a commitment fee at a rate of 0.375%.

(4)  In connection with the December 4, 1996 consummation of the Spin-off, the
     Company issued 66,408,000 shares of Company Common Stock. The basic and
     diluted loss per common share amounts for the years ended December 31, 1996
     and 1995 assume that the shares issued pursuant to the Spin-off were issued
     and outstanding since January 1, 1995. Accordingly the calculation of the
     net loss per share assumes weighted average shares outstanding of
     66,408,000 for each of the years ended December 31, 1996 and 1995. The
     effect of all other common stock equivalents has been excluded for all
     periods as inclusion would be anti-dilutive.

(5)  In connection with the Hughes Transaction, the Company recognized a gain on
     the sale of the Tempo Satellites and related orbital location license in
     1999.

(6)  In connection with the Hughes Medium Power Transaction, the stockholders
     of Phoenixstar approved the payment to TSAT of consideration in the form of
     1.407 million shares of GMH Stock, valued at $66,143,000, subject to the
     terms set forth in the Phoenixstar Payment Agreement.

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

GENERAL

HUGHES TRANSACTIONS

Effective June 4, 1999, the Company completed the sale of its high power DBS
assets to Hughes Electronics Corporation ("Hughes"), pursuant to an asset
purchase agreement dated as of January 22, 1999 (the "Hughes High Power
Agreement"), among Tempo Satellite, Inc., a wholly-owned subsidiary of the
Company ("Tempo"), Phoenixstar, Inc., a Delaware corporation formerly known as
PRIMESTAR, Inc. ("Phoenixstar"), Phoenixstar Partners L.P., a Delaware limited
partnership and wholly-owned subsidiary of Phoenixstar formerly known as
PRIMESTAR Partners L.P. ("Phoenixstar Partners"), and Hughes, a subsidiary of
General Motors. The assets transferred by the Company pursuant to the Hughes
High Power Agreement consisted of Tempo's two high-power DBS satellites (the
"Tempo Satellites"), one of which was in orbit at 119DEG. West Longitude ("Tempo
DBS-1") and one of which was used as a ground spare ("Tempo DBS-2"), its FCC
authorizations with respect to the 119DEG. West Longitude orbital location (the
"FCC License"), and certain related assets (collectively, the "Tempo High Power
Assets").

The Company had previously granted Phoenixstar the transferable right and
option (the "Tempo Purchase Option") to purchase 100% of the Tempo High Power
Assets for aggregate consideration of $2.5 million in cash and the assumption
of all related liabilities. In addition, Tempo had previously granted to
Phoenixstar Partners the right to purchase or lease 100% of the capacity of
the DBS system being constructed by Tempo (the "Tempo Capacity Option"), and
Phoenixstar Partners had made advances to Tempo to fund the construction of
Tempo's DBS system in the aggregate amount of $465 million (the "Tempo
Reimbursement Obligation").

The Hughes High Power Agreement provided for (i) the sale by Phoenixstar to
Hughes of the Tempo Purchase Option, (ii) the exercise of the Tempo Purchase
Option by Hughes, and (iii) the termination of the Tempo Capacity Option
(collectively, the "Hughes High Power Transaction"). The aggregate
consideration payable by Hughes in the Hughes High Power Transaction was $500
million, payable as described below.

As regulatory approval was required to transfer Tempo DBS-1 and the FCC License,
the Hughes High Power Agreement provided for the Hughes High Power Transaction
to be completed in two steps. To facilitate the transaction, the Tempo Purchase
Option was amended to provide for a two-stage exercise process. The parties
allocated 70% of the total consideration under the Hughes High Power Agreement
to Tempo DBS-1 and related assets and 30% of the total consideration thereunder
to Tempo DBS-2 and related assets.

                                       II-3
<PAGE>

The first closing under the Hughes High Power Agreement was consummated
effective March 10, 1999. In the first closing, Hughes acquired Tempo DBS-2 and
related assets for aggregate consideration of $150 million, comprised of (i)
$9.75 million paid by Hughes to Phoenixstar and Phoenixstar Partners for the
transfer to Hughes of that portion of the Tempo Purchase Option allocable to
Tempo DBS-2 and the termination of that portion of the Tempo Capacity Rights
allocable to the Tempo DBS-2, (ii) $750,000 paid by Hughes to TSAT to exercise
that portion of the Tempo Purchase Option allocable to the Tempo DBS-2; and
(iii) the assumption and payment by Hughes of a portion of the Tempo
Reimbursement Obligation in the amount of $139.5 million.

In addition, as required by the Hughes High Power Agreement, the Company and
Phoenixstar agreed to terminate the previously announced merger of the Company
with and into Phoenixstar, effective as of such first closing.

The FCC approved the transfer of the FCC License to Hughes on May 28, 1999, and
the second closing under the Hughes High Power Agreement was consummated
effective June 4, 1999. In the second closing, Hughes acquired Tempo DBS-1 and
related assets, including all rights of Tempo with respect to the FCC License,
for aggregate consideration of $350 million comprised of (i) $22.75 million paid
by Hughes to Phoenixstar and Phoenixstar Partners for the transfer to Hughes of
that portion of the Tempo Purchase Option allocable to Tempo DBS-1 and the
termination of that portion of the Tempo Capacity Rights allocable to Tempo
DBS-1, (ii) $1.75 million paid by Hughes to Tempo to exercise that portion of
the Tempo Purchase Option allocable to Tempo DBS-1; and (iii) the assumption and
payment by Hughes of the remainder of the Tempo Reimbursement Obligation, in the
amount of $325.5 million.

The carrying value of Tempo DBS-1 was approximately $239 million at the time of
the second closing. In addition, Phoenixstar agreed to forgive amounts due from
Tempo not assumed by Hughes in the amount of $9.346 million.

Effective April 28, 1999, Phoenixstar completed the Hughes Medium Power
Transaction in which Phoenixstar sold to Hughes, Phoenixstar's medium-power
DBS business and assets for $1.1 billion in cash and 4.871 million shares of
GMH Stock valued at approximately $258 million on the date of closing. The
foregoing purchase price was subject to adjustments for working capital at
the date of closing, which subsequently totaled approximately $9.9 million.
Phoenixstar retained responsibility for the payment of certain obligations
not assumed by Hughes, and the payment of costs, estimated not to exceed $180
million at December 31, 1999, associated with the termination of certain
vendor and service contracts and lease agreements not assumed by Hughes.
Affiliates of stockholders of Phoenixstar, other than the Company, and an
affiliate of TCI, have committed to make funds available to Phoenixstar, up
to an aggregate of $1,013.3 million to fund such payments. Through December
31, 1999, approximately $467.3 million of such commitments have been funded
to Phoenixstar, and $382.6 million of such commitments expired undrawn.

In connection with their approval of the Hughes Medium Power Transaction and
other transactions, the stockholders of Phoenixstar approved the payment to TSAT
of consideration in the form of 1.407 million shares of GMH Stock (the
"Phoenixstar Payment"), subject to the terms and conditions set forth in an
agreement (the "Phoenixstar Payment Agreement") dated as of January 22, 1999. In
consideration of the Phoenixstar Payment, the Company agreed to approve the
Hughes Medium Power Transaction and Hughes High Power Transaction as a
stockholder of Phoenixstar, to modify certain agreements to facilitate the
Hughes High Power Transaction, and to issue Phoenixstar a share appreciation
right (the "TSAT GMH SAR") with respect to the shares of GMH Stock received as
the Phoenixstar Payment, granting Phoenixstar the right to any market price
appreciation in such GMH Stock during the one-year period following the date of
issuance, over an agreed strike price of $47.00. Pursuant to the Phoenixstar
Payment Agreement, TSAT has also agreed to forego any liquidating distribution
or other payment that may be made in respect of the outstanding shares of
Phoenixstar upon any dissolution and winding-up of Phoenixstar, or otherwise in
respect of Phoenixstar's existing equity and, subject to the approval of the
Company's stockholders, to

                                       II-4
<PAGE>

transfer its shares in Phoenixstar to the other Phoenixstar stockholders. On the
Hughes Closing Date, the Company received 1.407 million shares of GMH Stock from
Phoenixstar in satisfaction of the Phoenixstar Payment.

The TSAT GMH SAR is secured by a first priority pledge and security interest in
the underlying shares of GMH Stock, and both the TSAT GMH SAR and such pledge
and security interest have been pledged by Phoenixstar for the benefit of
certain holders of share appreciation rights issued by Phoenixstar with respect
to shares of GMH Stock (the "Phoenixstar GMH SARs"). The shares of GMH Stock
issued to TSAT pursuant to the Phoenixstar Payment Agreement are subject to
certain restrictions on transfer during the first year after the closing of the
Hughes Medium Power Transaction, and TSAT will be entitled (together with
Phoenixstar) to certain registration rights with respect to such shares
following the expiration of such one-year period.

The increase in the share appreciation right liability of approximately $69
million through December 31, 1999, is effectively hedged by the unrealized
holding gain on the GMH Stock.

RESTRUCTURING TRANSACTION

Effective April 1, 1998 ( the "Closing Date") and pursuant to (i) a Merger
and Contribution Agreement dated as of February 6, 1998, (the "Restructuring
Agreement"), among TSAT, Phoenixstar, prior to the Restructuring a
wholly-owned subsidiary of TSAT, Time Warner Entertainment Company, L.P.
("TWE"), Advance/Newhouse Partnership ("Newhouse"), Comcast Corporation
("Comcast"), Cox Communications, Inc. ("Cox"), MediaOne of Delaware, Inc.,
("MediaOne"), and GE American Communications, Inc. ("GE American"), and (ii)
an Asset Transfer Agreement dated as of February 6, 1998, (the "TSAT Asset
Transfer Agreement") between TSAT and Phoenixstar, a business combination
(the "Restructuring") was consummated. In connection with the Restructuring,
TSAT contributed and transferred to Phoenixstar (the "TSAT Asset Transfer")
all of TSAT's assets and liabilities except (i) the capital stock of Tempo,
(ii) the consideration to be received by TSAT in the Restructuring and (iii)
the rights and obligations of TSAT under certain agreements with Phoenixstar
and others. In addition, the business of Phoenixstar Partners and the
business of distributing the PRIMESTAR-Registered Trademark-programming
service of each of TWE, Newhouse, Comcast, Cox and affiliates of MediaOne
were consolidated into Phoenixstar.

In connection with the TSAT Asset Transfer, Phoenixstar assumed all of TSAT's
indebtedness on such date, and TSAT received 66.3 million Phoenixstar Class A
Common Stock and 8.5 million shares of Phoenixstar Class B Common Stock, in
accordance with the Restructuring Agreement and the TSAT Asset Transfer
Agreement. As a result, TSAT owns approximately 37% of the outstanding shares of
common equity of Phoenixstar, representing approximately 38% of the combined
voting power of such common equity. As a result of the dilution of TSAT's
investment in Phoenixstar from 100% to approximately 37%, TSAT recognized an
increase in its investment in Phoenixstar and an increase in additional paid-in
capital of $299,046,000, net of income taxes. Such increase represents the
difference between TSAT's historical investment basis in Phoenixstar and TSAT's
proportionate share of Phoenixstar's equity subsequent to the Restructuring.

TSAT MERGER

The TSAT Merger Agreement provided that TSAT would be merged with and into
Phoenixstar, with Phoenixstar as the surviving corporation. In connection with
the First Closing, the Company and Phoenixstar terminated the TSAT Merger
Agreement.


                                       II-5
<PAGE>

SUMMARY OF OPERATIONS

As a result of the consummation of the Restructuring, TSAT is a holding
company whose primary assets during the period from April 1, 1998, through
the consummation of the various transactions with Hughes described above
were: (i) Tempo's authorizations granted by the FCC and other assets and
liabilities relating to a proposed direct broadcast system being constructed
by Tempo and (ii) TSAT's investment in Phoenixstar. Accordingly, subsequent
to the Restructuring, TSAT's operations consisted of (i) expenses incurred to
maintain TSAT as a public company, including accounting and legal fees
($376,000 and $152,000 during 1999 and 1998), (ii) expenses associated with
the operation and maintenance of the Tempo Satellites ($6,365,000 during
1998) and (iii) TSAT's share of Phoenixstar's earnings or losses. TSAT's
results of operations for the year ended December 31, 1998 also include three
months of operations of TSAT's medium power DBS distribution business. Such
medium power business was contributed to Phoenixstar in connection with the
Restructuring.

During the periods covered by this report, the Company had no significant
operations subsequent to the TSAT Asset Transfer other than expenses
associated with the operation and maintenance of the Tempo Satellites, prior
to the sale of the Tempo Satellites to Hughes effective March 10, 1999 and
June 4, 1999. General and administrative expenses incurred to maintain the
Company's status as a publicly traded company and the increase in the share
appreciation right liability which is effectively hedged by the unrealized
holding gain on the GMH Stock.

In connection with the Hughes Medium Power Transactions, the stockholders of
Phoenixstar approved the payment to TSAT of consideration in the form of
1.407 million shares of GMH stock, valued at $66,143,000, subject to the
terms set forth in the Phoenixstar Payment Agreement. Such payment is
recorded as other income in the 1999 consolidated statement of operations.

TSAT recognized no income tax benefit during the years ended December 31,
1999, 1998 and 1997. TSAT is only able to realize income tax benefits for
financial reporting purposes to the extent that such benefits offset TSAT's
income tax liabilities or TSAT generates taxable income. For financial
reporting purposes, all of TSAT's income tax liabilities had been fully
offset by income tax benefits at December 31, 1999 and 1998.

The Company is currently evaluating its course of action and plans to take
advantage of its industry expertise and relationships in various future
business opportunities.


                                       II-6
<PAGE>

RECENT 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" ("Statement No. 133"). Statement No. 133 is effective
for fiscal quarters beginning after June 15, 1999. In June 1999, the
Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 137, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES -- DEFERRAL OF EFFECTIVE DATE OF FASB NO. 133" which deferred
Statement No. 133's effective date to fiscal quarter beginning after June 15,
2000.

The Company has not assessed the impact of implementing Statement No. 133,
but believes it will be insignificant.

LIQUIDITY AND CAPITAL RESOURCES

As a result of the consummation of the Hughes transactions, the Company
currently has no operating income or cash flow. As of December 31, 1999, the
Company's sources of liquidity were its available cash and any proceeds from
the liquidation of the GMH Stock (subject to a one-year holding period).

At December 31, 1999, TSAT had no substantial assets or liabilities other
than cash, its ownership interest in General Motors Class H Common Stock, a
certain equity investment, a majority owned subsidiary and its ownership
interest in Phoenixstar.

In July 1999, the Company negotiated a preliminary agreement (the "Asvan
Agreement") with Asvan Technology, LLC ("Asvan"). The Asvan Agreement
provides for Asvan to transfer certain assets to the Company's subsidiary,
TSAT Technologies, Inc. ("Technologies Sub") in exchange for a 20% equity
interest in Technologies Sub and for the Company to contribute a maximum of
$3,000,000 in exchange for an 80% equity interest in Technologies Sub. The
Asvan Agreement contemplates that Technologies Sub will perform research and
development related to certain emerging technologies. The operations of the
subsidiary are consolidated into the accompanying consolidated financial
statements.

In September 1999, the Company made an investment of $5,000,000 for 714,286
shares of Series C Preferred Stock ("Preferred Stock") of Jato Communications
Corp. ("Jato"). The investment included a payment of $2,000,000 and,
originally, a promissory note that was subsequently satisfied and discharged.
On November 16, 1999, Jato issued TSAT an additional 178,571 shares in
accordance with a change in the conversion ratio pursuant to a provision in
the original agreement.

As a result of the transactions with Liberty Media described herein, which
closed on March 16, 2000, the Company is the beneficial owner of 5,084,745
shares of Sprint Corporation PCS Common Stock (the "PCS Stock"), having a
market value on March 24, 2000 of approximately $333 million. The Company
currently intends to meet its liquidity requirements by selling, borrowing
against and/or otherwise monetizing such investment, until such time as the
Company has cash flow from operations or other sources of liquidity.

TSAT will continue to be subject to the risks associated with operating as a
holding company including possible regulation under the Investment Company Act.
TSAT does not currently intend to be an investment company within the meaning of
the Investment Company Act and is actively seeking to develop or acquire an
operating business related to or complementary with the Company's strategy to
pursue opportunities in the distribution of Internet data and other content
via satellite and related businesses.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

     The financial statements of the Company are filed under this item beginning
on page II-9.

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

     None.


                                       II-7
<PAGE>

                          INDEPENDENT AUDITORS' REPORT


The Board of Directors and Stockholders
TCI Satellite Entertainment, Inc.:

We have audited the accompanying consolidated balance sheets of TCI Satellite
Entertainment, Inc. and subsidiaries (as defined in note 1) as of December 31,
1999 and 1998 and the related consolidated statements of operations, equity
(deficit) and comprehensive income, and cash flows for each of the years in the
three-year period ended December 31, 1999. In connection with our audit of the
consolidated financial statements, we have also audited the financial statement
schedule listed in the index at Item 14(a). These consolidated financial
statements and the financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and the financial statement schedule based on
our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of TCI Satellite
entertainment, Inc. and subsidiaries as of December 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1999, in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly, in all material respects, the information set forth
therein.


Denver, Colorado
March 29, 2000


                                       II-8
<PAGE>

               TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES

                           Consolidated Balance Sheets

                           December 31, 1999 and 1998

<TABLE>
<CAPTION>

                  ASSETS                                           1999          1998
                                                                ---------      --------
                                                                  Amounts in thousands
<S>                                                             <C>             <C>
Cash and cash equivalents                                       $   2,473            --

Prepaid expenses                                                      113            --

Preferred stock investment, at cost (note 6)                        5,000            --

Investment in Phoenixstar, Inc. (note 6)                               --            --

Investment in General Motors Corporation
  at fair value (note 6)                                          135,101            --
                                                                ---------      --------
Equipment and leasehold improvements, at cost:
   Satellites (note 7)                                                 --       463,133
   Support equipment                                                  223            --
   Leasehold improvements                                              75            --
                                                                ---------      --------
                                                                      298       463,133
   Less accumulated depreciation                                       23            --
                                                                ---------      --------
                                                                      275       463,133
   Deferred financing costs                                           235            --
                                                                ---------      --------
       Total assets                                             $ 143,197       463,133
                                                                =========      ========

        LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

Accounts payable                                                $     139            --
Accrued interest payable                                               53            --
Other accrued expenses                                                 41            --
Taxes payable                                                         650            --
General Motors Corporation share appreciation right
  liability (note 2)                                               68,959            --
Employee stock appreciation right liability (note 12)               5,554            --
Due to Phoenixstar (note 7)                                            --       469,498
Franchise taxes payable                                                30            --
Debt (note 8)                                                       3,044            --
                                                                ---------      --------
       Total liabilities                                           78,470       469,498
                                                                ---------      --------
Stockholders' equity (deficit) (note 9):
   Preferred stock, $.01 par value; authorized 5,000,000
     shares; none issued                                               --            --
   Series A common stock, $1 par value; authorized
     185,000,000 shares; issued 62,894,446 in 1999 and
     59,280,466 in 1998                                            62,894        59,280
   Series B common stock, $1 par value; authorized
      10,000,000 shares; issued 8,465,224 in 1999 and 1998          8,465         8,465
   Additional paid-in capital                                     825,726       825,276
   Accumulated deficit                                           (832,358)     (899,386)
                                                                ---------      --------
       Total stockholders' equity (deficit)                        64,727        (6,365)
                                                                ---------      --------
Commitments and Contingencies (note 11)
       Total liabilities and stockholders' equity (deficit)     $ 143,197       463,133
                                                                =========      ========

</TABLE>

See accompanying notes to consolidated financial statements.

                                       II-9
<PAGE>

               TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES

                     Consolidated Statements of Operations

                  Years ended December 31, 1999, 1998 and 1997


<TABLE>
<CAPTION>
                                                       1999           1998          1997
                                                     ---------      --------      --------
                                                             Amounts in thousands
                                                            except per share amounts
<S>                                                  <C>           <C>           <C>
Revenue:
   Programming and equipment rental                  $      --       154,257       512,894
   Installation                                             --        14,243        49,096
                                                     ---------      --------      --------
                                                            --       168,500       561,990
                                                     ---------      --------      --------

Operating costs and expenses:
   Charges from Phoenixstar Partners (note 12)              --        82,235       259,600
   Operating (note 12)                                   4,536        16,211        23,992
   Selling, general and administrative (note 12)           751        55,495       198,263
   Stock compensation (notes 10 and 12)                  6,873         4,869         8,092
   Depreciation                                             23        65,105       243,642
                                                     ---------      --------      --------
                                                        12,183       223,915       733,589
                                                     ---------      --------      --------
       Operating loss                                  (12,183)      (55,415)     (171,599)
                                                     ---------      --------      --------
Other income (expense):
   Gain on sale of satellites                           13,712            --            --
   Interest expense                                       (140)      (14,177)      (47,992)
   Share of losses of Phoenixstar (note 6)                  --      (369,231)           --
   Share of losses of Phoenixstar Partners                  --        (5,822)      (20,473)
   Interest income                                         146            20         2,519
   Other (note 2)                                       66,143          (641)         (796)
                                                     ---------      --------      --------
                                                        79,861      (389,851)      (66,742)
                                                     ---------      --------      --------
       Earnings (loss) before income taxes              67,678      (445,266)     (238,341)
Income tax expense (note 10)                              (416)           --            --
                                                     ---------      --------      --------
       Net earnings (loss)                              67,262      (445,266)     (238,341)
                                                     =========      ========      ========
Basic and diluted earnings (loss) per
  common share                                       $    0.97         (6.58)        (3.58)
                                                     =========      ========      ========

</TABLE>

See accompanying notes to consolidated financial statements.

                                       II-10
<PAGE>

               TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES

            Consolidated Statements of Stockholders' Equity (Deficit)
                           and Comprehensive Income

                  Years ended December 31, 1999, 1998 and 1997
                                 (In thousands)


<TABLE>
<CAPTION>

                                                                                                          ACCUMULATED      TOTAL
                                                           COMMON STOCK        ADDITIONAL                   OTHER      STOCKHOLDERS'
                                                      ----------------------    PAID-IN     ACCUMULATED  COMPREHENSIVE    EQUITY
                                                      SERIES A     SERIES B     CAPITAL       DEFICIT       INCOME      (DEFICIT)
                                                      ---------    ---------   ---------    -----------   -----------  -------------
<S>                                                  <C>          <C>         <C>          <C>           <C>          <C>
Balance at December 31, 1996                            $57,946      8,467       521,724      (215,779)          --       372,358
    Recognition of stock compensation
       related to stock options and
       restricted stock awards                               --         --         1,781            --           --         1,781
    Issuance of Series A Common Stock related
       to restricted stock awards                            33         --           180            --           --           213
    Issuance of Series a Common Stock upon
       conversion of convertible securities of
       Tele-Communications, Inc.                            258         --            --            --           --           258
    Conversion of Series B to Series A                        2         (2)           --            --           --            --
    Net loss                                                 --         --            --      (238,341)          --      (238,341)
                                                        -------     ------      --------      --------      -------      --------

Balance at December 31, 1997                             58,239      8,465       523,685      (454,120)          --       136,269

    Recognition of stock compensation related
       to stock options and restricted stock awards          --         --         2,595            --           --         2,595
    Issuance of Series A Common Stock related to
       restricted stock awards                               50         --           (50)           --           --            --
    Issuance of Series A Common Stock upon
       conversion of convertible securities of
       Tele-Communications, Inc.                            991         --            --            --           --           991
    Issuance of common stock by subsidiary (note 3)          --         --       299,046            --           --       299,046
    Net loss                                                 --         --            --      (445,266)          --      (445,266)
                                                        -------     ------      --------      --------      -------      --------

Balance at December 31, 1998                             59,280      8,465       825,276      (899,386)          --        (6,365)
    Recognition of stock compensation related to
       stock options and restricted stock awards            162         --           450            --           --           612
    Tax benefit related to stock options and
       restricted stock awards                               --         --            --          (234)          --          (234)
    Issuance of Series A Common Stock related to
       Naify conversion                                   3,452         --            --            --           --         3,452
                                                        -------     ------      --------      --------      -------      --------
Comprehensive income:
    Net Earnings                                             --         --            --        67,262           --        67,262
    Unrealized holding gains on available for sale
       securities, net of tax                                --         --            --            --       42,583        42,583
    Share appreciation right liability, net of tax           --         --            --            --      (42,583)      (42,583)
                                                        -------     ------      --------      --------      -------      --------
          Total comprehensive income                         --         --            --        67,262           --        67,262
                                                        -------     ------      --------      --------      -------      --------

Balance at December 31, 1999                            $62,894      8,465       825,726      (832,858)          --        64,727
                                                        =======     ======      ========      ========      =======      ========


</TABLE>

See accompanying notes to consolidated financial statements.

                                       II-11
<PAGE>

               TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES

                      Consolidated Statements of Cash Flows

                  Years ended December 31, 1999, 1998 and 1997


<TABLE>
<CAPTION>
                                                                 1999          1998         1997
                                                               --------      --------      --------
                                                                        Amounts in thousands
                                                                          (see note 7)
<S>                                                            <C>           <C>           <C>
Cash flows from operating activities:
  Net earnings (loss)                                          $ 67,262      (445,266)     (238,341)
  Adjustments to reconcile net earnings (loss) to net cash
    (used in) provided by operating activities:
      Gain on sale of satellites                                (13,712)           --            --
      Depreciation                                                   23        65,105       243,642
      Amortization of deferred financing costs                       15            --            --
      Share of losses of Phoenixstar                                 --       369,231            --
      Share of losses of Phoenixstar Partners                        --         5,822        20,473
      Accretion of debt discount                                     --         4,682        16,719
      Stock compensation and restricted stock awards              6,873         4,869         8,092
      Deferred income tax expense                                  (234)           --            --
      Receipt of General Motors stock recorded
        as other income                                         (66,143)           --            --
      Other non-cash charges                                         --         8,108         6,919
      Changes in operating assets and liabilities,
        net of the effect of the
          Restructuring:
            Change in receivables                                    --        10,845       (15,014)
            Change in prepared expenses                            (113)           --            --
            Change in other assets                                   --          (736)         (335)
            Change in accruals and payables                         957       (10,210)       42,056
            Change in subscriber advance payments                    --        (3,114)        7,426
                                                               --------      --------      --------
              Net cash (used in) provided by
                operating activities                             (5,072)        9,336        91,637
                                                               --------      --------      --------
Cash flows from investing activities:
  Capital expended for equipment                                   (298)      (73,966)     (227,327)
  Capital expended for construction of satellites                    --            --        (5,448)
  Payments for stock appreciation rights exercised                 (707)           --            --
  Investment in Jato Communications                              (2,000)           --            --
  Additional investments in, and related advances to,
    Phoenixstar Partners                                             --           (75)       (7,073)
  Repayments of advances to Phoenixstar Partners                     --            --         7,815
  Other investing activities                                         --            --        (1,581)
  Proceeds from sale of equipment                                 2,500            --            --
                                                               --------      --------      --------
              Net cash used in investing activities                (505)      (74,041)     (233,614)
                                                               --------      --------      --------
Cash flows from financing activities:
  Borrowings of debt                                                 --       113,000       498,061
  Repayments of debt                                                 --       (61,735)     (344,699)
  Payment of deferred financing costs                              (250)           --       (17,780)
  Increase in due to Phoenixstar                                  4,848         6,365         5,448
  Proceeds from issuance of common stock                          3,452           991           471
                                                               --------      --------      --------
              Net cash provided by financing activities           8,050        58,621       141,501
                                                               --------      --------      --------
              Net increase (decrease) in cash and cash
                equivalents                                       2,473        (6,084)         (476)

Cash and cash equivalents:
  Beginning of year                                                  --         6,084         6,560
                                                               --------      --------      --------
  End of year                                                  $  2,473            --         6,084
                                                               ========      ========      ========

</TABLE>

See accompanying notes to consolidated financial statements.

                                       II-12
<PAGE>

               TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                        December 31, 1999, 1998 and 1997


(1)  BASIS OF PRESENTATION

     The accompanying consolidated financial statements include the accounts of
     TCI Satellite Entertainment, Inc. and those of all majority-owned
     subsidiaries ("TSAT" or the "Company"). All significant inter-company
     transactions have been eliminated.

     As a result of the Hughes Transaction described in note 2 and the TSAT
     Asset Transfer described in note 3, TSAT is currently a holding company,
     with no substantial assets or liabilities other than (i) cash, (ii) its
     ownership interest in General Motors, (iii) a certain equity investment,
     (iv) a majority owned subsidiary (v) its ownership interest in Phoenixstar,
     and (vi) its rights and obligations under certain agreements with
     Phoenixstar and others.

     In addition, the Company has not had significant operations subsequent to
     the TSAT Asset Transfer other than (i) expenses associated with the
     operation and maintenance of the Tempo Satellites, as defined below, prior
     to the sale to Hughes effective June 4, 1999 and (ii) general and
     administrative expenses incurred to maintain the Company's status as a
     publicly traded company. The Company's majority owned subsidiary conducts
     research and development in certain emerging technology.

     Certain prior year amounts have been reclassified for comparability with
     the 1999 presentation.

(2)  HUGHES TRANSACTIONS

     Effective June 4, 1999, the Company completed the sale of its high power
     direct broadcast satellite ("DBS") assets to Hughes Electronics Corporation
     ("Hughes"), pursuant to an asset purchase agreement dated as of January 22,
     1999 (the "Hughes High Power Agreement"), among Tempo Satellite, Inc., a
     wholly-owned subsidiary of the Company ("Tempo"), Phoenixstar, Inc., a
     Delaware corporation formerly known as PRIMESTAR, Inc. ("Phoenixstar"),
     Phoenixstar Partners L.P. a Delaware limited partnership and wholly-owned
     subsidiary of Phoenixstar formerly known as PRIMESTAR Partners L.P.
     ("Phoenixstar Partners"), and Hughes, a subsidiary of General Motors. The
     assets transferred by the Company pursuant to the Hughes High Power
     Agreement consisted of Tempo's two high-power DBS satellites (the "Tempo
     Satellites"), one of which was in orbit at 119DEG. West Longitude ("Tempo
     DBS-1") and one of which was used as a ground spare ("Tempo DBS-2"), its
     FCC authorizations with respect to the 119DEG. West Longitude orbital
     location (the "FCC License"), and certain related assets (collectively,
     the "Tempo High Power Assets").

     The Company had previously granted Phoenixstar the transferable right and
     option (the "Tempo Purchase Option") to purchase 100% of the Tempo High
     Power Assets for aggregate consideration of $2.5 million in cash and the
     assumption of all liabilities. In addition, Tempo had previously granted to
     Phoenixstar Partners the right to purchase or lease 100% of the capacity of
     the DBS system being constructed by Tempo (the "Tempo Capacity Rights"),
     and Phoenixstar Partners had made

                                       II-13
<PAGE>

               TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                        December 31, 1999, 1998 and 1997

     advances to Tempo to fund the construction of Tempo's DBS system in the
     aggregate amount of $465 million (the "Tempo Reimbursement Obligation")

     Accordingly, the Hughes High Power Agreement provided for (i) the sale of
     Phoenixstar to Hughes of the Tempo Purchase Option, (ii) the exercise of
     the Tempo Purchase Option by Hughes, and (iii) the termination of the Tempo
     Capacity Rights (collectively, the "Hughes High Power Transaction"). The
     aggregate consideration payable by Hughes in the Hughes High Power
     Transaction was $500 million, payable as described below.

     As regulatory approval was required to transfer Tempo DBS-1 and the FCC
     License, the Hughes High Power Agreement provided for the Hughes High
     Power Transaction to be completed in two steps. To facilitate the
     transaction, the Tempo Purchase Option was amended to provide for two-stage
     exercise process. The parties allocated 70% of the total consideration
     under the Hughes High Power Agreement to Tempo DBS-1 and related assets
     and 30% of the total consideration thereunder to Tempo DBS-2 and related
     assets.

     The first closing under the Hughes High Power Agreement was consummated
     effective March 10, 1999. In the first closing, Hughes acquired Tempo
     DBS-2 and related assets for aggregate consideration of $150 million,
     comprised of (i) $9.75 million paid by Hughes to Phoenixstar and
     Phoenixstar Partners for the transfer to Hughes of the portion of the
     Tempo Purchase Option allocable to Tempo DBS-2 and the termination of
     that portion of the Tempo Capacity Rights allocable to Tempo DBS-2,
     (ii) $750,000 paid by Hughes to Tempo to exercise that portion of the
     Tempo Purchase Option allocable to Tempo DBS-2; and (iii) the assumption
     and payment by Hughes of a portion of the Tempo Reimbursement Obligation
     in the amount of $139 million.

     In addition, as required by the Hughes High Power Agreement, the Company
     and Phoenixstar agreed to terminate the previously announced merger of the
     Company with and into Phoenixstar, effective as of such first closing.

     The FCC approved the transfer of the FCC License to Hughes on May 28, 1999,
     and the second closing under the Hughes High Power Agreement was
     consummated effective June 4, 1999. In the second closing Hughes acquired
     Tempo DBS-1 and related assets, including all rights of Tempo with respect
     to the FCC License, for aggregate consideration of $350 million comprised
     of (i) $22.75 million paid by Hughes to Phoenixstar and Phoenixstar
     Partners for the transfer to Hughes of the portion of the Tempo Purchase
     Option allocable to Tempo DBS-1 and the termination of that portion of the
     Tempo Capacity Rights allocable to Tempo DBS-1, (ii) $1.75 million paid by
     Hughes to Tempo to exercise that portion of the Tempo Purchase Option
     allocable to Tempo DBS-1; and (iii) the assumption and payment by Hughes
     of the remainder of the Tempo Reimbursement Obligation, in the amount of
     $325.5 million.

     The carrying value of Tempo DBS-1 was approximately $239 million at the
     time of the second closing. In addition, Phoenixstar agreed to forgive
     amounts due from Tempo not assumed by Hughes in the amount of $9,346,000.

     In a separate transaction (the Hughes Medium Power Transaction) completed
     on April 28, 1999 (the Hughes Closing Date), Phoenixstar sold to Hughes
     Phoenixstar's medium-power DBS business and

                                       II-14
<PAGE>

               TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                        December 31, 1999, 1998 and 1997

     assets for $1.1 billion in cash and 4,871 million shares of General Motors
     Class H common stock ("GMH Stock") valued at approximately $258 million on
     the date of closing. The foregoing purchase price was subject to
     adjustments for working capital at the date of closing, which subsequently
     totaled approximately $9.9 million. At December 31, 1999, Phoenixstar
     retained responsibility for the payment of certain obligations not assumed
     by Hughes, and the payment of costs, estimated not to exceed $180 million
     at December 31, 1999, associated with the termination of certain vendor and
     service contracts and lease agreements not assumed by Hughes. Affiliates
     of stockholders of Phoenixstar, other than the Company, and an affiliate of
     Tele-Communications, Inc. ("TCI") have committed to make funds available
     to Phoenixstar, up to an aggregate of $1,013.3 million to fund such
     payments. Through December 31, 1999, approximately $465.3 million of
     such commitments have been funded to Phoenixstar, and $382.6 million of
     such commitments expired undrawn.

     In connection with their approval of the Hughes Medium Power Transaction
     and other transactions, the stockholders of Phoenixstar approved the
     payment to TSAT of consideration in the form of 1.407 million shares of GMH
     Stock (the "Phoenixstar Payment"), subject to the term and conditions set
     forth in an agreement (the "Phoenixstar Payment Agreement) dated as of
     January 22, 1999. In consideration of the Phoenixstar Payment, the Company
     agreed to approve the Hughes Medium Power Transaction and Hughes High Power
     Transaction as a stockholder of Phoenixstar, to modify certain agreements
     to facilitate the Hughes High Power Transaction, and to issue Phoenixstar a
     share appreciation right (the "TSAT GMH SAR") with respect to the shares of
     GMH Stock received as the Phoenixstar Payment, granting Phoenixstar the
     right to any market price appreciation in such GMH Stock during the
     one-year period following the date of issuance, over an agreed strike price
     of $47.00. Pursuant to the Phoenixstar Payment Agreement, TSAT has also
     agreed to forego any liquidation distribution or other payment that may be
     made in respect of the outstanding shares of Phoenixstar upon any
     dissolution and winding-up of Phoenixstar, or otherwise in respect of
     Phoenixstar's existing equity and, subject to the approval of the
     Company's stockholders, to transfer its shares in Phoenixstar to the other
     Phoenixstar stockholders. On the Hughes Closing Date, the Company received
     1.407 million shares of GMH Stock, valued at approximately $66,143,000,
     from Phoenixstar in satisfaction of the Phoenixstar Payment. Such amount is
     recorded as other income in the 1999 consolidated statement of operations.

     The TSAT GMH SAR is secured by a first priority pledge and security
     interest in the underlying shares of GMH Stock, and both the TSAT GMH SAR
     and such pledge and security interest have been pledged by Phoenixstar for
     the benefit of certain holders of share appreciation rights issued by
     Phoenixstar with respect to shares of GMH Stock (the Phoenixstar GMH SARs).
     The shares of GMH Stock issued to TSAT pursuant to the Phoenixstar Payment
     Agreement are subject to certain restriction on transfer during the first
     year after the closing of the Hughes Medium Power Transaction, and TSAT
     will be entitled (together with Phoenixstar) to certain registration rights
     with respect to such shares following the expiration of such one-year
     period.

     The Company's investment in GMH Stock is being accounted for as an
     available-for-sale security and is recorded at fair value. Unrealized
     holding gains and losses from increases and decreases in the fair value
     of the security are reported as separate components of stockholders' equity
     in comprehensive income. The TSAT GMH SAR serves as a hedge of the
     unrealized holding gain on the GMH Stock and is also reported as a separate
     component of stockholders' equity in comprehensive income.

(3)  RESTRUCTURING

     Effective April 1, 1998 (the "Closing Date") and pursuant to (i) a Merger
     and Contribution Agreement dated as of February 6, 1998, the "Restructuring
     Agreement"), among TSAT, Phoenixstar, prior to the Restructuring a
     wholly-owned subsidiary of TSAT, Time Warner

                                       II-15
<PAGE>
               TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                        December 31, 1999, 1998 and 1997

     Entertainment Company, L.P. ("TWE"), Advance/Newhouse Partnership
     ("Newhouse"), Comcast Corporation ("Comcast"), Cox Communications, Inc.
     ("Cox"), MediaOne of Delaware, Inc., ("MediaOne"), and GE American
     Communications, Inc., and (ii) an Asset Transfer Agreement dated as of
     February 6, 1998, (the "TSAT Asset Transfer Agreement") between TSAT and
     Phoenixstar, a business combination (the "Restructuring") was consummated.
     In connection with the Restructuring, TSAT contributed and transferred to
     Phoenixstar (the "TSAT Asset Transfer") all of TSAT's assets and
     liabilities except (i) the capital stock of Tempo, (ii) the consideration
     to be received by TSAT in the Restructuring and (iii) the rights and
     obligations of TSAT under certain agreements with Phoenixstar and others.
     In addition, the business of Phoenixstar Partners and the business of
     distributing the PRIMESTAR-Registered Trademark- programming service
     ("PRIMESTAR-Registered Trademark-") of each of TWE, Newhouse, Comcast,
     Cox and affiliates of MediaOne were consolidated into Phoenixstar.

     In connection with the TSAT Asset Transfer, Phoenixstar assumed all of
     TSAT's indebtedness on such date, and TSAT received from Phoenixstar 66.3
     million shares of Class A Common Stock of Phoenixstar ("Phoenixstar Class A
     Common Stock") and 8.5 million shares of Class B Common Stock of
     Phoenixstar ("Phoenixstar Class B Common Stock" and together with the
     Phoenixstar Class A Common Stock, "Phoenixstar Common Stock"), in
     accordance with the Restructuring Agreement and the TSAT Asset Transfer
     Agreement. In connection with the Restructuring, Phoenixstar assumed
     TSAT's obligations pursuant to the Indemnification Agreements. As a result,
     TSAT owns approximately 37% of the outstanding shares of common equity of
     Phoenixstar, representing approximately 38% of the combined voting power of
     such common equity. As a result of the dilution of TSAT's investment in
     Phoenixstar from 100% to approximately 37%, TSAT recognized an increase
     in its investment in Phoenixstar and an increase in additional paid-in
     capital of $299,046,000, net of income taxes. Such increase represents the
     difference between TSAT's historical investment basis in Phoenixstar and
     TSAT's proportionate share of Phoenixstar's equity subsequent to the
     Restructuring.

(4)  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     (a)  CASH AND CASH EQUIVALENTS

          The Company considers all highly liquid investments with a maturity of
          three months or less at the date of acquisition to be cash
          equivalents.

     (b)  INVESTMENTS

          Investments mainly consist of equity securities. The Company
          classifies its equity securities as available-for-sale and are
          recorded at fair value.

          A decline in the market value of any available-for-sale security below
          cost that is deemed to be other than temporary results in a reduction
          in carrying amount to fair value. The impairment is charged to
          earnings and a new cost basis for the security is established.

                                       II-16
<PAGE>
               TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                        December 31, 1999, 1998 and 1997

          Investments in entities without a readily determinable market value
          are carried at cost if the Company cannot significantly influence
          operations, or as an equity investment if the Company's influence
          over operations is deemed to be less than control.

     (c)  EQUIPMENT AND LEASEHOLD IMPROVEMENTS

          The Company states equipment at cost and begins depreciation upon
          acceptance of delivery, using the straight-line method over the useful
          life of the asset. Leasehold improvements are amortized over the
          shorter of the useful life of the asset or lease term.

          The Company periodically reviews the carrying amount of its long-lived
          assets to determine whether current events or circumstances warrant
          adjustments to such carrying amounts. The Company considers historical
          and expected future net operating losses to be its primary indicators
          of potential impairment. Assets are grouped and evaluated for
          impairment at the lowest level for which there are identifiable cash
          flows that are largely independent of the cash flows of other groups
          of assets ("Assets"). The Company deems Assets to be impaired if the
          Company is unable to recover the carrying value of its Assets over
          their expected remaining useful life through a forecast of
          undiscounted future operating cash flows directly related to the
          Assets. If Assets are deemed to be impaired, the loss is measured as
          the amount by which the carrying amount of the Assets exceeds their
          fair values. TSAT generally measures fair value by considering sales
          prices for similar assets or by discounting estimated future cash
          flows. Considerable management judgment is necessary to estimate
          discounted future cash flows. Accordingly, actual results could vary
          significantly from such estimates.

     (d)  DEFERRED FINANCING COSTS

          Deferred financing costs are amortized over the term of the related
          loan facility.

     (e)  REVENUE RECOGNITION

          Programming and equipment rental revenue is recognized in the period
          that services are delivered. Installation revenue is recognized in the
          period the installation services are provided to the extent of direct
          selling costs. To date, direct selling costs have exceeded
          installation revenue.

     (f)  ADVERTISING COSTS

          Advertising costs generally are expensed as incurred. Amounts expensed
          for advertising aggregated $5,066,000 and $23,062,000 during 1998 and
          1997, respectively. There were no advertising costs in 1999.

     (g)  MARKETING AND DIRECT SELLING COSTS

          Marketing and direct selling costs are expensed as incurred. The
          excess cost of customer premises equipment over proceeds received upon
          sales of such equipment is recognized at the time of sale and is
          included in selling expense.

                                       II-17
<PAGE>
               TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                        December 31, 1999, 1998 and 1997

     (h)  RESIDUAL SALES COMMISSIONS

          Residual sales commissions, which become payable upon the collection
          of programming revenue from certain subscribers, are expensed during
          the period in which such commissions become payable.

     (i)  STOCK BASED COMPENSATION

          The Company accounts for stock-based employee compensation using the
          intrinsic value method pursuant to Accounting Principles Board Opinion
          No. 25.

     (j)  INCOME TAXES

          TSAT accounts for its income taxes using the asset and liability
          method. Under the asset and liability method, deferred tax assets and
          liabilities are recognized for the estimated future tax consequences
          attributable to differences between the financial statement carrying
          amounts of existing assets and liabilities and their respective tax
          bases. Deferred tax assets and liabilities are measured using enacted
          tax rates in effect for the year in which those temporary differences
          are expected to be recovered or settled. The effect on deferred tax
          assets and liabilities of a change in tax rates is recognized in
          income in the period that includes the enactment date.

     (k)  EARNINGS (LOSS) PER COMMON SHARE

          The earnings (loss) per common share for the years ended December 31,
          1999, 1998 and 1997 is based on 69,587,000, 67,718,000 and 66,658,000
          weighted average shares outstanding during the respective periods.
          Excluded from the computation of diluted EPS for the years ended
          December 31, 1999, 1998 and 1997 are options to acquire 3,462,000,
          6,929,000 and 7,894,000 weighted average shares of Series A Common
          Stock, respectively, because inclusion of such options would be
          anti-dilutive.

     (l)  ESTIMATES

          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 assets and
          liabilities at the date of the financial statements and the reported
          amounts of revenue and expenses during the reporting period. Actual
          results could differ from those estimates.

(5)  SUPPLEMENTAL DISCLOSURES TO STATEMENTS OF CASH FLOWS

     Cash paid for interest was $13,844,000 and $20,224,000 during the years
     ended December 31, 1998 and 1997, respectively. Cash paid for income taxes
     was not material during the years ended December 31, 1999, 1998 and 1997.


                                       II-18
<PAGE>
               TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                        December 31, 1999, 1998 and 1997



     Significant non-cash investing and financing activities for the year ended
     December 31, 1999 and 1998 are as follows (amounts in thousands):

<TABLE>
<S>                                               <C>
1999
          Issuance of note payable in connection
                with investment                   $     3,044
                                                  ===========
             Increase in value of GMH stock and
             corresponding SAR liability          $    68,959
                                                  ===========
1998
          Contribution of operating assets and
                liabilities to subsidiary in
                Restructuring                     $    68,796
                                                  ===========
          Increase in equity due to issuance of
                stock by subsidiary in
                Restructuring                     $   299,046
                                                  ===========
</TABLE>

     Accounts payable include accrued capital expenditures of $35,645,000 at
     December 31, 1997, which has been excluded from the accompanying statements
     of cash flows.

(6)  INVESTMENTS

     Prior to the Hughes Medium Power Transaction, Phoenixstar owned and
     operated the PRIMESTAR-Registered Trademark- direct to home satellite
     service throughout the continental United States. In connection with the
     Phoenixstar Payment Agreement as discussed in Note 2, the Company has
     agreed to forego any liquidation distribution or other payment that may be
     made in respect of the outstanding shares of Phoenixstar, or otherwise in
     respect of Phoenixstar's existing equity and, subject to the approval of
     the Company's stockholders, to transfer its shares in Phoenixstar to the
     other Phoenixstar stockholders. The Company's investment in Phoenixstar at
     December 31, 1999 and 1998 is zero as a result of the cumulative losses of
     Phoenixstar and the expected transfer of the Company's shares in
     Phoenixstar pursuant to the Phoenixstar Payment Agreement.

     On September 16, 1999, the Company made an investment of $5,000,000 for
     714,286 shares of Series C Preferred Stock ("Preferred Stock") of Jato
     Communications Corp. ("Jato"). The investment included a payment of
     $2,000,000 and a promissory note in the amount of $3,000,000 originally due
     October 31, 1999 and subsequently extended to November 10, 1999, bearing
     interest at 10%, and secured by 434,208 shares of the Preferred Stock.
     The note was subsequently satisfied and discharged. The Preferred Stock is
     convertible into common stock at the option of the holder based on certain
     conversion rates and allows the holder to vote equally with all other
     classes of stock, on a per share basis, based on the number of shares of
     common stock into which the Preferred Stock is convertible. The Preferred
     Stock also has certain liquidation preferences and voting rights with
     respect to certain actions by Jato. The Preferred Stock is carried at
     cost. On November 16, 1999, Jato issued TSAT an additional 178,571 shares
     in accordance with a change in the conversion ratio pursuant to a
     provision in the original agreement.

     The Company's investment in General Motors Corporation is an investment
     in marketable equity securities and is accounted for as available-for-sale
     under Statement of Financial Accounting Standard No. 115, "Accounting for
     Certain Investments in Debt and Equity Securities." Such investment is
     recorded at fair value. Unrealized gains and losses on available-for-sale
     securities are reported as a separate component of stockholders' equity.

(7)  EQUIPMENT AND LEASEHOLD IMPROVEMENTS

     The Company purchased certain equipment in 1999 for research and
     development purposes. The equipment is being depreciated over its useful
     life, estimated to be 5 years. Leasehold improvements are amortized over
     the leasehold term of 2 years.

     TEMPO DBS SYSTEM

     Prior to the Hughes Transactions, the Company, through Tempo, held the
     FCC Permit authorizing construction of a high power DBS system consisting
     of two or more satellites delivering DBS service in 11 frequencies at the
     119DEG. W.L. orbital position.

                                       II-19
<PAGE>
               TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                        December 31, 1999, 1998 and 1997

          Tempo was also a party to the Satellite Construction Agreement with
          Loral, pursuant to which Tempo has arranged for the construction of
          the Tempo Satellites at a fixed contract price of $487,159,500, and
          had an option to purchase up to three additional satellites.

          On April 30, 1998, the FCC determined that Tempo's satellite at
          119DEG. W.L. was not operational. It did find, however, that an
          extension of time was warranted for that orbital location and granted
          an extension to Tempo for 119DEG. W.L. Such extension was granted
          until six months after the FCC determination on the Transfer
          Application, with the condition that Tempo not enter into a lease
          agreement with Phoenixstar or any similar lease arrangement prior to
          the FCC's decision on the Transfer Application. In addition, Tempo
          voluntarily surrendered its permit for 166DEG. W.L.

          On November 25, 1998, Tempo and Phoenixstar requested expedited action
          by the FCC on the Transfer Application. Several parties filed
          responses to that request, objecting to the proposed transfer.
          Phoenixstar and Tempo filed a joint reply to those objections. On
          January 27, 1999, Tempo filed a joint application with DIRECTV
          Enterprises, Inc. seeking FCC approval to assign Tempo's DBS
          authorization to DIRECTV ("DIRECTV Application"). In addition, Tempo
          and Phoenixstar jointly filed a letter seeking to maintain the status
          quo with respect to the Transfer Application until the FCC decides the
          DIRECTV Application. Therefore, Tempo and Phoenixstar requested that
          the Transfer Application be held in abeyance and, subject to and
          contemporaneously with approval of the DIRECTV Application, that the
          FCC dismiss the Transfer Application. EchoStar filed a petition to
          deny the DirecTV Application on March 5, 1999, on the basis that
          DirecTV should not be allowed to control high power DBS spectrum at
          three full-CONUS orbital locations and that EchoStar had offered to
          purchase the Tempo high power DBS assets. On the same date, the Small
          Cable Business Association submitted a request that any grant of the
          DirecTV Application be conditioned on DirecTv providing a digital
          add-on service that small cable systems can self-brand, and Media
          Access Project filed a petition to deny the application to the extent
          the FCC did not apply and DirecTv did not accept application of
          Section 310(b) of the Communications Act. DirecTv and Terripo each
          filed oppositions to these petitions on March 19, 1999. On April 12,
          1999, Echostar filed a response, to which Tempo and DirecTV replied.
          By order dated May 28, 1999, the FCC granted the DirecTV Application
          and dismissed the Transfer Application.

          TEMPO OPTION

          In February 1990, Tempo entered into an option agreement (the "Tempo
          Option Agreement") with Phoenixstar Partners granting Phoenixstar
          Partners the right and option (the "Tempo Capacity Option"), upon
          exercise, to purchase or lease 100% of the capacity of the DBS system
          to be built, launched and operated by Tempo pursuant to the FCC
          Permit. Under the Tempo Option Agreement, upon the exercise of the
          Tempo Capacity Option, Phoenixstar Partners was obligated to pay Tempo
          $1,000,000 (the "Exercise Fee") and to lease or purchase the entire
          capacity of the DBS system with the purchase price (or aggregate lease
          payments) being sufficient to cover the costs of constructing,
          launching and operating such DBS system. In connection with the Tempo
          Capacity Option and certain related matters, Tempo and Phoenixstar
          Partners subsequently entered into two letter agreements (the "Tempo
          Letter Agreements"), which provided for, among other things, the
          funding by Phoenixstar Partners of

                                       II-20
<PAGE>
               TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                        December 31, 1999, 1998 and 1997

          milestone and other payments due under the Satellite Construction
          Agreement, and certain related costs, through advances by Phoenixstar
          Partners to Tempo (the "Phoenixstar Advances"). The Phoenixstar
          Advances aggregated $469,498,000 at December 31, 1998 and are
          reflected in due to Phoenixstar, Inc. in the accompanying 1998
          consolidated balance sheets.

          On February 7, 1997, the Partners Committee of Phoenixstar Partners
          adopted a resolution (i) affirming that Phoenixstar Partners had
          unconditionally exercised the Tempo Capacity Option, (ii) approving
          the proposed launch of Tempo DBS-1 into the 119DEG. W.L. orbital
          position and the use of Tempo DBS-2 as a spare or back-up for Tempo
          DBS-1, pending other deployment or disposition as determined by
          Phoenixstar Partners, and (iii) authorizing the payment by Phoenixstar
          Partners to Tempo of the Exercise Fee and other amounts in connection
          with the Tempo Capacity Option and the Tempo Letter Agreements,
          including funding of substantially all construction and related costs
          relating to the Tempo Satellites not previously funded by Phoenixstar
          Partners.

          In connection with the Hughes High Power Transaction, Hughes assumes
          $465 million of Tempo's obligation to Phoenixstar Partners for the
          Phoenixstar Advances, and Phoenixstar Partners forgive the remaining
          balance. In addition, Phoenixstar Partners has agreed to terminate its
          rights under the Tempo Capacity Option.

(8)  DEBT

     On November 9, 1999, the Company entered into a Demand Note with the Bank
     of America wherein TSAT could borrow up to $5,000,000 prior to November 19,
     1999. Interest was based on the bank's prime rate plus .75%. On
     November 10, 1999 approximately $3,044,000 was drawn on the demand note
     in order to satisfy the Promissory Note, and accrued interest thereon,
     with Jato as discussed in note 4.

     On November 19, 1999, TSAT entered into a Loan Agreement with the Bank of
     America for the following facilities (i) Facility A commitment of
     $5,000,000; (ii) Facility B commitment of $15,000,000; and (iii) Facility C
     commitment of $5,000,000. Upon the "Collateral Pledge Perfection Date" as
     defined as in the Agreement, the undrawn portions of Facility C expires
     and the Facility A commitment increases to $10,000,000.

                                       II-21
<PAGE>
               TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                        December 31, 1999, 1998 and 1997

     At December 31, 1999, $3,044,000 had been drawn on Facility C at an
     interest rate of 10.5% per annum. The unused Facility A, Facility B and
     Facility C amounts are charged a commitment fee at a rate of 0.375%.

(9)  STOCKHOLDERS' EQUITY

     (a)  COMMON STOCK

          The Series A Common Stock has one vote per share and the Series B
          Common Stock has ten votes per share. Each share of Series B Common
          Stock is convertible, at the option of the holder, into one share of
          Series A Common Stock.

     (b)  PREFERRED STOCK

          TSAT is authorized to issue 5,000,000 shares of Preferred Stock. The
          Preferred Stock may be issued from time to time as determined by the
          Board of Directors, without stockholder approval. Such Preferred Stock
          may be issued in such series and with such designations, preferences,
          conversion or other rights voting powers, qualifications, limitations,
          or restrictions as shall be stated or expressed in a resolution or
          resolutions providing for the issue of such series adopted by the
          Company's Board of Directors (the "TSAT Board").

     (c)  EMPLOYEE RETIREMENT PLAN

          TSAT's Employee Stock Purchase Plan (the "TSAT ESPP") became effective
          on January 1, 1997. The TSAT Plan provided eligible employees with an
          opportunity to invest in TSAT and to create a retirement fund. Terms
          of the TSAT ESPP provided for eligible employees to contribute up to
          10% of their compensation to a trust for investment in TSAT common
          stock. TSAT, by annual resolution of the TSAT Board, could elect to
          contribute up to 100% of the amount contributed by employees. TSAT
          contributed $317,000 and $1,200,000 in 1998 and 1997, respectively,
          to the TSAT ESPP. The TSAT ESPP was merged into Phoenixstar Partners'
          retirement plan in connection with the Restructuring, accordingly, no
          further contributions were made by TSAT.

     (d)  STOCK OPTIONS

          On the Spin-off Date, the TSAT Board adopted, and TCI as the sole
          stockholder of the Company prior to the Spin-off, approved, the TCI
          Satellite Entertainment, Inc. 1996 Stock Incentive Plan (the "TSAT
          1996 Plan"). The TSAT 1996 Plan provides for awards to be made in
          respect of a maximum of 3,200,000 shares of Series A Common Stock
          (subject to certain anti-dilution adjustments). Awards may be made as
          grants of stock options, stock appreciation rights ("SARs"),
          restricted shares, stock units, performance awards or any
          combination thereof (collectively, "Awards"). Awards may be made
          to employees and to consultants and advisors to the Company who are
          not employees. Shares of Series A Common Stock that are subject to
          Awards that expire, terminate or are annulled for any reason
          without having been exercised (or deemed exercised, by virtue of
          the exercise of a related SAR), or are forfeited prior to becoming
          vested, will return to the pool of such shares available for grant
          under the TSAT 1996 Plan.

                                       II-22
<PAGE>
               TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                        December 31, 1999, 1998 and 1997

          In June 1996, the Board of Directors of TCI (the "TCI Board")
          authorized TCI to permit certain of its executive officers to acquire
          equity interests in certain of TCI's subsidiaries. In connection
          therewith, the TCI Board approved the acquisition by each of two
          executive officers of TCI who are not employees of the Company (the
          "TCI Officers"), of 1.0% of the net equity of the Company. The TCI
          Board also approved the acquisition by the chief executive officer and
          a director of the Company (the "Company Officer"), of 1.0% of the net
          equity of the Company and the acquisition by an executive officer of
          certain TCI subsidiaries who is also a director, but not an employee,
          of the Company (the "TCI Subsidiary Officer"), of 0.5% of the net
          equity of the Company. The TCI Board determined to structure such
          transactions as grants by the Company to such persons of options to
          purchase shares of Series A Common Stock representing 1.0% ( in the
          case of each of the TCI Officers and the Company Officer) and 0.5% (in
          the case of the TCI Subsidiary Officer) of the shares of Series A
          Common Stock and Series B Common Stock issued and outstanding on the
          Spin-off Date, determined immediately after giving effect to the
          Spin-off, but before giving effect to any exercise of such options
          (the "Spin-off Date Options").

          Spin-off Date Options to purchase 2,324,266 shares of Series A Common
          Stock at a per share price of $8.86 were granted on the Spin-off Date.
          The Spin-off Date options vest in 20% cumulative increments on each
          of the first five anniversaries of February 1, 1996, and are
          exercisable for up to ten years following February 1, 1996.
          Compensation expense with respect to the Spin-off Date Options held
          by the Company Officer aggregated $246,000, $621,000 and $1,101,000
          during the years ended December 31, 1999, 1998 and 1997, respectively.

          Pursuant to the Reorganization Agreement, and (in the case of the TCI
          Officers and the TCI Subsidiary Officer) in partial consideration for
          the capital contribution made by TCI to the Company in connection with
          the Spin-off, the Company agreed, effective as of the Spin-off Date,
          to bear all obligations under such options and to enter into stock
          option agreements with respect to such options with each of the TCI
          Officers, the Company Officer and the TCI Subsidiary Officer.

          On March 6, 1998, stockholders of the Company approved the TCI
          Satellite Entertainment, Inc. 1997 Nonemployee Director Stock Option
          Plan (the "TSAT DSOP") including the grant, effective as of February
          3, 1997, to each person that as of that date was a member of the TSAT
          Board and was not an employee of the Company or any of its
          subsidiaries, of options to purchase 50,000 shares of Series A Common
          Stock. Pursuant to the TSAT DSOP, options to purchase 200,000 shares
          of Series A Common Stock were granted at an exercise price of $8.00
          per share. As originally granted, options issued pursuant to the TSAT
          DSOP vest and become exercisable over a five-year period from the date
          of grant and expire 10 years from the date of grant. In November 1997,
          the TSAT Board approved modifications to the vesting provisions to
          provide for vesting in three annual installments, commencing February
          1998. In November 1997, the TSAT Board also voted to increase the
          number of directors by one, and the director

                                       II-23
<PAGE>
               TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                        December 31, 1999, 1998 and 1997

          named to fill such newly created directorship received options to
          purchase 50,000 shares of Series A Common Stock at an exercise price
          of $6.50.

          The Company applies Accounting Principles Board Opinion No. 25 in
          accounting for its stock options, and accordingly, compensation
          expense has been recognized for its stock options in the accompanying
          financial statements using the intrinsic value method. Had the Company
          determined compensation expense based on the grant-date fair value
          method pursuant to Statement of Financial Accounting Standards No.
          123, the Company's net earnings (loss) and earnings (loss) per share
          would have been $66,498,000 and $0.96 for 1999, ($447,012,000) and
          ($6.60) for 1998, ($240,384,000) and ($3.61) for 1997, respectively.

          The following table presents the number, weighted-average exercise
          price and weighted-average grant-date fair value of options to buy
          Series A Common Stock.

<TABLE>
<CAPTION>
                                                              WEIGHTED -    WEIGHTED -
                                                               AVERAGE       AVERAGE
                                                 NUMBER OF     EXERCISE     GRANT-DATE
                                                  OPTIONS       PRICE       FAIR VALUE
                                                -----------  -----------   -----------
<S>                                             <C>           <C>          <C>
Granted in connection with Spin-off              2,324,266      $   8.86        8.74
    Granted in 1997                              1,070,000          7.93        4.77
                                                 ---------
Outstanding at December 31, 1997 and 1998        3,394,266          8.57

Exercised                                           80,000          8.00

Forfeited and cancelled                             20,000          8.00

Granted in 1999                                  1,190,500          7.93        6.03

Outstanding at December 31, 1999                 4,484,766          8.40
                                                 =========          ====
Exercisable at December 31, 1997                   464,853          8.86
                                                 =========          ====
Exercisable at December 31, 1998                 1,241,706          8.64
                                                 =========          ====
Exercisable at December 31, 1999                 2,204,720          8.52
                                                 =========          ====

</TABLE>

                                       II-24
<PAGE>
               TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                        December 31, 1999, 1998 and 1997

          As originally granted in February 1997, options granted to employees
          vest evenly over five years with such vesting period beginning
          January 1, 1997, first become exercisable on January 1, 1998 and
          expire on December 31, 2006. In November 1997, the TSAT Board
          approved modifications to the vesting provisions to provide for
          vesting in three equal annual installments, commencing February
          1998. In accordance with the TSAT 1996 Plan, absent action by the
          TSAT Board, vesting would accelerate and the options would terminate
          upon a sale of substantially all assets of the Company which
          occurred with the sale of the Tempo DBS-1 Assets on June 4, 1999.
          Pursuant to a provision in the TSAT 1996 Plan, the TSAT Board allowed
          the options held by most of the employees and officers to vest and
          extended the termination date to June 4, 2000. The original terms
          for the options were maintained for employees and officers who were
          continuing with the Company.

          Options outstanding at December 31, 1999 have a range of exercise
          prices from $6.50 to $8.86 and a weighted-average remaining
          contractual life of approximately eight years.

          The respective estimated grant-date fair values of the options noted
          above are based on the Black-Scholes model and are stated in current
          annualized dollars on a present value basis. The key assumptions used
          in the model for purposes of these calculations include the following:
          (a) a discount rate equal to the one-year Treasury Bill rate for the
          twelve months ended December 31, 1999; (b) a 84% volatility rate;
          (c) the 10-year option term; (d) the closing price of the Series A
          Common Stock on the date of grant; and (e) an expected dividend rate
          of zero.

          In February 1997, certain key employees of the Company were granted,
          pursuant to the TSAT 1996 Plan, an aggregate of 325,000 restricted
          shares of Series A Common Stock. As originally granted, such
          restricted shares vest as to 50% on January 1, 2001 and as to the
          remaining 50% on January 1, 2002. In November 1997, the TSAT Board
          approved modifications to the vesting provisions accelerating the
          vesting schedules under such restricted stock awards to provide for
          vesting of 50% on each of the second and third anniversaries of the
          date of granting. Compensation expense with respect to the restricted
          shares aggregated $366,000 and $434,000 during the years ended
          December 31, 1999 and 1998, respectively.

          On December 1, 1999, certain key employees and officers of TSAT
          were granted, pursuant to the TSAT 1996 Plan, an aggregate of
          628,000 options to acquire shares of Class A Common Stock at a per
          share exercise price of $7.125 and 562,500 options to acquire
          shares of Class A Common Stock at a per share exercise price of
          $8.84 ("the 1999 Grant"). Each grant of options vest over a 5 year
          period beginning on the date of the grant, first becomes
          exercisable as to 25% on the second anniversary of the date of
          grant and become exercisable as to an additional 25% on each of the
          third, fourth and fifth anniversaries of the date of grant, and
          expires on December 1, 2009.

     (e)  OTHER

          Pursuant to the Reorganization Agreement, the Company granted to TCI
          an option to purchase up to 4,765,000 shares of Series A Common Stock,
          at an exercise price of $1.00 per share, as required by TCI from time
          to time to meet its obligations under the conversion features of
          certain convertible securities of TCI as such conversion features were
          adjusted as a result of the Spin-off. During 1999 and 1998, TCI
          purchased 3,452,000 shares and 991,000 shares, respectively, of
          Series A Common Stock pursuant to such option.

          In connection with the Spin-off, TCI and the Company also entered into
          a "Share Purchase Agreement" to sell to each other from time to time,
          at the then current market price, shares of Series A TCI Group Stock
          and Series A Common Stock, respectively, as necessary to satisfy their
          respective obligations after the Spin-off Date under certain stock
          options and SARs held by their respective employees and non-employee
          directors.

          At December 31, 1999, a total of 5,338,329 shares of Series A Common
          Stock were reserved for issuance pursuant to the Spin-off Date
          Options, the Share Purchase Agreements, the

                                       II-25
<PAGE>
               TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                        December 31, 1999, 1998 and 1997

          Reorganization Agreement, the TSAT 1996 Plan and the TSAT DSOP. In
          addition, one share of Series A Common Stock is reserved for each
          outstanding share of Series B Common Stock.

(10) INCOME TAXES

     Through the Spin-off Date, TSAT's results of operations were included in
     TCI's consolidated U.S. Federal income tax returns, in accordance with the
     existing tax sharing arrangements among TCI and its consolidated
     subsidiaries. Effective July 1, 1995 TCI, TCIC and certain other
     subsidiaries of TCI entered into a tax sharing agreement (the "Tax Sharing
     Agreement"), which formalized such pre-existing tax sharing arrangements
     and implemented additional provisions regarding the allocation of certain
     consolidated income tax attributes and the settlement procedures with
     respect to the intercompany allocation of current tax attributes. In
     connection with the Spin-off, the Tax Sharing Agreement was amended to
     provide that TSAT be treated as if it had been a party to the Tax Sharing
     Agreement, effective July 1, 1995. TSAT's intercompany income tax
     allocation through the Spin-off Date has been calculated in accordance with
     the Tax Sharing Agreement. Subsequent to the Spin-off Date, TSAT files
     separate U.S. Federal and state income tax returns.

     In connection with the Restructuring, TSAT and TCI entered into a tax
     sharing agreement dated June 1997, to confirm that pursuant to the amended
     Tax Sharing Agreement (i) neither TSAT nor any of its subsidiaries has any
     obligation to indemnify TCI or the TCI shareholders for any tax resulting
     from the Spin-off failing to qualify as a tax-free distribution pursuant to
     Section 355 of the Internal Revenue Code of 1986 (the "Code"); (ii) TCI is
     obligated to indemnify TSAT and its subsidiaries for any taxes resulting
     from the Spin-off failing to qualify as a tax-free distribution pursuant to
     Section 355 of the Code; (iii) to the best knowledge of TCI, TSAT's total
     payment obligation under the Tax Sharing Agreement could not reasonably be
     expected to exceed $5 million; and (iv) the sole agreement between TCI and
     TSAT or any of its subsidiaries relating to taxes is the Tax Sharing
     Agreement.

     TSAT recognized no income tax benefit during either of the years ended
     December 31, 1999, 1998 and 1997. As a result of the Spin-off, TSAT is no
     longer a part of the TCI consolidated tax group, and accordingly, is only
     able to realize income tax benefits for financial reporting purposes to
     the extent that such benefits offset TSAT's income tax liabilities or TSAT
     generates taxable income. For financial reporting purposes, all of TSAT'S
     income tax liabilities had been fully offset by income tax benefits at
     December 31, 1999, 1998 and 1997.

     Income tax benefit (expense) for the year ended December 31, 1999
     consists of:

<TABLE>
<CAPTION>
                                       Current    Deferred     Total
                                       -------    --------     -----
                                            amounts in thousands
<S>                                    <C>        <C>          <C>
Year ended December 31, 1999:
  Federal                              $  (650)     (1,197)    (1,847)
  State and local                           --       1,431      1,431
                                       -------    --------     ------
                                       $  (650)        234       (416)
                                       =======    ========     ======
</TABLE>

                                       II-26
<PAGE>
               TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                        December 31, 1999, 1998 and 1997


     Income tax benefit (expense) differs from the amounts computed by applying
     the Federal income tax rate of 35% as a result of the following (amounts in
     thousands):

<TABLE>
<CAPTION>
                                           YEARS ENDED DECEMBER 31,
                                        -------------------------------
                                         1999       1998        1997
                                        -------   ---------    -------
                                            amounts in thousands
<S>                                     <C>       <C>           <C>
Computed "expected" tax (expense)
   benefit                              (23,687)  $ 155,843     83,419
State and local income taxes, net
   of Federal income tax benefit            931          --     13,009
Issuance of common stock by subsidiary       --    (104,666)        --
Change in valuation allowance            15,695     (51,736)   (98,521)
Other                                     6,645         559      2,093
                                        -------   ---------    -------
                                        $  (416)         --         --
                                        =======   =========    ========

</TABLE>

     The tax effects of temporary differences that give rise to significant
     portions of the deferred tax assets and deferred tax liabilities at
     December 31, 1999 and 1998 are presented below:

<TABLE>
<CAPTION>

                                                                     DECEMBER 31,
                                                                ------------------------
                                                                   1999           1998
                                                                ----------     ---------
                                                                  amounts in thousands
<S>                                                             <C>            <C>
Deferred tax assets:
   Net operating loss carryforwards and tax credits             $  150,286      152,468
   Investment in  Phoenixstar, principally due to losses
     recognized for financial statement purposes in excess
     of losses recognized of tax purposes                               --       15,827
  Share appreciation right liability                                26,376           --
Future deductible amounts principally due to
  accruals deductible in later periods                                 642           --
Property and equipment, principally due to differences in
    depreciation net of increase in tax basis resulting from
    intercompany transfer                                                5           --
                                                                ----------     ---------
      Total deferred tax assets                                    177,309      168,295
Less - valuation allowance                                        (150,933)    (166,628)
                                                                ----------     ---------
      Net deferred tax assets                                       26,376        1,667
Deferred tax liability:

                                       II-27
<PAGE>
               TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                        December 31, 1999, 1998 and 1997

  Future gain related to unrealized appreciation on held
    for sale security                                               26,376           --
  Other                                                                 --        1,667
                                                                ----------     ---------
      Net deferred tax liability                                $       --           --
                                                                ==========     =========
</TABLE>

     The valuation allowances for deferred tax assets as of December 31, 1999
     and 1998 were $150,933,000 and $166,628,000, respectively. Such balances
     increased $15,195,000 and $51,736,000 from December 31, 1998 and 1997,
     respectively.

     The Company has analyzed the sources and expected reversal periods of its
     deferred tax assets. The Company believes that the tax benefits
     attributable to deductible temporary differences will be realized to the
     extent of future reversals of existing taxable temporary differences.

     At December 31, 1999, the Company had net operating loss carry forwards for
     income tax purposes aggregating approximately $390,565,000 of which, if not
     utilized to reduce taxable income in future periods, $18,953,000 expire in
     2010, $17,094,000 expire in 2011, $238,558,000 expire in 2012 and
     $115,960,000 expire in 2018.

(11) COMMITMENTS AND CONTINGENCIES

     The Company leases its office space under noncancelable operating leases.
     Future minimum rental payments on these leases are as follows (in
     thousands):

<TABLE>
<S>                                <C>
             2000                  $    186
             2001                       131
                                   --------
                                   $    317
                                   ========
</TABLE>

     Rent expense was approximately $23,000, $358,000 and $1,866,000 in 1999,
     1998 and 1997, respectively.

     The Company has contingent liabilities related to legal proceedings and
     other matters arising in the ordinary course of business. Although it is
     reasonably possible the Company may incur losses upon conclusion of such
     matters, an estimate of any loss or range of loss cannot be made. In the
     opinion of management, it is expected that amounts, if any, which may be
     required to satisfy such contingencies will not be material in relation to
     the accompanying financial statements.

                                       II-28
<PAGE>
               TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                        December 31, 1999, 1998 and 1997


(12) TRANSACTIONS WITH RELATED PARTIES

     Pursuant to the terms of the TSAT Merger Agreement, Phoenixstar reimbursed
     TSAT for all reasonable costs and expenses incurred by TSAT (i) to comply
     with its tax and financial reporting obligations, (ii) to maintain certain
     insurance coverage and (iii) to maintain its status as a publicly traded
     company. During the years ended December 31, 1999 and 1998, such
     reimbursements aggregated $376,000 and $152,000, respectively. The effects
     of such reimbursements have been reflected as a reduction of TSAT's
     investment in Phoenixstar.

     In addition, Phoenixstar makes advances to TSAT for the payment of certain
     costs related to the Tempo Satellite and the proposed high power strategy.
     Such advances aggregated $6,365,000 during 1998, and are included in due to
     Phoenixstar in the accompanying 1998 consolidated balance sheets.

     Certain former employees of TSAT, who are now employees of Phoenixstar,
     hold stock options, stock options with tandem stock appreciation rights,
     and restricted shares of TSAT (collectively, the "TSAT Options").
     Subsequent to the Restructuring, compensation expense related to the TSAT
     Options aggregated $1,541,000 and has been reflected as an increase in
     TSAT's investment in PRIMESTAR in the accompanying consolidated financial
     statements.

     Prior to the Restructuring, Phoenixstar Partners provided programming
     services to the Company and other authorized distributors in exchange for a
     fee based upon the number of subscribers receiving programming services. In
     addition, Phoenixstar Partners arranged for satellite capacity and uplink
     services, and provided national marketing and administrative support
     services in exchange of a separate authorization fee.

     Effective January 1, 1997, charges for customer fulfillment services
     provided by TCI were made pursuant to the Fulfillment Agreement entered
     into by the Company and TCIC in connection with the Spin-off. Pursuant to
     the fulfillment Agreement, TCIC continued to provide fulfillment services
     on an exclusive basis to the Company following the Spin-off with respect to
     customers of the PRIMESTAR-Registered Trademark- medium power service.
     Such services were performed in accordance with specified performance
     standards. Charges to TSAT pursuant to the Fulfillment Agreement
     aggregated $54,823,000 during 1997, of which $46,498,000 were capitalized
     installation costs. The Fulfillment Agreement terminated on
     December 31, 1997.

     Effective on the Spin-off Date, charges for administrative services
     provided by TCIC were made pursuant to the Transition Services Agreement.
     Pursuant to the Transition Services Agreement, TCI was obligated to provide
     to the Company certain services and other benefits. As compensation for the
     services rendered and for the benefits made available to the Company
     pursuant to the Transition Services Agreement, the Company was required to
     pay TCI a monthly fee of $1.50 per qualified subscribing household or other
     residential or commercial unit (counted as one subscriber regardless of the
     number of satellite receivers), up to a maximum of $3,000,000 per month,
     and to reimburse TCI quarterly for direct, out-of-pocket expenses incurred
     by TCI to third parties in providing the services. Amounts charged to TSAT
     pursuant to the Transition Services Agreement aggregated $3,174,000 and
     $11,579,000 for the years ended December 31, 1998 and 1997, respectively,
     and was included in selling, general and administrative expense in the
     accompanying consolidated statements of operations. Upon

                                       II-29
<PAGE>
               TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                        December 31, 1999, 1998 and 1997

     consummation of the Restructuring, TSAT and TCI agreed to terminate the
     Transition Services Agreement.

     Beginning in March 1997, and through the Closing Date, TCIC provided TSAT
     with customer support services from TCIC's Boise, Idaho call center.
     Amounts charged by TCIC to TSAT for such services aggregated $5,026,000
     and $12,173,000 during the years ended December 31, 1998 and 1997,
     respectively, and are included in selling, general and administrative
     expenses in the accompanying consolidated statements of operations.

     Certain key employees of the Company hold stock options in tandem with SARs
     with respect to certain common stock of TCI. In connection with the
     Spin-off, the Company assumed the stock compensation liability with respect
     to such TCI options and SARs. Estimates of the compensation related to the
     options and/or SARs granted to employees of the Company have been recorded
     in the accompanying financial statements, but are subject to future
     adjustment based upon the market value of the underlying TCI common stock
     and, ultimately, on the final determination of market value when the rights
     are exercised. Non-cash increases (decreases) to such estimated stock
     compensation liability aggregated $5,554,000 during the year ended December
     31, 1999. In 1999, 1998 and 1997, the Company recognized $6,261,000,
     $3,814,000 and $6,134,000, respectively, of stock compensation expense
     related to the aforementioned options with tandem SARs.

(13) SUBSEQUENT EVENTS

     Effective February 1, 2000, the Company entered into a Management Agreement
     with Phoenixstar pursuant to which the Company is managing Phoenixstar's
     affairs in exchange for a monthly management fee of $45,000.

     On March 16, 2000, the Company completed transactions with Liberty Media
     Corporation ("Liberty Media"). As a result of such transactions, the
     Company became the managing member (through its wholly-owned subsidiaries)
     of two new limited liability companies (collectively, the "Liberty Joint
     Ventures"), through which the Company holds interests in a number of
     satellite and related businesses. The Company also acquired from Liberty
     Media beneficial ownership in 5,084,745 shares of Sprint Corporation
     PCS common stock, having a market value of approximately $333 million as
     of March 24, 2000, in exchange for the issuance by the Company to Liberty
     Media of (i) Series A Preferred Stock of the Company with a liquidation
     value of $150 million and (ii) Series B Preferred Stock of the Company
     with a liquidation value of $150 million. The Series B Preferred Stock is
     convertible into Series B Common Stock of the Company at a conversion
     price of $8.84 per share, subject to adjustment, and prior to conversion
     represents approximately 85% of the voting power of the Company.

                                       II-30
<PAGE>

PART III.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The following lists the directors and executive officers of the Company, their
birth dates, a description of their business experience and positions held with
the Company, as of February 1, 2000.

<TABLE>
<CAPTION>
          NAME                                   POSITION
-------------------------  ------------------------------------------------------
<S>                        <C>
John C. Malone
Born March 7, 1941         Has served as Chairman of the Board and a director
                           of the Company since December 1996. Dr. Malone is also
                           currently the Chairman of the Board and a director of
                           Liberty Media Corporation. Dr. Malone served as Chief Executive
                           Officer of TCI from January 1994 until March 1999, and as
                           Chairman of the Board of TCI from November 1996 until March 1999.
                           Dr. Malone served as President of TCI from January 1994 to March
                           1997. Dr. Malone is also a director to AT&T, The Bank of New
                           York, USANi LLC, At Home Corporation, United GlobalCom, Inc. and
                           Cendant Corporation.

Gary S. Howard
Born February 22, 1951     Has served as Chief Executive Officer of the Company since
                           December 1996 and a director of the Company since November
                           1996. From February 1995 through August 1997, Mr. Howard
                           also served as President of the Company. Mr. Howard is also
                           currently the Executive Vice President and Chief Operating
                           Officer of Liberty Media Corporation. Mr. Howard
                           served as Executive Vice President of TCI from December 1997
                           to March 1999; as Chief Executive Officer, Chairman of the
                           Board and director of TV Guide, Inc. from June 1997 to March
                           1999; and as President and Chief Executive Officer of TCI
                           Ventures Group, LLC from December 1997 to March 1999. Mr. Howard
                           served as President of TV Guide, Inc. from June 1997 to
                           September 1997; and as Senior Vice President of TCI
                           Communications, Inc. from October 1994 to December 1996.
                           Mr. Howard is a director of Liberty Media Corporation, TV Guide,
                           Inc., Liberty Digital, Inc., and Teligent, Inc.


David P. Beddow
Born December 27, 1943     Has served as a director of the Company since December 1996.
                           Mr. Beddow has served as Vice President of Liberty Media
                           Corporation since April 1999. Mr. Beddow served as
                           Executive Vice President of TCIC and President and Chief
                           Executive Officer of NDTC from August 1998 until April 2000.
                           Prior to August 1998, Mr. Beddow served as Senior Vice
                           President of TCITV and NDTC since February 1995. Mr. Beddow
                           served as Vice President of TCI Technology, Inc. from June
                           1993 to February 1995.

William E. Johnson
Born June 23, 1941         Has served as a director of the Company since December 1996.
                           Mr. Johnson served as Chief Executive Officer of Scientific
                           Atlanta, Inc. from January 1987 until his retirement in
                           December 1992. Mr. Johnson served as a director of
                           Intelligent Electronic, Inc. from November 1994 to 1998 and
                           as a director of ATX, Inc. since January 1993.

</TABLE>

                                       III-1
<PAGE>

<TABLE>
<CAPTION>
          NAME                                   POSITION
-------------------------  ------------------------------------------------------
<S>                        <C>
John W. Goddard
Born May 4, 1941           Has served as a director of the Company since December 1996.
                           Mr. Goddard served as President and Chief Executive Officer
                           of the cable division of Viacom International, Inc. from
                           1980 until the division was sold in July 1996. Mr. Goddard
                           is also a director of Diva Systems Corporations, Phoenixstar,
                           Bend Cable Communications, Cable Television Laboratories, Inc.
                           (Cablelabs), and the Deafness Research Foundation and is a
                           Trustee of the Walter Kaitz Foundation.

Leo J. Hindery, Jr.
Born October 31, 1947      Has served as a director of the Company since November 1997.
                           Mr. Hindery is the Chief Executive Officer of Global
                           Crossings, Ltd. and of Global Center, Inc. Mr. Hindery served
                           as President and Chief Operating Officer of TCI, and as
                           President and a director of TCIC, from March 1997 until March 1999,
                           and as President and Chief Executive Officer of AT&T Broadband
                           and Internet Services from March 1999 until October 1999. Prior
                           to joining TCI, Mr. Hindery was the founder, Managing General
                           Partner and Chief Executive Officer of InterMedia Partners and its
                           affiliated entities since 1988. Mr. Hindery is also a
                           director of Tanning Technology Corp., TD Waterhouse Group, Inc.,
                           VerticalNet, Inc., and Phoenixstar.

Christopher Sophinos
Born January 26, 1952      Has served as President of the Company since September 1997,
                           and was previously Senior Vice President of the Company from
                           February 1996. Mr. Sophinos served as Senior Vice President
                           of Phoenixstar from April 1998 until August 1999. Mr.
                           Sophinos served as the President of Boats Unlimited from
                           November 1993 to September 1998 and has served as a director
                           of Sophinos & Sons, Inc. since November 1993.

Kenneth G. Carroll
Born April 21, 1955        Has served as Senior Vice President and Chief Financial
                           Officer of the Company since February 1995 and as Treasurer since
                           August 1999. He also served as Senior Vice President and Chief
                           Financial Officer of Phoenixstar since April 1998. From December
                           1994 to May 1997, Mr. Carroll served as Vice President of TCI K-1,
                           Inc. and as Vice President of United Artists K-1 Investments,
                           Inc. From April 1994 through January 1995, Mr. Carroll
                           served as Vice President of Business Operations and Chief
                           Financial Officer of Netlink USA, a subsidiary of TCI and
                           from July 1992 to May 1994, Mr. Carroll served as Senior
                           Director of Finance and Business Operations of Netlink.

William D. Myers
Born March 23, 1958        Served as Vice President and Treasurer of the Company from
                           September 1996 until August 1999. He also served as Vice
                           President and Treasurer of Phoenixstar from April 1998 until
                           August 1999. Mr. Myers served as Vice President of TCI Cable
                           Management Corporation from November 1994 through August
                           1996. Mr. Myers served as Director of Finance of TCI from
                           December 1991 to November 1994.

</TABLE>

                                       III-2
<PAGE>



<TABLE>
<CAPTION>
          NAME                                   POSITION
-------------------------  ------------------------------------------------------
<S>                        <C>
</TABLE>


The directors of the Company will hold office until the next annual meeting of
stockholders of the Company and until their successors are duly elected and
qualified. The executive officers named above will be elected to serve in such
capacities until the next annual meeting of the Company's Board of Directors
(the "TSAT Board"), or until their respective successors have been duly elected
and have been qualified, or until their earlier death, resignation,
disqualification or removal from office.

The Company's charter provides for a classified Board of Directors of not
less than three members, divided into three classes of approximately equal
size, with each class to be elected for a three-year term at each annual
meeting of stockholders. The exact number of directors is fixed by resolution
of the TSAT Board. In connection with the Spin-off, the number of directors
on the TSAT Board was fixed at five. On November 10, 1997, the TSAT Board
voted to increase the size of the TSAT Board from five to six, and to add Leo
J. Hindery, Jr. to fill the newly created directorship. For purposes of
determining their terms, directors are divided into three classes. The Class
I directors, whose terms were scheduled to expire at the 1997 annual
stockholders' meeting, are Mr. Beddow and Mr. Hindery. The Class II
directors, whose terms were to expire at the 1998 annual stockholders'
meeting, are Messrs. Howard and Johnson. The Class III directors, whose terms
were to expire at the 1999 annual stockholders' meeting, are Dr. Malone and
Mr. Goddard. On November 10, 1997, approximately 11 months after the
Spin-off, the TSAT Board determined that the 1997 annual stockholders meeting
would not be held, as a result of the pendency of the proposed Roll-up Plan,
which would have resulted in the merger of the Company with and into
Phoenixstar. On March 6, 1998, the Company held a special meeting of
stockholders to vote on the Roll-up Plan, which was approved by more than
66-2/3% of the outstanding voting power of the Series A Common Stock and
Series B Common Stock, voting together as a class. Due to the pendency of the
TSAT Merger in 1998 and the Hughes High Power Transaction and Medium Power
Transaction in 1999, the 1998 and 1999 annual stockholders meeting were also
deferred. The Company currently expects that the 2000 annual stockholders
meeting will be held during the summer of 2000. At the 2000 annual
stockholders meeting, TSAT stockholders will have an opportunity to vote with
respect to the election of two Class I directors (whose terms will expire in
2001), two Class II directors (whose terms will expire in 2002 and two Class
III directors (whose terms will expire in 2003.

There are no family relations by blood, marriage or adoption, of first cousin or
closer, among the above named individuals.

                                       III-3
<PAGE>

During the past five years, none of the persons named above has had any
involvement in such legal proceedings as would be material to an evaluation of
his ability or integrity.

Section 16(a) of the Security Exchange Act of 1934, as amended, requires the
Company's officers and directors, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Security and Exchange Commission
("SEC"). Officers, directors and greater-than-ten-percent shareholders are
required by SEC regulation to furnish the Company with copies of all Section
16(a) forms they file.

Based solely on review of the copies of Forms 3, 4 and 5 and amendments thereto
furnished to the Company with respect to its most recent fiscal year, or written
representations that no Forms 5 were required, the Company believes that, during
the year ended December 31, 1999, its officers, directors and
greater-than-ten-percent beneficial owner complied with all Section 16(a) filing
requirements.

ITEM 11. EXECUTIVE COMPENSATION

(a)  SUMMARY COMPENSATION TABLE

     Certain directors, officers and employees of TCI and its subsidiaries
     (including the Company, prior to the Spin-off) were granted options to
     purchase shares of Series A TCI Group Common Stock ("TCI Options") and
     stock appreciation rights with respect to shares of Series A TCI Group
     Common Stock ("TCI SARs"). The TCI Options and TCI SARs were granted
     pursuant to various stock plans of TCI (the "TCI Plans").

     Immediately prior to the Spin-off, each TCI Option was divided into two
     separately exercisable options: (i) an option to purchase Series A Common
     Stock (an "Add-on Company Option"), exercisable for the number of shares of
     Series A Common Stock that would have been issued in the Spin-off in
     respect of the shares of Series A TCI Group Stock subject to the applicable
     TCI Option, if such TCI Option had been exercised in full immediately prior
     to the Spin-off Date, and (ii) an option to purchase Series A TCI Group
     Stock (an "Adjusted TCI Option"), exercisable for the same number of shares
     of Series A TCI Group Stock as the corresponding TCI Option had been. The
     aggregate exercise price of each TCI Option was allocated between the
     Add-on Company Option and the Adjusted TCI Option into which it was
     divided, and all other terms of the Add-on Company Option and Adjusted TCI
     Option are in all material respects the same as the terms of such TCI
     Option. Similar adjustments were made to the outstanding TCI SARs,
     resulting in the holders thereof holding Adjusted TCI SARs and Add-on
     Company SARs instead of TCI SARs, and to outstanding restricted share
     awards, resulting in the holders thereof holding restricted shares of
     Series A Common Stock in addition to restricted shares of Series A TCI
     Group Stock, effective immediately prior the Spin-off.

     As a result of the foregoing, certain persons who remained TCI employees or
     non-employee directors after the Spin-off and certain persons who were TCI
     employees prior the Spin-off but became Company employees after the
     Spin-off hold both adjusted TCI Options and separate Add-on Company Options
     and/or hold both Adjusted TCI SARs and separate Add-on Company SARs. The
     obligations with respect to the Adjusted TCI Options, Add-on Company
     Options, Adjusted TCI SARs and Add-on Company SARs held by TCI employees
     and non-employee directors are obligations solely of TCI. The obligations
     with respect to the Adjusted TCI Options, Add-on Company Options, Adjusted
     TCI SARs and Add-on Company SARs held by persons who were Company employees
     at the time of the Spin-off and following the Spin-off were no longer TCI
     employees ("Company Employees") are obligations solely of the Company.
     Prior to the Spin-off, TCI and the Company entered into an agreement to
     sell to each other from time to time at the then current market price
     shares of Series A TCI Group Common Stock and Series A Common Stock,
     respectively, as necessary to satisfy their respective obligations under
     such securities.

                                       III-4
<PAGE>

     The following table is a summary of all forms of compensation paid by the
     Company to the officers named therein for services rendered in all
     capacities to the Company for the fiscal years ended December 31, 1999,
     1998, and 1997 (total of four persons).

<TABLE>
<CAPTION>

                                                   ANNUAL COMPENSATION                LONG-TERM COMPENSATION
                                         ----------------------------------------   ---------------------------
                                                                        OTHER                      SECURITIES          ALL
      NAME AND                                                          ANNUAL       RESTRICTED    UNDERLYING         OTHER
 PRINCIPAL POSITION                                                  COMPENSATION      STOCK        OPTIONS/      COMPENSATION
  WITH THE COMPANY              YEAR      SALARY          BONUS          (4)           AWARD          SARS             (8)
--------------------            ----     --------        -------     ------------   -----------    -----------    -----------
<S>                             <C>      <C>             <C>         <C>          <C>             <C>            <C>
Gary S. Howard (1)              1999     $     --             --          --             --             --             --
  (Chief Executive Officer)     1998           --             --          --             --             --        $    --
                                1997      215,519        120,600       2,976      1,000,000(5)          --         17,158

Christopher Sophinos (2)        1999       51,923(3)          --          --             --        425,000(7)          --
   (President)                  1998       51,626         35,500          --             --             --          4,667
                                1997      174,538         70,000          --        400,000(5)     100,000(6)      10,240

Kenneth G. Carroll (2)          1999           --             --          --             --        425,000(7)          --
  (Senior Vice President        1998       51,827         35,500          --             --             --          4,590
   and Chief Financial          1997      174,538         78,846       2,182        400,000(5)     100,000(6)       9,934
   Officer)

William D. Meyers (2)           1999           --             --          --             --             --             --
  (Vice President and           1998       41,731         26,000          --             --             --          2,617
  Treasurer)                    1997      139,827         35,000       2,352        400,000(5)     100,000(6)       9,711

</TABLE>

                                       III-5
<PAGE>

(1)  Effective June 1, 1997 and through December 31, 1997, TSAT and UVSG agreed
     that 75% of Mr. Howard's annual salary was to be charged to UVSG, of which
     Mr. Howard is a director and chief Executive Officer. The 1997 amount
     represents Mr. Howard's 1997 annual salary less amount charged to UVSG
     ($215,481). Subsequent to December 31, 1997, all of Mr. Howard's annual
     salary is charged to UVSG and other TCI subsidiaries.

(2)  In connection with the Restructuring and effective April 1, 1998, Messrs.
     Sophinos, Carroll and Myers became officers of Phoenixstar; and from that
     date forward, all of such officers' compensation for 1998 was paid by
     Phoenixstar. Accordingly, the 1998 compensation information included in the
     table represents three months of employment.

(3)  Mr. Sophinos' employment by Phoenixstar terminated on August 31, 1999. Mr.
     Sophinos began receiving compensation from TSAT on September 1, 1999.
     Accordingly, the 1999 compensation information included in the table
     represents four months of employment.

(4)  Consists of amounts reimbursed during the year for the payment of taxes.

(5)  Pursuant to the TCI Satellite Entertainment, Inc. 1996 Stock Incentive Plan
     (the "TSAT 1996 Plan"), Mr. Howard was granted 125,000 restricted shares of
     Series A Common Stock and Messrs. Sophinos, Carroll and Myers were each
     granted 50,000 restricted shares vested as to 50% on each of January 1,
     2001 and January 1, 2002. On November 10, 1997, the TSAT Board and the
     Compensation Committee of the TSAT Board approved modifications to the
     terms of such awards, accelerating the vesting provisions to provide for
     vesting of 50% on February 3, 1999 and as to the remaining 50% on February
     3, 2000. The value of Mr. Howard's unvested restricted shares at the end of
     1999 was $1,000,000, and the value of each of Messrs. Sophinos', Carroll's
     and Myers' unvested restricted shares at the end of 1999 was $400,000. The
     Company has not paid cash dividends on the Series A common Stock and does
     not anticipate paying cash dividends on the Series A Common Stock at any
     time in the foreseeable future.

(6)  Pursuant to the TSAT 1996 Plan, Messrs. Sophinos, Carroll and Myers were
     each granted options with tandem SARs to purchase 100,000 shares of Series
     A Common Stock at a purchase price of $8.00. As originally granted each
     such grant of options vests evenly over five years with such vesting period
     beginning January 1, 1997, first became exercisable on January 1, 1998 and
     expires on December 31, 2006. On November 10, 1997, the TSAT Board and the
     TSAT compensation committee approved modifications to the vesting of all
     options issued pursuant to the TSAT 1996 Plan, accelerating the vesting
     schedules under such options from five to three years, commencing February
     1998.

(7)  Pursuant to the TSAT 1996 Plan, Messrs. Sophinos and Carroll were each
     granted options to purchase 200,000 shares of Series A Common Stock at a
     purchase price of $7.125 and 225,000 shares of Series A Common stock at a
     purchase price of $8.84.

                                       III-6
<PAGE>

(8)  Includes TSAT contributions to the TSAT Employee Stock Purchase Plan
     (the "TSAT ESPP") from January 1, 1997 through March 31, 1998. All named
     executives were fully vested in such plans. Directors who are not
     employees of TSAT are ineligible to participate in the TSAT ESPP. The
     TSAT ESPP, a defined contribution plan, enables participating employees
     to acquire a proprietary interest in TSAT and benefits upon retirement.
     Under the terms of the TSAT ESPP, employees were eligible for
     participation after one year of service. The TSAT ESPP's normal
     retirement age is 65 years. Participants could contribute up to 10% of
     their compensation and TSAT (by annual resolution of the TSAT Board)
     could contribute up to a matching 100% of the participants'
     contributions. The TSAT ESPP included a salary deferral feature in
     respect of employee contributions. Forfeitures (due to participants'
     withdrawal prior to full vesting) were used to reduce TSAT's otherwise
     determined contributions. In connection with the Restructuring and
     effective June 30, 1998, the TSAT ESPP was merged into the Phoenixstar,
     Inc. 401(k) Savings Plan. Also includes insurance premiums paid by TSAT
     in 1998 for the benefit of Messrs. Sophinos, Carroll and Myers in the
     amount of $245, $148 and $113, respectively, and in 1997 for the benefit
     of Messrs. Howard, Sophinos, Carroll and Myers in the amount of $2,158,
     $740, $434 and $211, respectively.

(b)  OPTION AND SARS GRANTS IN LAST FISCAL YEAR

     The following table discloses information regarding stock options granted
     during the year ended December 31, 1999 to each of the named executive
     officers of the Company in respect of shares of Class A Common stock under
     the TSAT 1996 Plan.

<TABLE>
<CAPTION>
                                               % OF
                            NUMBER OF         TOTAL                  MARKET
                            SECURITIES      GRANTED TO    EXERCISE  PRICE ON
                            UNDERLYING    OFFICERS AND    OR BASE     GRANT                          GRANT DATE
                            OPTIONS         EMPLOYEES     PRICE       DATE                            PRESENT
       NAME                 GRANTED (1)       1999        ($/SH)    ($/SH)(2)   EXPIRATION DATE       VALUE (3)
---------------------       -----------    ----------     ------    ---------   ----------------      ---------
<S>                         <C>            <C>            <C>       <C>        <C>                   <C>
Gary S. Howard                   --              --          --         --            --                    --
Christopher Sophinos        200,000           16.80%       7.125       7.125     December 1, 2009    1,218,600
                            225,000           18.90%       8.84        7.125     December 1, 2009    1,342,800
Kenneth G. Carroll          200,000           16.80%       7.125       7.125     December 1, 2009    1,218,600
                            225,000           18.90%       8.84        7.125     December 1, 2009    1,342,800
William D. Meyers                --              --          --         --            --                    --

</TABLE>

(1)  Effective December 1, 1999 certain key employees and officers of TSAT
     were granted, pursuant to the TSAT 1996 Plan, an aggregate of 628,000
     options to acquire shares of Class A Common stock at a per share
     exercise price of $7.125 and 562,500 options to acquire shares of Class
     A Common Stock at a per share exercise price of $8.84 (the "1999
     Grant"). Each such grant of options vests over a five-year period
     beginning on the date of grant, first becomes exercisable as to 25% on
     the second anniversary of the date of grant and becomes exercisable as
     to an additional 25% on each of the third, fourth, and fifth
     anniversaries of the date of grant, and expires on

                                       III-7
<PAGE>

     December 1, 2009.

(2)  Represents the closing market price per share of TSAT Series A Common Stock
     on December 1, 1999, the date of grant.

(3)  The value shown is based on the Black-Scholes model and is stated in
     current annualized dollars on a present value basis. The key assumptions
     used in the model for purposes of this calculation include the following:
     (a) a 5% discount rate; (b) a 84% volatility factor; (c) the 10-year
     option term; (d) the closing price of TSAT Series A Common Stock on
     December 1, 1999; and (e) a per share exercise price of $7.125 or $8.84
     accordingly. The actual value an executive may realize will depend upon
     the extent to which the stock price exceeds the exercise price on the date
     the option is exercised. Accordingly, the value, if any, realized by an
     executive will not necessarily be the value determined by the model.

(c)  AGGREGATED TSAT OPTION/SAR EXERCISES AND FISCAL YEAR-END TSAT OPTION/SAR
     VALUES

     The following table provides, for the executives named in the Summary
     Compensation Table, information on (i) the exercise during the year ended
     December 31, 1999, of options with respect to shares of Series A Common
     Stock, (ii) the number of shares of Series A Common Stock represented by
     unexercised options owned by them at December 31, 1999, and (iii) the value
     of those options as of the same date.

<TABLE>
<CAPTION>

                                                                   NUMBER OF
                                                                   SECURITIES           VALUE OF
                                                                   UNDERLYING         UNEXERCISED
                                                                   UNEXERCISED       IN-THE-MONEY
                                                                     OPTIONS/          OPTIONS/
                                                                     SARS AT            SARS AT
                                                                   DECEMBER 31,       DECEMBER 31,
                                          SHARES                       1999               1999
                                         ACQUIRED     VALUE        EXERCISABLE/       EXERCISABLE/
               NAME                    ON EXERCISE   REALIZED      UNEXERCISABLE      UNEXERCISABLE
         ------------------            ------------  --------      -------------      -------------
<S>                                    <C>           <C>           <C>                <C>
         Gary S. Howard
            Exercisable Series A            --         $     --         425,446        $  2,844,901
            Unexercisable Series A          --               --         268,630           1,923,391
         Christopher Sophinos
            Exercisable Series A            --               --          66,667             533,336
            Unexercisable Series A          --               --         458,333           3,652,664
</TABLE>

                                       III-8
<PAGE>

<TABLE>
<CAPTION>

                                                                   NUMBER OF
                                                                   SECURITIES           VALUE OF
                                                                   UNDERLYING         UNEXERCISED
                                                                   UNEXERCISED       IN-THE-MONEY
                                                                     OPTIONS/          OPTIONS/
                                                                     SARS AT            SARS AT
                                                                   DECEMBER 31,       DECEMBER 31,
                                          SHARES                       1999               1999
                                         ACQUIRED     VALUE        EXERCISABLE/       EXERCISABLE/
               NAME                    ON EXERCISE   REALIZED      UNEXERCISABLE      UNEXERCISABLE
         ------------------            ------------  --------      -------------      -------------
<S>                                    <C>           <C>           <C>                <C>
         Kenneth G. Carroll
            Exercisable Series A            --           --            68,467         $   533,336
            Unexercisable Series A          --           --           458,683           3,652,664
         William D. Myers
            Exercisable Series A            --           --           101,900             800,000
            Unexercisable Series A          --           --                --                  --
</TABLE>

(d)  COMPENSATION OF DIRECTORS

     Members of the TSAT Board who are also full-time employees of the Company
     or Liberty Media, or any of their respective subsidiaries, do not receive
     any additional compensation for their services as directors. Directors who
     are not full-time employees of the Company or Liberty Media, or any of
     their respective subsidiaries, receive a retainer of $30,000 per year. All
     members of the TSAT Board are also reimbursed for expenses incurred to
     attend any meeting of the TSAT Board or any committee thereof. In addition,
     on March 6, 1998, the TSAT stockholders approved the TCI Satellite
     Entertainment, Inc. 1997 Nonemployee Director Stock Option Plan (the "TSAT
     DSOP"). Pursuant to the TSAT DSOP, each of the persons who were directors
     of the Company, but not employees of the Company or any of the Company's
     subsidiaries (each such director, a "Nonemployee Director") as of
     February 3, 1997 has been granted options to purchase 50,000 shares of
     Series A Common Stock, and each person who becomes a Nonemployee Director
     after February 3, 1997 will be automatically granted options to purchase
     50,000 shares of Series A Common Stock upon such person's becoming a
     director. The TSAT DSOP provides that the per share exercise price of each
     option granted under the TSAT DSOP will be equal to the fair market value
     of the Series A Common Stock on the date such option is granted. In
     general, fair market value is determined by reference to the last sale
     price for shares of Series A Common Stock on the date of grant.


                                       III-9
<PAGE>

(e)  ADDITIONAL INFORMATION WITH RESPECT TO COMPENSATION COMMITTEE INTERLOCKS
     AND INSIDER

     PARTICIPATION IN COMPENSATION DECISIONS

     The members of the Company's compensation committee are Messrs. William E.
     Johnson and John. W. Goddard, each a director of the Company. None of the
     members of the compensation committee are or were officers of the Company
     or any of its subsidiaries.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

(a)  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS

     The following table lists stockholders believed by the Company to be the
     beneficial owners of more than five percent of the outstanding Company
     Common Stock as of December 31, 1999. Shares issuable upon exercise of
     options and upon vesting of restricted shares are deemed to be outstanding
     for the purpose of computing the percentage ownership and overall voting
     power of persons believed to beneficially own such securities, but have not
     been deemed to be outstanding for the purpose of computing the percentage
     ownership or overall voting power of any other person. Voting power in the
     table is computed with respect to a general election of directors. So far
     as is known to the Company, the persons indicated below have sole voting
     and investment power with respect to the shares indicated as believed to be
     owned by them except as otherwise stated in the notes to the table.

<TABLE>
<CAPTION>

    NAME AND ADDRESS                 TITLE      NUMBER OF SHARES         PERCENT       VOTING
  OF BENEFICIAL OWNER              OF CLASS    BENEFICIALLY OWNED     OF CLASS (1)    POWER (1)
--------------------------         ---------   ------------------     ------------    ---------
<S>                                <C>         <C>                    <C>             <C>
John C. Malone,
   Chairman of the Board
   5619 DTC Parkway                Series A        909,845(3)             1.4%          23.9%
   Englewood, Colorado             Series B      3,439,958(4)            40.6%

Kim Magness
   (individually as
   a member of Magness
   Security LLC
   4000 E. Belleview               Series A        383,806(2)(7)         0.61%           21.3%
   Greenwood Village, Colorado     Series B      3,745,206(2)            25.6%

Gary Magness
   (as co-representative
   of the estate of Bob
   Magness)
   29 Sunset Drive                 Series A        243,373                 *            21.3%
   Englewood, Colorado             Series B      3,120,770(2)            36.9%

The Associated Group, Inc.
   200 Gateway Towers              Series A      1,247,997(5)             2.0%           5.6%
   Pittsburgh, Pennsylvania        Series B        707,185(6)             8.4%

</TABLE>

                                       III-10
<PAGE>

<TABLE>
<CAPTION>

    NAME AND ADDRESS                 TITLE      NUMBER OF SHARES         PERCENT       VOTING
  OF BENEFICIAL OWNER              OF CLASS    BENEFICIALLY OWNED     OF CLASS (1)    POWER (1)
--------------------------         ---------   ------------------     ------------    ---------
<S>                                <C>         <C>                    <C>             <C>
Tudor Investment Corporation
   600 Steamboat Road              Series A      4,238,670(8)             6.7%           2.9%
   Greenwich, CT  06830

Paul Tudor Jones, II
   c/o Tudor Investment            Series A      4,519,100(8)             7.2%           3.1%
   Corporation
   600 Steamboat Road
   Greenwich, CT  06830

</TABLE>

     *Less than one percent.

(1)  Based on 62,894,446 shares of Series A Common Stock and 8,465,224 shares of
     Series B Common Stock outstanding as of December 31, 1999.

(2)  Effective January 5, 1998, Mr. Kim Magness and Mr. Gary Magness were
     appointed co-Personal Representatives of the Estate of Bob Magness.

(3)  Assumes the exercise in full of all Add-On Company Options and Add-On
     Company SARS, whether or not then exercisable or in-the-money, in respect
     of the following: (i) stock options granted in tandem with SARs in November
     of 1992 to acquire 100,000 shares of Series A Common Stock, all of which
     options are currently exercisable; and (ii) stock options granted in tandem
     with SARs in December of 1995 to acquire 100,000 shares of Series A Common
     Stock, of which options to purchase 80,000 shares are currently
     exercisable. Also assumes the exercise in full of options to purchase
     50,000 shares of Series A Common Stock granted pursuant to the TSAT DSOP
     effective February 3, 1997, 33,333 of which options are vested.

(4)  Includes 117,300 shares of Series B Common Stock held by Dr. Malone's wife,
     Mrs. Leslie Malone, but Dr. Malone disclaims any beneficial ownership of
     such shares.

(5)  The number of shares in the table is based on information provided by the
     respective stockholder.

(6)  The number of shares in the table is based upon information provided by The
     Associated Group on February 26, 1998. Said corporation has shared voting
     power and dispositive power over 707,185 shares of Series B Common Stock.

(7)  Includes 210,533 shares of Series A Common Stock and 634,621 shares of
     Series B common Stock held by Magness Securities LLC. Mr. Magness is
     deemed to have beneficial ownership over such shares as a member of Magness
     Securities LLC. Also assumes the exercise in full of all Add-on Company
     Options and Add-on Company SARs, whether or not then exercisable or
     in-the-money of stock options granted in November of 1994 to acquire
     5,000 shares of Series A Common Stock, all of which options are currently
     exercisable.

                                       III-11
<PAGE>

(8)  The number of shares in the table is based upon a Schedule 13G, dated
     February 14, 2000, filed by Tudor Investment Corporation which Schedule 13G
     reflects that said company has shared voting power over 4,238,670 shares
     and shared dispositive power over 4,238,670 shares of Series A Common
     Stock.

(9)  The number of shares in the table is based upon a Schedule 13G, dated
     February 14, 2000, filed by Paul Tudor Jones, II, which Schedules 13G
     reflects that said individual has shared voting power over 4,519,100 shares
     and shared dispositive power over 4,519,100 shares of Series A Common
     Stock.

(b)  SECURITY OWNERSHIP OF MANAGEMENT

     The following table lists the number of shares of Company Common Stock
     believed to be owned beneficially by each director and each of the
     executive officers named in the above Summary Compensation Table, and
     all directors and executive officers as a group as of December 31, 1999,
     according to data furnished by the persons named. Shares issuable
     upon exercise of options and upon vesting of restricted shares are deemed
     to be outstanding for the purpose of computing the percentage ownership and
     overall voting power of persons believed to beneficially own such
     securities, but have not been deemed to be outstanding for the purpose of
     computing the percentage ownership or overall voting power of any other
     persons. Voting power in the table is computed with respect to a general
     election of directors. So far as is known to the Company, the persons
     indicated below have sole voting and investment power with respect to the
     shares indicated as believed to be owned by them.

<TABLE>
<CAPTION>

                                                                                  VOTING
        NAME                     SERIES A        SERIES B     SERIES A  SERIES B POWER (1)
----------------------         -----------    --------------  --------  -------- ---------
<S>                           <C>             <C>             <C>       <C>      <C>
Directors:
  John C. Malone                909,845(2)      3,439,958(3)    1.5%    40.6%      23.9%
  Gary S. Howard                824,215(4)             --       1.4%      --         *
  David P. Beddow               414,300(5)             --        *        --         *
  William E. Johnson             50,200(6)             10        *        *          *
  John W. Goddard                51,408(6)(7)       1,425(7)     *        *          *
  Leo J. Hindery, Jr             50,000(6)             --        *        --         *
Other named executive
  officers:
   Christopher Sophinos         575,000(8)             --        *        --         *

   Kenneth G. Carroll           577,170(9)             --        *        --         *
   William D. Myers             151,974(10)            --        *        --         *
All directors and
  executive officers
  as a group (nine persons)   3,604,112         3,441,393       5.7%    40.7%      25.8%

</TABLE>

     *Less than one percent.

(1)  Based on 62,894,446 shares of Series A Common Stock and 8,465,224 shares of
     Series B Common Stock outstanding as of December 31, 1998.

(2)  Assumes the exercise in full of all Add-On Company Options and Add-On
     Company SARs, whether or not then exercisable or in-the-money, in respect
     of the following: (1) stock options granted in tandem with SARs in November
     of 1992 to acquire 100,000 shares of Series A

                                       III-12
<PAGE>

     Common Stock, all of which options are currently exercisable; and (ii)
     stock options granted in tandem with SARs in December of 1995 to acquire
     100,000 shares of Series A Common Stock, of which options to purchase
     80,000 shares are currently exercisable. Also assumes the exercise in full
     of options to purchase 50,000 shares of Series A Common Stock granted
     pursuant to the TSAT DSOP effective February 3, 1997, of which options to
     purchase 33,333 shares are currently vested.

(3)  Includes 117,300 shares of Series B Common Stock held by Dr. Malone's wife,
     Mrs. Leslie Malone, but Dr. Malone disclaims any beneficial ownership of
     such shares.

(4)  Assumes the exercise in full of all Add-On Company Options and Add-On
     Company SARs, whether or not then exercisable or in-the-money, in respect
     of the following: (i) stock options granted in tandem with SARs in November
     of 1992 to acquire 5,000 shares of Series A Common Stock, all of which
     options are currently exercisable; (ii) stock options in tandem with SARs
     granted in October of 1993 to acquire 5,000 shares of Series A Common
     Stock, all of which options are currently exercisable; (iii) stock options
     in tandem with SARs granted in November of 1994 to acquire 5,000 shares of
     Series A Common Stock, all of which options to are currently exercisable;
     (iv) stock options granted in tandem with SARs in December of 1995 to
     purchase 15,000 shares of Series A Common Stock, of which options to
     acquire 12,000 shares are currently exercisable; and (v) stock options
     granted in December of 1996 to purchase 664,076 shares of Series A Common
     Stock, of which options to acquire 398,446 shares are currently
     exercisable. Additionally assumes the vesting in full of 126,500 restricted
     shares of Series A Common Stock, 63,250 of which are currently vested. Also
     includes 1,022 shares of Series A Common Stock held by trusts in which Mr.
     Howard is beneficial owner as trustee for his children.

(5)  Assumes the exercise in full of all Add-On Company Options and Add-On
     Company SARs, whether or not then exercisable or in-the-money, in respect
     of the following: (i) stock options granted in tandem with SARs in October
     of 1993 to acquire 750 shares of Series A Common Stock, all of which
     options are currently exercisable; (ii) stock options granted in tandem
     with SARs in November of 1994 to acquire 5,000 shares of Series A Common
     Stock, all of which are currently exercisable; (iii) stock options granted
     in tandem with SARs in December of 1995 to purchase 25,000 shares of Series
     A Common Stock, of which options to purchase 20,000 shares are currently
     exercisable; and (iv) stock options granted in December of 1996 to purchase
     332,038 shares of Series A Common Stock, of which options to acquire
     199,223 shares are currently exercisable. Additionally assumes the vesting
     in full of 1,500 restricted shares of Series A Common Stock, 750 of which
     are currently vested. Also assumes the exercise in full, whether or not
     then exercisable or in-the-money, of options to purchase 50,000 shares of
     Series A Common Stock granted pursuant to the TSAT DSOP effective February
     3, 1997, of which options to purchase 33,334 shares are currently vested.

(6)  Assumes the exercise in full, whether or not then exercisable or
     in-the-money, of options to purchase 50,000 shares of Series A Common Stock
     granted pursuant to the TSAT DSOP, of which options to purchase 33,334
     shares are currently vented.

(7)  Includes 478 shares of Series A Common Stock held by Mr. Goddard's wife, of
     which Mr. Goddard is beneficial owner, and 129 shares of Series B Common
     Stock held by a trust in which Mr. Goddard is beneficial owner as trustee.

(8)  Assumes the exercise in full, whether or not then exercisable or
     in-the-money, of stock options granted in tandem with SARs in February of
     1997 to purchase 100,000 shares of Series A Common Stock, of which options
     to purchase 66,667 shares are currently exercisable, and assumes the
     vesting in full of 50,000 restricted shares of Series A Common Stock,
     25,000 of

                                       III-13
<PAGE>

     which are currently vested. Additionally assumes the exercise in full,
     whether or not then exercisable or in-the-money of stock options granted in
     December of 1999 to purchase 425,000 shares of Series A Common Stock, none
     of which are currently exercisable.

(9)  Assumes the exercise in full of all Add-On Company Options and Add-On
     Company SARs, whether or not then exercisable or in-the-money, in respect
     of the following: (1) stock options granted in tandem with SARs in November
     of 1994 to acquire 400 shares of Series A Common Stock, all of which
     options are currently exercisable; and (ii) stock options granted in tandem
     with SARs in December of 1995 to purchase 1,750 shares of Series A Common
     Stock, of which options to purchase 1,400 shares of Series A Common Stock
     are currently exercisable. Additionally assumes the exercise in full,
     whether or not then exercisable or in-the-money, of stock options granted
     in tandem with SARs in February of 1997 to purchase 100,000 shares of
     Series A Common Stock, of which options to purchase 66,667 shares are
     currently exercisable, and assumes the vesting in full of 50,000 restricted
     shares of Series A Common Stock, 25,000 of which are currently vested.
     Additionally assumes the exercise in full, whether or not then exercisable
     or in-the-money, of stock options granted in December of 1999 to purchase
     425,000 shares of Series A Common Stock, none of which are currently
     exercisable.

(10) Assumes the exercise in full of all Add-On Company Options and Add-On
     Company SARs, whether or note then exercisable or in-the-money, in respect
     of the following: (i) stock options granted in tandem with SARs in November
     of 1994 to acquire 900 shares of Series A Common Stock, all of which
     options are currently exercisable; and (ii) stock options granted in tandem
     with SARs in December of 1995 to purchase 1,000 shares of Series A Common
     Stock, all of which options are currently exercisable. Additionally assumes
     the exercise in full, whether or not then exercisable or in-the-money, of
     stock options granted in tandem with SARs in February of 1997 to purchase
     100,000 shares of Series A Common Stock, all of which options are currently
     exercisable, and assumes the vesting in full of 50,000 restricted shares of
     Series A Common Stock, all of which are currently vested.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     Prior to the March 9, 1999 merger of TCI into AT&T, John Malone was the
     Chairman of the Board and a director of TCI and also the Chairman of the
     Board and a director of the Company. Dr. Malone was also a principal
     stockholder of TCI and currently is a principal stockholder of the Company.

     The Company was formed in connection with the Spin-off to own and operate
     certain businesses of TCI constituting all of TCI's interests in the
     digital satellite business. On the Spin-off Date, TCI distributed all the
     shares of Company Common Stock held by TCI to the holders of record of TCI
     Group Stock, on the basis of one share of Series A Stock for each ten
     shares of Series A TCI Group

                                       III-14
<PAGE>

     Stock, and one share of Series B Common Stock for each ten shares of Series
     B TCI Group Stock held by such holders.

     Since the consummation of the Spin-off, the Company and TCI have operated
     independently. However, for the purposes of governing certain of the
     ongoing relationships between the Company and TCI after the Spin-off, and
     to provide mechanisms for an orderly transition, the Company and TCI
     entered into various agreements, including the "Reorganization Agreement",
     the "Transition Services Agreement," an amendment to TCI's existing "Tax
     Sharing Agreement," the "Indemnification Agreements," the "Trade name and
     Service Mark Agreement" and the "Share Purchase Agreement," all of which
     are described below.

     REORGANIZATION AGREEMENT. On the Spin-off Date, TCI, TCIC and a number of
     other TCI subsidiaries, including the Company, entered into the
     Reorganization Agreement, which provided for, among other things, the
     principal corporate transactions required to effect the Spin-off, the
     conditions thereto and certain provisions governing the relationship
     between the Company and TCI with respect to and resulting from the
     Spin-off.

     Pursuant to the Reorganization Agreement, the Company assumed TCI's
     obligations under options granted to Brendan R. Clouston, Larry E. Romrell
     and David P. Beddow to purchase shares of Series A Common Stock
     representing 1.0%, 1.0% and 0.5%, respectively, of the shares of Company
     Common Stock issued and outstanding on the Spin-off Date, determined
     immediately after giving effect to the spin-off but before giving effect to
     the issuance of the shares of Series A Common Stock issuable upon exercise
     of such options; and granted an option to TCI to purchase up to 4,765,000
     shares of Series A Common Stock (as such number may be adjusted to reflect
     stock dividends, stock splits and the like), for a purchase price equal to
     the par value of such shares, as necessary to satisfy TCI's obligations to
     deliver shares of Series A Common Stock upon conversion of certain
     convertible securities of TCI as a result of the Spin-off. During the year
     ended December 31, 1999, the Company issued 3,451,880 shares of Series A
     Common Stock to TCI under this arrangement.


                                       III-15
<PAGE>

     TRADE NAME AND SERVICE MARK LICENSE AGREEMENT. Pursuant to the Trade Name
     and Service Mark License Agreement (the "License Agreement"), TCI granted
     to the Company, for an initial term of three years following the
     Distribution, a non-exclusive non-assignable license to use certain trade
     names and service marks specifically identified in the License Agreement,
     including the mark "TCI" in the context of the Digital Satellite Business.
     The License Agreement provides, among other things, that all advertising,
     promotion and use of certain of TCI's trade names and service markets by
     the Company shall be consistent wit TCI guidelines and standards, as well
     as subject to TCI approval in certain circumstances. Since the
     Distribution, the Company has taken steps to phase out the use of the TCI
     names and marks covered by the License Agreement, except in connection with
     its corporate name. The Company and TCI amended the License Agreement
     immediately prior to the closing of the Restructuring to reflect such
     limited use. The License Agreement has now expired.

     OTHER ARRANGEMENTS. On the Spin-off Date, TCI and the Company entered into
     the Share Purchase Agreement, which obligates TCI and the Company to sell
     to each other from time to time, at the then current market price, shares
     of Series A TCI Group Common Stock and Series A Common Stock, respectively,
     as necessary to satisfy their respective obligations under Adjusted TCI
     Options and Add-on Company Options held after the Spin-off Date by their
     respective employees and non-employee directors. During the year ended
     December 31, 1999, the Company did not issue shares of Series A Common
     Stock to TCI under this arrangement.

     Certain officers of the Company who were officers or directors of TCI
     and/or TCIC prior to the Spin-off received undertakings of indemnification
     from TCI and/or TCIC. Such undertakings survived the Spin-off.

     In June 1996, the TCI Board authorized TCI to permit certain of its
     executive officers to acquire the equity interests in certain of TCI's
     subsidiaries. In connection therewith, the TCI Board approved the
     acquisition by each of Brendan R. Clouston and Larry E. Romrell, executive
     officers of TCI, of 1.0% of the net equity of the Company. The TCI Board
     also approved the acquisition by Gary S. Howard, an executive officer of
     TCIC prior to the Spin-off Date and chief executive officer and a director
     of the Company, of 1.0% of the net equity of the Company and the
     acquisition by David P. Beddow, an executive officer of certain TCI
     subsidiaries and a director of the Company, of 0.5% of the net equity of
     the Company. The TCI Board determined to structure such transactions as
     grants to such persons of options to purchase shares of Series A Common
     Stock representing 1.0% (in the case of each of Messrs. Clouston, Romrell
     and Howard) and 0.5% (in the case of Mr. Beddow) of the shares of Series A
     Common Stock and Series B Common Stock issued and outstanding on the
     Spin-off Date, determined immediately after giving effect to the Spin-off,
     but before giving effect to any exercise of such option ("Distribution Date
     Options"). Distribution Date Options to purchase 2,324,266 shares of Series
     A Common Stock at a per share price of $8.86 were granted on the Spin-off
     Date. Pursuant to the Reorganization Agreement, and (in the case of the
     options granted to Messrs. Clouston, Romrell and Beddow) in partial
     consideration for the capital contribution made by TCI to the Company in
     connection with the Spin-off, the Company agreed, effective as of the
     Spin-off Date, to bear all obligations under such options and to enter into
     stock option agreements with respect to such options with each of Messrs.
     Clouston, Romrell, Howard and Beddow.

                                       III-16
<PAGE>

                                  SIGNATURES

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

                                       TCI SATELLITE ENTERTAINMENT, INC.


                                       By: /s/ Gary S. Howard
                                          ------------------------------
                                          Name: Gary S. Howard
                                          Title:  Chief Executive Officer

Dated March 31, 2000

     Pursuant to the Securities Exchange Act of 1934, this report has been
signed by the following persons on behalf of the Registrant and in the
capacities and on the date indicated:

<TABLE>
<CAPTION>

           Signature                         Title                             Date
           ---------                         -----                             ----
<S>                               <C>                                      <C>

/s/ John C. Malone
---------------------------       Chairman of the Board and                March 31, 2000
John C. Malone                        Director

/s/ Gary S. Howard
---------------------------       Director and Chief Executive             March 31, 2000
Gary S. Howard                        Officer

/s/ David P. Beddow
---------------------------       Director                                 March 31, 2000
David P. Beddow

/s/ John W. Goddard
---------------------------       Director                                 March 31, 2000
John W. Goddard

/s/ Leo J. Hindery, Jr.
---------------------------       Director                                 March 31, 2000
Leo J. Hindery, Jr.

/s/ Christopher Sophinos
---------------------------       President                                March 31, 2000
Christopher Sophinos

/s/ Kenneth G. Carroll
---------------------------       Senior Vice President                    March 31, 2000
Kenneth G. Carroll                    Chief Financial Officer and
                                      Treasurer (Principal Financial
                                      Officer)
</TABLE>

                                       III-17


<PAGE>

PART IV.

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

(a) (1)  FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
Included in Part II of this Report:                               Page No.
<S>                                                               <C>
         Independent Auditors' Report                              II-8

         Consolidated Balance Sheets,
            December 31, 1999 and 1998                             II-9

         Consolidated Statements of Operations,
            Years ended December 31, 1999, 1998 and 1997           II-10

         Consolidated Statements of Equity (Deficit),
            Years ended December 31, 1999, 1998 and 1997           II-11

         Consolidated Statements of Cash Flows,
            Years ended December 31, 1999, 1998 and 1997           II-12

         Notes to Consolidated Financial Statements,
            December 31, 1999, 1998 and 1997                       II-13

(a) (2)  FINANCIAL STATEMENT SCHEDULES

Included in Part IV of this Report:

    (i)  Financial Statement Schedules required to be filed:

         Schedule II - Valuation and Qualifying Accounts,
            Years ended December 31, 1999,                          IV-6

</TABLE>

                                       IV-1
<PAGE>

(a) (3)  EXHIBITS

The following exhibits are filed herewith or are incorporated by reference
herein (according to the number assigned to them in Item 601 of Regulation S-K)
as noted:

<TABLE>
<S>     <C>
2 -     Plan of Acquisition, Reorganization, Arrangement, Liquidation or Succession:

2.1     Reorganization Agreement dated as of December 4, 1996, among
        Tele-Communications, Inc. ("TCI"), TCI Communications, Inc. ("TCIC"),
        Tempo Enterprises, Inc., TCI Digital Satellite Entertainment, Inc., TCI
        K-1, Inc. ("TCI K-1"), United Artists K-1 Investments, Inc. ("UA K-1"),
        TCI SE Partner 1, Inc. ("TCISE 1"), TCI SE Partner 2, Inc. "(TCISE 2")
        and TCI Satellite Entertainment, Inc. (the "Company"). (d)

2.2     Merger and Contribution Agreement dates as of February 6, 1998, among
        the Company, PRIMESTAR, Inc., Time Warner Entertainment Company L.P.
        ("TWE"), Advance/Newhouse Partnership ("Newhouse"), Comcast Corporation
        ("Comcast"), Cox Communications, Inc. ("Cox"), MediaOne of Delaware,
        Inc. ("MediaOne") and GE American Communications, Inc. ("GE Americom"). (f)

2.3     Asset Transfer Agreement dates as of February 6, 1998, between the
        Company and PRIMESTAR, Inc. (f)

2.4     Agreement and plan of Merger dates as of February 6, 1998, between the
        Company and PRIMESTAR, Inc. (f)

2.5     Guarantee Agreement dated as of February 6, 1998, by US WEST Media
        Group, Inc. ("US West"), in favor of each of the Company, PRIMESTAR,
        Inc., TWE, Newhouse, Comcast, Cox and GE Americom. (f)

2.6     Letter Agreement dates as of February 6, 1998, between John C. Malone
        and the Company, PRIMESTAR, Inc., TWE, Newhouse, Comcast, Cox, MediaOne
        and GE Americom, for the benefit of the Company, PRIMESTAR, Inc., TWE,
        Newhouse, Comcast, Cox, MediaOne and GE Americom. (f)

2.7     Voting Agreement dates as of June 12, 1997, among John C. Malone, Time
        Warner Cable, a division of TWE, Comcast, the Company, Cox, MediaOne,
        Newhouse and GE Americom. (f)

2.8     Voting Agreement dates as of June 12, 1997, among Donne F. Fisher, as
        Co-Personal Representative of the Estate of Bob Magness, Time Warner
        Cable, a division of TWE, Comcast, the Company, Cox, MediaOne, Newhouse
        and GE Americom. (f)

2.9     Voting Agreement dates as of June 12, 1997, among TCI, John C. Malone,
        Time Warner Cable, a division of TWE, Comcast, the Company, Cox,
        MediaOne, Newhouse and GE Americom. (f)

</TABLE>

                                       IV-2
<PAGE>
<TABLE>
<S>     <C>
2.10    Form of Stockholders Agreement among PRIMESTAR, Inc., the Company, TWE,
        Newhouse, Comcast, Cox, MediaOne, Continental Satellite company, Inc./,
        Continental Satellite Company of Chicago, Inc., Continental Satellite
        Company of Minnesota, inc., Continental Satellite company of New
        England, Inc., Continental Satellite Company of Michigan, Inc.,
        Continental Satellite Company of Ohio, Inc., Continental Satellite
        Company of Virginia, Inc., MediaOne Satellite II, Inc., GE Americom and
        John C. Malone. (f)

2.11    Form of Registration Rights Agreement among PRIMESTAR, inc., the
        Company, TWE, Newhouse, Comcast, Cox, MediaOne, Continental Satellite
        company, Inc./, Continental Satellite Company of Chicago, Inc.,
        Continental Satellite Company of Minnesota, inc., Continental Satellite
        company of New England, Inc., Continental Satellite Company of Michigan,
        Inc., Continental Satellite Company of Ohio, Inc., Continental Satellite
        Company of Virginia, Inc., MediaOne Satellite II, Inc., GE Americom and
        John C. Malone. (f)

2.12    Share Appreciation Rights Agreement, dated as of April 28, 1999(h)

2.13    Pledge and Security Agreement dated as of April 28, 1999(h)

2.14    Amendment dated as of March 10, 1999 to TSAT Tempo Agreement Dated as
        of February 6, 1998 Between Primestar, Inc. and TCI Satellite
        Entertainment, Inc.(a)

2.15    Termination Agreement TSAT Merger Agreement(a)

2.16    Stockholders Agreement dates as of February 6, 1998, among PRIMESTAR,
        Inc., the Company and John C. Malone. (f)

2.17    TSAT Tempo Agreement dated as of February 6, 1998, between PRIMESTAR,
        Inc., and the Company. (f)

2.18    Contribution and Exchange Agreement (TSAT) among TCI Satellite Entertainment,
        Inc., Liberty LSAT, Inc. and Liberty LSAT II, Inc. dated as of March 16, 2000. (a)

2.19    Contribution Agreement by and among Liberty Media Corporation, Liberty Media
        International, Inc., LSAT Holdings, Inc., TCI Satellite Entertainment, Inc.,
        TSAT Holding 1, Inc., each of the Liberty Members signatory hereto, Liberty
        Satellite, LLC, and LSAT Astro, LLC dated March 16, 2000. (a)

2.20    Operating Agreement of Liberty Satellite, LLC dated March 16, 2000. (a)

2.21    Amended and Restated Operating Agreement of LSAT Astro LLC dated March 16, 2000. (a)

3 -     Articles of Incorporation and Bylaws:

3.1     Amended and Restated Certificate of Incorporation of the Company. (e)

3.2     Amended and Restated Bylaws of the Company. (e)

3.3     TCI Satellite Entertainment, Inc. Certificate of Designations, Series A
        Preferred Stock. (a)

3.4     TCI Satellite Entertainment, Inc. Certificate of Designations, Series B
        Preferred Stock. (a)

4 -     Instruments Defining the Rights of Security Holders:

4.1     Specimen certificate representing shares of Series A Common Stock of the
        Company. (e)

4.2     Specimen certificate representing shares of Series B Common Stock of the
        Company. (e)

10 -    Material Contracts

10.1    TCI Satellite Entertainment, Inc. 1996 Stock Incentive Plan. (e)

10.2    Qualified Employee Stock Purchase Plan of the Company. (d)

10.3    Indemnification Agreement dated December 4, 1996, by and between TCI and
        Gary S. Howard. (d)

10.4    Option Agreement, dated as of December 4, 1996, by and between the
        Company and Gary S. Howard. (d)

10.5    Option Agreement, dated as of December 4, 1996, by and between the
        Company and Larry E, Romrell. (d)

10.6    Option Agreement, dated as of December 4, 1996, by an between the
        Company and Brendan R. Clouston. (d)

</TABLE>
                                       IV-3
<PAGE>
<TABLE>
<S>     <C>

10.7    Option Agreement, dated as of December 4, 1996, by ad between the
        Company and David P. Beddow. (d)

10.8    1996 Ancillary Agreement Among Partners dates as of October 18, 1996,
        among PRIMESTAR Partners L.P., the Participating Partners named therein,
        GE Americom Services, Inc. and its affiliate GE American Communications,
        Inc. (d)

10.9    Annex A to the 1996 Ancillary Agreement Among Partners. (e)

10.10   Option agreement dated February 8, 1990, between Tempo and K Prime
        Partners, L.P. (e)

10.11   Letter Agreement dated July 30, 1993, between Tempo and PRIMESTAR
        Partners, L.P. relating to FSS. (e)

10.12   Letter Agreement dated July 30, 1993, between Tempo an PRIMESTAR
        Partners, L.P. relating to BSS. (e)

10.13   TPO-1-290 BSS Construction Agreement dates as of February 22, 1990,
        between Tempo and Space Systems/Loral, Inc. (e)(h)

10.14   Trade Name and Service Mark License Agreement dates as of December 4,
        1996, between TCI and the Company. (d)

10.15   Tax Sharing Agreement effective July 1, 1995, among TCIC and certain
        other subsidiaries of TCI. (e)

10.16   First Amendment to Tax Sharing Agreement dates as of October 1995, among
        TCIC a certain other subsidiaries of TCI. (e)

10.17   Second Amendment to Tax Sharing Agreement dates as of December 3, 1996,
        among TCIC and certain other subsidiaries of TCI. (d)

10.18   TCI/TSAT Tax Sharing Agreement dated June 1997, by and between the
        Company and TCI. (f)

10.19   Share Purchase Agreement dated as of December 4, 1996, between TCI and
        the Company. (d)

10.20   Option Agreement dated as of December 4, 1996, between TCI and the
        Company. (d)

10.21   Indemnification Agreement dated as of June 11, 1997, among News Corp.,
        the Company, PRIMESTAR Partners, Time Warner, Comcast, Cox, MediaOne,
        Newhouse, and GE Americom. (f)

10.22   TCI Satellite Entertainment, Inc. 1997 Nonemployee Director Plan. (f)

10.23   Asset Purchase Agreement by and among Hughes Electronics Corporation,
        PRIMESTAR, Inc., PRIMESTAR Partners L.P., Tempo Satellite, Inc. and the
        Stockholders of PRIMESTAR listed herein, dates as of January 22, 1999. (g)

10.24   Asset Purchase Agreement among PRIMESTAR, Inc., PRIMESTAR Partners L.P.,
        PRIMESTAR MOV, Inc., the Stockholders of PRIMESTAR, Inc. listed herein and
        Hughes Electronics Corporation dated as of January 22, 1999. (g)

10.25   PRIMESTAR Payment Agreement dated as of January 22, 1999 among TCI Satellite
        Entertainment, Inc., PRIMESTAR, Inc., the Funding Parties and Paragon
        Communications. (j)

21      Subsidiaries of the Registrant. (a)

27      Financial Data Schedule. (a)

</TABLE>

                                       IV-4
<PAGE>

(a)     Filed herewith.

(b)     Incorporated by reference to the Company's Annual Report on Form 10-K
        for the year ended December 31, 1998 (Commission File No. 0-21317).

(c)     Incorporated by reference to the Company's Annual Report on Form 10-K
        for the year ended December 31, 1997 (Commission File No. 0-21317).

(d)     Incorporated by reference to the Company's Annual Report on Form 10-K
        for the year ended December 31, 1996 (Commission File No. 0-21317).

(e)     Incorporated by reference to the Company's Registration Statement on
        Form 10 filed with the Securities and Exchange Commission ("SEC") on
        November 15,1996 (Registration No. 0-21317).

(f)     Incorporated by reference to PRIMESTAR, Inc.'s Registration Statement on
        Form S-4 filed with the SEC on February 9, 1998 (Registration No.
        333-45835).

(g)     Incorporated by reference to the Company's Current Report on Form 8-K,
        dated February 1, 1999.

(h)     Incorporated by reference to the Company's Quarterly Report on Form
        10-Q for the period ended, March 31, 1999

(i)     Portions of this document have been granted confidential treatment by
        the SEC and have been redacted in accordance therewith.

(j)     Incorporated by reference to Phoenixstar, Inc's Current Report on
        Form 8-K, dated May 13, 1999.

(b)     REPORTS ON FORM 8-K FILED DURING THE QUARTER ENDED DECEMBER 31, 1999:

     None.


                                       IV-5

<PAGE>
                                                                     SCHEDULE II

                        TCI SATELLITE ENTERTAINMENT, INC.

                        Valuation and Qualifying Accounts

                  Years ended December 31, 1999, 1998 and 1997

<TABLE>
<CAPTION>


                                                                 ADDITIONS     DEDUCTIONS
                                                   BALANCE AT    CHARGED TO    WRITE-OFFS               BALANCE
                                                    BEGINNING      PROFIT        NET OF                 AT END
                                                     OF YEAR      AND LOSS     RECOVERIES   OTHER (1)   OF YEAR
                                                   ----------    ----------    ----------   ---------   -------
<S>                                                <C>           <C>           <C>          <C>         <C>
Year ended December 31, 1999:
    Allowance for doubtful receivables - trade     $     --           --            --          --         --
                                                   ========       ======       =======      ======      =====
Year ended December 31, 1998:
    Allowance for doubtful receivables - trade     $  5,307        3,062        (4,003)     (4,366)        --
                                                   ========       ======       =======      ======      =====
Year ended December 31, 1997:
    Allowance for doubtful receivables - trade     $  4,666       18,339       (17,698)         --      5,307
                                                   ========       ======       =======      ======      =====

</TABLE>

(1)  Contribution of accounts receivable and related allowance for doubtful
     accounts in connection with TSAT Asset Transfer.

                                       IV-6