<PAGE>

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

                                   -----------

                                   FORM 10-K/A
                                (AMENDMENT NO. 2)

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

                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999

/ /  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15() 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) 268-5440

        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. Yes /X/   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>

                                   SIGNATURES

     Pursuant to the requirements 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/ Kenneth G. Carroll
                                          ---------------------------------
                                       Name: Kenneth G. Carroll
                                       Title: SENIOR VICE PRESIDENT, CHIEF
                                              FINANCIAL OFFICER AND TREASURER

Dated August 4, 2000

<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.

                                       KPMG LLP

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      (832,358)          --        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 years 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 made 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 sheet.

     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