<PAGE>

                                 UNITED STATES

                      SECURITIES AND EXCHANGE COMMISSION

                            WASHINGTON, D.C.  20549

                                   FORM 10-K

[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934
     For the fiscal year ended December 31, 1997

                                      OR

[_]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
     For the transition period from _____ to _____


Commission File Number  0-21317


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

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


    8085 South Chester, Suite 300
       Englewood, Colorado                                     80112
 ----------------------------------------               ----------------------
 (Address of principal executive offices)                    (Zip Code)


      Registrant's telephone number, including area code: (303) 712-4600

      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
          10 7/8% Senior Subordinated Notes Due 2007
          12 1/4% Senior Subordinated Discount Notes Due 2007

  Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.  [X] Yes   [_] No

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

  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 January 30, 1998, was approximately
$345,393,000.

  The number of shares outstanding of TCI Satellite Entertainment, Inc.'s common
stock as of January 30, 1998 was:

          Series A Common Stock - 59,041,830 shares; and
          Series B Common Stock - 8,465,324 shares.

<PAGE>

                       TCI SATELLITE ENTERTAINMENT, INC.
                        1997 ANNUAL REPORT ON FORM 10-K

                               Table of Contents

                                                                   Page
                                                                   ----
                                    PART I

Item 1.    Business..............................................  I-1

Item 2.    Properties............................................  I-34

Item 3.    Legal Proceedings.....................................  I-35

Item 4.    Submission of Matters to a Vote of Security Holders...  I-35


                                    PART II

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

Item 6.    Selected Financial Data...............................  II-2

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

Item 8.    Financial Statements and Supplementary Data...........  II-18

Item 9.    Changes in and Disagreements with Accountants
           on Accounting and Financial Disclosure................  II-18


                                   PART III

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

Item 11.    Executive Compensation...............................  III-4

Item 12.    Security Ownership of Certain Beneficial Owners
            and Management.......................................  III-11

Item 13.    Certain Relationships and Related Transactions.......  III-16


                                    PART IV

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

<PAGE>

Item 1.  Business.
------   --------

     (a) General Development of Business
         -------------------------------

     TCI Satellite Entertainment, Inc. ("TSAT" or the "Company") is a leading
distributor of digital satellite-based television services in the United States.
The Company markets and distributes the PRIMESTAR(R) programming service
("PRIMESTAR(R)"), a medium power digital satellite service, under the brand
names "PRIMESTAR(R) By TCI" and "PRIMESTAR(R) By TSAT" and owns an aggregate
20.86% partnership interest in PRIMESTAR Partners L.P. ("PRIMESTAR Partners" or
the "Partnership"), which owns and operates the PRIMESTAR(R) service.  The
PRIMESTAR(R) service is broadcast from GE-2 ("GE-2") a medium power satellite
stationed at the 85 (DEGREE) West Longitude ("W.L.") orbital position.

     Through its wholly-owned subsidiary, Tempo Satellite, Inc. ("Tempo"), the
Company holds a construction permit (the "FCC Permit") issued by the Federal
Communications Commission ("FCC"), authorizing construction of a high power
direct broadcast satellite ("DBS") system consisting of two or more satellites
delivering DBS service in 11 frequencies at the 119 degrees W.L. orbital
position and 11 frequencies at the 166 degrees W.L. orbital position. Tempo is a
party to a satellite construction agreement (the "Satellite Construction
Agreement") with Space Systems/Loral, Inc. ("Loral") pursuant to which Tempo
arranged for the construction of two high power direct broadcast satellites (the
"Tempo Satellites"). Construction of the Tempo Satellites has been completed. On
March 8, 1997, one of the Tempo Satellites ("Tempo DBS-1") was launched into
geosynchronous orbit, to be stationed in Tempo's high power slot at 119 degrees
W.L. orbital position. The 119 degrees W.L. orbital position is one of three
such orbital positions available for DBS service to the U.S. which are "full
CONUS", meaning that they have a view of the entire continental U.S. The other
Tempo Satellite ("Tempo DBS-2") presently serves as a ground spare for Tempo
DBS-1. Tempo DBS-1 is currently undergoing extended in-orbit testing under the
Satellite Construction Agreement.

     On March 6, 1998, the stockholders of the Company approved a proposal to
adopt (i) the Merger and Contribution Agreement dated as of February 6, 1998
(the "Restructuring Agreement"), among TSAT, PRIMESTAR, Inc. ("New PRIMESTAR"),
Time Warner Entertainment Company, L.P. ("TWE"), Advance/Newhouse Partnership
("Newhouse"), Comcast Corporation ("Comcast"), Cox Communications, Inc. ("Cox"),
MediaOne of Delaware, Inc. ("MediaOne") and GE American Communications, Inc.
("GE Americom"), (ii) the Asset Transfer Agreement dated as of February 6, 1998
(the "TSAT Asset Transfer Agreement"), between TSAT and New PRIMESTAR, (iii) the
Agreement and Plan of Merger dated as of February 6, 1998 (the "TSAT Merger
Agreement") between TSAT and New PRIMESTAR, (iv) each of the other agreements
contemplated by the Restructuring Agreement to which TSAT is a party and (v) the
transactions contemplated by the Restructuring Agreement, the TSAT Asset
Transfer Agreement, the TSAT Merger Agreement and such other agreements
(collectively, the "Roll-up Plan").  The Roll-up Plan is a two-part transaction,
comprising the Restructuring Transaction (as defined below) and the TSAT Merger
(as defined below), with the TSAT Merger expected to occur after the
Restructuring Transaction, subject to regulatory approval and other conditions
set forth in the TSAT Merger Agreement.

                                      I-1
<PAGE>

     Pursuant to the Restructuring Agreement, the businesses of TSAT and
PRIMESTAR Partners and the PRIMESTAR(R) distribution businesses of each of TWE,
Newhouse, Comcast, Cox and affiliates of MediaOne, will be consolidated into New
PRIMESTAR (the "Restructuring Transaction").  New PRIMESTAR is a newly formed
wholly-owned subsidiary of TSAT.  The Restructuring Agreement provides for,
among other things, the contribution to New PRIMESTAR (by asset transfer or
merger) of the respective interests in the Partnership of TSAT, TWE, Newhouse,
Cox, Comcast, MediaOne and GE Americom and the respective PRIMESTAR(R)
subscribers and certain other related assets of TSAT, TWE, Newhouse, Cox,
Comcast and MediaOne, in exchange for (i) in the case of Cox and MediaOne, an
amount of cash and, in the case of TSAT, TWE, Newhouse, Comcast and GE Americom,
an assumption of indebtedness by New PRIMESTAR, (ii) shares of Class A Common
Stock, $.01 par value per share, of New PRIMESTAR ("New PRIMESTAR Class A Common
Stock"), (iii) in the case of TSAT only, shares of Class B Common Stock, $.01
par value per share, of New PRIMESATR ("New PRIMESTAR Class B Common Stock"),
and (iv) except in the case of TSAT and GE Americom, shares of Class C Common
Stock, $.01 par value per share, of New PRIMESTAR ("New PRIMESTAR Class C Common
Stock"), in each case in an amount determined pursuant to the Restructuring
Agreement.

     As a result of the Restructuring Transaction, TSAT will become a holding
company, with no substantial assets or liabilities other than (i) 100% of the
outstanding capital stock of Tempo, (ii) its ownership interest in New
PRIMESTAR, and (iii) its rights and obligations under certain agreements with
New PRIMESTAR.  TSAT will own approximately 36% of the outstanding shares of
common equity of New PRIMESTAR at the closing of the Restructuring Transaction,
representing approximately 37% of the combined voting power of such common
equity, and TWE and Newhouse (collectively), Comcast, MediaOne, Cox and GE
Americom will own approximately 31%, 10%, 9%, 9% and 5%, respectively, of New
PRIMESTAR's outstanding common equity at closing, representing approximately
32%, 10%, 10%, 9% and 2%, respectively, of such voting power, subject in each
case to adjustments. Through its ownership of shares of New PRIMESTAR Class B
Common Stock, TSAT will be entitled to elect three out of the eleven members of
the board of directors of New PRIMESTAR at the closing of the Restructuring
Transaction.

     The outstanding shares of Series A Common Stock, $1.00 par value per share,
of TSAT ("Series A Common Stock"), and Series B Common Stock, $1.00 par value
per share, of TSAT ("Series B Common Stock" and, together with the Series A
Common Stock, "TSAT Common Stock") will remain outstanding and will not be
directly affected by the Restructuring Transaction.

     Pursuant to the TSAT Merger Agreement, TSAT will be subsequently merged
with and into New PRIMESTAR, with New PRIMESTAR as the surviving corporation
(the "TSAT Merger") and, in connection therewith (i) each outstanding share of
Series A Common Stock will be converted into the right to receive one share of
New PRIMESTAR Class A Common Stock and (ii) each outstanding share of Series B
Common Stock will be converted into the right to receive one share of New
PRIMESTAR Class B Common Stock.  Each share of New PRIMESTAR's common stock then
held by TSAT will be canceled.  As a result of the TSAT Merger, TSAT
stockholders on the closing date of the TSAT Merger will become stockholders of
New PRIMESTAR.

     The Restructuring Transaction will be consummated prior to the anticipated
closing date of the TSAT Merger. Consummation of the TSAT Merger is subject to
regulatory approval and certain other conditions to closing set forth in the
TSAT Merger Agreement. Accordingly, there can be no assurances that the TSAT
Merger will be consummated, even if the Restructuring Transaction is
consummated.

                                      I-2
<PAGE>

     In connection with the execution and delivery of the Restructuring
Agreement, the Company and New PRIMESTAR entered into the TSAT Tempo Agreement
dated as of February 6, 1998 (the "TSAT Tempo Agreement"), pursuant to which,
among other things, the Company granted to New PRIMESTAR (the "Option Holder")
the exclusive and irrevocable option (the "Tempo Sale Option"), exercisable at
any time during the term of the TSAT Tempo Agreement, upon receipt of FCC
approval of the transfer of control of Tempo to New PRIMESTAR (including
approval of a transfer in anticipation of a subsequent sale), to purchase from
the Company (at the Option Holder's election) either (x) all the issued and
outstanding shares of capital stock of Tempo or (y) all the rights, title and
interests of TSAT in, to and under the Tempo Assets (as defined below), in
either case for an aggregate purchase price equal to $2.5 million plus, in the
case of an asset purchase, the assumption by the Option Holder of all
obligations and liabilities of Tempo in respect of the Tempo Assets, other than
those incurred in violation of the TSAT Tempo Agreement (either such transaction
being referred to herein as the "Tempo Sale").  The Option Holder, in its sole
discretion, is entitled to assign the TSAT Tempo Agreement and New PRIMESTAR's
rights, interests and obligations thereunder at any time.  "Tempo Assets" means
(i) the FCC Permit, (ii) the Tempo Satellites, (iii) the Satellite Construction
Agreement, and (iv) all rights, claims and causes of action under the Satellite
Construction Agreement, all insurance claims in respect of the Tempo Satellites,
and Tempo's rights under the Tempo Option Agreement.

     In a separate proposed transaction (the "ASkyB Transaction"), pursuant to
an asset acquisition agreement, dated as of June 11, 1997 (the "ASkyB
Agreement") among the Partnership, The News Corporation Limited ("News Corp."),
MCI Telecommunications Corporation, the principal domestic operating subsidiary
of MCI Communications Corporation ("MCI"), American Sky Broadcasting LLC, a
wholly-owned subsidiary of News Corp. ("ASkyB"), and for certain purposes only,
each of the partners of the Partnership (collectively, the "Partners"), New
PRIMESTAR will acquire from MCI, News Corp. and ASkyB, as applicable, two high
power communications satellites currently under construction (the "MCI
Satellites"), certain authorizations granted to MCI by the FCC to operate a DBS
business at the 110 (DEGREE) W.L. orbital location using 28 transponder
channels, and certain related contracts. In consideration, ASkyB will receive
non-voting convertible securities of New PRIMESTAR, comprising, subject to
closing adjustments, approximately $600 million liquidation value of non-voting
convertible preferred stock, $.01 par value per share, of New PRIMESTAR (the
"New PRIMESTAR Convertible Preferred Stock") (convertible into approximately 52
million shares of non-voting Class D Common Stock, $.01 par value per share, of
New PRIMESTAR ("New PRIMESTAR Class D Common Stock"), subject to adjustment) and
approximately $516 million principal amount of convertible subordinated notes of
New PRIMESTAR ("New PRIMESTAR Convertible Subordinated Notes") (convertible into
approximately 45 million shares of New PRIMESTAR Class D Common Stock).
Consummation of the ASkyB Transaction is contingent on, among other things,
receipt of all necessary government and regulatory approvals, and accordingly,
no assurance can be given that the ASkyB Transaction will be consummated. In
addition, it is a condition precedent to the closing of the ASkyB Transaction by
New PRIMESTAR that the ASkyB Transaction be approved by the holders of New
PRIMESTAR Voting Common Stock, including the former holders of TSAT Common Stock
if the TSAT Merger shall have been consummated, at an annual or special meeting
of New PRIMESTAR.

                                      I-3
<PAGE>

     TSAT was incorporated in Delaware in November 1996.  Prior to the
Distribution (as defined below), the Company was wholly owned by Tele-
Communications, Inc. ("TCI"), which, through various subsidiaries, was engaged
in the business of distributing PRIMESTAR(R) from December 1990 until the
consummation of the Distribution.  TSAT's predecessor was incorporated in
February 1995 to consolidate TCI's PRIMESTAR(R) distribution business into one
subsidiary, and was merged into TSAT in connection with the Distribution.

  TSAT was formed to own and operate certain businesses of TCI Communications,
Inc. ("TCIC"), a subsidiary of TCI, constituting TCI's collective interests
("TCI SATCO") in the Digital Satellite Business.  As used herein, "Digital
Satellite Business" means the business of distributing multichannel programming
services directly to consumers in the U.S. via digital medium or high power
satellite, including the rental and sale of customer premises equipment relating
thereto.  On December 4, 1996 (the "Distribution Date") TCI distributed, (the
"Distribution"), as a dividend, all of the issued and outstanding TSAT Common
Stock to the holders of record of shares of Tele-Communications, Inc., Series A
TCI Group Common Stock, $1.00 par value per share (the "Series A TCI Group
Stock"), and Tele-Communications, Inc., Series B TCI Group Common Stock, $1.00
par value per share (the "Series B TCI Group Stock" and, together with the
Series A TCI Group Stock, the "TCI Group Stock"), other than certain
subsidiaries of TCI that waived such dividend, on the basis of one share of the
Series A Common Stock for each ten shares of Series A TCI Group Stock, and one
share of Series B Common Stock for each ten shares of Series B TCI Group Stock.

  References herein to the "Company" may, as the context requires, refer to (i)
TCI SATCO prior to the Distribution Date and (ii) TSAT and its consolidated
subsidiaries on and after the Distribution Date.  Additionally, unless the
context indicates otherwise, references herein to "TCI" and "TCIC" are to TCI
and TCIC and their respective consolidated subsidiaries (other than the
Company).

  On February 20, 1997, the Company issued 10-7/8% Senior Subordinated Notes due
2007 having an aggregate principal amount of $200,000,000 the ("Senior
Subordinated Notes") and 12-1/4% Senior Subordinated Discount Notes due 2007
having an aggregate principal amount at maturity of $275,000,000 (the "Senior
Subordinated Discount Notes, and together with the Senior Subordinated Notes,
the "Notes").  The issuance of the Notes resulted in aggregate net proceeds to
the Company of approximately $340,500,000, after deducting offering expenses.
The notes were not originally registered under the Securities Act of 1933, as
amended (the "Securities Act").  On February 17, 1998, TSAT filed a registration
statement (which registration statement was declared effective by the Securities
and Exchange Commission (the "SEC") on such date) with respect to an offer to
exchange (the "Exchange Offer") the Notes for substantially identical notes that
are registered under the Securities Act.  The Exchange Offer commenced on
February 27, 1998 and expires on March 30, 1998, unless extended.

                                      I-4
<PAGE>

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

     (b) Financial Information about Industry Segments
         ---------------------------------------------
         Not applicable.

                                      I-5
<PAGE>

     (c) Narrative Description of Business
         ---------------------------------

INDUSTRY OVERVIEW

General
-------

     Digital satellite television services use communications satellites,
broadcasting at Ku-band or higher frequencies, to transmit multichannel video
programming directly to consumers, who receive such signals on home satellite
dishes ("HSDs"). Such satellites operate in geosynchronous orbit above the
equator, from orbital positions or ''slots'' allocated by international
agreement to the U.S. and other national governments and assigned by such
governments in accordance with local law. Orbital slots are designated by their
location East or West of the zero meridian, measured in degrees of longitude,
and comprise both a physical location and an assignment of broadcast spectrum in
the applicable frequency band.  The assigned spectrum is divided into 32
frequency channels. Such frequency channels are sometimes referred to as
''transponders'' because each transponder on a satellite generally transmits on
one of such channels. At standard levels of digital compression technology
currently deployed, each frequency channel can be converted on average into five
or more analog channels of video programming (depending on the video density of
the programming), thereby enabling the digital satellite service operator to
offer a broader variety of programming choices than analog satellite systems.
Advanced compression technologies currently being tested are expected to result
in substantially greater compression ratios.  Digital technology enables
subscribers to receive laser disc-quality picture and compact disc-quality sound
from the satellite.

     The operator of a digital satellite television service typically enters
into agreements with programmers, who deliver their programming content to the
digital satellite service operator via commercial satellite, fiber optics or
microwave transmissions. The digital satellite service operator generally
monitors such signals for quality, and may add promotional messages, public
service programming or other system-specific content. The signals are then
digitized, compressed, encrypted and combined with other programming sharing a
given transponder.  Each transponder's signal is then uplinked, or transmitted,
to the transponder owned or leased by the service operator on the service's
satellite, which receives and retransmits the signal to HSDs configured and
authorized to receive it.

     In order to receive programming, a subscriber requires (i) a properly
installed HSD, which includes a dish-shaped antenna, low noise block converter
(''LNB'') and related equipment, (ii) an integrated receiver/decoder (''IRD,''
sometimes referred to herein as the ''satellite receiver'' or ''set-top box''),
which receives the data stream from each broadcasting transponder, separates it
into separate digital programming signals, decrypts and decompresses those
signals that the subscriber is authorized to receive and converts such digital
signals into analog radio frequency signals, and (iii) a television set, to view
and listen to the programming contained in such analog signals. A subscriber's
IRD is generally connected to the digital satellite service operator's
authorization center by telephone, to report the purchase of  pay-per-view
channels.

  The FCC authorizes two types of satellite services for transmission of
television programming: Broadcast Satellite Service (''BSS''), which operates at
high power in the Ku-band, and Fixed Satellite Service (''FSS''), which includes
medium power services transmitting in the Ku-band, as well as low power analog
services transmitting in the C-band. Both high power BSS satellites and medium
power FSS satellites are used for digital satellite television services. High
power signals can generally be received by HSDs of approximately 14 to 18 inches
in diameter (depending on the geographical location of the HSD and wattage per
channel), while medium power signals require HSDs of 27 to 39 inches in diameter
(depending on the geographical location of the HSD and wattage per channel). Low
power signals, such as those used by C-band direct-to-home satellite services,
require still larger HSDs.

                                      I-6
<PAGE>

  Generally, both high power and medium power digital satellite services provide
the same high video and audio quality.  However, in certain situations medium
power services may be more susceptible to interference from adjacent satellites
than high power services.  High power services have the benefit of certain
regulatory safeguards instituted by the FCC to protect BSS broadcast signals
from interference from other sources.  Under the FCC's current policy, BSS
orbital locations are spaced at greater intervals than FSS orbital locations.
There are 9 degrees of longitude between adjacent BSS orbital slots, as
compared to 2 degrees between adjacent FSS locations. The smaller interval
between FSS orbital locations, together with their lower power, requires the use
of a relatively large HSD to prevent interference. Newly assigned FSS license
holders are required to coordinate their satellite designs with the satellites
previously existing at adjacent orbital locations. However, such coordination
efforts between FSS license holders may not be sufficient to resolve any
interference that may occur, and an FSS license holder may not have adequate
recourse if the FCC assigns an adjacent location to another user that results in
signal interference.

  In 1982, the FCC allocated a spectrum within the Ku-band for BSS services.
Eight BSS orbital slots, each with 32 frequencies, have been reserved by the FCC
for use by domestic DBS providers. Three of those orbital slots (101 degrees
W.L., 110 degrees W.L. and 119 degrees W.L.) provide full CONUS visibility.
DirecTv, Inc. ("DirecTv") and United States Satellite Broadcasting Corporation
("USSB") are the only entities licensed for the 101 degrees W.L. orbital slot,
with a total of 32 transponders. MCI, in partnership with News Corp., acquired
certain FCC authorizations to build and operate a DBS service at the 110 degrees
W.L. orbital location, using 28 transponders and, pursuant to the ASkyB
Agreement, has agreed to transfer such authorizations to New PRIMESTAR. EchoStar
Communications Corporation ("EchoStar") holds certain FCC authorizations with
respect to one of the remaining four transponders at 110 degrees W.L. and USSB
holds certain FCC authorizations with respect to the other three transponders at
110 degrees W.L. EchoStar's DBS service uses 21 transponders at the 119 degrees
W.L. orbital location and Tempo's FCC Permit authorizes it to build a DBS
service using the remaining 11 transponders at 119 degrees W.L.

Digital Satellite Services Business
-----------------------------------

  As of December 31, 1997, the installed base for digital satellite services
consisted of approximately 6.2 million active subscribers nationwide, as
compared to approximately 4.4 million subscribers as of December 31, 1996 and
approximately 2.2 million subscribers as of the end of 1995. According to
industry sources, there are approximately 97 million television households in
the U.S., and it is estimated that approximately 65 million cable subscribers
pay an average of approximately $38 per month for multichannel programming
services.  TSAT believes that those 97 million television households represent
the potential customer universe in the U.S. for video, audio and data
programming services via satellite, and that those 65 million cable subscribers
represent a key potential customer base for TSAT.  TSAT believes that video,
audio and data programming services via satellite can also be effectively
marketed to (i) the approximately 5 to 6 million households that do not have
access to cable television (not ''passed by cable''), (ii) the approximately 21
million households currently passed by cable television systems with fewer than
40 channels of programming, (iii) other existing cable subscribers who desire a
greater variety of programming, improved video and audio quality, better
customer service and fewer transmission interruptions, (iv) the commercial
marketplace, including  restaurants, bars, hotels, motels, multiple dwelling
units ("MDUs"), businesses and schools, and (v) the approximately 2.1 million
low power C-band subscribers who may desire to migrate to digital service.

                                      I-7
<PAGE>

  PRIMESTAR Partners estimates that, based on the number of subscribers
installed, it served approximately 32% of all digital satellite television
subscribers as of December 31, 1997, as compared to approximately 51% for
DirecTv, combined with USSB, and approximately 17% for EchoStar.

  The Company believes that the following factors will contribute to the growth
of the digital satellite services business.

  Demand for More Choice in Television Programming, Reliable Service and Better
Quality Picture and Sound.  Prior to the growth of cable television services,
television viewers were offered a relatively limited number of channels. As the
number of channels increased, consumer demand for more programming choices also
increased. As a result, the multichannel video industry has experienced
significant growth, both in terms of the number of content producers creating
programming and the number of channels available to viewers. The Company expects
that this trend will continue and consumers will desire even more programming
choices than are available through cable television. The Company believes
consumers are also demanding more reliable service and improved picture quality
compared to what has historically been offered by over-the-air VHF and UHF
broadcasters and by cable.  The most recent consumer survey of cable and
satellite customers by J.D. Power and Associates found that digital satellite
television providers far outranked cable providers in customer satisfaction.  In
the survey, PRIMESTAR(R) ranked number one in customer satisfaction, ahead of
both EchoStar and DirecTv.

  Large Potential Customer Base.  The approximate 97 million television
households in the U.S. are potential subscribers to satellite programming
services.  In addition, cable subscribers and, more specifically, cable
subscribers who purchase premium or pay-per-view services, represent a
particularly lucrative potential customer base for providers of satellite
programming services.

  Households Unserved or Underserved by Cable.  The Company believes that
households not passed by cable and households served by cable systems with fewer
than 40 channels provide an opportunity for market growth.  Cable systems with
sufficient channel capacity (generally 54 or more channels) and good quality
cable plant will not require costly upgrades to add bandwidth or incur
significant maintenance costs in order to offer digital programming services.
The Company believes, however, that based on current compression technology, the
number of channels that a cable system would have to remove from its existing
service offerings in order to use them for digital services may, in the case of
cable systems with limited channel capacity, degrade the value of their analog
programming offering and alienate subscribers. Accordingly, pending the
availability of advances in digital compression technology now under
development, such smaller cable systems will be required to incur substantial
costs to upgrade their plant to expand channel capacity before they can
introduce digital services. Due to the substantial capital investment required
for wide scale deployment of fiber-based digital services, several cable
companies have delayed originally-announced deployment schedules.

  Commercial Subscribers.  The Company believes that digital satellite services
are well suited for hotels, motels, bars, MDUs, businesses, schools and other
organizations with commercial applications, as well as for non-residential
buildings which are not easily accessible by cable.  The Company expects that
some commercial organizations will in the future create increased demand for
educational, foreign language, and other niche video and audio programming, as
well as data services, in addition to the Company's wide variety of
entertainment, sports, news and other general programming.

                                      I-8
<PAGE>

PRIMESTAR By TSAT
------------------

  The PRIMESTAR(R) Service.  PRIMESTAR Partners was formed as a limited
partnership in 1990 by subsidiaries of TCI, several other large cable operators
and G.E. American Services, Inc. ("GEAS"), a subsidiary of General Electric
Corporation. Through March 9, 1997, the PRIMESTAR(R) service was transmitted
from Satcom K-2, a medium power satellite, and until April 20, 1997,
PRIMESTAR(R) offered 95 channels of entertainment programming throughout the
continental U.S. to HSDs approximately 36 inches in diameter.  Since March 10,
1997, the PRIMESTAR(R)  service has been transmitted from GE-2, a medium power
satellite that was launched into the 85 degrees W.L. orbital position on January
30, 1997, and accepted as commercially operational as of March 6, 1997. On April
20, 1997, using the additional capacity of GE-2, PRIMESTAR(R) increased its
offerings from 95 to 150 channels of programming, and in August 1997,
PRIMESTAR(R) completed its expansion to over 160 channels. In addition, since
April 1997, PRIMESTAR(R) has offered subscribers in the majority of the U.S. the
opportunity to use HSDs of approximately 27 to 29 inches in diameter.

  PRIMESTAR(R) includes a variety of advertiser-supported networks (sometimes
referred to as ''basic cable'' channels), a broad selection of movie services,
national and regional sports packages and other premium services, and
multiplexed pay-per-view programming.  PRIMESTAR Partners secures its rights to
broadcast such programming via satellite by entering into non-exclusive
affiliation agreements with programming vendors. In addition to video services,
PRIMESTAR(R) includes digital audio and data services, including Ingenius, which
provides access to news, business news, stock quotes, sports, weather and
entertainment information to subscribers through their personal computers.

  Digital satellite television service requires that subscribers install HSDs
for a clear line of sight to the transmitting satellite.  GE-2 provides coverage
to the entire continental U.S. with favorable ''look'' angles, meaning that the
satellite is viewable from the entire continental U.S. at angle elevations high
enough to facilitate installation of HSDs in most areas. Additionally, GE-2's
orbital location over the East coast of the U.S. is considered favorable because
the signal travels a shorter path through the relatively moist air of the
Eastern seaboard, minimizing potential interference from bad weather. The
overall PRIMESTAR(R) system is designed for high availability, and operates
consistently without any significant interference approximately 99.8% of the
time.

  As currently in effect, the Amended and Restated Memorandum between GE
Americom and the Partnership (the "GE-2 Agreement") provides for an initial
lease term of six years from the availability of GE-2, extendible for the
remainder of the useful life of GE-2 at the option of the Partnership (the "End-
of-Life Option").  Although the End-of-Life Option was originally scheduled to
expire in February 1997, and was subsequently extended by mutual agreement to
December 1997, GE Americom has agreed to extend the term of the End-of-Life
Option for an indeterminate period to permit the Partnership and GE Americom to
discuss the terms of a further formal extension or other modification.  In that
connection, GE Americom has agreed that the End-of-Life Option will remain
exercisable until at least 15 days after GE Americom delivers to the Partnership
a written proposal with respect to such further extension or modification. If
the Partnership exercises the End-of-Life Option, the Partnership will have a
further right to negotiate to obtain capacity on any successor satellite to GE-2
launched by GE Americom at 85 degrees W.L. Upon consummation of the
Restructuring Transaction, the GE-2 Agreement will be assumed by New PRIMESTAR.

                                      I-9
<PAGE>

  Pursuant to the GE-2 Agreement, GE Americom provides the Partnership with
service on 24 transponders on GE-2.  The Partnership is currently entitled to
non-preemptible service on 18 of the transponders on GE-2 and preemptible
service on six transponders.  Preemptible transponders are transponders that may
be reassigned to restore service to protected customers if such protected
customers experience transponder or satellite failure.  The Company does not
believe that, during the early stages of GE-2's operational life, the use of
preemptible transponders is likely to interfere in any material respect with the
operation of the PRIMESTAR(R) service.  The Partnership currently receives
"orbital location protected service" on all 24 of its transponders, meaning that
if there is a failure of GE-2, the Partnership will be entitled to restore the
lost service on another GE Americom medium power satellite, GE-3, which was
successfully launched on September 4, 1997 into the same 85 degrees W.L. orbital
position used by GE-2.  Even in those circumstances, the six preemptible
transponders, although protected, would remain preemptible.  Upon the successful
launch of another GE Americom medium power satellite, GE-4 ("GE-4"), the
Partnership's six preemptible transponders will become non-preemptible.  GE-4 is
expected to be launched in the first quarter of 1999.

  If, after exercise of the End-of-Life Option, PRIMESTAR Partners intends to
use more than six of its transponders for uses other than providing the
PRIMESTAR(R) service, GE Americom may reduce service from orbital location
protected service to nonpreemptible or preemptible service, as the case may be.

  PRIMESTAR Partners currently uses proprietary authorization, encryption and
digital compression technology developed by an affiliate of General Instruments
Corporation ("GI"). The Company believes that the compression technology used by
PRIMESTAR Partners produces picture and sound quality comparable to that of
other digital satellite television providers.  Uplinking, encoding and
compression services are provided by National Digital Television Center, Inc., a
subsidiary of TCI (''NDTC''), under a Master Digital Transmission Agreement
between NDTC and the Partnership. Although the satellite receiver used by
PRIMESTAR(R) customers is not currently compatible with certain other
compression systems, it can be upgraded to be compatible through equipment
provided by GI, the cost of which equipment is projected to range from $150 to
$200 at commercial volumes.

  The Partnership does not distribute its programming directly, but utilizes
authorized distributors ("Distributors"), including the Company, and authorized
retailers such as Radio Shack to market the PRIMESTAR(R) service and contract
with subscribers. Currently, affiliates of each of the Partnership's partners
other than GEAS, are authorized Distributors of PRIMESTAR(R). However, the
Limited Partnership Agreement of PRIMESTAR Partners, as amended (the "PRIMESTAR
Partnership Agreement"), does not require that Distributors be affiliated with
the Partnership's partners.  All of the Partnership's distribution arrangements
are currently non-exclusive.

                                      I-10
<PAGE>

  The Company and other Distributors set their own retail pricing and are
responsible in their respective territories for authorization of subscribers,
installation, maintenance and retrieval of customer premises equipment, and
billing and collection of monthly and other fees, and bear all risks of loss
relating thereto. The Partnership negotiates and enters into agreements with
programmers, arranges for satellite capacity through its agreements with GE
Americom and is responsible, through its Master Digital Transmission Agreement
with NDTC for the uplinking and compression of programming signals. In addition,
the Partnership provides marketing and administrative support, including
national advertising and a national toll-free number, ''1-800-PRIMESTAR,'' that
automatically transfers callers to one of the Distributors, based on the
callers' zip codes.  In return for such services, the Partnership collects from
the Distributors a monthly programming fee based on the number of active
authorized satellite receivers or IRDs ("Authorized Units") receiving such
programming plus a separate monthly authorization fee based on each
Distributor's total number of Authorized Units.

  The Company markets and distributes equipment and services to households and
businesses in its assigned territories under the names PRIMESTAR By TCI and
PRIMESTAR By TSAT.  The Company's territories as a PRIMESTAR(R) Distributor
comprise communities and other areas assigned by the management of PRIMESTAR
Partners, in each case on a non-exclusive basis. The Company's territories cover
approximately 44% of the geographic area of the U.S., as of December 31, 1997.
The Company estimates that approximately 41% of the country's 97 million
television households reside in the Company's territories.

  Programming.  At December 31, 1997, the Company offered consumers three
primary programming packages, which provide approximately 75 to 110 channels of
audio and video programming depending upon the package.  Each of the packages
includes a free monthly programming guide. As of December 31, 1997, the monthly
prices for the PrimeHitsSM package, the PrimeEntertainmentSM package and the
PrimeValueSM package were $49.99, $33.99 and $24.99, respectively. Most of the
Company's customers rent their equipment and pay an additional $10 monthly
charge for equipment rental, which includes free maintenance and customer
service.

  As of December 31, 1997, PRIMESTAR(R) also offered 14 channels of pay-per-view
movies and events, a 20-channel regional sports tier and other sports packages
that provide expanded coverage of regular-season, out-of-market sports events,
and niche services on an a la carte basis such as PBS and east and west coast
feeds of ABC, NBC, CBS and FOX (to those subscribers unable to receive such
networks through local affiliates), The Golf Channel and TV Japan.

  As of December 31, 1997, the Company had an installed base of approximately
985,000 Authorized Units, of which approximately 28% received the Company's
premier programming package, PrimeHitsSM.  Exclusive of installation revenue,
the Company's average monthly revenue per Authorized Unit was $48 ($55 per
customer) and $44 ($50 per customer) for the years ended December 31, 1997 and
1996, respectively. At December 31, 1997, the Company's Authorized Units
represented approximately 43% of PRIMESTAR Partners' estimated 2.3 million
installed Authorized Units.

                                      I-11
<PAGE>

     The Company contracts with and bills its residential and commercial
subscribers directly for the PRIMESTAR(R) service. Most residential subscribers
may terminate their service at any time upon notice to the Company.  Commercial
subscribers' service contracts automatically renew for successive terms unless
the commercial subscribers provide 90 days' prior written notice to the Company
of their intent to terminate their service at the end of the current term.  In
addition, a commercial customer may terminate the contract prior to the
expiration of the contractual term by paying a cancellation fee.  Satellite
reception equipment reclaimed from terminating subscribers is tested,
refurbished as necessary and placed back into service.

     Distribution.  The Company distributes PRIMESTAR(R) services through
multiple distribution channels. The Company's master agent program, direct sales
force, national call center (the "National Call Center") and agreement with
Radio Shack(R) form a wide-reaching distribution network. The Company has
engaged four master sales agents, (the ''Master Agents''), each of which has
extensive experience distributing C-band direct-to-home satellite equipment.
Master Agents generally do not sell directly to customers, but recruit, train
and maintain a network of sub-agents in the Company's target markets. The sub-
agents sell PRIMESTAR(R) services on behalf of the Company and install, service
and maintain customer premises equipment for the Company's subscribers.
Authorization of new customers is provided by the National Call Center. At
December 31, 1997, the Company's Master Agents had over 1,300 active sub-agents,
and in the year ended December 31, 1997, the master agent program accounted for
approximately  41% of the Company's new business.

  Master Agents are responsible for maintaining their sub-agents' inventories of
HSDs and other customer premises equipment, which are provided by the Company on
consignment. The Company pays the Master Agents commissions on equipment leased
or sold by their sub-agents, as well as an installation reimbursement to cover
the cost of each new installation and a formula-based commission on monthly
programming revenue received from subscribers enrolled through the master agent
program, for a contractually determined period of time (generally five years).
Master Agents are responsible for compensating their sub-agents.

  The Company's direct sales force solicits potential subscribers by making
door-to-door sales calls, setting up booths at special events and otherwise
marketing the PRIMESTAR(R) service to customers in target markets in its
authorized distribution areas. At December 31, 1997, the direct sales force
consisted of over 300 full- and part-time employees throughout the Company's
service areas, operating out of the Company's five regional offices and several
field offices. To date, the main focus of the direct sales force has been rural
and semi-rural communities. Direct sales employees are paid pursuant to a tiered
compensation plan with varying commission arrangements based on productivity.
New subscriptions obtained by the direct sales force are referred to the
National Call Center for authorization, which in turn dispatches the new orders
to the nearest third party contractor for installation.

                                      I-12
<PAGE>

  In order to support its direct sales force, the Company obtains installation,
maintenance, retrieval, inventory management and other customer fulfillment
services ("Fulfillment Services") from third party contractors for TSAT
customers enrolled by its direct sales force or National Call Center. From the
Distribution Date through December 31, 1997, TCIC provided Fulfillment Services
to TSAT customers pursuant to a fulfillment agreement (as amended, the
"Fulfillment Agreement").  The Fulfillment Agreement, among other things, (i)
set forth the responsibilities of TCIC with respect to Fulfillment Services,
including performance standards, (ii) provided for TCIC's fulfillment sites to
be connected to the billing and information systems used by TSAT, allowing for
on-line scheduling and dispatch of installation and other service calls, and
(iii) provided scheduled rates to be charged to the Company for the various
Fulfillment Services to be provided by TCIC. The Company retained sole control
under the Fulfillment Agreement to establish the retail prices and other terms
and conditions on which installation and other services were provided to the
Company's customers.  The Fulfillment Agreement terminated on December 31, 1997.
In September and October 1997, TSAT entered into agreements with eight regional
fulfillment companies to perform the services that are no longer performed by
TCIC.

  The National Call Center, which, as of December 31, 1997, housed more than 475
employees, takes subscription orders and provides both sales support and
customer service. The National Call Center offers customers round-the-clock
telephone support for sales, installation, authorization and billing, as well as
for repair and customer service, 365 days per year. During the year ended
December 31, 1997, the National Call Center handled over 3.9 million customer
service calls and over 1.0 million sales calls. In addition, since March 1997,
TCIC has provided TSAT with additional customer support services from its Boise,
Idaho call center (the "Boise Call Center") to assist the Company in responding
to calls that exceed the capacity of the National Call Center.

  In addition to the master agent program, direct sales force and National Call
Center, the Company distributes its services through certain national consumer
electronics retailers, including Radio Shack.  Pursuant to the Partnership's
national agreement with Radio Shack, Radio Shack is compensated based on the
number of installations generated.  The Company's distribution network is
further supported by approximately 1,600 local market retailers, such as
hardware stores and convenience stores, which promote the Company's services and
further assist the Company in its distribution efforts.

  The Company believes that its use of a number of different distribution
channels has been an important factor in the success of its sales efforts.  As
of December 31, 1997, the Company had approximately 6,400 points of sale.  The
Company intends to continue to target multiple distribution channels and to
expand on its existing satellite retailer distribution network and presence with
consumer electronics outlets.

                                      I-13
<PAGE>

  Equipment and Installation.  Unlike other digital satellite television
services, PRIMESTAR(R) does not require consumers to purchase or finance the
equipment needed to receive its programming. The Company provides the HSD,
satellite receiver and remote control to subscribers for a monthly rental fee
($10 per month at December 31, 1997), which includes ongoing maintenance and
service at no additional charge.  Satellite receivers are manufactured by GI,
and packaged by GI with remote controls, and HSDs are manufactured by multiple
vendors under agreements with PRIMESTAR Partners.  Pursuant to such agreements,
each Distributor orders and purchases its inventory of customer premises
equipment directly from the vendor, and is responsible for certain minimum
purchases based on forecasts provided to the vendor through PRIMESTAR Partners.

  TSAT believes that the ability to obtain PRIMESTAR(R) without a large initial
cash outlay is a significant factor in TSAT's early acceptance by consumers.
However, subscribers who would prefer to own their equipment may purchase a
single refurbished satellite receiver for $149 (or a new receiver for $199) plus
an installation charge of $149 (less a $50 customer rebate direct from the
Partnership).  Subscribers who wish to purchase two satellite receivers may
purchase refurbished receivers for $149 (or new receivers for $199), with the
installation charge of the first receiver set at $149 (less a $50 customer
rebate direct from the Partnership) and the installation price of the second
receiver set at $75.  TSAT also offers customers who have leased equipment for a
minimum of one year the option to purchase such equipment for $99.

  In addition to monthly fees for programming and the purchase or lease of
equipment, the Company generally charges new subscribers an installation fee
ranging from $99 to $149.  The Company has, from time to time, offered qualified
subscribers an opportunity to enter into subscription contracts that allowed for
the option of paying their installation fee over time.  Certain other direct
satellite service providers offer consumers the option of self-installation of
the HSD and other equipment for their digital satellite systems, with an
installation kit that retails for approximately $70.

  Marketing.  To complement the national marketing support received from
PRIMESTAR Partners, the Company operates a central advertising strategy that
also supports regional marketing efforts. The Company's advertising strategy
focuses on five important selling points for potential subscribers: (i) program
variety and categorization, (ii) good value, (iii) digital quality picture and
sound, (iv) no equipment to buy, and (v) on-going equipment maintenance and
service at no extra charge.  The Company also provides its network of sub-agents
and direct sales force with marketing support ranging from cooperative
advertising funds to customized advertising campaigns.  In addition, the Company
has engaged a media agency to provide media counsel and services to aid the
Company in planning, placing and measuring results in regional and local
advertising and media programs. The Company has also engaged an advertising
agency to develop strategic and creative efforts in advertising and a marketing
fulfillment agency to provide direct mail, collateral materials and other
marketing services.

  The Company, from time to time, promotes subscriptions to its programming
service by offering discounts or free services for a limited period of time. For
example, the Company has provided coupons to new customers which offer various
programming discounts, including free pay-per-view movies.

  The Company engages independent retailers as display representatives who
display promotional materials about the Company. The Company uses such display
representatives to promote its service and to attain customer referrals. The
Company pays the display representative a one time referral fee for each
eligible subscriber who installs the service within sixty days of the referral.
The Company also participates in joint marketing efforts to bundle products and
services to the marketplace.

                                      I-14
<PAGE>

  Use of PRIMESTAR(R) Name and Marks.  The Company markets and distributes the
Partnership's equipment and services to households and businesses in its
assigned territories under the names PRIMESTAR By TCI and PRIMESTAR By TSAT.
PRIMESTAR(R) is a registered service mark of PRIMESTAR Partners. The Company
believes that it has the right to use the PRIMESTAR(R) name and certain related
trademarks and service marks as a Distributor, in substantially the same manner
as it has been using such name and marks, pursuant to its existing
understandings with PRIMESTAR Partners. However, the Company does not have a
written license to use the PRIMESTAR(R) name and marks, and if the Restructuring
Transaction is not consummated, there can be no assurance that the Company will
be entitled to continue to use the PRIMESTAR (R) name and marks in the future.

High Power Satellites
---------------------

  Tempo DBS System. The Company, through Tempo, holds 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 119 degrees W.L.
orbital position and 11 frequencies at the 166 degrees W.L. orbital position.
The 119 degrees W.L. orbital position is generally visible to HSDs throughout
the entire continental U.S.; the 166 degrees W.L. orbital position is visible
only in the western half of the continental U.S., as well as Alaska and Hawaii.
Tempo is also a party to the Satellite Construction Agreement with Loral,
pursuant to which Tempo arranged for the construction of Tempo DBS-1 and Tempo
DBS-2 and has an option to purchase up to three additional satellites. As
constructed, each Tempo Satellite can operate in either ''single transponder''
mode (with 32 transponders broadcasting at 113 watts per channel) or in ''paired
transponder'' mode (with 16 transponders broadcasting at 220 watts per channel).
Either such configuration can be selected at any time, either before or after
launch.

  Tempo DBS-1 was outfitted with an antenna designed for operation at the 119
degrees W.L. orbital location and was launched into geosynchronous orbit on
March 8, 1997. Since the launch of Tempo DBS-1, Loral has notified Tempo of at
least eight separate occurrences of power reductions on Tempo DBS-1. TSAT does
not currently know the extent of such power reductions, and cannot confirm the
precise causes thereof; however, such reductions could eventually affect the
proposed operation of Tempo DBS-1, either alone or together with other events
that may arise during the expected life of the satellite. As a result of such
power reductions, in-orbit testing has been extended and Tempo DBS-1 has not yet
been accepted. However, it is currently expected that such testing will be
completed during the second quarter of 1998. TSAT currently believes that Tempo
DBS-1 may not fully comply with specifications, but has not yet determined the
extent of any such non-compliance. Tempo and Loral are currently engaged in
negotiations regarding this matter, including the timing, extent and methodology
of any further tests to be conducted and the terms of any monetary settlement
with respect to the satellite to which Tempo may be entitled under the Satellite
Construction Agreement. Certain defects or damages affecting Tempo DBS-1 could
cause a substantial monetary loss to TSAT or, following consummation of the TSAT
Merger, New PRIMESTAR.

                                      I-15
<PAGE>

  Assuming that in-orbit testing results in acceptance of the satellite by Tempo
under the Satellite Construction Agreement, Tempo DBS-1 is expected to be
available for commercial operations in April 1998.  Tempo currently intends to
operate Tempo DBS-1 as a platform to provide high power digital video and audio
programming services to residential customers, as well as MDUs, commercial
customers and resellers.  Broadcasting on 11 of the 16 available transponder
pairs in accordance with Tempo's FCC Permit and using available technology for
statistical multiplexing and digital compression, TSAT believes that Tempo DBS-1
would be able to deliver approximately 100 channels of digital video and 20
channels of digital audio programming.  Tempo expects to use 18 inch dishes for
the proposed high power service, the same diameter currently used by other high
power DBS providers, in most areas.

  Pursuant to an option agreement between Tempo and the Partnership (the "Tempo
Option Agreement"), Tempo has agreed to sell or lease to the Partnership 100% of
the capacity of any DBS system constructed by Tempo under the FCC Permit.  If
the TSAT Merger is consummated, Tempo will be a wholly-owned subsidiary of New
PRIMESTAR, and New PRIMESTAR will operate Tempo's high power DBS system.  If the
TSAT Merger is not consummated, TSAT expects that 100% of the capacity of such
system will be utilized by New PRIMESTAR pursuant to the Tempo Option Agreement.
The availability and utility of Tempo DBS-1, including the power levels provided
by Tempo DBS-1, are subject to risks of satellite defect, loss or reduced
performance.

  In light of the pendency of the Restructuring Transaction, the TSAT Merger and
the ASkyB Transaction, TSAT and the Partnership are evaluating alternative
future plans with respect to Tempo DBS-2 including its use or disposition.
Tempo DBS-2 presently serves as a ground spare for Tempo DBS-1.

  Tempo Option.  In February 1990, Tempo entered into the Tempo Option Agreement
with PRIMESTAR Partners, granting PRIMESTAR Partners the right and option (the
"Tempo 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 Option,
PRIMESTAR 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) for such capacity sufficient to
cover the costs of constructing, launching and operating such DBS system. In
connection with the Tempo Option and certain related matters, Tempo and
PRIMESTAR Partners subsequently entered into two letter agreements (the "Tempo
Letter Agreements"), which provided for, among other things, the funding by
PRIMESTAR Partners of milestone and other payments due under the Satellite
Construction Agreement, and certain related costs, through advances by the
Partnership to Tempo. The Partnership financed such advances to Tempo through
borrowings under a bank credit facility (the "PRIMESTAR Credit Facility"), which
is in turn supported by letters of credit arranged for by affiliates of the
partners of the Partnership (other than GEAS).  At December 31, 1997, the
aggregate funding provided to Tempo by PRIMESTAR Partners was $463,133,000, and
the balance due under the PRIMESTAR Credit Facility was $565,000,000, including
amounts borrowed to pay interest charges.  Upon consummation of the
Restructuring Transaction, the PRIMESTAR Credit Facility will be assumed by New
PRIMESTAR, and the Partners have agreed to maintain their respective letters of
credit through June 30, 1999.

                                      I-16
<PAGE>

  On February 7, 1997, the Partners Committee adopted a resolution (i) affirming
that PRIMESTAR Partners had unconditionally exercised the Tempo Option, (ii)
approving the proposed launch of Tempo DBS-1 into the 119 degrees 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 PRIMESTAR Partners, and
(iii) authorizing the payment by PRIMESTAR Partners to Tempo of the Exercise Fee
and other amounts in connection with the Tempo Option and the Tempo Letter
Agreements, including funding of substantially all construction and related
costs relating to the Tempo Satellites not previously funded by the Partnership.

  The Tempo Letter Agreements permit the Partnership to apply its advances to
Tempo against any payments (other than the Exercise Fee) due under the Tempo
Option with respect to its purchase or lease of satellite capacity.  Although
TSAT and the Partnership have not entered into an agreement with respect to the
purchase or lease of 100% of the capacity of the proposed Tempo DBS system
pursuant to the Tempo Option, TSAT believes that its obligations to the
Partnership with respect to such advances will be satisfied in connection with
the completion of such purchase or lease.  However, if notwithstanding the
exercise of the Tempo Option, such purchase or lease of satellite capacity is
not completed, TSAT believes that alternative courses of action are available
that would allow TSAT to recover its costs of constructing the Tempo Satellites,
whether or not the Restructuring Transaction is consummated.

Competition
-----------

  The business of providing video programming to consumers is highly
competitive. The Company faces competition from numerous other companies
offering video, audio and data products and services. The Company's existing and
potential competitors comprise a broad range of companies engaged in
communications and entertainment, including other digital satellite program
providers, cable operators, wireless cable operators, television networks and
local broadcasters and home video products companies, as well as companies
developing new technologies and other purveyors of news, information and
entertainment.  Many of the Company's competitors have greater financial,
marketing and programming resources than the Company. The Company expects that
quality and variety of programming, quality of picture and service and cost will
be the key bases of competition.

  Advances in communications technology, as well as changes in the marketplace
and the regulatory and legislative environment, are constantly occurring.  As a
result, the Company cannot predict the effect that ongoing or future
developments might have on the video programming distribution industry generally
or the Company specifically.

  Other Digital Satellite Service Providers.  In addition to the Company,
several other companies offer digital satellite services and are positioned to
compete with the Company for home satellite subscribers.

  DirecTv successfully launched its first satellite in December 1993, its second
satellite in August 1994 and a third satellite in June 1995 as an in-orbit
spare. The third satellite may also be operated by DirecTv to provide additional
capacity. DirecTv's satellites, which are high power satellites, are located at
101 degrees W.L. DirecTv operates 27 transponders on each of its existing
satellites, enabling it to offer over 175 channels of digital programming. As of
December 31, 1997, according to trade publications, DirecTv served approximately
3.2 million subscribers.

                                      I-17
<PAGE>

  DirecTv recently filed an application with the FCC to expand its existing
satellite system and, in connection therewith, requested orbital slots located
at 96.5 degrees W. L. and 105.5 degrees W.L. To implement this expansion,
DirecTv must secure additional frequencies that are not currently allocated
domestically for DBS use, and DirecTv has also requested an FCC rulemaking to
secure such allocations. In addition, DirecTv recently entered into an agreement
with PanAmSat Corp., pursuant to which DirecTv acquired additional Ku-band
transponder capacity on PanAmSat's full CONUS Galaxy III-R satellite located at
95 degrees W. L. Initially, Galaxy III-R will be used to deliver six channels of
foreign-language programming. Under the agreement, DirecTv will initially lease
four Ku-band transponders and will have the ability to expand transponder
capacity to ultimately offer up to 120 channels dedicated for special interest
programming (such as programming services directed to foreign-language
communities), niche programs, future business-to-business applications and high
definition television transmissions.

  DirecTv's programming service and equipment are available in numerous retail
outlets nationwide.  In addition, affiliates of the National Rural
Telecommunications Cooperative have acquired territories in rural areas of the
U.S. as distributors of DirecTv programming.

  In order to expand its sales and service distribution network in the MDU
marketplace, DirecTv has established regional MDU sales offices in Chicago,
Atlanta, Dallas, New York and Los Angeles.  In addition, DirecTv has entered
into several cooperative marketing agreements with private cable and wireless
operators to help expand its sales and service distribution presence in the MDU
marketplace.

  DirecTv's parent corporation also has received an FCC authorization to
construct, launch and operate a Ka-band system, including an authorization for a
Ka-band satellite at 101 degrees W.L.

  USSB owns and operates five transponders on the first satellite launched by
DirecTv and offers a programming service separate from DirecTv's service, with
over 25 channels of premium video programming not available from DirecTv. USSB's
selection of programming services (and its use of transponders on the same
satellite used by DirecTv, which enables subscribers to receive both DirecTv and
USSB signals with a single HSD) allows it to be marketed as complementary to
DirecTv, partially offsetting the competitive handicap caused by its relatively
limited channel capacity. In the second quarter of 1997, USSB and DirecTv
entered into an agreement to combine their marketing efforts to expand the
availability of DBS television services to the MDU marketplace. Pursuant to such
agreement, all new and existing system operators assigned by DirecTv are able to
represent USSB as well as DirecTv. As of December 31, 1997, approximately 65% of
DirecTv's 3.2 million subscribers received USSB programming. In addition, USSB
has a construction permit from the FCC that would allow it to build and launch
two high power DBS systems, one at 110 degrees W.L. (with three transponders)
and one at 148 degrees W.L. (with eight transponders). The 110 degrees W.L.
orbital location would enable USSB to provide a second high power DBS service to
the continental U.S., although with limited channel capacity. The 148 degrees
W.L. slot would allow USSB to transmit signals to viewers in Alaska and Hawaii
and could provide programming between the U.S. and certain locations on the
Pacific Rim.

                                      I-18
<PAGE>

  EchoStar successfully launched its first high power satellite in December 1995
and commenced national broadcasting of programming channels in March 1996.
EchoStar was assigned 11 transponders at 119 degrees W.L., the same orbital
location as Tempo, and acquired 10 transponders at such location, one
transponder at 110 degrees W.L. and 11 transponders at 175 degrees W.L. through
a merger with DirectSat Corporation (''DirectSat''). Following such merger,
DirectSat, which became an EchoStar subsidiary, launched EchoStar's second
satellite into the 119 degrees W.L. orbital location in September 1996. As of
December 31, 1997, EchoStar distributed approximately 150 channels of video and
audio programming to the entire continental United States, and served
approximately 1.0 million subscribers. In addition, EchoStar acquired 24
frequencies at 148 degrees W.L. for $52.3 million in an FCC auction held in
January 1996, and in August 1996, the FCC approved the prior assignment of
Direct Broadcasting Satellite Corporation's DBS permit for 11 frequencies at
61.5 degrees W.L. and 11 frequencies at 175 degrees W.L. to another subsidiary
of EchoStar. In addition, EchoStar has an agreement with Dominion Video
Satellite, Inc. ("Dominion") to use 3 of the 8 transponder frequencies assigned
by the FCC to Dominion at 61.5 degrees W.L. On October 5, 1997, EchoStar
launched its third satellite into geosynchronous orbit at 61.5 degrees W.L. Such
satellite is equipped with 32 transponders operating at 120 watts per channel,
and includes programming complementary to that offered by EchoStar's existing
service on EchoStar's first two satellites, such as educational and business
programming, and retransmissions of broadcast television signals. EchoStar has
announced that it expects to launch a fourth satellite in the second quarter of
1998 to 119 degrees W.L. and plans to move a satellite to 148 degrees W.L.,
subject to FCC approval.

  In addition, the International Bureau has granted EchoStar a conditional
authorization to construct, launch and operate a Ku-band domestic fixed
satellite into the orbital position at 83 degrees W.L., immediately adjacent to
that occupied by GE-2. Contrary to previous FCC policy which would have
permitted operation of a satellite at the 83 degrees W.L. orbital position at a
power level of only 60-90 watts (subject to coordination requirements), EchoStar
has been authorized to operate at a power level of 130 watts. If EchoStar were
to launch its high power satellite authorized to 83 degrees W.L. and commence
operations at that location at a power level of 130 watts, it would likely cause
harmful interference to the reception of the PRIMESTAR(R) signal from GE-2 by
subscribers to the PRIMESTAR(R) medium power service.

  EchoStar has also been granted conditional authorization to construct, launch
and operate a Ku-band domestic fixed satellite at the 121 degrees W.L. orbital
position and two Ka-band domestic fixed satellites, including an authorization
for a Ka-band satellite at 121 degrees W.L.

  In March 1996, Alphastar, Inc. ("AlphaStar"), which is owned by Tee-Comm
Electronics, Inc., a Canadian company, commenced offering approximately 100
digital video and audio channels of programming in the United States via a
medium power FSS satellite. However, in August 1997, AlphaStar ceased
transmitting its service, as a result of the ongoing bankruptcy proceedings of
Tee-Comm Electronics, Inc.  The AlphaStar service used MPEG 2/DVB digital
compression technology, and AlphaStar subscribers generally were required to use
36 inch satellite dishes, similar in size to those used by some PRIMESTAR(R)
medium power subscribers, rather than the 18 inch satellite dishes used by
customers of the high power services of DirecTv, USSB and EchoStar.  According
to the Satellite Broadcasting and Communications Association ("SBCA"),
approximately 60% of AlphaStar's 51,000 former customers were in areas outside
the continental U.S., mainly in the Caribbean and Canada.

                                      I-19
<PAGE>

  It was recently announced that AlphaStar's U.S.-based operations for digital
home satellite service will be revived by Champion Holding Co. ("Champion").
The U.S. Bankruptcy Court in Delaware overseeing the Tee-Comm Electronics, Inc.
proceeding has approved the sale of substantially all of the assets of AlphaStar
Television Network and its affiliate, Tee-Comm Distribution to Champion and
selected assets of Tee-Comm Electronics Canada.  The sale was completed in mid-
December, although the format and programming of the service have not yet been
determined and no specific date for re-starting the service has been announced.

  Foreign satellite systems are also potential providers of digital satellite
services within the United States.  Canada, Mexico and other countries have been
allocated various DBS orbital locations which are capable of providing service
to part or all of the continental U.S.  In general, non-U.S. licensed satellites
are not allowed to provide domestic digital satellite services in the U.S.
However, in April 1996, the United States entered into a bilateral agreement
with Mexico which would allow, subject to certain conditions, the use of
satellites licensed in Mexico to provide digital satellite services to U.S.
consumers.  Pursuant to such agreement, in August 1997, the FCC authorized
Televisa International, LLC ("Televisa") to operate one million receive-only
earth stations in the U.S., subject to certain conditions, to receive direct-to-
home FSS television services from Solidaridad II, a satellite licensed by the
Mexican Government. Televisa owns and operates television broadcast networks and
stations in Mexico, and exports Spanish language programming to broadcast
networks, broadcast stations and cable systems in the U.S. and other countries.
Televisa is presently engaged in the development of direct-to-home FSS
television and related services in Mexico, Latin America, North America and
Europe.  Televisa intends to use the Solidaridad II satellite operating in the
Ku-band and located at 113 degrees W.L. to provide an FSS service of
entertainment, sports, news, educational and informational video programming,
primarily in the Spanish language, to customers in the U.S. All of the
transmissions to Solidaridad II would originate in Mexico.

  The United States has indicated its willingness to enter into similar
agreements with other countries in North, Central and South America.  If the
U.S. government moves forward with these initiatives, or if other countries
authorize digital satellite service providers to use their orbital slots to
serve the U.S. and the U.S. approves of such service, additional competition
could be created.  At this time, TSAT is unable to predict the effect of such
existing and future foreign satellite services upon its operations.

  In addition, the FCC has allocated certain additional U.S. licensed DBS
frequencies to DirecTv and other parties.  These frequencies could provide
additional capacity for existing digital satellite operators thereby enhancing
their competitive position relative to the Company.  Alternatively, such
presently unused frequencies could enable new competitors to enter the digital
satellite services business.  Further, other potential competitors may provide
television programming by leasing transponders from an existing satellite
operator. However, the number of transponders available for lease on any one
satellite is generally limited, making it difficult to provide sufficient
channels of programming for a viable system.

                                      I-20
<PAGE>

  To date, the PRIMESTAR(R) medium power service has been competitively
disadvantaged vis-a-vis other satellite programming distributors due to its
relatively larger dish size.  TSAT has sought to mitigate this competitive
disadvantage through various programs. Unlike other current suppliers of digital
satellite television, the Company does not require customers to buy satellite
reception equipment. PRIMESTAR(R) is marketed as a service, with programming,
equipment rental, maintenance and 24-hour customer service included in the
monthly price.  In addition, each of the PRIMESTAR(R) programming packages
includes a free monthly programming guide. The up-front costs to new subscribers
of PRIMESTAR(R), who are charged only an installation fee and the first month's
programming and equipment rental fees, are generally lower than the up-front
costs to new subscribers of other direct satellite service providers, who
typically must purchase and install an HSD, IRD and related equipment. Moreover,
since the Company generally owns, services and installs all home reception
equipment, the Company protects its subscribers from the inconvenience of
equipment failure, maintenance concerns, obsolete technology, self-installation
and expired warranties. The Company believes that when the cost of equipment is
factored in, its service is priced competitively, compared to the respective
prices of other current digital satellite service providers.

  C-band Satellite Program Distributors. The Company also competes with C-band
satellite program distributors. C-band systems have been popular (mostly in
rural and semi-rural areas) since the late 1970s, and in the aggregate serve
approximately 2 million subscribers as of December 31, 1997. However, digital
satellite television systems use Ku-band frequencies that can be received by
less expensive systems with significantly smaller dishes than those used with C-
band frequencies. As a result of the smaller dish size, digital satellite
television systems are more widely accepted by consumers than C-band systems,
particularly in urban and suburban areas.

  Cable Television.  Cable television is currently available for purchase by
more than 95% of the approximate 97 million U.S. television households. The
cable television industry is an established provider of multichannel
programming, with approximately 65 million subscribers or approximately 67% of
total U.S. television households. Cable systems typically offer 30 to 80 analog
channels of programming at an average monthly subscription price of
approximately $38.

  The Company encounters a number of challenges in competing with cable
television providers. First, cable television providers benefit from a strong
position in the domestic consumer marketplace. Second, satellite television
systems generally have not yet found it efficient to provide any local broadcast
programming and, third the Satellite Home Viewer Act of 1994 (the "SHVA")
prohibits the retransmission by a satellite carrier of a television broadcast
signal of a network television station to households that receive a Grade B
intensity over-the-air signal of a television broadcast station affiliated with
such network or that receive (or within the past 90 days had received) through a
cable system the signal of a television station affiliated with such network.
Accordingly, PRIMESTAR(R) subscribers who are subject to the foregoing SHVA
restrictions are unable to obtain such programming (which is among the most
popular and desirable video programming) from the Company. Such subscribers
must, instead, receive such programming either through use of a standard
television antenna (traditional rooftop or set-top antenna) or by purchasing
that level of cable service which includes such programming. Third, since
reception of digital satellite signals requires clear line of sight to the
satellite, it may not be possible for some households served by cable to receive
PRIMESTAR(R) as a result of large adjacent structures or other obstacles. In
addition to households lacking a clear line of sight to the satellite,
PRIMESTAR(R) is not available to households in apartment complexes or other MDUs
that do not facilitate or allow the installation of satellite television
equipment. Lastly, because IRDs are currently significantly more expensive than
analog cable converters, existing cable operators are able to offer their
subscribers the ability to have fully functional cable on multiple television
sets in a household without significant additional cost to the operator.

                                      I-21
<PAGE>

  While cable companies currently serve a majority of the U.S. television
market, the Company believes many may not be able to provide the quality and
variety of programming offered by digital satellite service providers until they
significantly upgrade their coaxial systems. Many cable television providers are
in the process of upgrading their systems and other cable operators have
announced intentions to make significant upgrades. Many proposed upgrades, such
as conversion to digital format, fiber optic cabling, advanced compression
technology and other technological improvements, when fully completed, will
permit cable companies to increase channel capacity, thereby increasing
programming alternatives, and to deliver a better quality signal.  In addition,
the expanded capacity may be used to provide interactive and other new services.
Many of the largest cable systems in the U.S. have announced plans to offer
access to telephony services through their existing cable equipment, and have
entered into agreements with major telephony providers to further these efforts.
In some cases, certain cable systems have actually commenced trial offerings of
such services.  If such trials are successful, many consumers may find cable
service to be more attractive than digital satellite service for the reception
of programming. However, although cable systems with adequate available
bandwidth may offer digital service without major rebuilds, the Company believes
that, given the limits of current compression technology, other cable systems
with more limited bandwidth will require major physical plant upgrades to
provide digital service, and that such upgrades will require substantial
investments of capital and time to complete industry-wide. As a result, the
Company believes that there will be a substantial delay before cable systems can
offer programming services equivalent to digital satellite television providers
on a national basis and that some cable systems may never be upgraded, subject
to advances in compression technology.

  Wireless Cable Systems.  Other competitors of the Company are multi-channel
multi-point distribution systems, which deliver programming services over
microwave channels to subscribers with special antennas, and other so-called
''wireless cable'' systems. Wireless cable systems operating in the U.S.,
currently serve an estimated 1.2 million subscribers, mostly with limited
channel, analog service. Wireless cable systems typically offer 20 to 40
channels of programming with inferior image and sound quality compared to
digital satellite services.  However, wireless cable systems may provide their
customers with local programming, a potential advantage over digital satellite
television systems, and developments in compression technology will
significantly increase the number of channels and video and audio quality of
wireless cable systems. In 1995, several large telephone companies acquired
significant ownership interests in numerous wireless cable companies. This
infusion of money into the wireless cable industry can be expected to accelerate
its growth and its competitive impact. However, while it is expected that most
large wireless operators backed by local telephone companies will upgrade to
digital technology over the next several years, such upgrades will require the
installation of new digital decoders in customers' homes and modifications to
transmission facilities, at a potentially significant cost. Wireless cable also
generally requires direct line of sight from the receiver to the transmitter
tower, which creates the potential for substantial interference from terrain,
buildings and foliage.

                                      I-22
<PAGE>

  Telephone Companies. Certain regional telephone companies and long distance
telephone companies could become significant competitors in the future as they
have expressed an interest in becoming subscription television providers.
Legislation enacted by Congress in 1996 removed barriers to entry which
previously inhibited telephone companies from competing, or made it more
difficult for telephone companies to compete, in the provision of video
programming and information services. Certain telephone companies have received
authorization to test market video and other services in certain geographic
areas using fiber optic cable and digital compression over existing telephone
lines. Estimates for the timing of wide-scale deployment of such multichannel
video service vary, as several telephone companies have delayed originally
announced deployment schedules.  In addition, several large telephone companies
have announced plans to acquire or merge with existing cable and wireless cable
systems.

  As more telephone companies begin to provide subscription television
programming and other information and communications services to their
customers, additional significant competition for subscribers will develop.
Among other things, telephone companies have an existing relationship with
substantially every household in their service area, substantial financial
resources, and an existing infrastructure and may be able to subsidize the
delivery of programming through their position as the sole source of telephone
service to the home.

  VHF/UHF Broadcasters.  Most areas of the U.S. are covered by traditional
territorial over-the-air VHF/UHF broadcasts, which typically include three to
ten channels. These stations provide local, network and syndicated programming
free of charge, but each major market is generally limited in the number of
available programming channels. However, the FCC has recently allocated
additional digital spectrum to licensed broadcasters.  During a transition
period ending in 2006, each existing television station will be able to transmit
programming on a digital channel that may permit multiple programming services
per channel.

  Private Cable.  Private cable is a multi-channel subscription television
service where the programming is received by a satellite receiver and then
transmitted via coaxial cable through private property, often MDUs, without
crossing public rights of way.  Private cable generally operates under an
agreement with a private landowner to service a specific MDU, commercial
establishment or hotel.  These agreements are often exclusive arrangements with
lengthy (e.g., ten-year) terms, and private cable systems generally are not
subject to substantial federal, state or local regulations.  The FCC recently
amended its rules to allow the provision of point-to-point delivery of video
programming by private cable operators and other video delivery systems in the
18 gigahertz bandwidth.  Private cable operators compete with PRIMESTAR(R) for
customers within the general market of consumers of subscription television
services.

  Local Multi-Point Distribution Service.  In March 1997, the FCC announced its
intention to offer two local multi-point distribution service ("LMDS") licenses,
one for a block of spectrum 1150 megahertz wide and the other for a 150
megahertz-wide block, in each of 493 Basic Trading Areas pursuant to an auction
in the case of mutually exclusive applications.  Incumbent local exchange
carriers and cable operators will not be allowed to obtain in-region licenses
for the larger spectrum block for three years.  The LMDS auction began on
February 18, 1998 and is ongoing.  The broadband 28 and 31 gigahertz LMDS
spectrum allocation may enable LMDS providers to offer subscribers a wide
variety of audio, video and interactive service options.

                                      I-23
<PAGE>

  Utilities.  In 1996, Congress enacted legislation authorizing utility holding
companies and their subsidiaries to provide video programming services,
notwithstanding the Public Utility Holding Company Act.  Utilities must
establish separate subsidiaries and must apply to the FCC for operating
authority.  Several such utilities have been granted broad authority by the FCC
to engage in activities which could include the provision of video programming.

  Other Providers of News, Information and Entertainment.  The Company also
competes broadly with other providers of news, information and entertainment to
consumers.

Regulatory Matters
------------------

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

  Currently, a DBS permittee must complete and file with the FCC a satellite
construction contract with respect to its authorized satellite station(s) within
one year of the grant of the construction permit.  DBS permittees who received
their permits prior to January 19, 1996 have six years from the date of permit
grant to begin operating their DBS systems.  New permits and permit extensions
granted after January 19, 1996 provide for a four year construction period.
Upon completion of construction, the FCC authorizes DBS permittees to launch and
operate their satellites.  Those DBS providers which control the video
programming they distribute, and DBS licensees which offer broadcast service,
are subject to equal employment opportunity requirements.  DBS providers
offering non-broadcast service from their DBS satellites are licensed to operate
for ten years, while those offering broadcast services (that is, services
available on a non-subscription basis) are licensed for five years.  FCC
licenses must be renewed at the end of each license term.  FCC licenses are
generally renewed in the ordinary course, absent misconduct by the licensee.

  In 1995, the FCC adopted several new service rules for DBS permittees and
licensees.  The FCC established a requirement that those entities acquiring DBS
permits or licenses after January 19, 1996, must provide service to Alaska and
Hawaii if such service is technically feasible.  It also required that all
existing DBS permittees and licensees provide service to Alaska and Hawaii from
at least one of their currently assigned orbital positions or relinquish their
western orbital location.  In addition, the FCC revised its rules with respect
to licensees' ability to use portions of their satellite capacity for non-DBS
services.  The FCC provided that licensees must principally use their DBS
authorizations for DBS service, but that during their first five years in
operations, licensees may offer non-DBS services.  After five years, licensees
may continue to provide non-DBS services so long as at least half of their total
satellite capacity at a given orbital location is used for DBS service.

                                      I-24
<PAGE>

  In December 1996, the International Bureau of the FCC concluded that foreign
ownership restrictions do not apply to subscription DBS service.  This decision,
however, is subject to a pending review by the FCC, and the current
Administration has requested that the FCC reconsider its decision in a general
rulemaking proceeding. As described further below, the FCC has adopted a Notice
of Proposed Rulemaking and is seeking comments on the applicability of foreign
ownership restrictions to subscription DBS providers and FSS-DTH providers, such
as PRIMESTAR Partners. Should the FCC determine that foreign ownership
restrictions apply to subscription DBS service providers, then, as a condition
to the consummation of the ASkyB Transaction, New PRIMESTAR would have to seek a
waiver of such restrictions.  There can be no assurance that the FCC would grant
such a waiver.

  Regulations proposed for DBS, but not yet adopted by the FCC include access
requirements for federal political candidates on DBS systems, limitations on
charges for advertising by political candidates and a requirement that DBS
providers reserve four to seven percent of their channel capacity for
noncommercial programming of an educational and informational nature.  In the
spring of 1997, the FCC announced during an FCC-sponsored DBS discussion that it
planned to initiate a review of its DBS rules by year-end.

  On February 26, 1998, the FCC released a Notice of Proposed Rulemaking to
consolidate the construction permit and licensing process for DBS providers, to
consolidate the DBS rules with the FCC's other satellite rules, and to update
the  DBS technical rules.  The FCC also requests comment on the application of
foreign ownership limitations to subscription DBS and FSS-DTH providers, such as
PRIMESTAR Partners; whether any limitations on cable/DBS cross-ownership are
warranted and whether the FCC should have a rule of general applicability
restricting cable interests in DBS licensees; and how the delivery of DBS
service can be improved to Alaska, Hawaii, and the U.S. territories and
possessions.  TSAT cannot predict how application of the FCC's proposed rules
will affect its own or PRIMESTAR Partners' operations, the operations of New
PRIMESTAR or the operations of its competitors, or the applications pending at
the FCC as descried below in "Required FCC Approvals."

  The satellite that PRIMESTAR Partners currently uses and the satellites it
proposes to use in the future are geostationary satellites ("GSOs").  At
present, no satellite systems except other GSO systems have been authorized to
use the frequency bands in which PRIMESTAR Partners' satellites transmit and
will transmit in the future.

  In 1997, an application was filed at the FCC by SkyBridge L.L.C. to construct
and operate a nongeostationary satellite system ("NGSO") that would share
frequencies used by the PRIMESTAR Partners satellites and other GSO satellites.
In addition, the FCC initiated a rulemaking proceeding to address potential
regulations for NGSO systems such as the one proposed by SkyBridge L.L.C.  At
the World Radiocommunication Conference ("WRC") in late 1997, the International
Telecommunications Union ("ITU") adopted "provisional" technical rules that
would authorize frequency sharing between GSO and NGSO systems.  These
provisional rules are subject to affirmation and/or modification at a WRC
meeting scheduled for 1999.

                                      I-25
<PAGE>

  PRIMESTAR Partners and many other users and operators of GSO satellite systems
have expressed concerns regarding potential technical interference to GSO
satellites that could be caused by NGSO systems, including those that might
operate pursuant to the 1997 WRC provisional rules.  PRIMESTAR Partners and
other GSO users and operators are participating in FCC proceedings and in the
preparation process for the WRC meeting in 1999 in an  attempt to assure that
any rules finally adopted by the ITU and the FCC for GSO/NGSO frequency sharing
would not result in unacceptable technical interference to GSO transmissions.
PRIMESTAR Partners cannot now predict the outcome of these various proceedings
or what effect, if any, GSO/NGSO frequency sharing would have on its technical
operations or business.

  In addition, regulations promulgated by governmental entities other than the
FCC may affect the distribution of programming by DBS providers.  The SHVA
prohibits the retransmission by a satellite carrier of the television broadcast
signal of a network television station to households that receive a Grade B
intensity over-the-air signal of a television broadcast station affiliated with
such network and to households that receive (or within the past 90 days had
received) through a cable system the signal of a television station affiliated
with such network.  The Partnership has received numerous challenges to its
network subscribers from certain network affiliates and in some instances has
discontinued network service to certain subscribers.  The networks and their
affiliates have commenced infringement actions against certain other satellite
carriers for violation of the network service restrictions.  However, while the
networks and affiliates have from time to time threatened litigation, none of
the networks or affiliates has yet asserted any claim for damages under
applicable law against the Partnership or any of the other parties to the Roll-
up Plan.  Negotiations are continuing between representatives of the
Partnership, the National Association of Broadcasters, certain network-
affiliated television stations and their respective affiliate associations
regarding a proposed Settlement and Compliance Agreement, which agreement is
expected to provide for pre-screening techniques for customers based on zip
codes and maps to ensure compliance with SHVA procedures, the time for
disconnecting any existing non-compliant network subscribers, and provisions for
mutual release for any past or future liability.  Although a final agreement
with respect to such matters has not yet been executed, the Partnership
currently expects to enter into such agreement during April 1998. However, if an
agreement is not reached, it is likely that litigation will be initiated against
the Partnership. The SHVA provides for remedies which can include actual
damages, injunctions, and statutory damages. Statutory damages per individual
claim are limited to $5.00 per subscriber, per month, and statutory damages for
a pattern or practice of violations are limited to $250,000 in a six month
period. At present, the Partnership is unable to determine the basis upon which
any damages might be calculated or what their amount might be. Therefore, it is
not possible to assess the impact, if any, of such unasserted claims on the
Partnership's results of operations or cash flow. Management is also currently
unable to determine the extent to which the restriction on the delivery of
network service to subscribers, as contemplated by the proposed Settlement and
Compliance Agreement, would have on the marketing of the Partnership's services
generally.

                                      I-26
<PAGE>

  The Copyright Office reviewed the SHVA and submitted its report to Congress on
August 1, 1997.  Of particular note, the Copyright Office recommended the
adoption of a "red zone/green zone" plan under which satellite carriers
generally would be barred from retransmitting a network-affiliated station to
households located within the local market area (i.e., Area of Dominant
Influence) of another affiliate of the same network, but would be permitted to
retransmit (subject to payment of the applicable SHVA royalty fee) a network-
affiliated station to households located in any Area of Dominant Influence that
is not served by an affiliate of the same network.  The Copyright Office further
proposed that a new royalty fee system be established that would permit
satellite carriers to retransmit a network-affiliated station to households
located in the local market of another affiliate upon the payment of a royalty
fee which would be distributed to network affiliates.  The Copyright Office also
recommended that the Copyright Act be amended to expressly permit satellite
carriers to retransmit a network affiliated station to households located in
that station's own market.  The Copyright Office took no position on whether
there should be a royalty fee payment imposed for such "local into local"
retransmissions.  Lastly, the Copyright Office recommended that Congress
indefinitely extend the satellite carrier license, similar to the cable
compulsory license.  The recommendations of the Copyright Office do not
currently have legal force or effect, and will not have legal force or effect
unless and until they are adopted by Congress and enacted as legislation.  On
February 12, 1998, a bill was introduced in the House of Representatives (H.R.
3210) which would permit satellite carriers to provide local broadcast signals.

  A Copyright Arbitration Royalty Panel ("CARP") convened pursuant to the terms
of the SHVA recommended that the Librarian of Congress adopt an increase in the
royalty fees paid by satellite carriers for the distribution of superstations
and network affiliates directly to homes to a level commensurate with fair
market value. Specifically, the CARP recommended that the rates be increased
from their current level, $0.06 per subscriber per month for network signals and
$0.175 ($0.14 for certain "syndex proof" stations) per subscriber per month for
superstations, to a uniform rate of $0.27 per subscriber per month for all
signals.  The satellite carriers filed petitions with the Librarian of Congress
to set aside or modify the report, arguing, inter alia, that the new rate is
unfair because it is well in excess of the effective royalty rates currently
paid by cable television systems, and because their increases were made
effective retroactively to July 1, 1997.  The Librarian of Congress released his
report on October 27, 1997, adopting CARP's recommendation.  However the
Librarian of Congress rejected CARP's recommendation to make the new fees
retroactive, and instead, made the new fees effective as of January 1, 1998.
The SBCA, representing the satellite carriers, filed a petition with the
Librarian of Congress requesting a stay of the effectiveness of the rate
increase, pending judicial review or congressional action.  The Librarian of
Congress denied the petition.  The SBCA also filed a petition seeking review of
the rate increase with the U.S. Court of Appeals for the District of Columbia.
In addition, the satellite carriers requested Congress to override the rate
adjustment by legislation.  A bill has been introduced in the Senate (S. 1422)
which would delay an increase in the royalty fees until January 1, 1999 and
would require the FCC to report to Congress within 180 days of enactment of the
legislation on the effect of the increase of the royalty fees on the satellite
carriers' abilities to compete in the market for delivery of multichannel video
programming.  A bill also has been introduced in the House of Representatives
(H.R. 2921) which is similar to the Senate bill and requires a stay of the
royalty increase until the FCC reviews the effects on the market and reports to
Congress; however, the stay would be in effect no later than 210 days after
enactment.  No assurance can be given that the carriers will be able to obtain
relief from the U.S. Court of Appeals or Congress.  With the rate increase, the
Company and/or New PRIMESTAR (and all other direct broadcast satellite
and direct-to-home satellite service providers) may be competitively
disadvantaged as against cable operators.

                                      I-27
<PAGE>

  The Telecommunications Act of 1996.  The Telecommunications Act of 1996 ("1996
Act") clarified that the FCC has exclusive jurisdiction over direct-to-home
satellite services, and that criminal penalties may be imposed for piracy of
direct-to-home satellite services.  The 1996 Act also preempted local (but not
state) governments from imposing taxes or fees on direct-to-home services,
including DBS, and directed the FCC to promulgate regulations prohibiting local
(including state) governments from maintaining zoning or other regulations that
impair a viewer's ability to receive video programming services through the use
of DBS receive-only dishes in residential areas. The FCC has adopted rules that
it believes comply with the statutory requirements. Finally, the 1996 Act
requires that multichannel video programming distributors such as DBS operators
scramble or block channels providing indecent or sexually explicit adult
programming.

  Existing FCC Permits and Licenses. Tempo holds the FCC Permit, which
authorizes construction of a high power DBS system consisting of two or more
satellites delivering DBS service in 11 frequencies at the 119 degrees W.L.
orbital location and 11 frequencies at the 166 degrees W.L. orbital location. As
the holder of a DBS permit, Tempo is subject to FCC jurisdiction and review
primarily for: (i) authorization of individual satellites (i.e. meeting minimum
financial, legal, and technical standards) and earth stations, (ii) avoiding
interference with other radio frequency transmitters, (iii) complying with the
rules the FCC has established specifically for holders of U.S. DBS
authorizations and (iv) complying with applicable provisions of the
Communications Act. Under the FCC Permit, which was issued in May 1992, the time
by which the Tempo Satellites must be operational expires in May 1998. TSAT
believes that it has complied with the obligations for Tempo DBS-1 to become
operational by that date, but there can be no assurance that the FCC would agree
that such satellite is operational, and if an application for extension of the
FCC Permit were required, there can be no assurance that such an extension would
be granted by the FCC.

  In an order released February 24, 1997, the International Bureau of the FCC
granted, subject to certain conditions, Tempo's request to launch and operate
the Tempo DBS-1 satellite at 119 degrees W.L. and to test its satellite at 109.8
degrees W.L. for eight weeks. In addition, the International Bureau required
Tempo to submit to the FCC information required to initiate advance publication
and notification of Tempo's operations in accordance with the Radio Regulations
of the International Telecommunications union. The International Bureau also
granted Tempo authority to modify its satellite design, as requested in a July
1993 application, and denied oppositions which had been filed by numerous
existing and potential DBS competitors. Tempo DBS-1 was launched on March 8,
1997, and is now stationed in its authorized location at 119 degrees W.L. Tempo
may need to file an application with the FCC for a license to operate the
satellite in orbit. Tempo expects that the FCC would approve any such request,
but cannot assure the ultimate outcome. Tempo DBS-1 is currently expected to be
available for commercial operations in the second quarter of 1998, but if it
does not become operational by May 1998, Tempo may need to apply to the FCC for
an extension of time to complete its system at 119 degrees W.L. Tempo cannot be
certain that such an extension would be granted.

  At present, Tempo must continue to demonstrate that it is exercising due
diligence in progressing toward the completion of its system at 166 degrees W.L.
and has in place the Satellite Construction Agreement with Loral to fulfill this
due diligence requirement. There can be no assurance that Tempo will be able to
comply with the FCC's due diligence obligations for 166 degrees W.L. or that the
FCC will determine that Tempo has complied with such due diligence obligations.
If Tempo is unable to meet the terms of its permit, it would be necessary for
Tempo to apply to the FCC for an extension of time to complete its DBS system at
166 degrees W.L. Tempo cannot be certain that such an extension would be
granted.

                                      I-28
<PAGE>

  While Tempo generally has been successful to date with respect to compliance
with regulatory matters, there can be no assurance that it will succeed in
obtaining all requisite regulatory approvals for its operations without the
imposition of restrictions on or other adverse consequences to Tempo or TSAT.

  Required FCC Approvals.  On July 18, 1997, TSAT and the Partnership filed an
application with the FCC for consent to the transfer of control of Tempo, as the
holder of the FCC Permit, to New PRIMESTAR (the "Transfer Application").  The
FCC released a Public Notice of the Transfer Application on July 23, 1997,
establishing procedural dates for petitions to deny and responsive pleadings.
EchoStar, CAI Wireless Systems, Inc., the Small Cable Business Association and
Media Access Project filed petitions to deny the Transfer Application, while
DirecTv and the Wireless Cable Association International filed comments on the
Transfer Application.  These petitions and comments request that the FCC deny or
dismiss the Transfer Application on a variety of procedural and substantive
grounds or that the FCC condition its approval of the Transfer Application upon
New PRIMESTAR's and the Restructuring Parties' compliance with restrictions
designed to ensure access to programming and protect against cross-
subsidization, among other requests.  TSAT and the Partnership filed a joint
opposition to these petitions and comments, and the National Rural
Telecommunications Cooperative filed a reply comment in support of DirecTv's
comments.  The petitioners and commenters filed replies to TSAT's and the
Partnership's opposition on September 9, 1997.  There can be no assurance that
the FCC's review of these documents or the Transfer Application will be
favorable, or that the FCC will not impose conditions unacceptable to TSAT, the
Partnership, or the other Restructuring Parties in connection with its review.

                                      I-29
<PAGE>

  On August 15, 1997, the Partnership (on behalf of New PRIMESTAR) and MCI filed
an application with the FCC for consent to the assignment to New PRIMESTAR of
the high power DBS authorizations and certain other assets described above owned
by MCI (the "Assignment Application").  As part of this transaction, ASkyB, an
entity presently indirectly wholly-owned by News Corp., will acquire non-voting
securities convertible into an approximate 33% equity interest in New PRIMESTAR.
Upon the transfer of such non-voting securities to any person other than
affiliates of ASkyB, the non-voting securities would be converted into shares of
New PRIMESTAR Class A Common Stock representing approximately 20% of the voting
power of New PRIMESTAR.  The FCC released a Public Notice of the Assignment
Application on August 25, 1997, establishing procedural dates for petitions to
deny and responsive pleadings. EchoStar, DirecTv, SCBA, United Church of Christ
("UCC") et al., and the Wireless Cable Association filed petitions to deny the
Assignment Application.  The National Rural Telecommunications Cooperative,
BellSouth et al., and Ameritech New Media filed comments on the Assignment
Application,  The Partnership, MCI and News Corp. filed separate oppositions to
these petitions.  Replies were filed on October 20, 1997.  The issues raised in
these petitions, comments and replies include the following: (1) opposition to
the Partnership or New PRIMESTAR holding the 110 degrees W.L. authorization; (2)
opposition to the Partnership of New PRIMESTAR simultaneously holding
authorizations for both the 110 degrees W.L. orbital position (28 transponders)
and the 119 degrees W.L. orbital position (11 transponders), which together
represent about 40% of the total transponder capacity in the three orbital
positions allocated to the U.S. for DBS service that provide full CONUS
visibility; (3) requests for extension of the FCC's rules governing access to
satellite delivered programming to News Corp. and expansion of those rules to
programming not delivered by satellite (such as broadcast television stations),
and (4) issues relating to the possible applicability of the Communications
Act's Section 310(b) foreign ownership restrictions. UCC et al. also filed a
petition to stay the effectiveness of MCI's DBS authorizations or, in the
alternative, to hold the MCI authorization and the Transfer Application and the
Assignment Application in abeyance, pending the initiation and resolution of a
rulemaking on the applicability of certain statutory provisions to DBS
providers, including the foreign ownership provisions. The Partnership filed an
opposition to this petition, which is presently pending before the FCC. There
can be no assurance that the FCC's review of these and other documents or the
Assignment Application will be favorable, or that the FCC will not impose
conditions unacceptable to New PRIMESTAR, MCI, ASkyB or News Corp. in connection
with its review.

  In support of the Transfer Application and Assignment Application, the
Partnership filed two ex parte filings.  The first filing was an economic study
                      --------
prepared by outside economic consultants which demonstrated that (1) an analysis
of PRIMESTAR Partners' penetration in cabled areas served by a PRIMESTAR Partner
and those areas served by a non-affiliated cable operator does not indicate a
systematic strategy by the Partnership to compete selectively and (2) New
PRIMESTAR's incentives to compete are comparable to those of a stand-alone DBS
operator.  The second filing was an analysis of the Transfer Application and
Assignment Application proceedings using the framework established in the FCC's
Bell Atlantic/NYNEX decision, as well as a summary of the Partnership's
--------------------
responses to the arguments and requested conditions raised by parties during the
proceedings. The FCC requested responses to those filings from interested
parties. EchoStar and DirecTV argued that both Applications should be denied,
while BellSouth and the Wireless Cable Association requested conditions
regarding the availability of programming affiliated with New PRIMESTAR's
owners. EchoStar also filed a motion seeking access to the underlying data used
by the economic consultants or, in the alternative, deletion of the economic
filing from the records. PRIMESTAR Partners filed a response to all of these
filings on February 20, 1998, rejecting the arguments raised by the parties, and
PRIMESTAR Partners requested expedited approval of the Applications.

                                      I-30
<PAGE>

  On March 2, 1998, the Chief of the International Bureau of the FCC submitted
to the Partnership a letter request for the submission of certain documents
previously submitted to the Department of Justice as well as certain information
regarding the economic study described above and information regarding the
programming interests of the Partnership's cable owners.  Once these documents
are submitted pursuant to a suitable protective order, it is anticipated that
interested parties will be given an opportunity to comment and the Partnership
will be given an opportunity to reply.  On March 5, 1998, the Chief of the
International Bureau of the FCC requested that the Partnership submit by March
11, 1998, a copy of any lease agreement for the Tempo capacity at 119 degrees
W.L., as well as the underlying option agreement and other agreements that may
affect the terms and conditions of the lease or purchase.

  Antitrust Decree.  The Partnership and the Partners named in the actions
described below are subject to the jurisdiction of the U.S. District Court for
the Southern District of New York to ensure compliance with an antitrust consent
decree. In United States v. PRIMESTAR Partners, L.P., et al., 93 Civ. 3919 (SDNY
1993) (the ''Federal Decree''), the Partnership and such Partners agreed to
refrain from (i) enforcing any provisions of the PRIMESTAR Partnership Agreement
that affect the availability, price, terms or conditions of sale of programming
to any provider of multichannel subscription television, or (ii) entering into
certain other agreements restricting the availability of programming services.
The Company was not named as a defendant in the above action, but may be subject
to certain provisions of the Federal Decree as a successor-in-interest to TCI K-
1, Inc. and United Artists K-1 Investments, Inc., indirect subsidiaries of TCI
that were original partners in PRIMESTAR Partners and named defendants in the
action. The Company believes that it is currently in compliance with the Federal
Decree in all material respects and that the Federal Decree does not currently
have a material adverse effect on the Company or its operations.  In any event,
the Federal Decree will continue to apply to New PRIMESTAR after consummation of
the Restructuring Transaction (whether or not the TSAT Merger is consummated)
and could be expanded as a condition for any necessary governmental approvals of
the ASkyB Transaction.  Such conditions may be unacceptable to New PRIMESTAR.

                                      I-31
<PAGE>

PRIMESTAR Partnership Agreement
--------------------------------

  Pursuant to the PRIMESTAR Partnership Agreement, the business and affairs of
the Partnership are managed and controlled by a committee (the "Partners
Committee"), composed of representatives of each of the partners and two
independent members. The Company has two voting representatives on the Partners
Committee, TWE has two voting representatives, and Cox, Comcast, MediaOne,
Newhouse and GE Americom each have one voting representative. Ordinary decisions
of the Partners Committee require the consent of a majority of the members of
the Partners Committee, which majority must include a majority of the
representatives of the Partners. Certain extraordinary decisions of the Partners
Committee, including, without limitation, decisions regarding the dissolution,
merger or sale of substantially all the assets of the Partnership; the admission
of additional partners; calls for capital contributions; the approval of the
annual budget; the appointment or dismissal of Partnership senior management;
the determination of the Partnership's policies with respect to the distribution
of its programming services; the selection of satellites (including successor
satellite capacity, the decision whether the Partnership should provide services
at BSS or higher frequencies and the decision to exercise the End-of-Life
Option); the determination to take any action that would cause the amount of the
letters of credit required to be issued in connection with the Partnership's
obligations under the GE-2 Agreement to exceed $100,000,000; the decision to
effect certain material changes to the GE-2 Agreement and certain related
agreements with respect to the letters of credit issued in connection with the
GE-2 Agreement; and the decision to provide any optional letters of credit, or
pledge, grant a security interest in or otherwise create a lien on any material
assets of the Partnership to secure the payment of reimbursement obligations of
the Partnership with respect to letters of credit issued in connection with the
GE-2 Agreement require, in addition to a majority vote, the affirmative vote of
at least six of the nine partner representatives on the Partners Committee
(assuming that no partner representative is required to abstain in such vote),
or such other vote as shall be required by the PRIMESTAR Partnership Agreement
if one or more partner representatives are required to abstain in such vote
under the terms of the PRIMESTAR Partnership Agreement because of such
Partner's, or an affiliate's, interest in the outcome thereof.

  Pursuant to the PRIMESTAR Partnership Agreement, if the Company fails to pay
its share of capital contributions or loans that the Partners agree to require
or that are contemplated by budgets or business plans approved by the Partners,
or that are otherwise necessary in order to satisfy partnership commitments, the
Company's interest in the Partnership will be diluted and, if such interest is
diluted to less than 5%, its right to vote or exercise certain other rights may
be forfeited.

  As a result of the Restructuring Transaction, New PRIMESTAR will own all of
the general and limited partnership interests in the Partnership, and the
Partnership Agreement will be terminated or amended to remove all of its
management provisions.

Certain Agreements
------------------

  The Company is subject to the provisions of certain agreements that may limit
the ability of the Company to engage in, or invest in entities that engage in,
certain businesses, other than through the Partnership.

                                      I-32
<PAGE>

  Tag-Along Agreement.   Tempo is a party to the Tag-Along Agreement, originally
entered into by and among Cox Enterprises, Inc., Comcast, MediaOne and Newhouse
Broadcasting Corporation (subsidiaries of each of which are Partners), Tempo,
TCIC and TCI Development Corporation, a subsidiary of TCIC (the ''Tag-Along
Agreement''). The Tag-Along Agreement provides that if any party to the
agreement, directly or indirectly through any person controlled by such party
(an ''Investing Party''), engages in, or makes an equity investment in any
entity engaging or proposing to engage in, the business of providing television
programming by uplink to BSS or higher frequency domestic satellite
transponders, or otherwise becomes entitled to exercise a management role with
respect to any such entity, at any time that such party or a person controlled
by such party is a Partner, or within one year after it ceases to be a Partner,
then, subject to certain exceptions, such party shall provide the other parties
with a written offer to participate in such investment or other transaction on
terms and conditions comparable to those available to the Investing Party, pro
rata in accordance with their respective percentage interests in the Partnership
at the time of such offer. The Tag-Along Agreement further provides that if a
party transfers assets to a person that is not majority owned or controlled by
such party but which person either is the ''ultimate parent'' of, or has the
same ''ultimate parent'' as, such party, then such party must cause such
affiliate to become a party to the Tag-Along Agreement. The term ''ultimate
parent'' as used in the Tag-Along Agreement has the meaning ascribed to such
term in the Hart-Scott-Rodino Antitrust Improvement Act of 1976, as amended
(''HSR Act''). Generally under the HSR Act, the ''ultimate parent'' of a person
is an entity that directly or indirectly owns at least 50% of the voting
securities of such person or has the contractual right to designate 50% or more
of a board of directors of such person. The Tag-Along Agreement will terminate
upon the termination or dissolution of the Partnership, or, if earlier, when the
parties to the Tag-Along Agreement and their affiliates cease to be partners of
the Partnership.

  Partnership Agreement Provisions Regarding Investments in Similar Businesses.
The PRIMESTAR Partnership Agreement provides, among other things, that if any
Partner, or an affiliate of a Partner, engages in, or makes an equity investment
in any entity engaging or proposing to engage in, the business of providing
television programming by uplink to FSS, BSS or higher frequency domestic
satellite transponders, directly or indirectly to HSDs, or otherwise becomes
entitled to exercise a management role with respect to any such entity, then
such Partner (the ''Notifying Partner'') shall be required to give notice of
such investment or other transaction to the Partnership and the other Partners,
and the Partnership, by vote of the Partners Committee, with the Notifying
Partner abstaining, shall have the right, but not the obligation, to elect one
of the following courses of action: (i) to remove the Notifying Partner's
representative from the Partners Committee, in which case the Notifying Partner
will no longer be entitled to make capital contributions to the Partnership or
to receive any financial or other information about the Partnership, other than
audited year-end financial statements and tax-related information; or (ii) to
purchase the Notifying Partner's entire interest in the Partnership for a
purchase price equal to the fair market value thereof, payable in cash or, at
the option of the Partnership, for a combination of cash and a three-year
promissory note. Notwithstanding the foregoing, the Partnership will not have
the right to exercise either of the foregoing alternatives if the Notifying
Partner, or its affiliate, acquires an equity interest in an entity that engages
in, or proposes to engage in, the business of uplinking television programming
to BSS or higher frequency domestic satellite transponders, and the Partnership
does not then uplink its programming to BSS or higher frequency transponders and
does not, within 120 days thereafter, make a commitment to such transmission
method comparable to the commitment of such other entity. The Partnership will
also not have the right to exercise either of such remedies if the Notifying
Partner, or its affiliate, offers each other Partner who did not vote against
the Partnership making a commitment to such transmission method, or its
affiliate, an opportunity to participate with the Notifying Partner or its
affiliate in its equity interest in such BSS business.

                                      I-33
<PAGE>

  If the Restructuring Transaction is consummated, the Tag-Along Agreement and
the provisions of the PRIMESTAR Partnership Agreement regarding investments in
similar businesses will be terminated.

Other
-----

  Legislative, administrative and/or judicial action may change all or portions
of the foregoing statements relating to competition and regulation.

  The Company has not expended material amounts during the last three fiscal
years on research and development activities.

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

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

  The Company had approximately 1,100 employees as of December 31, 1997. None of
the Company's employees are represented by a union and the Company believes its
employee relations are good.  Upon consummation of the Restructuring Transaction
the majority of TSAT's employees will become employees of New PRIMESTAR.

  (d)  Financial Information about Foreign and Domestic Operations and Export
       -----------------------------------------------------------------------
       Sales
       -----

       Not applicable.

Item 2.  Properties.
------   ----------

  The Company owns no real estate. The Company has entered into noncancellable
operating leases for all of its facilities, including its corporate headquarters
and National Call Center, both of which are located in Englewood, Colorado.  All
of such operating leases expire at various times through 2008. The Company
believes that such facilities are in good condition and are suitable and
adequate for its business operations for the foreseeable future.  Upon
consummation of the Restructuring Transaction, New PRIMESTAR will succeed to
such facilities and will assume the leases relating thereto.

                                      I-34
<PAGE>

Item 3.  Legal Proceedings.
------   -----------------

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

  On September 30, 1997, a civil action entitled Croce Advertising, Inc. v. TCI
                                                 ------------------------------
Digital Satellite Entertainment, Inc., d/b/a PRIMESTAR By TCI and The Hibbert
-----------------------------------------------------------------------------
Company d/b/a The Hibbert Group was filed in the U.S. District Court for the
-------------------------------
District of Colorado, Civil Action No. 97-S-2130.  On October 20, 1997, the
plaintiff filed an amended complaint naming TSAT as a defendant and dropping TCI
Digital Satellite Entertainment, Inc. d/b/a PRIMESTAR By TCI from the action.
Service was made upon TSAT on October 20, 1997.  Croce alleges copyright
infringement based on its allegations that after its relationship with TSAT was
terminated, TSAT reprinted certain marketing materials created by Croce.  TSAT
is investigating the merits of the claim and believes it has legitimate
defenses.  Croce's claim for damages includes alleged profits related to the
printing of the materials at issue and TSAT's profits from the use of these
materials.  Croce also named The Hibbert Company as a defendant on the copyright
infringement claim because The Hibbert Company printed certain TSAT marketing
materials.  TSAT has agreed to indemnify The Hibbert Company for costs and
damages arising out of the copyright claim. Croce's remaining claims arise out
of the parties' ongoing dispute concerning unpaid invoices. Croce alleges that
TSAT owes $4,962,560.05 on these invoices, plus interest from March 7, 1997,
until final resolution.  New PRIMESTAR has agreed to indemnify TSAT for any
potential liability with respect to this matter, to the extent not covered by
insurance or other third party indemnification obligations, subject to
consummation of the Restructuring Transaction.  Management of TSAT believes
that, although no assurance can be given regarding the outcome of this action,
the ultimate disposition should not have a material adverse effect upon the
financial condition of TSAT.

  In a civil action entitled Jerry Wayne Self v. PRIMESTAR By TCI, el al., filed
                             -------------------------------------------
in the Circuit Court of Jefferson County, Alabama, Civil Action No. 96-831, an
Order of Judgment was entered against PRIMESTAR by TCI on November 12, 1997, in
the amount of $4,257,242, consisting of medial expenses of $15,242, lost wages
of $52,000, future lost wages of $1,040,000, physical and mental pain and
suffering in an amount of $150,000 and punitive damages of $3,000,000.  The
judgment arises out of a case in which the plaintiff alleges that on September
19, 1995, he was riding in the front seat of a car that was struck head-on by a
car driven by William Francis Hinton, causing the plaintiff to suffer injuries.
The plaintiff alleges that Hinton was intoxicated and was "acting within the
line and scope of his employment" for PRIMESTAR By TCI when the accident
occurred.  "PRIMESTAR By TCI" is a trade name currently or formerly used in
certain jurisdictions by TSAT and/or its predecessors.  On December 3, 1997,
TSAT filed an Answer and Affirmative Defenses and a Motion to Set Aside Entry of
Default and Default Judgment or in the Alternative for Relief from Judgment or
in the Alternative a Motion to Reconsider or for a New Trial.  On December 12,
1997, the Court entered an order setting aside the Entry of Default and Default
Judgment. New PRIMESTAR has agreed to indemnify TSAT for any potential liability
with respect to this matter, to the extent not covered by insurance or other
third party indemnification obligations, subject to consummation of the
Restructuring Transaction.  Management of TSAT believes that, although no
assurance can be given regarding the outcome of this action, the ultimate
disposition should not have a material adverse effect upon the financial
condition of TSAT.

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

         None.

                                      I-35
<PAGE>

                                   PART II.


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

     On December 5, 1996 shares of Series A Common Stock, and Series B Common
Stock, commenced trading on the Nasdaq National Market tier of the Nasdaq Stock
Market 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 periods indicated as
furnished by Nasdaq.  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>
   1996
   ----
       Fourth quarter 1996 (beginning
       December 5, 1996)                       13 1/8          9 7/8            13            10

   1997
   ----
       First quarter                           10 1/2          6 7/8            11         7 1/2
       Second quarter                          10 3/4          5 3/4        11 3/8         6 5/8
       Third quarter                            9 1/4          6 3/8         9 1/2         6 1/2
       Fourth quarter                           8 3/4          5 3/4             8         5 3/4
</TABLE>

   As of January 31, 1998, there were 5,775 and 350 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.  Following the Restructuring Transaction and prior to the TSAT
Merger, the Company will be a holding company and, as such, the Company's
ability to pay cash dividends will be dependent on its ability to receive cash
dividends, loans and advances from its subsidiaries and New PRIMESTAR.
Moreover, during the term of the TSAT Merger Agreement, the Company will be
subject to the covenants provided for therein, including the Company's agreement
not to, and to cause each of its subsidiaries not to, declare, set aside or pay
any dividend with respect to any shares of its capital stock.  In addition, the
Company is subject to loan and other agreements that prohibit or limit the
ability of the Company to pay dividends on its common equity and following the
Restructuring Transaction, such agreements will be assumed by New PRIMESTAR.
For further discussion of such restrictions, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations."

   During the three months ended December 31, 1997, TSAT issued 2,000 shares of
Series A Common Stock to TCI for aggregate consideration of $2,000.  Such shares
were issued pursuant to a "Share Purchase Agreement" between TSAT and TCI to
allow TCI to meet its obligations under the conversion features of certain
convertible securities of TCI.  The issuance was made in reliance on the
exemption from registration afforded by Section 4(2) of the Securities Act.

                                      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, 1997 are summarized
as follows (such information should be read in conjunction with the accompanying
financial statements of the Company):
<TABLE>
<CAPTION>
                                                         Years ended December 31,
                                      --------------------------------------------------------------
                                          1997          1996          1995         1994         1993
                                      ------------  ------------  ------------  -----------  -----------
                                                          amounts in thousands,
                                                        except per share amounts
Summary Statement of Operations Data:
-------------------------------------
<S>                                   <C>           <C>            <C>            <C>         <C>
Revenue                                $561,990       417,461        208,903        30,279      11,679
Operating, selling, general and
 administrative expenses and stock
 compensation                          (489,947)     (410,390)      (214,117)      (25,106)     (7,069)
Depreciation (1)                       (243,642)     (191,355)       (55,488)      (14,317)     (6,513)
                                       --------      --------        -------       -------      ------
   Operating loss                      (171,599)     (184,284)       (60,702)       (9,144)     (1,903)
Interest expense (2)                    (47,992)       (2,023)            --            --          --
Share of losses of PRIMESTAR Partners   (20,473)       (3,275)        (8,969)      (11,722)     (5,524)
Other, net                                1,723         3,641            306           306          88
Income tax benefit                           --        45,937         21,858         6,872       2,505
                                       --------      --------        -------       -------      ------
   Net loss                           $(238,341)     (140,004)       (47,507)      (13,688)     (4,834)
                                      =========      ========        =======       =======      ======

Basic and diluted loss per common
  share (3)                              $(3.58)        (2.11)          (.72)
                                      =========      ========        =======
</TABLE>

<TABLE>
<CAPTION>
                                                               December 31,
                                      --------------------------------------------------------------
                                          1997          1996          1995         1994         1993
                                      ------------  ------------  ------------  -----------  -----------
                                                           amounts in thousands
Summary Balance Sheet Data:
---------------------------
<S>                                  <C>            <C>            <C>            <C>          <C>
Property and equipment, net           $1,121,937     1,107,654      889,220        397,798      95,323
Investment in, and related advances
 to, PRIMESTAR Partners               $   11,093        32,240       17,963          9,793      19,625
 Total assets                         $1,204,856     1,180,273      933,443        410,105     116,495
Due to PRIMESTAR Partners             $  463,133       457,685      382,900        278,772      71,164
Debt (2)                              $  418,729       247,230           --             --          --
Equity                                $  136,269       372,358      483,584        120,526      43,349
</TABLE>
------------
(1)  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.

(2)  Effective December 31, 1996, TSAT entered into a bank credit facility with
     initial commitments of $350,000,000.  In addition, on February 20, 1997,
     TSAT issued the Notes with aggregate principal amounts at maturity of
     $475,000,000.

                                      II-2
<PAGE>

(3)  In connection with the December 4, 1996 consummation of the Distribution,
     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 Distribution
     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.

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

General
-------

          Roll-up Plan

     On March 6, 1998, the TSAT stockholders voted to approve a proposal to
adopt the provisions of certain agreements and the transactions contemplated
thereby as detailed below.

          Restructuring Transaction
          -------------------------

     Pursuant to the Restructuring Agreement and the TSAT Asset Transfer
Agreement, it is contemplated that the Restructuring Transaction will be
consummated whereby (a) TSAT will contribute and transfer to New PRIMESTAR 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 Transaction and (III)
the rights and obligations under certain agreements with New PRIMESTAR related
to the Restructuring Transaction and (b) the business of PRIMESTAR Partners and
the business of distributing the PRIMESTAR(R) programming service of each of
TWE, Newhouse, Comcast, Cox and affiliates of MediaOne will be consolidated into
New PRIMESTAR.

     In connection with the TSAT Asset Transfer, at the closing, New
PRIMESTAR will assume all of TSAT's indebtedness on such date, and TSAT will
receive from New PRIMESTAR such number of  shares of New PRIMESTAR Class A
Common Stock and New PRIMESTAR Class B Common Stock, respectively, as equals the
number of shares of Series A Common Stock and Series B Common Stock,
respectively, issued and outstanding or deemed to be issued and outstanding on
the closing date, in accordance with the Restructuring Agreement and the TSAT
Asset Transfer Agreement.  TSAT will own approximately 36% of the outstanding
shares of common equity of New PRIMESTAR at the closing of the Restructuring
Transaction, representing approximately 37% of the combined voting power of such
common equity.

     As a result of the TSAT Asset Transfer, TSAT will become a holding
company, with no substantial assets or liabilities other than (i) 100% of the
outstanding capital stock of Tempo, (ii) its ownership interest in New
PRIMESTAR, and (iii) its rights and obligations under certain agreements with
New PRIMESTAR.  The respective obligations of the parties to the Restructuring
Agreement to consummate the Restructuring Transaction are subject to the
satisfaction or waiver of a number of conditions.

                                      II-3
<PAGE>

     The TSAT Asset Transfer will be recorded at TSAT's historical cost due
to the fact that New PRIMESTAR is a wholly-owned subsidiary of TSAT.  The
remaining elements of the Restructuring Transaction, as set forth above, will be
treated as the acquisition by New PRIMESTAR of the Partnership Interests and
PRIMESTAR Assets, and the assumption by New PRIMESTAR of the PRIMESTAR
Liabilities, of the Non-TSAT Parties, and such acquisition will be accounted for
using the purchase method of accounting.  The fair value of the consideration to
be issued to the Non-TSAT Parties will be allocated to the assets and
liabilities acquired based upon the estimated fair values of such assets and
liabilities.  TSAT has been identified as the acquiror for accounting purposes
and the predecessor for financial reporting purposes due to the fact that TSAT
will own the largest interest in New PRIMESTAR immediately following
consummation of the Restructuring Transaction.

         TSAT Merger
         -----------

     Pursuant to the TSAT Merger Agreement, it is contemplated that,
subsequent to the Restructuring Transaction, TSAT will be merged with and into
New PRIMESTAR, with New PRIMESTAR as the surviving corporation.  In connection
therewith (i) each outstanding share of Series A Common Stock will be converted
into the right to receive one share of New PRIMESTAR Class A Common Stock, and
(ii) each outstanding share of Series B Common Stock will be converted  into the
right to receive one share of New PRIMESTAR Class B Common Stock, subject to
adjustment.  Each share of New PRIMESTAR's Common Stock then held by TSAT will
be canceled.  Consummation of the TSAT Merger is subject to regulatory approval
and other conditions to closing set forth in the TSAT Merger Agreement.
Accordingly, the TSAT Merger may not be consummated even if the Restructuring
Transaction is consummated.

     Upon the closing of the TSAT Merger, the then existing shareholders of
TSAT will become the direct owners of TSAT's ownership interest in New
PRIMESTAR.  The respective obligations of the parties to the TSAT Merger
Agreement to consummate the TSAT Merger are subject to the satisfaction or
waiver of a number of conditions, including, among others, occurrence of one of
the following: (i) FCC approval of TSAT's pending application to transfer
control of Tempo to New PRIMESTAR, (ii) divestiture by TSAT of the FCC Permit,
or (iii) FCC permission to consummate the TSAT Merger without divestiture of the
FCC Permit (including pursuant to an agreement to divest the FCC Permit within a
specific time period following effectiveness of the TSAT Merger).  In addition,
New PRIMESTAR has the right to terminate the TSAT Merger Agreement, and abandon
the TSAT Merger, under certain circumstances.  In light of the foregoing
conditions, there can be no assurance that the TSAT Merger will be consummated
as currently contemplated by the TSAT Merger Agreement.

     The TSAT Merger will be treated as the acquisition of TSAT by New
PRIMESTAR.  Such acquisition will be accounted for at TSAT's historical cost
since (i) the percentage of New PRIMESTAR owned by TSAT prior to consummation of
the TSAT Merger will be approximately equal to the percentage of New PRIMESTAR
to be owned by TSAT shareholders following consummation of the TSAT Merger and
(ii) the TSAT Merger and the Restructuring Transaction are both part of the
Roll-up Plan.

                                      II-4
<PAGE>

         Acquisition of Certain Satellite Assets

     In a separate transaction, pursuant to the ASkyB Agreement, New
PRIMESTAR will acquire from MCI two high-power communications satellites
currently under construction, certain authorizations granted to MCI by the FCC
to operate a direct broadcast satellite business at the 110 degrees W.L. orbital
location using 28 transponder channels, and certain related contracts.  In
consideration, ASkyB will receive, subject to closing adjustments, approximately
$600 million liquidation value of New PRIMESTAR Convertible Preferred Stock
(convertible into approximately 52 million shares of New PRIMESTAR Class D
Common Stock, subject to adjustment) and approximately $516 million principal
amount of New PRIMESTAR Convertible Subordinated Notes (convertible into
approximately 45 million shares of New PRIMESTAR Class D Common Stock).  The
fair value of the consideration to be issued to MCI in connection with the ASkyB
Transaction will be allocated to the assets acquired based upon the estimated
fair value of such assets.

     The New PRIMESTAR Convertible Subordinated Notes will be due and
payable, and the New PRIMESTAR Convertible Preferred Stock will be mandatorily
redeemable, on the tenth anniversary of the date of issuance.  The New PRIMESTAR
Convertible Preferred Stock will accrue cumulative dividends at the annual rate
of 5% of the liquidation value of such shares and the New PRIMESTAR Convertible
Subordinated Notes will have an interest rate of 5%.  Dividends on the New
PRIMESTAR Convertible Preferred Stock and interest on the New PRIMESTAR
Convertible Subordinated Notes will be payable in cash or, at the option of New
PRIMESTAR, in shares of the non-voting New PRIMESTAR Class D Common Stock, for a
period of four years.  Thereafter, all dividend and interest payments will be
made solely in cash.  Such convertible securities, and the shares of New
PRIMESTAR Class D Common Stock to be issued to ASkyB or any of its affiliates
upon conversion of such New PRIMESTAR Convertible Preferred Stock and New
PRIMESTAR Convertible Subordinated Notes, or in payment of dividend or interest
obligations thereunder, will be non-voting; however, shares of New PRIMESTAR
Class D Common Stock will in turn automatically convert into shares of New
PRIMESTAR Class A Common Stock, on a one-to-one basis, upon transfer to any
person other than ASkyB, News Corp. or any of their respective affiliates.

     Consummation of the ASkyB Transaction is contingent on, among other
things, receipt of all necessary government and regulatory approvals, and
accordingly, no assurance can be given that the ASkyB Transaction will be
consummated.


Summary of Operations
----------------------



     The following discussion of TSAT's operations does not give effect to the
proposed Roll-up Plan or ASkyB Transaction.


     The Company reported net losses of $238,341,000, $140,004,000 and
$47,507,000 during the years ended December 31, 1997, 1996 and 1995,
respectively. Improvements in the Company's results of operations are largely
dependent upon its ability to increase its customer base while maintaining its
pricing structure, reducing subscriber churn and effectively managing its costs.
No assurance can be given that any such improvements will occur. In addition,
the Company incurs significant sales commission and installation costs when its
customers initially subscribe to the service.  Management expects that the costs
of acquiring subscribers will continue to be significant. The high cost of
obtaining new subscribers also magnifies the negative effects of subscriber
churn.

                                      II-5
<PAGE>

     During the years ended December 31, 1997, 1996 and 1995, (i) the
Company's annualized subscriber churn rate (which represents the annualized
number of subscriber terminations divided by the weighted average number of
subscribers during the period) was 30.1%, 38.5% and 24.7%, respectively, and
(ii) the subscriber life implied by such subscriber churn rate was 3.3 years,
2.6 years and 4.0 years, respectively.


     TSAT believes that the higher 1996 churn rate noted above is primarily
attributable to the fact that subscribers were allowed to initiate service with
no credit approval during the fourth quarter of 1995 and the first six months of
1996.  Service to a significant number of such subscribers was terminated during
1996 after their accounts became delinquent.  Such delinquent accounts
contributed to a significant increase in TSAT's bad debt expense during 1996.
TSAT has addressed this issue by implementing more stringent credit polices.
TSAT believes that a significant percentage of the subscribers whose service was
terminated during 1996 would not have been allowed to initiate service if the
credit policies that are currently in effect had been in place during 1995.


     Although no assurance can be given, TSAT expects that churn rates for
future periods will be lower than the levels experienced in 1996.  If TSAT's
churn rates were to return to, or increase from, such 1996 levels, TSAT believes
that its financial condition and results of operations could be adversely
affected.


     During 1997, TSAT began offering a marketing program that allows
subscribers to purchase TSAT's proprietary satellite reception equipment at a
price that is less than TSAT's cost.  Losses incurred by TSAT on such sales of
satellite reception equipment are charged  to operations in the period such
sales are consummated and aggregated $3,538,000 during 1997.  TSAT expects that
the number of customers who take advantage of this marketing program could
increase and the resultant charge to operations could be significant in the
future.

     Since July 1994, when PRIMESTAR Partners completed its conversion from an
analog to a digital signal, TSAT has experienced significant growth in the
number of customers and Authorized Units receiving its service.  In this regard,
the numbers of customers and Authorized Units were as follows:

<TABLE>
<CAPTION>
                                               December 31,
                        -----------------------------------------------------------
                             1997            1996           1995           1994
                        ---------------  -------------  -------------  ------------
<S>                     <C>              <C>            <C>            <C>
Customers                       851,000        702,000        472,000        91,000

Authorized Units                985,000        805,000        535,000       100,000
</TABLE>

     To the extent not otherwise described, increases in TSAT's revenue and
operating, selling, general and administrative expenses, as detailed below, are
primarily related to growth in customers and Authorized Units, as reflected in
the foregoing table. TSAT is operating in an increasingly competitive
environment.  No assurance can be given that such increasing competition will
not adversely affect TSAT's ability to continue to achieve growth in customers
and revenue.

                                      II-6
<PAGE>

     Through December 31, 1996, TCIC provided the Company with certain customer
fulfillment services for PRIMESTAR(R) customers enrolled by the Company's direct
sales force or the National Call Center. Charges for such services were
allocated to the Company by TCIC based on scheduled rates.  Such services, which
included installation, maintenance, retrieval, inventory management and other
customer fulfillment services, were to be performed in accordance with specified
performance standards.  Effective January 1, 1997, charges for customer
fulfillment services provided by TCI were made pursuant to a fulfillment
agreement (the "Fulfillment Agreement") entered into by the Company and TCIC in
connection with the Distribution.  Pursuant to the Fulfillment Agreement, TCIC
continued to provide fulfillment services on an exclusive basis to the Company
following the Distribution with respect to customers of the PRIMESTAR(R) medium
power service.  Such services were required to be performed in accordance with
specified performance standards.  The Fulfillment Agreement terminated on
December 31, 1997.  In September and October 1997, TSAT entered into agreements
with eight regional fulfillment companies to perform the services that are no
longer performed by TCIC.

     Installation charges from TCIC included direct and indirect costs of
performing installations.  Through the Distribution Date, the Company
capitalized a portion of such charges as subscriber installation costs based
upon amounts charged by unaffiliated third parties to perform similar services.
Subsequent to the Distribution Date, the Company capitalized the full amount of
installation fees paid to TCIC.  Additionally, the scheduled rates for the
services provided by TCIC under the Fulfillment Agreement exceeded the scheduled
rates upon which charges, historically, were allocated to the Company for such
services.  In this regard, installation charges allocated to the Company by TCIC
aggregated $62,461,000 during the year ended December 31, 1996.  If the
Fulfillment Agreement had been in effect during 1996, the estimated installation
fees incurred by the Company would have been $86,186,000.

     In connection with the Distribution, the Company and TCI also entered into
the "Transition Services Agreement", and certain other agreements.  Pursuant to
the Transition Services Agreement, TCIC provides certain general and
administrative services to TSAT for a fee of $1.50 per subscriber per month.
Amounts charged by TCIC pursuant to the Transition Services Agreement aggregated
$11,579,000 during the year ended December 31, 1997.  Upon consummation of the
Restructuring Transaction, TSAT and TCI have agreed that the Transition Services
Agreement will be terminated.

                                      II-7
<PAGE>

     Certain financial information concerning the Company's operations is
presented below (dollar amounts in thousands):



<TABLE>
<CAPTION>

                                                           Years ended December 31,
                                   ------------------------------------------------------------------------
                                             1997                     1996                      1995
                                   ------------------------  -----------------------  ------------------------
                                                 Percentage                Percentage                 Percentage
                                                  of total                  of total                   of total
                                     Amount       revenue       Amount       revenue      Amount       revenue
                                   -----------  ------------  -----------  -----------  -----------  ------------
<S>                                <C>          <C>           <C>          <C>          <C>          <C>
Revenue:
 Programming and equipment rental   $512,894      91%          $351,548       84%        $133,688       64%
 Installation                         49,096       9             65,913       16           75,215       36
                                    --------     ----          --------      ----        --------      ----
  Total revenue                      561,990     100            417,461      100          208,903      100
                                    --------     ----          --------      ----        --------      ----
Operating costs and expenses:
 Charges from PRIMESTAR Partners:
   Programming                      (175,418)     (32)         (124,074)      (30)        (53,006)      (25)
   Satellite, national marketing and
    distribution                     (84,182)     (15)          (64,650)      (15)        (25,244)      (12)
                                    --------     ----          --------      ----        --------      ----
                                    (259,600)     (47)         (188,724)      (45)        (78,250)      (37)

 Other operating                     (23,992)      (4)          (28,546)       (7)        (17,800)       (9)

Selling, general and administrative:
  Selling and regional marketing    (119,682)     (21)         (113,737)      (27)        (79,189)      (38)
  Bad debt                           (18,339)      (3)          (19,235)       (5)        (10,549)       (5)
  Other general and administrative   (60,242)     (11)          (60,594)      (14)        (27,428)      (13)
                                    --------     ----          --------      ----        --------      ----
                                    (198,263)     (35)         (193,566)      (46)       (117,166)      (56)
                                    --------     ----          --------      ----        --------      ----
  Operating Cash
    Flow (deficit)(1)                 80,135       14             6,625         2          (4,313)       (2)

Stock compensation                    (8,092)      (2)              446         -            (901)
Depreciation                        (243,642)     (43)         (191,355)      (46)        (55,488)      (27)
                                    --------     ----          --------      ----        --------      ----
  Operating loss                   $(171,599)     (31)%       $(184,284)      (44)%      $(60,702)      (29)%
                                    ========     ====          ========      ====        ========      ====
</TABLE>
------------
(1)  Operating Cash Flow, which represents operating income before depreciation
     and stock compensation, is a commonly used measure of value and borrowing
     capacity.  Operating Cash Flow is not intended to be a substitute for a
     measure of performance in accordance with generally accepted accounting
     principles and should not be relied upon as such.  Furthermore, Operating
     Cash Flow may not be comparable to similarly titled measures reported by
     other companies.  Operating Cash Flow should be viewed together with cash
     flows measured in accordance with generally accepted accounting principles.
     For information concerning such cash flows, see the statements of cash
     flows included in the accompanying financial statements.

                                      II-8
<PAGE>

     Revenue increased $144,529,000 or 35% and $208,558,000 or 100% during 1997
and 1996, respectively, as compared to the corresponding prior year.  The 1997
increase represents the net effect of a $161,346,000 or 46% increase in
programming and equipment rental revenue and a $16,817,000 or 26% decrease in
installation revenue.  The increase in programming and equipment rental revenue
is primarily the result of an increase in the number of Authorized Units.
Additionally, TSAT's average monthly programming and equipment rental revenue
per Authorized Unit increased from $44 ($50 per customer) during 1996 to $48
($55 per customer) during 1997.  Such increase was primarily the result of rate
increases implemented in May 1997 as well as an increase in the average monthly
revenue derived from pay-per-view services.  The decrease in installation
revenue is primarily attributable to a reduction in 1997 in the number of
installations performed and a decrease from $127 during 1996 to $112 during 1997
in the average installation revenue derived from each Authorized Unit installed.

     Exclusive of installation revenue, the Company's average monthly revenue
per Authorized Unit was $44 ($50 per customer) and $41 ($47 per customer) during
1996 and 1995, respectively.  The 7% increase from 1995 to 1996 in the average
monthly revenue per Authorized Unit was primarily a result of the positive
effects of (i) an increase in revenue derived from premium and pay-per-view
services, and (ii) a March 1995 increase in the monthly equipment rental fee.
Such positive effects more than offset the effects of a 1996 promotional
campaign that provided certain new customers with one month of free service.
The average installation revenue from each Authorized Unit installed was $127
and $161 during 1996 and 1995, respectively.  The decrease from 1995 to 1996 is
primarily attributable to certain promotional campaigns that were in effect
during 1996.

     PRIMESTAR Partners provides programming services to the Company and the
other authorized Distributors in exchange for a fee based upon the number of
Authorized Units receiving programming services.  PRIMESTAR Partners also
arranges for satellite capacity and uplink services, and provides national
marketing and administrative support services, in exchange for a separate
authorization fee from each Distributor, including the Company, based on each
such Distributor's total number of Authorized Units.  The aggregate charges for
such services increased $70,876,000 or 38% and $110,474,000 or 141% during 1997
and 1996, respectively, as compared to the corresponding prior year. The average
aggregate monthly amount per Authorized Unit charged by PRIMESTAR Partners was
$24, $23 and $24 ($28, $27 and $27 per customer) during 1997, 1996 and 1995,
respectively.

     Other operating expenses, which are primarily comprised of amounts related
to customer fulfillment activities, decreased $4,554,000 or 16% and increased
$10,746,000 or 60% during 1997 and 1996, respectively, as compared to the
corresponding prior year.  The 1997 decrease is primarily attributable to the
fact that TSAT's other operating costs and expenses for the year ended December
31, 1996 included $9,292,000 of installation fees paid to TCIC that were not
capitalized.  Other operating costs and expenses for the year ended December 31,
1997 do not include a similar amount since TSAT has capitalized the full amount
of installation fees paid to TCIC since the Distribution Date for installations
associated with customers who have elected to lease satellite reception
equipment. As described above, the charges for installation and other customer
fulfillment services provided by TCIC through December 31, 1997 were made
pursuant to the Fulfillment Agreement since January 1, 1997.

                                      II-9
<PAGE>

     Selling, general and administrative ("SG&A") expenses increased $4,697,000
or 2% and $75,053,000 or 64% during 1997 and 1996, respectively, as compared to
the corresponding prior year.  Selling and regional marketing expenses include
sales commissions, marketing and advertising expenses, and costs associated with
the operation of the National Call Center and five regional sales offices.  The
decrease in SG&A expenses as a percentage of revenue in 1997 is primarily
attributable to (i) lower sales commissions due to a 15% decrease in
installations in 1997 as compared to 1996, and (ii) the relatively fixed nature
of certain components of TSAT's selling, general and administrative expenses.

  SG&A expenses during the year ended December 31, 1997 include $11,579,000 that
was charged to TSAT by TCIC pursuant to the Transition Services Agreement,
$4,901,000 for certain telephony services, and $12,173,000 for the use of TCIC's
Boise Call Center to respond to calls that exceed the capacity of TSAT's
National Call Center.  Through the Distribution Date, general and administrative
allocations from TCIC (including telephony services) were based upon the
estimated cost of such services provided to TSAT.  The amounts charged to TSAT
pursuant to the Transition Services Agreement are in excess of the amounts that
would have been allocated by TCIC to TSAT under the arrangement that was in
effect through the Distribution Date.  If the Transition Services Agreement had
been effective as of January 1, 1996, selling, general and administrative
expenses would have been approximately $198,200,000 for the year ended December
31, 1996.

  As part of the compensation paid to the Company's four master sales agents,
the Company pays certain residual sales commissions equal to a percentage of the
programming collected from subscribers installed by such master sales agents
during specified periods following the initiation of service (generally five
years). During the years ended December 31, 1997, 1996 and 1995, residual
payments to such master sales agents aggregated $15,364,000, $11,848,000 and
$2,178,000, respectively and were charged to expense as incurred.

  Depreciation expense increased $52,287,000 or 27% and $135,867,000 or 245%
during 1997 and 1996, respectively, as compared to the corresponding prior year.
The 1997 increase is primarily the result of an increase in TSAT's depreciable
assets due to capital expenditures.  Changes in the Company's depreciation
policies also contributed to the increase.  Effective October 1, 1996, TSAT
changed the method used to depreciate its subscriber installation costs, and
reduced the estimated useful life of certain satellite reception equipment.  The
inception-to-date effect on depreciation expense of the change in depreciation
method aggregated $55,304,000, and was recorded during the fourth quarter of
1996.  The effect of the reduction in estimated useful life was accounted for on
a prospective basis.

     TSAT incurred interest expense of $47,992,000 during the year ended
December 31, 1997.  Substantially all of such interest was attributable to the
December 31, 1996 completion of the Bank Credit Facility and the February 1997
issuance of the Notes. TSAT expects that it will continue to incur significant
levels of interest expense in future periods.

                                     II-10
<PAGE>

     The Company's 20.86% share of PRIMESTAR Partners' net losses increased
$17,198,000 and decreased $5,694,000 during 1997 and 1996, respectively, as
compared to the corresponding prior year periods.  The 1997 increase is
primarily attributable to increases in PRIMESTAR Partners' interest expense and
operating loss.  The increase in interest expense is attributable to interest
incurred on borrowings under the PRIMESTAR Credit Facility that were used to
fund the construction of Tempo DBS-2.  Prior to the January 1, 1997
determination that construction of Tempo DBS-2 was substantially complete,
interest incurred on the applicable borrowings under the PRIMESTAR Credit
Facility had been capitalized.  The increase in PRIMESTAR Partners' operating
loss occurred primarily because the increase in PRIMESTAR Partners' revenue did
not fully offset increases in selling, marketing and certain other expenses.
The 1996 decrease is primarily attributable to a significant increase in the
revenue derived by PRIMESTAR Partners from the Company and the other
Distributors of the PRIMESTAR(R) service.

     TSAT recognized no income tax benefit during the year ended December 31,
1997 and an income tax benefit of $45,937,000 and $21,858,000 during 1996 and
1995, respectively.  TSAT's income tax benefits for the years ended December 31,
1996 and 1995 include intercompany allocations from TCI of current income tax
benefits of $70,645,000 and $36,530,000, respectively.  As a result of the
Distribution, 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, 1997 and 1996.  Additionally, during the first several years
following the Distribution, TSAT believes that it will incur net losses for
income tax purposes, and accordingly, will not be in a position to realize
income tax benefits on a current basis.  In connection with the Distribution,
TSAT became a party to the Tax Sharing Agreement that currently exists among
TCI, TCIC and certain other subsidiaries of TCI.

Recent Accounting Pronouncements
--------------------------------

     In June 1997, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards No. 130, Reporting Comprehensive
Income  ("Statement No. 130").  Statement No. 130 establishes standards for
reporting and displaying comprehensive income and its components in the
consolidated financial statements.  Statement No. 130 is effective for fiscal
years beginning after December 15, 1997.

     In June 1997, the FASB also issued Statement of Financial Accounting
Standards No. 131, Disclosure about Segments of an Enterprise and Related
Information ("Statement No. 131").  Statement No. 131 establishes standards for
the manner in which business enterprises are to report information about
operating segments in its annual financial statements and requires those
enterprises to report selected information regarding operating segments in
interim financial reports issued to shareholders.  Statement No. 131 is
effective for fiscal years beginning after December 15, 1997.

     The Company does not expect either Statement No. 130 or Statement No. 131
to have a significant effect on its operating results.

                                     II-11
<PAGE>

Liquidity and Capital Resources
-------------------------------

     As described above, TSAT has entered into binding agreements with respect
to the Restructuring Transaction, the TSAT Merger and the ASkyB Transaction.
Upon consummation of the Restructuring Transaction, the Company will become a
holding company whose assets and liabilities will be comprised primarily of (i)
its ownership interest in New PRIMESTAR and (ii) the Tempo Satellites and
related liabilities and licenses.  As TSAT will have an approximate 36%
ownership interest in New PRIMESTAR, TSAT will account for such investment using
the equity method of accounting, and TSAT will have no access to the cash flows
of New PRIMESTAR.

     New PRIMESTAR will be a significantly larger entity than TSAT and will have
significant financial obligations.  In this regard, New PRIMESTAR will incur
significant indebtedness in connection with the Restructuring Transaction and
will issue approximately $600 million liquidation value of preferred stock and
approximately $516 million principal amount of subordinated convertible notes in
connection with the ASkyB Transaction.  The debt to be assumed by New PRIMESTAR
in connection with the Restructuring Transaction will include the Notes, any
amounts outstanding under the Bank Credit Facility and certain debt of the Non-
TSAT Parties.  New PRIMESTAR intends to obtain bridge financing in connection
with the consummation of the Restructuring Transaction.  New PRIMESTAR intends
to use the proceeds from such bridge financing to repay the debt assumed from
the Non-TSAT Parties and to pay amounts due at closing.  In addition to the
foregoing obligations, New PRIMESTAR will be responsible for payments due under
the GE-2 Agreement and various other commitments and contingent liabilities
associated with the businesses and assets that will comprise New PRIMESTAR
following consummation of the Roll-up Plan (or any part thereof) and the ASkyB
Transaction.  New PRIMESTAR will also require significant capital in order to
fund its business strategies, including the development of a high-power DBS
service, and any possible migration of some or all of the existing medium-power
PRIMESTAR(R) customers to such high-power service.  No assurance can be given
that the Roll-up Plan (or any part thereof) and the ASkyB Transaction will be
consummated or that, if consummated, New PRIMESTAR will be able to obtain
sufficient  financial resources in order to satisfy its short-term and long-term
liquidity requirements.  The following discussion focuses on the liquidity and
capital resources of TSAT as a stand-alone entity without giving effect to any
part of the pending Roll-up Plan or the ASkyB Transaction.

     Prior to the Distribution, the Company relied upon non-interest bearing
advances from TCI in order to fund the majority of the Company's working capital
requirements and capital expenditures. During the years ended December 31, 1996
and 1995, such advances aggregated $250,189,000 and $397,529,000, respectively.
On the Distribution Date, the Company issued the Company Note to TCIC and TCIC
agreed to provide the Company with financing pursuant to a credit facility (the
"TCIC Credit Facility") that provided for TCIC's commitment to make revolving
loans to the Company (the "TCIC Revolving Loans") and the Company's obligations
with respect to the TCIC Revolving Loans and the Company Note, including the
Company's best efforts obligations to refinance the TCIC Credit Facility.  On
December 31, 1996, the Company entered into the Bank Credit Facility and used
proceeds therefrom to repay the Company Note in full.  In connection with the
February 1997 issuance of the Notes and the March 1997 determination that GE-2
was commercially operational, borrowing availability pursuant to the TCIC Credit
Facility was terminated.  Accordingly, TCI is not expected to be a source of
financing for the Company in future periods.

                                     II-12
<PAGE>

     On February 20, 1997, the Company issued the 10-7/8% Senior Subordinated
Notes due 2007 having an aggregate principal amount at maturity of $200,000,000
and the 12-1/4% Senior Subordinated Discount Notes due 2007 having an aggregate
principal amount at maturity of $275,000,000. The net proceeds from the issuance
of the Notes (approximately $340,500,000 after deducting offering expenses) were
initially held in escrow and were subsequently released to the Company on March
17, 1997.  The Company initially used $244,404,000 of such net proceeds to repay
amounts outstanding under the Bank Credit Facility and used the remaining net
proceeds to fund capital expenditures and operations and to provide for working
capital and for other general corporate purposes.  The Notes were not originally
registered under the Securities Act.  On February 17, 1998, TSAT filed a
registration statement, which registration statement was declared effective by
the SEC on such date, with respect to an offer to exchange the Notes for
substantially identical notes that are registered under the Securities Act.  The
Exchange Offer commenced on February 27, 1998 and expires on March 30, 1998,
unless extended.

     Cash interest on the Senior Subordinated Notes is payable semi-annually in
arrears on February 15 and August 15.  Cash interest will not accrue or be
payable on the Senior Subordinated Discount Notes prior to February 15, 2002.
Thereafter cash interest will accrue at a rate of 12-1/4% per annum and will be
payable semi-annually in arrears on February 15 and August 15, commencing August
15, 2002, provided however, that at any time prior to February 15, 2002, the
Company may make a Cash Interest Election (as defined) on any interest payment
date to commence the accrual of cash interest from and after the Cash Election
Date (as defined).  The Notes will be redeemable at the option of the Company,
in whole or in part, at any time after February 15, 2002 at specified redemption
prices.  In addition, prior to February 15, 2000, the Company may use the net
cash proceeds from certain specified equity transactions to redeem up to 35% of
the Notes at specified redemption prices.

     At December 31, 1997, the Company's aggregate borrowings under the Bank
Credit Facility were $48,000,000.  As a result of the February 1997 issuance of
the Notes and the March 1997 determination that GE-2 was commercially
operational, the available commitments under the Bank Credit Facility were
increased from $350,000,000 to $750,000,000.  At December 31, 1997, $672,000,000
of such maximum commitments was unused and the remaining $30,000,000 in
commitments was used to support an aggregate $30,000,000 of standby letters of
credit issued for the account of TSAT.  The availability of such commitments is
subject to the Company's compliance with operating and financial covenants and
other customary conditions.  Commencing March 31, 2001, aggregate commitments
under the Bank Credit Facility will be reduced quarterly in accordance with a
schedule, until final maturity at June 30, 2005.

                                     II-13
<PAGE>

     During the years ended December 31, 1997, 1996 and 1995, the Company's
operating activities provided cash of $91,637,000, $115,201,000, and $64,193,000
respectively. Most of the cash provided by the Company's operating activities
during 1996 and 1995 is attributable to the intercompany allocation of current
income tax benefits from TCI, and to changes in the Company's receivables,
prepaids, accruals and payables and subscriber advance payments ("Operating
Assets and Liabilities"). As described above, during the first several years
following the Distribution, the Company believes that it will not be in a
position to realize income tax benefits on a current basis. In addition, the
timing and amount of changes in the balances of the Company's Operating Assets
and Liabilities are subject to a variety of factors, certain of which are
outside of the control of, or not easily predicted by, the Company. Exclusive of
the effects of intercompany allocations of current income tax benefits, and
changes in the Company's Operating Assets and Liabilities, the Company's
operating activities provided (used) cash of $8,378,000 and $(4,007,000) during
the years ended December 31, 1996 and 1995, respectively. For the first several
years following the Distribution, the Company believes that its operating
activities will represent a reliable source of liquidity only to the extent that
the Company is able to generate Operating Cash Flow.

     During the years ended December 31, 1997, 1996 and 1995, the Company used
cash of $5,448,000, $74,785,000 and $104,128,000, respectively, to fund the cost
of constructing the Company Satellites and $227,327,000, $326,621,000, and
$442,782,000, respectively, to fund (i) the acquisition and installation of
satellite reception equipment, and (ii) certain other capital expenditures.
Based upon current business plans, the Company estimates that its aggregate
capital expenditures will range from $250,000,00 to $280,000,000 for its medium
power satellite business during the year ended December 31, 1998. The Company
expects that the majority of such estimated capital expenditures will be used to
fund the acquisition and installation of satellite reception equipment. The
actual amount of capital to be required will be primarily a function of (i)
subscriber growth and churn rates, and (ii) the actual cost of purchasing and
installing satellite reception equipment. Accordingly, no assurance can be given
that the Company's actual capital expenditures during the year ended December
31, 1998 will not exceed the estimated capital expenditures set forth above.

     TSAT currently intends to operate Tempo DBS-1 as a platform to provide
high-power digital video and audio programming services to residential
customers, as well as multiple dwelling units, commercial customers and
resellers. TSAT presently is unable to reasonably estimate the amount of capital
expenditures that would be required in connection with any high-power strategy
that might be pursued by TSAT.  As discussed above, TSAT's capital expenditure
requirements would be significantly impacted by the consummation of the Roll-up
Plan (or any part thereof) and the ASkyB Transaction.  In addition, TSAT's
capital expenditure requirements would be impacted if TSAT were to complete any
significant acquisitions or enter into any other significant business
activities.

     At December 31, 1997, the Company's future minimum commitments to purchase
satellite reception equipment aggregated approximately $30,000,000.

                                     II-14
<PAGE>

     In connection with the Distribution, the Company entered into an
Indemnification Agreement with each of TCIC and TCI UA 1, Inc. ("TCI UA 1"), an
indirect subsidiary of TCIC, (collectively, the "Indemnification Agreements").
The Indemnification Agreement with TCIC provides for the Company to reimburse
TCIC for any amounts drawn under an irrevocable transferable letter of credit
issued for the account of TCIC to support the Company's share of PRIMESTAR
Partners' obligations under the GE-2 Agreement. The drawable amount of such
letter of credit is $25,000,000.  The Indemnification Agreement with TCI UA 1
provides for the Company to reimburse TCI UA 1 for any amounts drawn under the
TCI UA 1 Letter of Credit, which supports the PRIMESTAR Credit Facility.  At
December 31, 1997, the drawable amount of the TCI UA 1 Letter of Credit was
$141,250,000.

     The Indemnification Agreements provide for the Company to indemnify and
hold harmless TCIC and TCI UA 1 and certain related persons from and against any
losses, claims, and liabilities arising out of the respective letters of credit
or any drawings thereunder.  The payment obligations of the Company to TCIC and
TCI UA1, respectively, under such Indemnification Agreements are subordinated in
right of payment with respect to the obligations of the Company under the Bank
Credit Facility.

     During 1997, two additional irrevocable transferable letters of credit were
issued pursuant to the Bank Credit Facility for the account of TSAT, one to
support the Company's share of PRIMESTAR Partners' obligations under the GE-2
Agreement, and the second to support the PRIMESTAR Credit Facility.  The initial
drawable amount of the first letter of credit is $25,000,000, increasing to
$50,000,000 if PRIMESTAR Partners exercises the End-Of-Life Option, and the
initial drawable amount of the second letter of credit is $5,000,000.

     The amounts advanced by PRIMESTAR Partners to the Company to fund the cost
of constructing the Tempo Satellites ($463,133,000 at December 31, 1997) have
been financed by PRIMESTAR Partners' borrowings under the PRIMESTAR Credit
Facility, which is in turn supported by letters of credit arranged for by
affiliates of all but one of the partners of PRIMESTAR Partners.  At December
31, 1997, PRIMESTAR Partners' indebtedness under the PRIMESTAR Credit Facility
aggregated $565,000,000, including amounts borrowed to pay interest charges.
The PRIMESTAR Credit Facility matures on September 30, 1998 and the Company and
PRIMESTAR Partners are currently evaluating long-term refinancing alternatives
with respect to the Tempo Satellites.  No assurance can be given that the
Company and PRIMESTAR Partners will be successful in obtaining long-term
financing for the Tempo Satellites.

     TCI has agreed to cause TCI UA 1 to renew the letter of credit arranged by
it on the Company's behalf, through June 30, 1999. The Company believes (but
cannot assure) that during such period the Company and/or PRIMESTAR Partners
will be able to obtain permanent financing for the Tempo Satellites (to the
extent not sold to a person other than PRIMESTAR Partners) on a basis that does
not require the Company to post a letter of credit with respect thereto. If such
permanent financing is not available, under certain maintenance covenants
contained in the Bank Credit Facility, the Company would be unable to provide or
arrange for such a letter of credit unless (i) the lenders under the Bank Credit
Facility were to agree to amend or waive such covenants to permit the posting of
such letter of credit by the Company, (ii) TCI were to agree to renew the TCI UA
1 Letter of Credit for an additional period, or (iii) the Company were to
achieve a greater than anticipated increase in Operating Cash Flow. If the
Company and/or PRIMESTAR Partners are unable to refinance the Tempo Satellites
(to the extent not sold to a person other than PRIMESTAR Partners) without a
letter of credit and are unable to post (or arrange for the posting of) such a
letter of credit, the Company could be adversely affected.

                                     II-15
<PAGE>

     At December 31, 1997, approximately 9,496,000 shares of Series A Common
Stock were reserved for issuance pursuant to certain option and restricted stock
agreements, and certain arrangements with TCIC.

     Under the PRIMESTAR Partnership Agreement, the Company has agreed to fund
its share of any capital contributions and/or loans to PRIMESTAR Partners that
might be agreed upon from time to time by the Partners. Additionally, those
subsidiaries of the Company that are general partners of PRIMESTAR Partners are
liable as a matter of partnership law for all debts of PRIMESTAR Partners in the
event the liabilities of PRIMESTAR Partners were to exceed its assets. The
Company has additional contingent liabilities related to PRIMESTAR Partners.

     The International Bureau of the FCC has granted EchoStar a conditional
authorization to construct, launch and operate a Ku-band domestic fixed
satellite into the orbital position at 83 degrees W.L., immediately adjacent to
that occupied by GE-2, the medium power satellite now used to provide the
PRIMESTAR(R) service. Contrary to previous FCC policy, which would have
permitted operation of a satellite at the 83 degrees W.L. orbital position at a
power level of only 60 to 90 watts (subject to coordination requirements)
EchoStar has been authorized to operate at a power level of 130 watts. If
EchoStar were to launch its high power satellite authorized to 83 degrees W.L.
and commence operations at that location at a power level of 130 watts, it would
likely cause harmful interference to the reception of the PRIMESTAR(R) signal
from GE-2 by subscribers to the PRIMESTAR(R) medium power service.

     GE Americom and PRIMESTAR Partners have each requested reconsideration of
the International Bureau's authorization for EchoStar to operate at 83 degrees
W.L. These requests, which were opposed by EchoStar and others, currently are
pending at the International Bureau. There can be no assurance that the
International Bureau will change slot assignments, or power levels, in a fashion
that eliminates the potential for harmful interference. Accordingly, the
ultimate outcome of this matter cannot presently be predicted.

     GE Americom and PRIMESTAR Partners have attempted to resolve potential
coordination problems directly with EchoStar.  It is uncertain whether any
agreement in respect of such coordination between PRIMESTAR Partners and
EchoStar will be reached, or that if such agreement is reached that coordination
will resolve such interference.

     ResNet Communications, LLC ("ResNet LLC"), a limited liability corporation
owned 95.01% by ResNet Communications, Inc. and 4.99% by a subsidiary of TSAT,
has agreed to purchase from TSAT, at a price that approximates TSAT's cost, up
to $40,000,000 in satellite reception equipment over a five-year period (subject
to a one-year extension at the option of ResNet LLC if ResNet LLC has not
purchased the full $40,000,000 in equipment during the five-year initial term).
TSAT also agreed to make a subordinated convertible term loan to ResNet LLC, in
the principal amount of $34,604,000, the proceeds of which can be used only to
purchase such equipment from TSAT. The term of the loan is five years with an
option by ResNet LLC to extend the term for one additional year. The total
principal and accrued and unpaid interest under the loan is convertible over a
four-year period into ownership interests in ResNet LLC, representing 32% of the
total ownership interests in ResNet LLC.  TSAT's only recourse with respect to
repayment of the loan is conversion into ownership interests in ResNet LLC stock
or warrants.  Under current interpretations of the FCC rules and regulations
related to restrictions on the provision of cable and satellite master antenna
television services (ResNet LLC's business) in certain areas, TSAT could be
prohibited from holding 5% or more of the ownership interests in ResNet LLC and
consequently could not exercise the conversion rights under the convertible loan
agreement.  TSAT is required to convert the convertible loan at such time as
conversion would not violate such currently applicable regulatory restrictions.
As of December 31, 1997, ResNet had purchased $5,319,000 in equipment from TSAT
for cash.

                                     II-16
<PAGE>

     The Company believes that borrowing availability pursuant to the Bank
Credit Facility and any funds generated by the Company's operating activities
will be sufficient through December 31, 1998, to fund the Company's working
capital, debt service and currently projected capital expenditure requirements
associated with its medium power satellite distribution business. However, to
the extent that the Company (i) funds all or any significant portion of the cost
of the Tempo Satellites, (ii) pursues a strategy with respect to the high power
segment of the digital satellite industry, (iii) completes any significant
acquisitions, (iv) enters into any other business activities, other than its
existing medium power satellite distribution business, (v) is required to
perform under the Indemnification Agreements or is required to meet other
significant future liquidity requirements in addition to those described above,
the Company anticipates that it would be required to obtain additional debt or
equity financing.  No assurance can be given, however, that the Company would be
able to obtain additional financing on terms acceptable to it, or at all.

     The Company is highly leveraged. The degree to which the Company is
leveraged may adversely affect the Company's ability to compete effectively
against better capitalized competitors and to withstand downturns in its
business or the economy generally, and could limit its ability to pursue
business opportunities that may be in the interests of the Company and its
stockholders. The Company's ability to repay or refinance its debt will require
the Company to increase its Operating Cash Flow or to obtain additional debt or
equity financing. There can be no assurance that the Company will be successful
in increasing its Operating Cash Flow by a sufficient magnitude or in a timely
manner or in raising sufficient additional debt or equity financing to enable it
to repay or refinance its debt.

     During the year ended December 31, 1997, the Company began a process to
identify and address issues surrounding the Year 2000 and its impact on the
Company's operations. The issue surrounding the Year 2000 is whether the
Company's operating and financial systems or the systems used by companies with
whom TSAT conducts business will properly recognize date sensitive information
when the year changes to 2000, or "00." Systems that do not properly recognize
such information could generate erroneous data or cause a system to fail. As the
Company has not completed its initial assessment of the impact the Year 2000 may
have on its computer operations, management can not estimate the costs
associated with ensuring the Company's systems are Year 2000 compliant. Although
the Company is in the initial phases of determining the impact of the Year 2000,
management anticipates completion of the project by January 1999, allowing
adequate time for testing. However, there can be no assurance that the Company's
systems nor the computer systems of other companies with whom the Company
conducts business will be Year 2000 compliant prior to December 31, 1999. If
such modifications and conversions are not completed timely, the Year 2000
problem may have a material impact on the operations of the Company.

                                     II-17
<PAGE>

Item 8.  Financial Statements and Supplementary Data.
------   -------------------------------------------

     The financial statements of the Company are filed under this item beginning
on page II-19.


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

         None.

                                     II-18
<PAGE>

                          INDEPENDENT AUDITORS' REPORT



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


     We have audited the accompanying balance sheets of TCI Satellite
Entertainment, Inc., (as defined in note 1) as of December 31, 1997 and 1996 and
the related statements of operations, equity, and cash flows for each of the
years in the three-year period ended December 31, 1997.  In connection with our
audit of the financial statements, we have also audited the financial statement
schedule listed in the index at Item 14(a).  These financial statements and the
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
the financial statement schedule based on our audits.

     We conducted our audits 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 financial statements referred to above present fairly,
in all material respects, the financial position of TCI Satellite Entertainment,
Inc., as of December 31, 1997 and 1996, and the results of their operations and
their cash flows for each of the years in the three-year period ended December
31, 1997, 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 Peat Marwick LLP

Denver, Colorado
March 6, 1998

                                     II-19
<PAGE>

                       TCI SATELLITE ENTERTAINMENT, INC.
                                 (See note 1)

                                 Balance Sheets

                           December 31, 1997 and 1996


<TABLE>
<CAPTION>
                                                                         1997                 1996
                                                                  -------------------  -------------------
                                                                            amounts in thousands
Assets
------
<S>                                                               <C>                  <C>
Cash and cash equivalents                                                  $    6,084                6,560

Accounts receivable                                                            40,386               24,731
Less allowance for doubtful accounts                                            5,307                4,666
                                                                           ----------            ---------
                                                                               35,079               20,065
                                                                           ----------            ---------

Prepaid expenses                                                                1,262                  927

Investment in, and related advances to, PRIMESTAR Partners
 L.P., ("PRIMESTAR Partners") (note 7)                                         11,093               32,240


Property and equipment, at cost:
 Satellite reception equipment                                                674,387              595,249
 Subscriber installation costs                                                227,131              175,553
 Support equipment                                                             34,389               28,332
 Satellites (note 8)                                                          463,133              457,685
                                                                           ----------            ---------
                                                                            1,399,040            1,256,819
 Less accumulated depreciation                                                277,103              149,165
                                                                           ----------            ---------
                                                                            1,121,937            1,107,654
                                                                           ----------            ---------

Deferred financing costs and other assets, net of accumulated
 amortization                                                                  29,401               12,827
                                                                           ----------            ---------

                                                                           $1,204,856            1,180,273
                                                                           ==========            =========
</TABLE>

                                                                     (continued)

                                     II-20
<PAGE>

                       TCI SATELLITE ENTERTAINMENT, INC.
                                 (See note 1)


                           Balance Sheets, continued

                           December 31, 1997 and 1996


<TABLE>
<CAPTION>
                                                                          1997                  1996
                                                                  --------------------  --------------------
                                                                             amounts in thousands
Liabilities and Stockholders' Equity
------------------------------------
<S>                                                               <C>                   <C>
Accounts payable                                                           $   50,755                18,860
Accrued charges from PRIMESTAR Partners (note 7)                               48,591                37,943
Accrued charges from TCI Communications, Inc. ("TCIC")                         14,225                 8,381
Accrued commissions                                                            10,435                   961
Accrued interest payable                                                        8,658                    70
Other accrued expenses                                                         24,386                14,536
Subscriber advance payments                                                    29,675                22,249
Due to PRIMESTAR Partners (note 8)                                            463,133               457,685
Debt (note 9)                                                                 418,729               247,230
                                                                           ----------             ---------

       Total liabilities                                                    1,068,587               807,915
                                                                           ----------             ---------


Stockholders' Equity:
 Preferred stock, $.01 par value;
     authorized 5,000,000; none issued                                             --                    --
 Series A common stock, $1 par value; authorized 185,000,000;
     issued 58,239,136 in 1997 and 57,946,044 in 1996                          58,239                57,946
 Series B common stock, $1 par value; authorized 10,000,000
     shares; issued 8,465,324 in 1997 and 8,466,564 in 1996                     8,465                 8,467
 Additional paid-in capital                                                   523,685               521,724
 Accumulated deficit                                                         (454,120)             (215,779)
                                                                           ----------             ---------

       Total stockholders' equity                                             136,269               372,358
                                                                           ----------             ---------

Commitments and contingencies
 (notes 8 and 13)
                                                                           $1,204,856             1,180,273
                                                                           ==========             =========
</TABLE>


See accompanying notes to financial statements.

                                     II-21
<PAGE>

                       TCI SATELLITE ENTERTAINMENT, INC.
                                 (See note 1)

                            Statements of Operations

                  Years ended December 31, 1997, 1996 and 1995

<TABLE>
<CAPTION>
                                                            1997                1996                1995
                                                     ------------------  ------------------  ------------------
                                                                        amounts in thousands
<S>                                                  <C>                 <C>                 <C>
Revenue:
 Programming and equipment rental                            $ 512,894             351,548             133,688
 Installation                                                   49,096              65,913              75,215
                                                             ---------            --------             -------
                                                               561,990             417,461             208,903
                                                             ---------            --------             -------
Operating costs and expenses:
 Charges from PRIMESTAR Partners (note 7):
   Programming                                                 175,418             124,074              53,006
   Satellite, marketing and distribution                        84,182              64,650              25,244
 Other operating (note 12)                                      23,992              28,546              17,800
 Selling, general and administrative (note 12)                 198,263             193,566             117,166
 Stock compensation                                              8,092                (446)                901
 Depreciation (note 4)                                         243,642             191,355              55,488
                                                             ---------            --------             -------
                                                               733,589             601,745             269,605
                                                             ---------            --------             -------

       Operating loss                                         (171,599)           (184,284)            (60,702)
                                                             ---------            --------             -------

Other income (expense):
 Interest expense                                              (47,992)             (2,023)                 --
 Interest income                                                 2,519               2,648                 306
 Share of losses of PRIMESTAR
   Partners (note 7)                                           (20,473)             (3,275)             (8,969)
 Other, net                                                       (796)                993                  --
                                                             ---------            --------             -------
                                                               (66,742)             (1,657)             (8,663)
                                                             ---------            --------             -------

       Loss before income taxes                               (238,341)           (185,941)            (69,365)

Income tax benefit (note 11)                                        --              45,937              21,858
                                                             ---------            --------             -------

       Net loss                                              $(238,341)           (140,004)            (47,507)
                                                             =========            ========             =======

Basic and diluted loss per common share (note 5)                $(3.58)              (2.11)               (.72)
                                                             =========            ========             =======

</TABLE>


See accompanying notes to financial statements.

                                     II-22
<PAGE>

                       TCI SATELLITE ENTERTAINMENT, INC.
                                 (See note 1)


                              Statements of Equity

                  Years ended December 31, 1997, 1996 and 1995

<TABLE>
<CAPTION>

                                                            Common Stock        Additional               Due to
                                                       -----------------------    paid-in   Accumulated  --------    Total
                                                         Series A    Series B     capital     deficit   ("TCIC")   equity
                                                       ------------  ---------  -----------  ---------  --------  ---------
<S>                                                    <C>           <C>        <C>          <C>        <C>       <C>
                                                                                 amounts in thousands
Balance at January 1, 1995                             $         --        --            --   (28,268)  148,794    120,526
 Net loss                                                        --        --            --   (47,507)       --    (47,507)
 Allocation of TCIC expenses                                     --        --            --        --    23,733     23,733
 Allocation of TCIC installation costs                           --        --            --        --    57,058     57,058
 Intercompany income tax allocation                              --        --            --        --   (36,530)   (36,530)
 Recognition of deferred tax assets in connection
  with intercompany transfer of certain property and
  equipment                                                      --        --            --        --    12,136     12,136
 Net cash transfers from TCIC                                    --        --            --        --   354,168    354,168
                                                            -------  --------   -----------  --------   -------   --------
Balance at December 31, 1995                                     --        --            --   (75,775)  559,359    483,584
 Net loss                                                        --        --            --  (140,004)       --   (140,004)
 Allocation of TCIC expenses                                     --        --            --        --    38,485     38,485
 Allocation of TCIC installation costs                           --        --            --        --    53,169     53,169
 Intercompany income tax allocation                              --        --            --        --   (70,645)   (70,645)
 Net cash transfers from TCIC                                    --        --            --        --   228,622    228,622
 Recognition of deferred tax assets upon transfer of
  PRIMESTAR Partners investment in connection with
  Distribution (note 11)                                         --        --            --        --    29,142     29,142
 Adjustment to reflect consummation of Distribution
  (note 3)                                                   57,941     8,467       521,724        --  (838,132)  (250,000)
 Issuance of Series A Common Stock upon conversion
  of notes of Tele-Communications, Inc. (note 10)                 5        --            --        --        --          5
                                                            -------  --------   -----------  --------   -------   --------
Balance at December 31, 1996                                 57,946     8,467       521,724  (215,779)       --    372,358
 Net loss                                                        --        --            --  (238,341)       --   (238,341)
 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. (note 10)                                                258        --            --        --        --        258
 Conversion of Series B to Series A                               2        (2)           --        --        --         --
                                                            -------  --------   -----------  --------   -------   --------
Balance at December 31, 1997                                $58,239     8,465       523,685  (454,120)       --    136,269
                                                            =======  ========   ===========  ========   =======   ========
</TABLE>

See accompanying notes to financial statements.

                                     II-23
<PAGE>


                       TCI SATELLITE ENTERTAINMENT, INC.
                                 (See note 1)

                         Notes to Financial Statement

                            Statements of Cash Flows

                  Years ended December 31, 1997, 1996 and 1995

<TABLE>
<CAPTION>
                                                                         1997               1996               1995
                                                                   -----------------  -----------------  ----------------
                                                                                    amounts in thousands
                                                                                        (see note 6)
Cash flows from operating activities:
<S>                                                                <C>                <C>                <C>
 Net loss                                                                 $(238,341)          (140,004)          (47,507)
 Adjustments to reconcile net loss to net cash provided by
  operating activities:
     Depreciation                                                           243,642            191,355            55,488
     Share of losses of PRIMESTAR Partners                                   20,473              3,275             8,969
     Accretion of debt discount                                              16,719                 --                --
     Stock compensation                                                       8,092               (446)              901
     Deferred income tax expense                                                 --             24,708            14,672
     Other non-cash charges (credits)                                         6,919               (311)              901
     Changes in operating assets and liabilities:
        Change in receivables                                               (15,014)             4,364           (21,859)
        Change in prepaids                                                     (335)              (841)              (86)
        Change in accruals and payables                                      42,056             24,096            41,234
        Change in subscriber advance payments                                 7,426              9,005            11,480
                                                                          ---------           --------          --------
          Net cash provided by operating activities                          91,637            115,201            64,193
                                                                          ---------           --------          --------

Cash flows from investing activities:
 Capital expended for property and equipment                               (227,327)          (326,621)         (442,782)
 Capital expended for construction of satellites                             (5,448)           (74,785)         (104,128)
 Additional investments in, and related advances to, PRIMESTAR
  Partners                                                                   (7,073)           (17,552)          (17,139)
 Repayments of advances to PRIMESTAR Partners                                 7,815                 --                --
 Other investing activities                                                  (1,581)            (5,458)               --
                                                                          ---------           --------          --------
   Net cash used in investing activities                                   (233,614)          (424,416)         (564,049)
                                                                          ---------           --------          --------

Cash flows from financing activities:
 Borrowings of debt                                                         498,061            259,000                --
 Repayments of debt                                                        (344,699)          (263,000)               --
 Payment of deferred financing costs                                        (17,780)            (7,000)               --
 Increase in due to PRIMESTAR Partners                                        5,448             74,785           104,128
 Proceeds from issuance of common stock                                         471                 --                --
 Increase in due to TCIC                                                         --            250,189           397,529
                                                                          ---------           --------          --------
   Net cash provided by financing activities                                141,501            313,974           501,657
                                                                          ---------           --------          --------

   Net increase (decrease) in cash and cash equivalents                        (476)             4,759             1,801

   Cash and cash equivalents:
         Beginning of year                                                    6,560              1,801                --
                                                                          ---------           --------          --------

         End of year                                                      $   6,084              6,560             1,801
                                                                          =========           ========          ========
</TABLE>

See accompanying notes to financial statements.

                                     II-24
<PAGE>

                       TCI SATELLITE ENTERTAINMENT, INC.
                                 (See note 1)

                         Notes to Financial Statements

                       December 31, 1997, 1996 and 1995

(1)  Basis of Presentation
     ---------------------

     The accompanying financial statements of TCI Satellite Entertainment, Inc.
     ("TSEI") include the historical financial information of (i) certain
     satellite television assets (collectively, "TCI SATCO") of TCIC, a
     subsidiary of Tele-Communications, Inc. ("TCI") for periods prior to the
     December 4, 1996 consummation of the distribution transaction (the
     "Distribution") described in note 3, and (ii) TSEI and its consolidated
     subsidiaries for the period following such date. Upon consummation of the
     Distribution, TSEI became the owner of the assets that comprise TCI SATCO,
     which assets include (i) a 100% ownership interest in the TCIC business
     that distributed the PRIMESTAR(R) programming service to subscribers within
     specified areas of the continental United States, (ii) a 100% ownership
     interest in Tempo Satellite, Inc. ("Tempo"), and (iii) a 20.86% aggregate
     ownership interest in PRIMESTAR Partners, which owns and operates the
     PRIMESTAR(R) service. PRIMESTAR Partners was formed as a limited
     partnership in 1990 by subsidiaries of TCIC, subsidiaries of several other
     cable operators, and a subsidiary of General Electric Company. PRIMESTAR
     Partners, among other things, transmits satellite entertainment services
     that are delivered to subscribers through TSEI and certain other authorized
     distributors.

     Tempo holds a permit (the "FCC Permit") issued by the Federal
     Communications Commission ("FCC") authorizing the construction of a direct
     broadcast satellite ("DBS") system. Tempo is also a party to a construction
     agreement (the "Satellite Construction Agreement") with Space
     Systems/Loral, Inc. ("Loral"), pursuant to which Tempo arranged for the
     construction of two high power communications satellites (the "Tempo
     Satellites") and has an option to purchase up to three additional
     satellites.

     In the following text, "TSAT" and the "Company" may, as the context
     requires, refer to "TCI SATCO" (prior to the completion of the
     Distribution), TSEI and its consolidated subsidiaries (subsequent to the
     completion of the Distribution) or both. Additionally, unless the context
     indicates otherwise, references to "TCI" and "TCIC" herein are to TCI and
     TCIC and their respective consolidated subsidiaries (other than the
     Company).

     All significant inter-entity and intercompany transactions have been
     eliminated.

(2)  Proposed Transactions
     ---------------------

     On March 6, 1998, the TSAT stockholders voted to approve a proposal to
     adopt the provisions of certain agreements and the transactions
     contemplated thereby as described below.

                                                                     (continued)

                                     II-25
<PAGE>

                       TCI SATELLITE ENTERTAINMENT, INC.
                                 (See note 1)

                         Notes to Financial Statements

 Restructuring Transaction

     Pursuant to (i) a Merger and Contribution Agreement dated as of February 6,
     1998, (the "Restructuring Agreement"), among TSAT, PRIMESTAR, Inc. ("New
     PRIMESTAR"), Time Warner Entertainment Company, L.P. ("TWE"),
     Advance/Newhouse Partnership ("Newhouse"), Comcast Corporation ("Comcast"),
     Cox Communications, Inc. ("Cox"), MediaOne of Delaware, Inc. ("MediaOne"),
     US West Media Group, Inc. and GE American Communications, Inc. ("GE
     Americom"), and (ii) the Asset Transfer Agreement dated as of February 6,
     1998, (the "TSAT Asset Transfer Agreement") between, TSAT and New
     PRIMESTAR, it is contemplated that a business combination (the
     "Restructuring Transaction") will be consummated whereby (a) TSAT will
     contribute and transfer to New PRIMESTAR (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 Transaction
     and (III) the rights and obligations under certain agreements with New
     PRIMESTAR related to the Restructuring Transaction and (b) the business of
     PRIMESTAR Partners and the business of distributing the PRIMESTAR(R)
     programming service ("PRIMESTAR(R)") of each of TWE, Newhouse, Comcast, Cox
     and affiliates of MediaOne will be consolidated into New PRIMESTAR.

     In connection with the TSAT Asset Transfer, at the closing, New PRIMESTAR
     will assume all of TSAT's indebtedness on such date, and TSAT will receive
     from New PRIMESTAR such number of shares of Class A Common Stock, $.01 par
     value per share, of New PRIMESTAR ("New PRIMESTAR Class A Common Stock")
     and Class B Common Stock, $.01 par value per share, of New PRIMESTAR ("New
     PRIMESTAR Class B Common Stock"), respectively, as equals the number of
     shares of Series A Common Stock of TSAT ("Series A Common Stock") and
     Series B Common Stock of TSAT ("Series B Common Stock"), respectively,
     issued and outstanding or deemed to be issued and outstanding on the
     closing date, in accordance with the Restructuring Agreement and the TSAT
     Asset Transfer Agreement. TSAT will own approximately 36% of the
     outstanding shares of common equity of New PRIMESTAR at the closing of the
     Restructuring Transaction, representing approximately 37% of the combined
     voting power of such common equity.

     As a result of the TSAT Asset Transfer, TSAT will become a holding company,
     with no substantial assets or liabilities other than (i) 100% of the
     outstanding capital stock of Tempo, (ii) its ownership interest in New
     PRIMESTAR, and (iii) its rights and obligations under certain agreements
     with New PRIMESTAR. The respective obligations of the parties to the
     Restructuring Agreement to consummate the Restructuring Transaction are
     subject to the satisfaction or waiver of a number of conditions.
                                                                     (continued)
                                     II-26
<PAGE>

                       TCI SATELLITE ENTERTAINMENT, INC.
                                 (See note 1)

                         Notes to Financial Statements


     The TSAT Asset Transfer will be recorded at TSAT's historical cost due to
     the fact that New PRIMESTAR is a wholly-owned subsidiary of TSAT. The
     remaining elements of the Restructuring Transaction, as set forth above,
     will be treated as the acquisition by New PRIMESTAR of the (i) PRIMESTAR
     subscribers and certain related assets and liabilities and (ii) the
     partnership interest in PRIMESTAR Partners of the parties to the
     Restructuring Agreement other than TSAT (the "Non-TSAT Parties"), and such
     acquisition will be accounted for using the purchase method of accounting.
     The fair value of the consideration to be issued to the Non-TSAT Parties
     will be allocated to the assets and liabilities acquired based upon the
     estimated fair values of such assets and liabilities. TSAT has been
     identified as the acquiror for accounting purposes and the predecessor for
     reporting purposes due to the fact that TSAT will own the largest interest
     in New PRIMESTAR immediately following consummation of the Restructuring
     Transaction.

 TSAT Merger

     Pursuant to an Agreement and Plan of Merger dated as of February 6, 1998
     (the "TSAT Merger Agreement"), between TSAT and New PRIMESTAR, it is
     contemplated that, subsequent to the Restructuring Transaction, TSAT will
     be merged with and into New PRIMESTAR, with New PRIMESTAR as the surviving
     corporation (the "TSAT Merger"). In connection therewith (i) each
     outstanding share of Series A Common Stock will be converted into the right
     to receive one share of New PRIMESTAR Class A Common Stock, and (ii) each
     outstanding share of Series B Common Stock will be converted into the right
     to receive one share of New PRIMESTAR Class B Common Stock, subject to
     adjustment. Each share of New PRIMESTAR's Common Stock then held by TSAT
     will be canceled.

     The Restructuring Transaction (including the TSAT Asset Transfer) and the
     TSAT Merger are collectively referred to herein as the Roll-up Plan. It is
     anticipated that the Restructuring Transaction will be consummated prior to
     the anticipated closing date of the TSAT Merger. Consummation of the TSAT
     Merger is subject to regulatory approval and other conditions to closing
     set forth in the TSAT Merger Agreement. Accordingly, the TSAT Merger may
     not be consummated even if the Restructuring Transaction is consummated.

     The TSAT Merger will be treated as the acquisition of TSAT by New
     PRIMESTAR. Such acquisition will be accounted for at TSAT's historical cost
     since (i) the percentage of New PRIMESTAR owned by TSAT prior to
     consummation of the TSAT Merger will be approximately equal to the
     percentage of New PRIMESTAR to be owned by TSAT shareholders following
     consummation of the TSAT Merger and (ii) the TSAT Merger and the
     Restructuring Transaction are both part of the Roll-up Plan.


                                                                     (continued)

                                     II-27
<PAGE>

                       TCI SATELLITE ENTERTAINMENT, INC.
                                 (See note 1)

                         Notes to Financial Statements

     Acquisition of Certain Satellite Assets

     In a separate transaction (the "ASkyB Transaction"), pursuant to an asset
     acquisition agreement, dated as of June 11, 1997 among PRIMESTAR Partners,
     The News Corporations Limited ("News Corp."), MCI Telecommunications
     Corporation, the principal domestic operating subsidiary of MCI
     Communications corporation ("MCI"), American Sky Broadcasting LLC, a
     wholly-owned subsidiary of News Corp. ("ASkyB"), and for certain purposes
     only, each of the partners of PRIMESTAR Partners (collectively, the
     "Partners"), New PRIMESTAR will acquire from MCI two high-power
     communications satellites currently under construction, certain
     authorizations granted to MCI by the FCC to operate a direct broadcast
     satellite business at the 110 degrees West Longitude ("W.L.") orbital
     location using 28 transponder channels, and certain related contracts. In
     consideration, ASkyB will receive non-voting convertible securities of New
     PRIMESTAR, comprising, subject to closing adjustments, approximately $600
     million liquidation value of non-voting convertible preferred stock, $.01
     par value per share, of New PRIMESTAR (the "New PRIMESTAR Convertible
     Preferred Stock") (convertible into approximately 52 million shares of non-
     voting Series D Common Stock, $.01 par value per share, of New PRIMESTAR
     (the "New PRIMESTAR Class D Common Stock"), subject to adjustment) and
     approximately $516 million principal amount of convertible subordinated
     notes of New PRIMESTAR (the "New PRIMESTAR Convertible Subordinated Notes")
     (convertible into approximately 45 million shares of New PRIMESTAR Class D
     Common Stock).

     The New PRIMESTAR Convertible Subordinated Notes will be due and payable,
     and the New PRIMESTAR Convertible Preferred Stock will be mandatorily
     redeemable, on the tenth anniversary of the date of issuance. The New
     PRIMESTAR Convertible Preferred Stock will accrue cumulative dividends at
     the annual rate of 5% of the liquidation value of such shares and the New
     PRIMESTAR Convertible Subordinated Notes will have an interest rate of 5%.
     Dividends on the New PRIMESTAR Convertible Preferred Stock and interest on
     the New PRIMESTAR Convertible Subordinated Notes will be payable in cash
     or, at the option of New PRIMESTAR, in shares of the non-voting New
     PRIMESTAR Class D Common Stock, for a period of four years. Thereafter, all
     dividend and interest payments will be made solely in cash. Such
     convertible securities, and the shares of New PRIMESTAR Class D Common
     Stock to be issued to ASkyB or any of its affiliates upon conversion of
     such New PRIMESTAR Convertible Preferred Stock and New PRIMESTAR
     Convertible Subordinated Notes, or in payment of dividend or interest
     obligations thereunder, will be non-voting; however, shares of New
     PRIMESTAR Class D Common Stock will in turn automatically convert into
     shares of New PRIMESTAR Class A Common Stock, on a one-to-one basis, upon
     transfer to any person other than ASkyB, News Corp. or any of their
     respective affiliates.

     Consummation of the ASkyB Transaction is contingent on, among other things,
     receipt of all necessary government and regulatory approvals, and
     accordingly, no assurance can be given that the ASkyB Transaction will be
     consummated.



                                                                     (continued)

                                     II-28
<PAGE>

                       TCI SATELLITE ENTERTAINMENT, INC.
                                 (See note 1)

                         Notes to Financial Statements

(3)  Distribution Transaction
     ------------------------

     General

     On December 4, 1996 (the "Distribution Date"), TCI distributed (the
     "Distribution") all the capital stock of the Company to the holders of
     Tele-Communications, Inc. Series A TCI Group Common Stock (the "Series A
     TCI Group Stock") and Tele-Communications, Inc. Series B TCI Group Common
     Stock (the "Series B TCI Group Stock" and, together with the Series A TCI
     Group Stock, the "TCI Group Stock"). The Distribution did not involve the
     payment of any consideration by the holders of TCI Group Stock (such
     holders, the "TCI Group Stockholders"), and is intended to qualify as a
     tax-free spinoff. TCI Group Stockholders received one share of Series A
     Common Stock for each ten shares of Series A TCI Group Stock owned and one
     share of Series B Common Stock for each ten shares of Series B TCI Group
     Stock owned. Immediately following the Distribution, 57,941,044 shares of
     Series A Common Stock and 8,466,564 shares of Series B Common Stock were
     issued and outstanding.

     Subsequent to the Distribution, the Company and TCI have operated
     independently. For the purposes of governing certain of the ongoing
     relationships between the Company and TCI after the Distribution, and to
     provide mechanisms for an orderly transition, the Company and TCI entered
     into various agreements, including the "Reorganization Agreement" (see
     below), the "Fulfillment Agreement" and the "Transition Services Agreement"
     (see note 12), the "Indemnification Agreements" (see note 13), and an
     amendment to TCI's existing "Tax Sharing Agreement" (see note 11).

     Reorganization Agreement

     The Reorganization Agreement provided for, among other things, the transfer
     to the Company of the assets of TCI SATCO, and for the assumption by the
     Company of related liabilities. No consideration was payable by the Company
     for such transfers. The Reorganization Agreement also provides for certain
     cross-indemnities designed to make the Company financially responsible for
     all liabilities relating to the digital satellite business conducted by TCI
     prior to the Distribution, and makes TCI financially responsible for all
     potential liabilities of the Company which are not related to the digital
     satellite business, including, for example, liabilities arising as a result
     of the Company having been a subsidiary of TCI.


                                                                     (continued)

                                     II-29
<PAGE>

                       TCI SATELLITE ENTERTAINMENT, INC.
                                 (See note 1)

                         Notes to Financial Statements


     Pursuant to the Reorganization Agreement, on the Distribution Date, the
     Company issued to TCIC a promissory note (the "Company Note"), in the
     principal amount of $250,000,000, representing a portion of the Company's
     intercompany balance owed to TCIC on such date. The remainder of the
     Company's intercompany balance owed to TCIC on the Distribution Date (other
     than certain advances made to the Company by TCIC in 1996 to fund certain
     construction and related costs associated with the Tempo Satellites, as
     described in note 8) was assumed by TCI in the form of a capital
     contribution to the Company. On December 31, 1996, the Company entered into
     a bank credit agreement (the "Bank Credit Facility") and used a portion of
     the borrowing availability thereunder to repay in full all principal and
     interest due to TCIC pursuant to the Company Note.

(4)  Changes in Accounting
     ---------------------

     During the fourth quarter of 1996, the Company changed its depreciation
     policy for subscriber installation costs. Such change was adopted effective
     October 1, 1996 and was treated as a change in accounting policy that was
     inseparable from a change in estimate. Accordingly, the cumulative effect
     of such change for periods prior to October 1, 1996, together with the
     fourth quarter 1996 effect of such change, was included in the Company's
     depreciation expense for the fourth quarter of 1996. Consequently, this
     change in policy resulted in increases to the Company's depreciation
     expense, net loss and net loss per share for the year ended December 31,
     1996 of $55,304,000 ($8,754,000 of which relates to periods prior to
     January 1, 1996) $41,478,000 ($6,566,000 of which relates to periods prior
     to January 1, 1996) and $.62 ($.10 of which relates to periods prior to
     January 1, 1996), respectively.

     The Company also revised the estimated useful life of certain satellite
     reception equipment on a prospective basis as of October 1, 1996. Such
     change in estimate resulted in increases to the Company's depreciation
     expense, net loss and net loss per share for the year ended December 31,
     1996 of $7,796,000, $5,847,000 and $.09, respectively.

(5)  Summary of Significant Accounting Policies
     ------------------------------------------

     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.

     Investment in PRIMESTAR Partners

     The Company uses the equity method to account for its investment in
     PRIMESTAR Partners. Under this method, the investment, originally recorded
     at cost, is adjusted to recognize the Company's share of the net earnings
     or losses of PRIMESTAR Partners as they occur, rather than as dividends or
     other distributions are received, limited to the extent of the Company's
     investment in, and advances and commitments to, PRIMESTAR Partners. The
     Company's share of net earnings or losses of PRIMESTAR Partners includes
     the amortization of the difference between the Company's investment and its
     share of the net assets of PRIMESTAR Partners.

                                                                     (continued)

                                     II-30
<PAGE>

                       TCI SATELLITE ENTERTAINMENT, INC.
                                 (See note 1)

                         Notes to Financial Statements

     Property and Equipment

     Property and equipment is stated at cost. Depreciation is computed on a
     straight-line basis using estimated useful lives of 4 to 6 years (4 to 8
     years through September 30, 1996) for satellite reception equipment and 3
     to 10 years for support equipment. Subscriber installation costs are
     depreciated over the estimated average life of a subscriber (4 years). Any
     subscriber installation costs that have not been fully depreciated at the
     time service to a subscriber is terminated are charged to depreciation
     expense during the period in which such termination occurs. Upon acceptance
     by the Company of delivery of a satellite, the satellite is depreciated
     using the straight-line method over the estimated useful life of such
     satellite.

     Installation charges from TCIC include direct and indirect costs of
     performing installations. Through the Distribution Date, the Company
     capitalized a portion of such charges as subscriber installation costs
     based upon amounts charged by unaffiliated third parties to perform similar
     services. Subsequent to the Distribution Date, the company has capitalized
     the full amount of installation fees paid to TCIC.

     Repairs and maintenance are charged to operations, and betterments and
     additions are capitalized. At the time of ordinary retirements of satellite
     reception equipment, sales or other dispositions of property, the original
     cost and cost of removal of such property are charged to accumulated
     depreciation, and salvage, if any, is credited thereto.

     Statement of Financial Accounting Standards No. 121, Accounting for the
     Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of
     ("Statement No. 121") requires impairment losses to be recorded on long-
     lived assets used in operations when indicators of impairment are present
     and the undiscounted cash flows estimated to be generated by those assets
     are less than the assets' carrying amount. In accordance with Statement No.
     121, 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.

                                                                     (continued)

                                     II-31
<PAGE>

                       TCI SATELLITE ENTERTAINMENT, INC.
                                 (See note 1)

                         Notes to Financial Statements


     Deferred Financing Costs

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

     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.

     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 sale of
     such equipment is recognized at the time of sale and is included in selling
     expense.

     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.

     Stock Based Compensation

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

     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.

                                                                     (continued)

                                     II-32
<PAGE>

                       TCI SATELLITE ENTERTAINMENT, INC.
                                 (See note 1)

                         Notes to Financial Statements

     Loss Per Common Share

     In February 1997, the Financial Accounting Standards Board issued Statement
     of Financial Accounting Standards No. 128, "Earnings Per Share" ("Statement
     No. 128"). Statement No. 128 requires the presentation of basic earnings
     per share ("EPS") and, for companies with potentially dilutive securities,
     such as convertible debt, options and warrants, diluted EPS. Statement No.
     128 is effective for annual and interim periods ending after December 15,
     1997. As TSAT generated a net loss for each of the periods presented,
     potential common shares have not been included in the computation of EPS.
     Therefore, the adoption of Statement No. 128 had no impact on the
     calculation of TSAT's loss per common share.

     The loss per common share for the year ended December 31, 1997 is based on
     66,658,000 weighted average shares outstanding during the period. TSAT
     issued 66,408,000 shares of Company Common Stock pursuant to the
     Distribution. The loss per share amounts set forth in the accompanying
     statements of operations assume that the shares issued pursuant to the
     Distribution were issued and outstanding since January 1, 1995.
     Accordingly, the calculation of the loss per share assumes weighted average
     shares outstanding of 66,408,000 for each of the years ended December 31,
     1996 and 1995. Excluded from the computation of diluted EPS for the years
     ended December 31, 1997 and 1996 are options to acquire 7,894,000 and
     591,000 weighted average shares of Series A Common Stock, respectively,
     because inclusion of such options would be anti-dilutive.

     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.

(6)  Supplemental Disclosures to Statements of Cash Flows
     ----------------------------------------------------

     Cash paid for interest was $20,224,000 and $1,946,000 during the years
     ended December 31, 1997 and 1996, respectively, and was not significant
     during the year ended December 31, 1995. Cash paid for income taxes was not
     material during the years ended December 31, 1997, 1996 and 1995.

     With the exception of certain non-cash transactions described in note 11,
     transactions effected through the intercompany account with TCIC for
     periods prior to the Distribution have been considered to be constructive
     cash receipts and payments for purposes of the accompanying statements of
     cash flows.

     The non-cash effects of the Distribution are set forth in the accompanying
     statements of equity.

     Accrued capital expenditures of $35,645,000 and $7,713,000 at December 31,
     1997 and 1996, respectively, have been excluded from the accompanying
     statements of cash flows.
                                                                     (continued)
                                     II-33
<PAGE>

                       TCI SATELLITE ENTERTAINMENT, INC.
                                 (See note 1)

                         Notes to Financial Statements


(7)  Investment in PRIMESTAR Partners
     --------------------------------

     Summarized unaudited financial information for PRIMESTAR Partners is as
     follows:

<TABLE>
<CAPTION>
                                                                  December 31,
                                                       ----------------------------------
                                                             1997              1996
                                                       ----------------  ----------------
<S>                                                    <C>               <C>
                                                              amounts in thousands
Financial Position
------------------
Current assets                                                 $156,706           137,048
Property and equipment, net                                      21,221            18,131
Cost of satellites under construction                           547,627           525,746
Other assets, net                                                    96             7,348
                                                               --------           -------

   Total assets                                                $725,650           688,273
                                                               ========           =======

PRIMESTAR Credit Facility expected to be refinanced            $565,000           521,000
Other current liabilities                                       103,541            63,907
Other liabilities                                                 3,952             4,227
Partners' capital                                                53,157            99,139
                                                               --------           -------

   Total liabilities and partners' capital                     $725,650           688,273
                                                               ========           =======
</TABLE>

<TABLE>
<CAPTION>
                                                                      Years ended December 31,
                                                       -------------------------------------------------------
                                                             1997               1996               1995
                                                       -----------------  -----------------  -----------------
<S>                                                    <C>                <C>                <C>
                                                                          amounts in thousands
Results of Operations
---------------------
Revenue                                                       $ 626,104            412,999            180,595

Operating, selling, general and administrative
 expenses                                                      (680,876)          (426,561)          (216,100)

Depreciation and amortization                                    (3,882)            (3,261)            (2,890)
                                                              ---------           --------           --------

   Operating loss                                               (58,654)           (16,823)           (38,395)

Interest expense                                                (17,836)              (737)                (8)
Other, net                                                        2,073              1,858             (3,634)
                                                              ---------           --------           --------

   Net loss                                                   $ (74,417)           (15,702)           (42,037)
                                                              =========           ========           ========
</TABLE>

     PRIMESTAR Partners provides 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, PRIMESTAR Partners
     arranges for satellite capacity and uplink services, and provides national
     marketing and administrative support services in exchange for a separate
     authorization fee.

                                                                     (continued)

                                     II-34
<PAGE>

                       TCI SATELLITE ENTERTAINMENT, INC.
                                 (See note 1)

                         Notes to Financial Statements


     Under the PRIMESTAR Partners limited partnership agreement, as amended, the
     Company has agreed to fund its share of any capital contributions and/or
     loans to PRIMESTAR Partners that might be agreed upon from time to time by
     the partners of PRIMESTAR Partners. Additionally, those subsidiaries of
     TSAT that are general partners of PRIMESTAR Partners are liable as a matter
     of partnership law for all debts of PRIMESTAR Partners in the event the
     liabilities of PRIMESTAR Partners were to exceed its assets. PRIMESTAR
     Partners has contingent liabilities related to legal and other matters
     arising in the ordinary course of business. Management of PRIMESTAR
     Partners is unable at this time to assess the impact, if any, of such
     matters on PRIMESTAR Partners' results of operations, financial position,
     or cash flows.

(8)  Satellites
     -----------

     Tempo DBS System

     The Company, through Tempo, holds 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 119 degrees W.L. orbital position and
     11 frequencies at the 166 degrees W.L. orbital position.

     Tempo is 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 has an option to
     purchase up to three additional satellites.

     One of the Tempo Satellites ("Tempo DBS-1") was launched into
     geosynchronous orbit on March 8, 1997. Since the launch of Tempo DBS-1,
     Loral has notified TSAT of at least eight separate occurrences of power
     reductions on Tempo DBS-1. TSAT does not currently know the extent of such
     power reductions, and cannot confirm the precise causes thereof; however,
     such reductions could eventually affect the proposed operation of Tempo
     DBS-1, either alone or together with other events that may arise during the
     expected life of the satellite. As a result of such power reductions, in-
     orbit testing has been extended and Tempo DBS-1 has not yet been accepted.
     Pursuant to the Satellite Construction Agreement, Loral bears the risk of
     loss of the Tempo Satellites until Tempo accepts delivery of the Tempo
     Satellites. TSAT currently believes that Tempo DBS-1 may not fully comply
     with specifications, but has not yet determined the extent of any such non-
     compliance. Tempo and Loral are currently engaged in negotiations regarding
     this matter, including the timing, extent and methodology of any further
     tests to be conducted and the terms of any monetary settlement with respect
     to the satellite to which Tempo may be entitled under the Satellite
     Construction Agreement. Certain launch defects or damages affecting Tempo
     DBS-1 could cause a substantial monetary loss to TSAT or, following
     consummation of the TSAT Merger, New PRIMESTAR.

     Under the FCC Permit the time by which the Tempo Satellites must be
     operational expires in May 1998. TSAT believes that it has complied with
     the obligations for Tempo DBS-1 to become operational by such date, but
     there can be no assurance that the FCC would agree that such satellite is
     operational, and if an application for extension of the FCC Permit were
     required, there can be no assurance that such an extension would be granted
     by the FCC.


                                                                     (continued)

                                     II-35
<PAGE>

                       TCI SATELLITE ENTERTAINMENT, INC.
                                 (See note 1)

                         Notes to Financial Statements



     Upon delivery of each of the Tempo Satellites, Tempo is obligated to make a
     $10 million incentive payment to Loral. Tempo is eligible to receive a pro
     rata warranty payback of each such incentive payment to the extent that
     transponder failures occur during the twelve-year period following
     delivery. Satellite incentive payments and any related warranty paybacks
     are treated as adjustments of the cost of the applicable Tempo Satellite.

     Tempo Option

     In February 1990, Tempo entered into an option agreement (the "Tempo Option
     Agreement") with PRIMESTAR Partners granting PRIMESTAR Partners the right
     and option (the "Tempo 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 Option, PRIMESTAR 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 Option and
     certain related matters, Tempo and PRIMESTAR Partners subsequently entered
     into two letter agreements (the "Tempo Letter Agreements"), which provided
     for, among other things, the funding by PRIMESTAR Partners of milestone and
     other payments due under the Satellite Construction Agreement, and certain
     related costs, through advances by PRIMESTAR Partners to Tempo. The
     aggregate funding provided to Tempo by PRIMESTAR Partners ($463,133,000 at
     December 31, 1997) is reflected in "Due to PRIMESTAR Partners" in the
     accompanying balance sheets.

     During 1996, TCIC made intercompany advances ("Construction Advances") to
     the Company to fund the majority of the construction and related costs
     ("Construction Costs") associated with the Tempo Satellites. In connection
     with the Distribution, a determination was made that such 1996 advances
     would be repaid by the Company, to the extent (and only to the extent) that
     Tempo received corresponding advances from PRIMESTAR Partners. In December
     1996, PRIMESTAR Partners advanced Tempo $73,786,000 as reimbursement for
     all of the 1996 Construction Costs. Tempo used the proceeds to repay the
     Construction Advances.

     On February 7, 1997, the Partners Committee of PRIMESTAR Partners adopted a
     resolution (i) affirming that PRIMESTAR Partners had unconditionally
     exercised the Tempo Option, (ii) approving the proposed launch of Tempo
     DBS-1 into the 119 degrees 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 PRIMESTAR Partners, and (iii) authorizing the
     payment by PRIMESTAR Partners to Tempo of the Exercise Fee and other
     amounts in connection with the Tempo Option and the Tempo Letter
     Agreements, including funding of substantially all construction and related
     costs relating to the Tempo Satellites not previously funded by PRIMESTAR
     Partners. Such amounts have been paid to TSAT.

                                                                     (continued)

                                     II-36
<PAGE>

                       TCI SATELLITE ENTERTAINMENT, INC.
                                 (See note 1)

                         Notes to Financial Statements


     The Tempo Letter Agreements permit PRIMESTAR Partners to apply its advances
     to Tempo against any payments (other than the Exercise Fee) due under the
     Tempo Option with respect to its purchase or lease of satellite capacity.
     Although TSAT and PRIMESTAR Partners have not entered into an agreement
     with respect to the purchase or lease of 100% of the capacity of the
     proposed Tempo DBS system pursuant to the Tempo Option, TSAT believes that
     its obligations to PRIMESTAR Partners with respect to such advances will be
     satisfied in connection with the completion of such purchase or lease.
     However, if notwithstanding the exercise of the Tempo Option such purchase
     or lease of satellite capacity is not completed, TSAT believes that
     alternative courses of action are available that would allow TSAT to
     recover its costs of constructing the Tempo Satellites.

(9)    Debt
       ----


       The components of debt are as follows:

<TABLE>
<CAPTION>
                                                                      December 31,
                                                          ------------------------------------
                                                                1997               1996
                                                          -----------------  -----------------
                                                                   amounts in thousands
       <S>                                                    <C>                <C>
        Bank Credit Facility (a)                              $ 48,000            246,000
        Senior Subordinated Notes (b)                          200,000                 --
        Senior Subordinated Discount Notes (b)                 168,781                 --
        Other                                                    1,948              1,230
                                                              --------            -------

                                                              $418,729            247,230
                                                              ========            =======
</TABLE>

     (a)  Aggregate commitments under the Bank Credit Facility at December 31,
          1997 were $750,000,000.  Commencing March 31, 2001, such aggregate
          commitments will be reduced quarterly in accordance with a schedule,
          until final maturity at June 30, 2005. At December 31, 1997,
          $672,000,000 of such maximum commitments was unused and $30,000,000 in
          commitments was used to support an aggregate $30,000,000 of standby
          letters of credit issued for the account of TSAT.  The availability of
          the unused commitments is subject to the Company's compliance with
          operating and financial covenants and other customary conditions.

          Borrowings under the Bank Credit Facility bear interest at variable
          rates (7.19% at December 31, 1997). In addition, the Company is
          required to pay a commitment fee equal to 0.375% on the average daily
          unused portion of the available commitments, payable quarterly in
          arrears and at maturity. Aggregate commitment fees during the year
          ended December 31, 1997 were not significant.

                                                                     (continued)

                                     II-37
<PAGE>

                       TCI SATELLITE ENTERTAINMENT, INC.
                                 (See note 1)

                         Notes to Financial Statements


          Borrowings under the Bank Credit Facility are guaranteed by TSAT's
          restricted subsidiaries (currently all of the Company's subsidiaries
          except Tempo) (the "Restricted Subsidiaries"), and secured by
          collateral assignments or other security interests in (i) all capital
          stock of certain of the Company's Restricted Subsidiaries and (ii)
          substantially all of the Company's assets (other than the Tempo
          Satellites). The Bank Credit Facility contains affirmative covenants
          regarding minimum subscribers, revenue per subscriber and debt service
          coverage, as well as negative covenants restricting, among other
          things, indebtedness, liens and other encumbrances, mergers or
          consolidation transactions, transactions with affiliates, investments,
          capital expenditures, and payments of dividends and other
          distributions.

     (b)  On February 20, 1997, the Company issued 10-7/8% Senior Subordinated
          Notes due 2007 having an aggregate principal amount of $200,000,000
          the ("Senior Subordinated Notes") and 12-1/4% Senior Subordinated
          Discount Notes due 2007 having an aggregate principal amount at
          maturity of $275,000,000 (the "Senior Subordinated Discount Notes",
          and together with the Senior Subordinated Notes, the "Notes").  The
          net proceeds from the issuance of the Notes (approximately
          $340,500,000 after deducting offering expenses) were initially held in
          escrow and were subsequently released to the Company on March 17,
          1997.

          Cash interest on the Senior Subordinated Notes is payable semi-
          annually in arrears on February 15 and August 15. Cash interest will
          not accrue or be payable on the Senior Subordinated Discount Notes
          prior to February 15, 2002. Thereafter cash interest will accrue at a
          rate of 12-1/4% per annum and will be payable semi-annually in arrears
          on February 15 and August 15, commencing August 15, 2002, provided
          however, that at any time prior to February 15, 2002, the Company may
          make a Cash Interest Election (as defined) on any interest payment
          date to commence the accrual of cash interest from and after the Cash
          Election Date (as defined). The Notes will be redeemable at the option
          of the Company, in whole or in part, at any time after February 15,
          2002 at specified redemption prices. In addition, prior to February
          15, 2000, the Company may use the net cash proceeds from certain
          specified equity transactions to redeem up to 35% of the Notes at
          specified redemption prices.

     The fair value of TSAT's debt is estimated based upon the quoted market
     prices for the same or similar issuances or on the current rates offered to
     TSAT for debt of the same remaining maturities.  With the exception of the
     Notes which had an aggregate fair value of $396,698,000 at December 31,
     1997, TSAT believes that the fair value and the carrying value of its debt
     were approximately equal at December 31, 1997.


                                                                     (continued)

                                     II-38
<PAGE>

                       TCI SATELLITE ENTERTAINMENT, INC.
                                 (See note 1)

                         Notes to Financial Statements

     As of December 31, 1997, annual maturities of the Company's debt for each
     of the next five years were as follows (amounts in thousands):

               1998                     $667
               1999                      654
               2000                      627
               2001                       --
               2002                       --

(10)    Stockholders' Equity
        --------------------

        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.

        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"). The TSAT Board has not
        authorized the issuance of any shares of Preferred Stock and has no
        current plans for the issuance of any shares of Preferred Stock.

        Employee Benefit Plans

        TSAT's Employee Stock Purchase Plan (the "TSAT ESPP"), which became
        effective on January 1, 1997, provides eligible employees with an
        opportunity to invest in TSAT and to create a retirement fund. Terms of
        the TSAT ESPP provide 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, may elect to contribute up to
        100% of the amount contributed by employees. TSAT contributions to the
        TSAT ESPP aggregated $1,200,000 for 1997.

                                                                     (continued)

                                     II-39
<PAGE>

                       TCI SATELLITE ENTERTAINMENT, INC.
                                 (See note 1)

                         Notes to Financial Statements

     Stock Options

     On the Distribution Date, the TSAT Board adopted, and TCI as the sole
     stockholder of the Company prior to the Distribution, 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.  Options granted pursuant to the TSAT 1996 Plan vest evenly over five
     years from the date of grant and expire 10 years from the date of grant.

     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 a
     former executive officer of TCIC who is also 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 Distribution Date, determined
     immediately after giving effect to the Distribution, but before giving
     effect to any exercise of such options (the "Distribution Date Options").


                                                                     (continued)

                                     II-40
<PAGE>

                       TCI SATELLITE ENTERTAINMENT, INC.
                                 (See note 1)

                         Notes to Financial Statements


     The aggregate exercise price for each Distribution Date Option is equal to
     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 TCI's Net Investment
     (as defined below) as of the Distribution Date, but excluding any portion
     of TCI's Net Investment that as of such date is represented by a promissory
     note or other evidence of indebtedness from the Company to TCI.  TCI's Net
     Investment is defined for this purpose as the cumulative amount invested by
     TCI and its predecessor in the Company and its predecessors prior to and
     including the applicable date of determination, less the aggregate amount
     of all dividends and distributions made by the Company and its predecessors
     to TCI and its predecessor prior to and including such date.  Distribution
     Date Options to purchase 2,324,266 shares of Series A Common Stock at a per
     share price of $8.86 were granted on the Distribution Date, will vest in
     20% cumulative increments on each of the first five anniversaries of
     February 1, 1996, and will be exercisable for up to ten years following
     February 1, 1996.  Compensation expense with respect to the Distribution
     Date Options held by the Company Officer aggregated $1,101,000 and $95,000
     during the years ended December 31, 1997 and 1996, 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
     Distribution, the Company agreed, effective as of the Distribution 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

     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 loss
     and loss per share would have been $240,384,000 and $3.61 for 1997 and
     would not have been significantly different than the amounts reported for
     1996.


                                                                     (continued)

                                     II-41
<PAGE>

                       TCI SATELLITE ENTERTAINMENT, INC.
                                 (See note 1)

                         Notes to Financial Statements

     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 Distribution     2,324,266              $8.86                $8.74
                                               -------------
     Outstanding at December 31, 1996            2,324,266

       Granted                                   1,070,000               7.93                 4.77
       Canceled                                    (10,000)              8.00
                                               -------------

     Outstanding at December 31, 1997            3,384,266               8.57
                                               =============

     Exercisable at December 31, 1996                   --
                                               =============

     Exercisable at December 31, 1997              464,853               8.86
                                               =============
</TABLE>

 ________________

     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.  As the exercise price of such
     options exceeded the market price of the Series A Common Stock, no
     compensation expense related to such options was recognized during 1997.

     Options outstanding at December 31, 1997 have a range of exercise prices
     from $6.50 to $8.86 and a weighted-average remaining contractual life of
     approximately nine years.


                                                                     (continued)

                                     II-42
<PAGE>

                       TCI SATELLITE ENTERTAINMENT, INC.
                                 (See note 1)

                         Notes to Financial Statements

     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.  Such options had a weighted average
     fair value of $4.82 on the date of grant.  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 voted to increase the number of directors by one, and the
     director 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.  Such options had a weighted average fair value of $3.83 on the date
     of grant.

     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 10-year Treasure rate on the date of grant; (b) a 35%
     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.  Such restricted shares vest as to 50% on January
     1, 2001 and as to the remaining 50% on January 1, 2002.  Compensation
     expense with respect to the restricted shares aggregated $585,000 during
     the year ended December 31, 1997.

     On November 10, 1997, the TSAT Board and the compensation committee of the
     TSAT Board approved modifications to the vesting provisions of all options
     and restricted stock awards issued pursuant to the TSAT 1996 Plan, (i)
     accelerating the vesting schedules under such options, to provide for
     vesting in three equal annual installments, commencing February 1998, and
     (ii) 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 in each case subject to consummation of the
     Restructuring Transaction.  Options granted prior to the Distribution,
     which were 40% vested in February 1998, will become two-thirds vested in
     February 1999 and fully vested in February 2000.  If the Restructuring
     Transaction is not consummated, the vesting provisions of such grants will
     revert back to their original schedules.

     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 Distribution.  During 1997, TCI purchased 258,000 shares of
     Series A Common Stock pursuant to such option.

                                                                     (continued)

                                     II-43
<PAGE>

                       TCI SATELLITE ENTERTAINMENT, INC.
                                 (See note 1)

                         Notes to Financial Statements

     Other

     In connection with the Distribution, 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 Distribution Date under certain stock
     options and SARs held by their respective employees and non-employee
     directors.

     At December 31, 1997, a total of 9,496,488 shares of Series A Common Stock
     were reserved for issuance pursuant to the Distribution Date Options, the
     Share Purchase Agreements, the Reorganization Agreement, the TSAT 1996 Plan
     and the DSOP.  In addition, one share of Series A Common Stock is reserved
     for each outstanding share of Series B Common Stock.

(11) Income Taxes
     ------------

     Through the Distribution 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. The Tax
     Sharing Agreement encompasses U.S. Federal, state, local and foreign tax
     consequences and relies upon the U.S. Internal Revenue Code of 1986, as
     amended, and any applicable state, local and foreign tax law and related
     regulations.  In connection with the Distribution, 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 Distribution Date has been
     calculated in accordance with the Tax Sharing Agreement.  Subsequent to the
     Distribution Date, TSAT files separate U.S. Federal and state income tax
     returns.

     In connection with the Restructuring Transaction, 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 Distribution 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 Distribution 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, on the one hand, and TSAT or any of its
     subsidiaries, on the other, relating to taxes is the Tax Sharing Agreement.
     As of the Distribution Date, the sole agreement, if any, between any of the
     TCI stockholders, on the one hand, and TSAT or any of its subsidiaries, on
     the other, relating to taxes was the Tax Sharing Agreement.

                                                                     (continued)

                                     II-44
<PAGE>

                       TCI SATELLITE ENTERTAINMENT, INC.
                                 (See note 1)

                         Notes to Financial Statements

     Income tax benefit (expense) for the years ended December 31, 1997, 1996
     and 1995 consists of:

<TABLE>
<CAPTION>
                                                            Current           Deferred             Total
                                                        ----------------  -----------------  -----------------
                                                                         amounts in thousands
<S>                                                     <C>               <C>                <C>
     Year ended December 31, 1997:
       Federal                                                  $    --                --                  --
       State and local                                               --                --                  --
                                                             -----------        -----------        -----------
                                                                $    --                --                  --
                                                             ===========        ===========        ===========

     Year ended December 31, 1996:
       Intercompany allocation                                  $70,645                --              70,645
       Federal                                                       --           (17,699)            (17,699)
       State and local                                               --            (7,009)             (7,009)
                                                             -----------        -----------        -----------
                                                                $70,645           (24,708)             45,937
                                                             ===========        ===========        ===========

     Year ended December 31, 1995:
       Intercompany allocation                                  $36,530                --              36,530
       Federal                                                       --           (11,040)            (11,040)
       State and local                                               --            (3,632)             (3,632)
                                                             -----------        -----------        -----------
                                                                $36,530           (14,672)             21,858
                                                             ===========        ===========        ===========
</TABLE>

     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
                                                       -------------------------------------------------------
                                                             1997               1996               1995
                                                       -----------------  -----------------  -----------------
<S>                                                    <C>                <C>                <C>
                                                                        amounts in thousands

     Computed "expected" tax benefit                      $ 83,419           65,079             24,278
     State and local income taxes, net
       of Federal income tax benefit                        13,009           (2,672)            (2,361)
     Change in valuation allowance                         (98,521)         (16,371)                --
     Other                                                   2,093              (99)               (59)
                                                           -------          -------            -------
                                                          $     --           45,937             21,858
                                                           =======          =======            =======
</TABLE>

                                                                     (continued)

                                     II-45
<PAGE>

                       TCI SATELLITE ENTERTAINMENT, INC.
                                 (See note 1)

                         Notes to Financial Statements


     The tax effects of temporary differences that give rise to significant
     portions of the deferred tax assets and deferred tax liabilities at
     December 31, 1997 and 1996 are presented below:

<TABLE>
<CAPTION>
                                                                                        December 31,
                                                                             ----------------------------------
                                                                                    1997              1996
                                                                             ------------------  --------------
<S>                                                                          <C>                 <C>
                                                                                   amounts in thousands
     Deferred tax assets:
       Net operating loss carry forwards                                             $ 133,024          21,628
       Investment in PRIMESTAR Partners:
         Due to an increase in tax basis upon transfer
          from TCIC to the Company                                                      29,305          29,142
         Due principally to losses recognized for
          financial statement purposes in excess of
          losses recognized for tax purposes                                             2,671             957
       Future deductible amounts principally due to
        accruals deductible in later periods                                             5,028           1,631
                                                                                     ---------         -------
       Total deferred tax assets                                                       170,028          53,358
         Less-valuation allowance                                                     (114,892)        (16,371)
                                                                                     ---------         -------
       Net deferred tax assets                                                          55,136          36,987

     Deferred tax liability-
       Property and equipment, principally due to
        differences in depreciation net of increase in
        tax basis resulting from intercompany transfer                                  55,136          36,987
                                                                                     ---------         -------
     Net deferred tax liability                                                      $      --              --
                                                                                     =========         =======
</TABLE>

     Immediately prior to the Distribution, the investment in PRIMESTAR Partners
     was transferred from TCIC to the Company. Such transfer, which resulted in
     an increased tax basis for the investment in PRIMESTAR Partners, was
     recorded at TCIC's carryover basis for financial reporting purposes. In
     connection with such transfer, the Company recorded a $29,142,000 non-cash
     increase to the intercompany account owed to TCIC and $29,142,000 non-cash
     decrease to the Company's deferred tax liability.

     The valuation allowance for deferred tax assets as of December 31, 1997 was
     $114,892,000. Such balance increased $98,521,000 from December 31, 1996.

     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, 1997, the Company had net operating loss carry forwards for
     income tax purposes aggregating approximately $347,775,000 of which, if not
     utilized to reduce taxable income in future periods, $14,000,000 expire in
     2009, $37,432,000 expire in 2010, $17,713,000 expire in 2011 and
     $278,630,000 expire in 2012.

                                                                     (continued)

                                     II-46
<PAGE>

                       TCI SATELLITE ENTERTAINMENT, INC.
                                 (See note 1)

                         Notes to Financial Statements

(12) Transactions with Related Parties
     ---------------------------------

     Through the Distribution Date, the effects of all transactions between the
     Company and TCI were reflected as adjustments to a non-interest bearing
     intercompany account.  As described in note 2, all but $250,000,000 of this
     intercompany account was forgiven in connection with the Distribution.
     Subsequent to the Distribution Date, the effects of all transactions (other
     than those related to the TCIC Credit Facility) are reflected in a non-
     interest bearing account between the Company and TCIC and are settled
     periodically in cash.

     Through December 31, 1996, TCIC provided certain installation, maintenance,
     retrieval and other customer fulfillment services to the Company. The costs
     associated with such services were allocated to the Company based upon a
     standard charge for each of the various customer fulfillment activities
     performed by TCIC. During the years ended December 31, 1996 and 1995, the
     Company's capitalized installation costs included amounts allocated from
     TCIC of $53,169,000 and $57,058,000, respectively.  Maintenance, retrieval
     and other operating expenses allocated from TCIC to the Company aggregated
     $20,365,000 and $15,916,000 during the years ended December 31, 1996 and
     1995, respectively.

     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 Distribution. Pursuant
     to the Fulfillment Agreement, TCIC continued to provide fulfillment
     services on an exclusive basis to the Company following the Distribution
     with respect to customers of the PRIMESTAR(R) 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. In
     September and October 1997, TSAT entered into agreements with eight
     regional fulfillment companies to perform the services that are no longer
     performed by TCIC.

     TCIC also provides corporate administrative services to the Company.
     Through the Distribution Date, such administrative expenses, which were
     allocated from TCIC to the Company based primarily on the estimated cost of
     providing the service aggregated $18,120,000 and $7,817,000 during the
     years ended December 31, 1996 and 1995, respectively.

                                                                     (continued)

                                     II-47
<PAGE>

                       TCI SATELLITE ENTERTAINMENT, INC.
                                 (See note 1)

                         Notes to Financial Statements


     Effective on the Distribution Date, charges for administrative services
     provided by TCIC are made pursuant to the Transition Services Agreement.
     Pursuant to the Transition Services Agreement, TCI is obligated to provide
     to the Company certain services and other benefits. Pursuant to the
     Transition Services Agreement, TCI has also agreed to provide the Company
     with certain most-favored-customer rights to programming services that TCI
     may own in the future and access to any volume discounts that may be
     available to TCI for purchase of home satellite dishes, satellite receivers
     and other equipment. As compensation for the services rendered and for the
     benefits made available to the Company pursuant to the Transition Services
     Agreement, the Company is 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 $11,579,000 for the year ended
     December 31, 1997. Upon consummation of the Restructuring Transaction, TSAT
     and TCI have agreed that the Transition Services Agreement will be
     terminated.

     During the year ended December 31, 1997, TSAT purchased from TCIC at TCIC's
     cost certain telephony services aggregating $4,901,000.

     Beginning in March 1997, TCIC began providing TSAT with customer support
     services from its Boise, Idaho call center (the "Boise Call Center").  The
     Boise Call Center responds to calls that exceed the capacity of TSAT's
     National Call Center.  Amounts charged by TCIC to TSAT for such services
     aggregated $12,173,000 during the year ended December 31, 1997.

     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
     Distribution, 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, which are included in the above-described
     TCIC administrative expense allocations, aggregated $(541,000) and $901,000
     during the years ended December 31, 1996 and 1995, respectively. In 1997,
     the Company recognized $6,134,000 of stock compensation expense related to
     the aforementioned options with tandem SARs.

     The Company has entered into indemnification agreements with TCIC. See note
     13.

                                                                     (continued)

                                     II-48
<PAGE>

                       TCI SATELLITE ENTERTAINMENT, INC.
                                 (See note 1)

                         Notes to Financial Statements

(13) Commitments and Contingencies
     -----------------------------

     At December 31, 1997, the Company's future minimum commitments to purchase
     satellite reception equipment aggregated approximately $30,000,000.

     The Company has engaged master sales agents to recruit, train and maintain
     a network of sub-agents to sell services on behalf of the Company and to
     install, service and maintain equipment located at the premises of
     subscribers. As part of the compensation for such services, the Company
     pays certain residual sales commissions equal to a percentage of the
     programming revenue collected from a subscriber installed by a master sales
     agent during specified periods following the initiation of service
     (generally five years). Residual payments to master sales agents aggregated
     $15,364,000, $11,848,000 and $2,178,000 during 1997, 1996 and 1995,
     respectively.

     The Company leases business offices and uses certain equipment under lease
     arrangements. Rental expense under such arrangements amounted to
     $2,237,000, $2,095,000 and $1,257,000 in 1997, 1996 and 1995, respectively.
     It is expected that, in the normal course of business, expiring leases will
     be renewed or replaced by leases on other properties; thus, it is
     anticipated that future minimum lease commitments will not be less than the
     rental expense incurred during 1997.

     In connection with the Distribution, the Company entered into
     Indemnification Agreements with each of TCIC and TCI UA 1, Inc., an
     indirect subsidiary of TCIC, ("TCI UA 1"). The Indemnification Agreement
     with TCIC provides for the Company to reimburse TCIC for any amounts drawn
     under an irrevocable transferable letter of credit issued for the account
     of TCIC to support the Company's share of PRIMESTAR Partners' obligations
     under a transponder lease agreement with GE Americom (the "GE-2
     Agreement"). The drawable amount of such letter of credit is $25,000,000.

     The Indemnification Agreement with TCI UA 1 provides for the Company to
     reimburse TCI UA 1 for any amounts drawn under an irrevocable transferable
     letter of credit issued for the account of TCI UA 1 (the "TCI UA 1 Letter
     of Credit"), which supports PRIMESTAR Partners' bank credit facility (the
     "PRIMESTAR Credit Facility").  The drawable amount of the TCI UA 1 Letter
     of Credit was $141,250,000 at December 31, 1997.

     The Indemnification Agreements provide for the Company to indemnify and
     hold harmless TCIC and TCI UA 1 and certain related persons from and
     against any losses, claims, and liabilities arising out of the respective
     letters of credit or any drawings thereunder. The payment obligations of
     the Company to TCIC and TCI UA 1 under the Indemnification Agreements are
     subordinated in right of payment with respect to the obligations of the
     Company under the Bank Credit Facility.

                                                                     (continued)

                                     II-49
<PAGE>

                       TCI SATELLITE ENTERTAINMENT, INC.
                                 (See note 1)

                         Notes to Financial Statements


     During 1997, two additional irrevocable transferable letters of credit were
     issued pursuant to the Bank Credit Facility for the account of TSAT, one to
     support the Company's share of PRIMESTAR Partners' obligations under the
     GE-2 Agreement and the second to support the PRIMESTAR Credit Facility.
     The initial drawable amount of the first letter of credit is $25,000,000,
     increasing to $50,000,000 if PRIMESTAR Partners elects to extend the term
     of the GE-2 Agreement, and the initial drawable amount of the second letter
     of credit is $5,000,000.

     TCI has agreed to cause TCI UA 1 to renew the letter of credit arranged by
     it on the Company's behalf, through June 30, 1999. The Company believes
     (but cannot assure) that during such period the Company and/or PRIMESTAR
     Partners will be able to obtain permanent financing for the Tempo
     Satellites (to the extent not sold to a person other than PRIMESTAR
     Partners) on a basis that does not require the Company to post a letter of
     credit with respect thereto. If such permanent financing is not available,
     under certain maintenance covenants contained in the Bank Credit Facility,
     the Company would be unable to provide or arrange for such a letter of
     credit unless (i) the lenders under the Bank Credit Facility were to agree
     to amend or waive such covenants to permit the posting of such letter of
     credit by the Company, (ii) TCI were to agree to renew the TCI UA 1 Letter
     of Credit for an additional period, or (iii) the Company were to achieve a
     greater than anticipated increase in operating income before depreciation
     and amortization. If the Company and/or PRIMESTAR Partners are unable to
     refinance the Tempo Satellites (to the extent not sold to a person other
     than PRIMESTAR Partners) without a letter of credit and is unable to post
     (or arrange for the posting of) such a letter of credit, the Company could
     be adversely affected.

     ResNet Communications, LLC ("ResNet LLC"), a limited liability corporation
     owned 95.01% by ResNet Communications, Inc. and 4.99% by a subsidiary of
     TSAT, has agreed to purchase from TSAT, at a price that approximates TSAT's
     cost, up to $40,000,000 in satellite reception equipment over a five-year
     period (subject to a one-year extension at the option of ResNet LLC if
     ResNet LLC has not purchased the full $40,000,000 in equipment during the
     five-year initial term).  TSAT also agreed to make a subordinated
     convertible term loan to ResNet LLC, in the principal amount of
     $34,604,000, the proceeds of which can be used only to purchase such
     equipment from TSAT. The term of the loan is five years with an option by
     ResNet LLC to extend the term for one additional year. The total principal
     and accrued and unpaid interest under the loan is convertible over a four-
     year period into ownership interests in ResNet LLC, representing 32% of the
     total ownership interests in ResNet LLC.  TSAT's only recourse with respect
     to repayment of the loan is conversion into ownership interests in ResNet
     LLC stock or warrants.  Under current interpretations of the FCC rules and
     regulations related to restrictions on the provision of cable and satellite
     master antenna television services (ResNet LLC's business) in certain
     areas, TSAT could be prohibited from holding 5% or more of the ownership
     interests in ResNet LLC and consequently could not exercise the conversion
     rights under the convertible loan agreement.  TSAT is required to convert
     the convertible loan at such time as conversion would not violate such
     currently applicable regulatory restrictions.


                                                                     (continued)

                                     II-50
<PAGE>

                       TCI SATELLITE ENTERTAINMENT, INC.
                                 (See note 1)

                         Notes to Financial Statements


     In a signal availability agreement with ResNet, the Company has committed
     to make the satellite signal used to transmit the PRIMESTAR(R) programming
     service (the "PRIMESTAR Satellite Signal") or the signal of a substantially
     comparable service available to ResNet for a term that extends
     substantially beyond March 31, 2001.  If the Company loses its contractual
     ability to make the PRIMESTAR Satellite Signal available and is not able to
     make the signal of a substantially comparable service available, the
     Company would be obligated to reimburse ResNet for its costs in obtaining a
     digital signal from another source, including the cost of replacement
     equipment if the new digital signal is not compatible with ResNet's
     equipment.  While it is not possible at this time to quantify the amount
     that the Company would be obligated to pay to ResNet under the
     circumstances described above, the Company believes that the costs could be
     significant, particularly if it were to lose its ability to make a signal
     available towards the end of its agreement with ResNet.

     The National Digital Television Center of TCI ("NDTC") has the right from
     PRIMESTAR Partners to use the PRIMESTAR Satellite Signal for delivery of
     programming for the benefit of third parties, including private cable
     systems (the "Simultaneous Use Rights").  NDTC has agreed with the Company
     that private cable systems designated by the Company including the ResNet
     private cable systems, will receive the transport of the PRIMESTAR
     Satellite Signal by NDTC in exchange for the payment by the Company of a
     per subscriber per video program signal.  Counsel to PRIMESTAR Partners has
     advised the Company of the Partnership's position that there are certain
     preconditions to NDTC's Simultaneous Use Rights which have not yet been
     satisfied and that such rights are not assignable by NDTC to the Company.
     The Company believes that its transaction with ResNet and similar
     transactions are permitted under the agreement between NDTC and PRIMESTAR
     Partners.  The Company does not believe that any potential dispute with the
     Partnership regarding this issue is likely to have a material adverse
     effect on the Company.

     The International Bureau of the FCC (the "International Bureau") has
     granted EchoStar Satellite Corporation ("EchoStar") a conditional
     authorization to construct, launch and operate a Ku-band domestic fixed
     satellite into the orbital position at 83 degrees W.L., immediately
     adjacent to that occupied by GE-2, the medium power satellite currently
     used to provide the PRIMESTAR(R) service. Contrary to previous FCC policy,
     which would have permitted operation of a satellite at the 83 degrees W.L.
     orbital position at a power level of only 60-90 watts (subject to
     coordination requirements), EchoStar has been authorized to operate at a
     power level of 130 watts. If EchoStar were to launch its high power
     satellite authorized to 83 degrees W.L. and commence operations at that
     location at a power level of 130 watts, it would likely cause harmful
     interference to the reception of the PRIMESTAR(R) signal from GE-2 by
     subscribers to the PRIMESTAR(R) medium power service.

     GE Americom and PRIMESTAR Partners have each requested reconsideration of
     the International Bureau's authorization for EchoStar to operate at 83
     degrees W.L. These requests, which were opposed by EchoStar and others,
     currently are pending at the International Bureau. There can be no
     assurance that the International Bureau will change slot assignments, or
     power levels, in a fashion that eliminates the potential for harmful
     interference.

                                                                     (continued)

                                     II-51
<PAGE>

                       TCI SATELLITE ENTERTAINMENT, INC.
                                 (See note 1)

                         Notes to Financial Statements

     GE Americom and PRIMESTAR Partners have attempted to resolve potential
     coordination problems directly with EchoStar.  It is uncertain whether any
     agreement in respect of such coordination between PRIMESTAR Partners and
     EchoStar will be reached, or that if such agreement is reached that
     coordination will resolve such interference.  Accordingly, the ultimate
     outcome of this matter cannot presently be predicted.

     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.

(14) Quarterly Financial Information (Unaudited)
     -------------------------------------------


<TABLE>
<CAPTION>
                                                      1st                2nd                3rd                 4th
                                                    Quarter            Quarter            Quarter             Quarter
                                                ----------------  -----------------  ------------------  -----------------
                                                                        amounts in thousands,
1997:                                                                  except per share amounts
----
<S>                                             <C>               <C>                <C>                 <C>
 Revenue                                               $123,264            137,381             145,427            155,918

 Operating loss                                        $(41,657)           (37,730)            (43,361)           (48,851)

 Net loss                                              $(52,531)           (55,059)            (58,954)           (71,797)

 Basic and diluted loss per common share               $   (.79)              (.83)               (.88)             (1.08)
------------------

1996:
----

 Revenue                                               $ 95,760             97,887             106,602            117,212

 Operating loss                                        $(19,154)           (27,352)            (34,760)          (103,018)

 Income tax benefit                                    $  5,867              9,003              10,936             20,131

 Net loss                                              $(13,571)           (19,317)            (23,706)           (83,410)

 Basic and diluted loss per common share               $   (.20)              (.29)               (.36)             (1.26)
 -----------------
</TABLE>


    The increased net loss during the fourth quarter of 1996 is primarily
     attributable to changes in the Company's depreciation policies.

                                     II-52
<PAGE>

PART III.

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

          The following lists the directors and executive officers of the
Company, their birth dates, a description of their business experience and
positions held with the Company, as of February 1, 1998.

                 Name                                  Position
                 ----                                  --------

John C. Malone                          Has served as Chairman of the Board
Born March 7, 1941                      and a director of the Company since
                                        December 1996. Has served as Chief
                                        Executive Officer of TCI since
                                        January 1994, and as Chairman of the
                                        Board of TCI since November 1996. Dr.
                                        Malone served as President of TCI
                                        from January 1994 to March 1997, as
                                        Chief Executive Officer of TCIC from
                                        March 1992 to October 1994 and as
                                        President of TCIC from 1973 to
                                        October 1994. Dr. Malone has also
                                        served as Chairman of the Board and
                                        as a director of Tele-Communications
                                        International, Inc. since May 1995.
                                        Dr. Malone is also a director of TCI,
                                        TCIC, TCI Pacific Communications,
                                        Inc., BET Holdings, Inc. and The Bank
                                        of New York.


Gary S. Howard                          Has served as Chief Executive Officer
Born February 22, 1951                  of the Company since December 1996
                                        and a director of the Company since
                                        November 1996.  From February 1995
                                        through August 1997, Mr. Howard also
                                        served as President of the Company.
                                        Mr. Howard is also currently Chairman
                                        of the Board, a director and Chief
                                        Executive Officer of United Video
                                        Satellite Group, Inc. ("UVSG"), a
                                        subsidiary of TCI since June 1997 and
                                        President of TCI Ventures Group LLC,
                                        a subsidiary of TCI, since December
                                        1997.  Mr. Howard served as President
                                        of UVSG from June 1997 to September
                                        1997, Senior Vice President of TCIC
                                        from October 1994 to December 1996,
                                        and as Vice President of TCIC from
                                        December 1991 through October 1994.


David P. Beddow                         Has served as a director of the
Born December 27, 1943                  Company since December 1996.  Mr.
                                        Beddow has served as Senior Vice
                                        President of TCITV and NDTC since
                                        February 1995. Mr. Beddow served as
                                        Vice President of TCI Technology,
                                        Inc. from June 1993 to February 1995
                                        and as Executive Vice President and
                                        Chief Operating Officer of PRIMESTAR
                                        Partners from March 1990 to June
                                        1993. Mr. Beddow has served as a
                                        director of UVSG since January 1996
                                        and served as President of UVSG from
                                        February 1997 to June 1997.


William E. Johnson                      Has served as a director of the
Born June 23, 1941                      Company since December 1996.  Mr.
                                        Johnson served as Chief Executive
                                        Officer of Scientific Atlanta, Inc.
                                        from January 1987 until his
                                        retirement in December 1992. Mr.
                                        Johnson has served as a director of
                                        Intelligent Electronic, Inc. since
                                        November 1994 and as a director of
                                        ATX, Inc. since January 1993. Mr.
                                        Johnson was a director of I.C.T. from
                                        1991 to 1993.


                                     III-1
<PAGE>

                 Name                                  Position
                 ----                                  --------

John W. Goddard                         Has served as a director of the
Born May 4, 1941                        Company since December 1996.  Mr.
                                        Goddard served as President and Chief
                                        Executive Officer of the cable
                                        division of Viacom International,
                                        Inc. from 1980 until his retirement
                                        in July 1996. Mr. Goddard served as a
                                        director of StarSight Telecast, Inc.
                                        from May 1994 to May 1997.


Leo J. Hindery, Jr.                     Has served as a director of the
Born October 31, 1947                   Company since November 1997.  Mr.
                                        Hindery has served a President and
                                        Chief Operating Officer of TCI, and
                                        as President and a director of TCIC,
                                        since March 1997.  Prior to joining
                                        TCI, Mr. Hindery was the founder,
                                        Managing General Partner and Chief
                                        Executive Officer of InterMedia
                                        Partners and its affiliated entities
                                        since 1988.


Christopher Sophinos                    Has served as President of the
Born January 26, 1952                   Company since September 1997, and was
                                        previously Senior Vice President of
                                        the Company from February 1996. Mr.
                                        Sophinos has served as the President
                                        of Boats Unlimited since November
                                        1993 and as a director of Sophinos &
                                        Sons, Inc. since November 1993. Mr.
                                        Sophinos served as the President of
                                        Midwest CATV, a division of UNR
                                        Industries, Inc., from July 1987 to
                                        November 1993.


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


Lloyd S. Riddle III                     Has served as Senior Vice President
Born September 16, 1960                 of the Company since February 1995,
                                        and also served as Chief Operating
                                        Officer of the Company from February
                                        1995 to November 1997. Mr. Riddle
                                        served as State Manager of TCI of New
                                        York from February 1993 to February
                                        1995 and Area Manager of TCI of Iowa
                                        from January 1992 to February 1993.


William D. Myers                        Has served as Vice President and
Born March 23, 1958                     Treasurer of the Company since
                                        September 1996. Mr. Myers served as
                                        Vice President of TCI Cable
                                        Management Corporation from November
                                        1994 through August 1996. Mr. Myers
                                        served as Director of Finance of TCI
                                        from December 1991 to November 1994.


                                     III-2
<PAGE>

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

          The Company's charter provides for a classified Board of Directors of
not less than three members, divided into three classes of approximately equal
size, with each class to be elected for a three-year term at each annual meeting
of stockholders.  The exact number of directors is fixed by resolution of the
TSAT Board.  In connection with the Distribution, the number of directors on the
TSAT Board was fixed at five.  On November 10, 1997, the TSAT Board voted to
increase the size of the TSAT Board from five to six, and to add Leo J. Hindery,
Jr. to fill the newly created directorship.  For purposes of determining their
terms, directors are divided into three classes.  The Class I directors, whose
terms were scheduled to expire at the 1997 annual stockholders' meeting, are Mr.
Beddow and Mr. Hindery. The Class II directors, whose terms expire at the 1998
annual stockholders' meeting, are Messrs. Howard and Johnson. The Class III
directors, whose terms expire at the 1999 annual stockholders' meeting, are Dr.
Malone and Mr. Goddard.  On November 10, 1997, the TSAT Board determined that
the 1997 annual stockholders meeting would not be held, as a  result of the
pendency of the proposed Roll-up Plan.  The Company currently expects that the
1998 annual stockholders meeting will be held during the summer of 1998, unless
the TSAT Merger is consummated prior to the date of the meeting.  If the 1998
annual stockholders meeting is held, TSAT stockholders will have an opportunity
to vote with respect to the election of two Class I directors (whose terms will
expire in 2000) and two Class II directors (whose terms will expire in 2001).

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

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

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

          Based solely on review of the copies of Forms 3, 4 and 5 and
amendments thereto furnished to the Company with respect to its most recent
fiscal year, or written representations that no Forms 5 were required, the
Company believes that, during the year ended December 31, 1997, its officers,
directors and greater-than-ten-percent beneficial owners complied with all
Section 16(a) filing requirements, except that one report covering one
transaction was filed late by Dr. John C. Malone, Chairman of the Board and a
director of the Company, and one report naming Mr. Leo J. Hindery, Jr. as a
director of the Company, was filed late.

                                     III-3
<PAGE>

Item 11.  Executive Compensation.
--------  ----------------------

          (a) Summary Compensation Table.  Certain directors, officers and
              --------------------------
employees of TCI and its subsidiaries (including the Company, prior to the
Distribution) have been granted options to purchase shares of Series A TCI Group
Common Stock ("TCI Options") and stock appreciation rights with respect to
shares of Series A TCI Group Common Stock ("TCI SARs").  The TCI Options and TCI
SARs have been granted pursuant to various stock plans of TCI (the "TCI Plans").
The TCI Plans give the committee of the Board of Directors of TCI (the "TCI
Board") that administers the TCI Plans (the "TCI Plan Committee") the authority
to make equitable adjustments to outstanding TCI Options and TCI SARs in the
event of certain transactions, of which the Distribution was one.

          The TCI Plan Committee and the TCI Board determined that, immediately
prior to the Distribution, each TCI Option would be divided into two separately
exercisable options: (i) an option to purchase Series A Common Stock (an "Add-on
Company Option"), exercisable for the number of shares of Series A Common Stock
that would have been issued in the Distribution in respect of the shares of
Series A TCI Group Stock subject to the applicable TCI Option, if such TCI
Option had been exercised in full immediately prior to the Distribution Date,
and containing substantially equivalent terms as the existing TCI Option, and
(ii) an option to purchase Series A TCI Group Stock (an "Adjusted TCI Option"),
exercisable for the same number of shares of Series A TCI Group Stock as the
corresponding TCI Option had been.  The aggregate exercise price of each TCI
Option was allocated between the Add-on Company Option and the Adjusted TCI
Option into which it was divided, and all other terms, including date of grant,
of the Add-on Company Option and Adjusted TCI Option are in all material
respects the same as the terms of such TCI Option, except that references
therein to TCI generally refer to the Company with respect to Adjusted TCI
Options and Add-on Company Options (and related stock appreciation rights
("SARs") held by Company Employees (as defined below).  Similar adjustments were
made to the outstanding TCI SARs, resulting in the holders thereof holding
Adjusted TCI SARs and Add-on Company SARs instead of TCI SARs, and to
outstanding restricted share awards, resulting in the holders thereof holding
restricted shares of Series A Common Stock in addition to restricted shares of
Series A TCI Group Stock, effective immediately prior to the Distribution.  The
foregoing adjustments were made pursuant to the anti-dilution provisions of the
TCI Plans pursuant to which the respective TCI Options and TCI SARs were
granted.

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

                                     III-4
<PAGE>

          At the time of the Distribution, TCI, in addition to the TCI Group
Stock, had two other series of common stock outstanding--the Tele-
Communications, Inc. Series A Liberty Media Group Common Stock, $1.00 par value
per share ("Series A Liberty Group Stock"), and the Tele-Communications, Inc.
Series B Liberty Media Group Common Stock, $1.00 par value per share ("Series B
Liberty Group Stock"), which are intended to reflect the separate performance of
TCI's programming and electronic retailing businesses (the "Liberty Media
Group").  Prior to the Distribution, the Company was a member of the group of
TCI businesses not attributed to Liberty Media Group (the "TCI Group") and all
of the assets and businesses transferred to the Company were included in TCI
Group.  Accordingly, the Distribution was made to the holders of TCI Group
Stock, and the holders of Liberty Group Stock did not participate in the
Distribution.

          The following table is a summary of all forms of compensation paid by
the Company (or by TCI or any other subsidiary of TCI) to the officers named
therein for services rendered in all capacities to the Company (and, prior to
the Distribution, TCI) for the fiscal years ended December 31, 1997, 1996 and
1995 (total of five persons).
<TABLE>
<CAPTION>
                                             Annual Compensation                     Long-Term Compensation
                             --------------------------------------------------    --------------------------
                                                                                                   Securities
                                                                   Other Annual    Restricted      Underlying       All Other
Name and Principal Position                                        Compensation    Stock Award      Options/      Compensation
    with the Company         Year     Salary ($)      Bonus ($)       ($)(4)           ($)            SARs           ($)(10)
---------------------------  ----    ------------   ------------   ------------    -----------     ----------     ------------
<S>                          <C>     <C>            <C>            <C>             <C>             <C>            <C>
Gary S. Howard               1997    $215,519 (1)   $120,600          $2,976       $1,000,000 (5)        --          $17,158
 (Chief Executive Officer)                          $ 23,210 (3)
                             1996    $275,000       $ 23,210 (3)      $4,230       $       --       664,076 (7)      $15,000
                             1995    $262,500       $ 23,210 (3)      $3,415       $  309,375 (6)   165,000 (8)      $15,000

Christopher Sophinos         1997    $174,538       $ 70,000          $   --       $  400,000 (5)   100,000 (9)      $10,240
 (President)                 1996    $ 96,865 (2)   $ 10,750 (2)      $   --       $       --            --          $    --

Kenneth G. Carroll (Senior   1997    $174,538       $ 78,846          $2,182       $  400,000 (5)   100,000 (9)      $ 9,934
 Vice President and Chief    1996    $119,423       $ 33,150          $   --       $       --            --          $ 9,500
 Financial Officer)          1995    $ 98,845       $ 27,199          $  861       $       --        19,250 (8)      $ 3,668

Lloyd S. Riddle III          1997    $174,673       $ 52,500          $3,220       $  400,000 (5)   100,000 (9)      $15,281
 (Senior Vice President)     1996    $140,000       $ 41,212          $3,263       $       --            --          $15,000
                             1995    $123,078       $ 34,478          $1,557       $       --        19,250 (8)      $13,439

William D. Myers (Vice       1997    $139,827       $ 35,000          $2,352       $  400,000 (5)   100,000 (9)      $ 9,711
 President and Treasurer)    1996    $115,010       $  5,000          $2,683       $       --            --          $ 8,639
                             1995    $108,130       $     --          $2,425       $       --        11,000 (8)      $ 8,839
</TABLE>

(1)  Effective June 1, 1997, TSAT and UVSG agreed that 75% of Mr. Howard's
     annual salary was to be charged to UVSG, of which Mr. Howard is a director
     and Chief Executive Officer.  Amount represents Mr. Howard's 1997 annual
     salary less amount charged to UVSG ($215,481).

(2)  Mr. Sophinos commenced employment on February 27, 1996, and accordingly,
     the 1996 compensation information included in the table reflects ten months
     of employment.

                                     III-5
<PAGE>

(3)  This amount reflects the amortization of obligations under an employment
     contract between Mr. Howard and a prior employer, which obligations were
     assumed by TCI in connection with the acquisition of such prior employer,
     and were assumed by the Company in connection with the Distribution.

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

(5)  Pursuant to the TCI Satellite Entertainment, Inc. 1996 Stock Incentive Plan
     (the "TSAT 1996 Plan"), Mr. Howard was granted 125,000 restricted shares of
     Series A Common Stock and Messrs. Sophinos, Carroll, Riddle and Myers were
     each granted 50,000 restricted shares of Series A Common Stock.  As
     originally granted, such restricted shares vested as to 50% on each of
     January 1, 2001 and January 1, 2002.  On November 10, 1997, the TSAT Board
     and the Compensation Committee of the TSAT Board approved modifications to
     the terms of such awards, accelerating the vesting provisions to provide
     for vesting of 50% on February 3, 1999 and as to the remaining 50% on
     February 3, 2000, subject to consummation of the Restructuring Transaction.
     The value of Mr. Howard's restricted shares at the end of 1997 was
     $859,375, and the value of each of Messrs. Sophinos', Carroll's, Riddle's
     and Myers' restricted shares at the end of 1997 was $343,750.  The Company
     has not paid cash dividends on the Series A Common Stock and does not
     anticipate paying cash dividends on the Series A Common Stock at any time
     in the foreseeable future.

(6)  Pursuant to the Tele-Communications, Inc. 1994 Stock Incentive Plan (the
     "TCI 1994 Plan"), on December 13, 1995, Mr. Howard was granted 15,000
     restricted shares of Series A TCI Group Stock, and in connection with the
     Distribution, received 1,500 restricted shares of Series A Common Stock.
     Such restricted shares vest as to 50% of such shares on December 13, 1999
     and as to the remaining 50% on December 13, 2000. The value of such
     restricted shares at the end of 1997 was $429,383. TCI and the Company have
     not paid cash dividends on the Series A TCI Group Stock and Series A Common
     Stock, respectively, and do not anticipate declaring and paying cash
     dividends on the Series A TCI Group Stock and Series A Common Stock,
     respectively, at any time in the foreseeable future.

(7)  On the Distribution Date, Mr. Howard was granted an option to purchase
     shares of Series A Common Stock representing 1.0% of the number of shares
     of Company Common Stock issued and outstanding on the Distribution Date,
     determined immediately after giving effect to the Distribution, but before
     giving effect to the exercise of such option or certain other options
     granted in connection with the Distribution.

                                     III-6
<PAGE>

(8)  On December 13, 1995, pursuant to the Tele-Communications, Inc. 1995 Stock
     Incentive Plan (the "TCI 1995 Plan"), certain key employees of TCI were
     granted an aggregate of 2,757,500 options in tandem with SARs to acquire
     shares of Series A TCI Group Stock. Messrs. Howard, Carroll, Riddle and
     Myers were granted 150,000, 17,500, 17,500 and 10,000 options,
     respectively. In connection with the Distribution, Messrs. Howard, Carroll,
     Riddle and Myers received 15,000, 1,750, 1,750 and 1,000 Add-on Company
     Options, respectively. Each such grant of options with tandem SARs vests
     evenly over five years with such vesting period beginning August 4, 1995,
     first became exercisable on August 4, 1996 and expires on August 4, 2005.
     Notwithstanding the vesting schedule as set forth in the option agreement,
     the option shares shall become available for purchase if the grantee's
     employment with the Company (a) shall terminate by reason of (i)
     termination by the Company without cause (ii) termination by the grantee
     for good reason (as defined in the agreement) or (iii) disability, (b)
     shall terminate pursuant to provisions of a written employment agreement,
     if any, between the grantee and the Company which expressly permits the
     grantee to terminate such employment upon occurrence of specified events
     (other than the giving of notice and passage of time), or (c) if the
     grantee dies while employed by the Company.  Further, the option shares
     will become available for purchase in the event of an Approved Transaction,
     Board Change, or Control Purchase (each as defined with reference to TCI),
     unless in the case of an Approved Transaction, the Compensation Committee
     of TCI under the circumstances specified determines otherwise.

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

(10) Includes dollar value of annual TCI contributions to the TCI Employee Stock
     Purchase Plan (''TCI ESPP'') prior to the Distribution and TSAT
     contributions to the TSAT Employee Stock Purchase Plan (the "TSAT ESPP")
     beginning January 1, 1997.  All named executives are fully vested in such
     plans, except for Mr. Sophinos who is 20% vested in the TSAT ESPP and is
     not a participant in the TCI ESPP.  Directors who are not employees of TSAT
     are ineligible to participate in the TSAT ESPP. The TSAT ESPP, a defined
     contribution plan, enables participating employees to acquire a proprietary
     interest in TSAT and benefits upon retirement. Under the terms of the TSAT
     ESPP, employees are eligible for participation after one year of service.
     The TSAT ESPP's normal retirement age is 65 years. Participants may
     contribute up to 10% of their compensation and TSAT (by annual resolution
     of the TSAT Board) may contribute up to a matching 100% of the
     participants' contributions. The TSAT ESPP includes a salary deferral
     feature in respect of employee contributions. Forfeitures (due to
     participants' withdrawal prior to full vesting) are used to reduce TSAT's
     otherwise determined contributions. Although TSAT has not expressed an
     intent to terminate the TSAT ESPP, it may do so at any time.  Also includes
     insurance premiums paid by TSAT in 1997 for the benefit of Messrs. Howard,
     Sophinos, Carroll, Riddle and Myers in the amount of $2,158, $740, $434,
     $281 and $211, respectively.

                                     III-7
<PAGE>

     (b) Option and SARs Grants in Last Fiscal Year.  On the Distribution Date,
         -------------------------------------------
the TSAT Board adopted, and TCI, as the sole stockholder of the Company prior to
the Distribution, approved, 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, 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.

     The following table discloses information regarding stock options granted
in tandem with SARs during the year ended December 31, 1997 to each of the named
executive officers of the Company in respect of shares of Series A Common Stock
under the TSAT 1996 Plan.
<TABLE>
<CAPTION>
                           No. of       % of Total
                         Securities      Options       Exercise        Market
                         Underlying    Granted to         or            Price                            Grant Date
                          Options     Employees in    Base Price       on Grant         Expiration        Present
Name                    Granted (1)       1997          ($/Sh)      Date($/Sh) (2)         Date         Value $ (3)
--------------------    -----------   ------------    ----------    --------------      ----------      -----------
<S>                     <C>           <C>             <C>           <C>              <C>                <C>
Christopher Sophinos      100,000        12.2%           $8.00         $  8.00        February 1, 2007   $  481,500
Kenneth G. Carroll        100,000        12.2%           $8.00         $  8.00        February 1, 2007   $  481,500
Lloyd S. Riddle III       100,000        12.2%           $8.00         $  8.00        February 1, 2007   $  481,500
William D. Myers          100,000        12.2%           $8.00         $  8.00        February 1, 2007   $  481,500
</TABLE>

(1)  Effective February 3, 1997, certain key employees of TSAT were granted,
     pursuant to the TSAT 1996 Plan, an aggregate of 820,000 options in tandem
     with SARs to acquire shares of Series A Common Stock at a per share
     exercise price of $8.00 per share and an aggregate of 325,000 restricted
     shares of Series A Common Stock (the "1997 Grant").  Mr. Howard was granted
     125,000 restricted shares, and each of Messrs. Sophinos, Carroll, Riddle
     and Myers were granted 100,000 options in tandem with SARs and 50,000
     restricted shares.  Each such grant of options with tandem SARs vests
     evenly over five years with such vesting period beginning January 1, 1997,
     first becomes exercisable on January 1, 1998 and expires on December 31,
     2006.  Each such grant of restricted shares vests as to 50% on January 1,
     2001 and as to the remaining 50% on January 1, 2002. On November 10, 1997,
     the TSAT Board and the TSAT compensation committee approved modifications
     to the vesting of all options issued pursuant to the TSAT 1996 Plan,
     accelerating the vesting schedules under such options from five to three
     years, commencing February 1998, subject to consummation of the
     Restructuring Transaction.

(2)  Represents the closing market price per share of Series A Common Stock on
     February 4, 1997, the first day of trading following the date of grant.

                                     III-8
<PAGE>

(3)  The value shown is based on the Black-Scholes model and is stated in
     current annualized dollars on a present value basis. The key assumptions
     used in the model for purposes of this calculation include the following:
     (a) a 6.49% discount rate; (b) a 35% volatility factor; (c) the 10-year
     option term; (d) the closing price of Series A Common Stock on February 3,
     1997; and (e) a per share exercise price of $8.00.  The actual value an
     executive may realize will depend upon the extent to which the stock price
     exceeds the exercise price on the date the option is exercised.
     Accordingly, the value, if any, realized by an executive will not
     necessarily be the value determined by the model.

     (c) Aggregated TCI Option/SAR Exercises and Fiscal Year-End TCI Option/SAR
         ----------------------------------------------------------------------
Values. In August 1997, TCI commenced offers (the "Exchange Offers") to exchange
-------
shares of Tele-Communications, Inc. Series A Ventures Group common stock (the
"Series A Ventures Group Stock") and shares of Tele-Communications, Inc. Series
B Ventures Group common stock for shares of Series A and Series B TCI Group
Stock, respectively, (representing approximately 30% of the outstanding shares
of each such series) in the ratio of one share of the applicable series of TCI
Ventures Group Stock in exchange for each share of the corresponding series of
TCI Group Stock properly tendered. In connection with the consummation of the
Exchange Offers, all of the Adjusted TCI Options and SARs were further adjusted
such that 30% of the Adjusted TCI Options and SARs were exchanged for options
with tandem SARs to purchase shares of Series A TCI Ventures Group Stock. The
following table provides, for the executives named in the Summary Compensation
Table, information on (i) the exercise during the year ended December 31, 1997,
of Add-on Company Options, Adjusted TCI Options and options to purchase Series A
Liberty Group Stock, (ii) the number of shares of Series A Common Stock, Series
A TCI Group Stock, Series A Liberty Group Stock and Series A TCI Ventures Group
Stock represented by unexercised options owned by them at December 31, 1997, and
(iii) the value of those options as of the same date. The number of options
granted to purchase shares of Series A Liberty Group Stock and Series A TCI
Ventures Group Stock and the price to purchase such options have been adjusted
to give effect to the distribution on February 9, 1998 by TCI of one share of
Series A Liberty Group Stock for each two shares of Series A Liberty Group Stock
held of record and one share of Series A TCI Ventures Group Stock for each share
of Series A TCI Ventures Group Stock held of record.
<TABLE>
<CAPTION>
                                                                           Number of
                                                                          Securities
                                                                          Underlying
                                                                          Unexercised        Value of
                                                                         Options/SARs     Unexercised In-
                                                                              at            the-Money
                                                                          December31,     Options/SARs at
                                             Shares                          1997 (#)     December 31, 1997
                                          Acquired on   Value Realized   Excercisable/   ($)Excercisable/
Name                                      Exercise (#)       ($)         Unexercisable     Unexercisable
----                                      ------------  --------------   -------------   ------------------
<S>                                       <C>           <C>              <C>             <C>
Gary S. Howard
  Exercisable
    Series A                                    --            --             150,815            $         --
    Series A TCI Group                          --            --             126,000            $  1,930,845
    Series A Liberty Group                      --            --              67,500            $  1,089,563
    Series A Ventures Group                     --            --             108,000            $    847,755
  Unexercisable
    Series A                                    --            --             543,261            $         --
    Series A TCI Group                          --            --              84,000            $  1,151,780
    Series A Liberty Group                      --            --              16,875            $    255,938
    Series A Ventures Group                     --            --              72,000            $    507,120
</TABLE>

                                     III-9
<PAGE>

<TABLE>
<CAPTION>
                                                                           Number of
                                                                          Securities
                                                                          Underlying
                                                                          Unexercised       Value of
                                                                         Options/SARs    Unexercised In-
                                                                              at            the-Money
                                                                          December31,    Options/SARs at
                                          Shares                             1997 (#)    December 31, 1997
                                          Acquired on   Value Realized   Excercisable/   ($)Excercisable/
Name                                      Exercise (#)       ($)         Unexercisable   Unexercisable
----                                      -----------   --------------   -------------   -----------------
<S>                                       <C>           <C>              <C>             <C>
Christopher Sophinos
  Exercisable
    Series A                                    --             --                --           $      --
    Series A TCI Group                          --             --                --           $      --
    Series A Liberty Group                      --             --                --           $      --
    Series A Ventures Group                     --             --                --           $      --
  Unexercisable
    Series A                                    --             --           100,000           $      --
    Series A TCI Group                          --             --                --           $      --
    Series A Liberty Group                      --             --                --           $      --
    Series A Ventures Group                     --             --                --           $      --
Kenneth G. Carroll
  Exercisable
    Series A                                    --             --               940           $      --
    Series A TCI Group                          --             --             6,580           $  88,352
    Series A Liberty Group                      --             --             1,350           $  19,422
    Series A Ventures Group                     --             --             5,640           $  38,922
  Unexercisable
    Series A                                    --             --           101,210           $      --
    Series A TCI Group                          --             --             8,470           $ 113,281
    Series A Liberty Group                      --             --               900           $  12,948
    Series A Ventures Group                     --             --             7,260           $  49,910
Lloyd S. Riddle III
  Exercisable
    Series A                                    --             --               940           $      --
    Series A TCI Group                          --             --             6,580           $  88,352
    Series A Liberty Group                      --             --             1,350           $  19,422
    Series A Ventures Group                     --             --             5,640           $  38,922
  Unexercisable
    Series A                                    --             --           101,210           $      --
    Series A TCI Group                          --             --             8,470           $ 113,281
    Series A Liberty Group                      --             --               900           $  12,948
    Series A Ventures Group                     --             --             7,260           $  49,910
William D. Myers
  Exercisable
    Series A                                    --             --               940           $      --
    Series A TCI Group                          --             --             6,580           $  89,255
    Series A Liberty Group .                    --             --             3,037           $  43,700
    Series A Ventures Group                     --             --             5,640           $  39,309
  Unexercisable
    Series A                                    --             --           100,960           $      --
    Series A TCI Group                          --             --             6,720           $  90,577
    Series A Liberty Group                      --             --             2,025           $  29,133
    Series A Ventures Group                     --             --             5,760           $  39,899
</TABLE>

                                     III-10
<PAGE>

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

          (e) Employment Contracts and Termination of Employment and Change of
              ----------------------------------------------------------------
Control Arrangements.
---------------------

          Effective November 7, 1997, TSAT entered into a Termination Agreement
with Mr. Riddle.  The agreement provides for Mr. Riddle's employment with TSAT
to terminate on March 31, 1998 and for Mr. Riddle to receive 39 weeks of pay
upon meeting certain conditions, including but not limited to Mr. Riddle
devoting his full time, attention and best efforts on behalf of TSAT through
March 31, 1998.  Mr. Riddle will receive an additional 52 weeks of severance pay
as well as certain severance benefits if he meets the conditions of TSAT's 1997
PRIMESTAR Transition Severance Pay Plan.  The agreement also provides for the
acceleration of the vesting of all stock options, SARs and restricted shares
held by Mr. Riddle arising out of his employment by TSAT and his former
employment by TCI.

          (f) Additional Information with respect to Compensation Committee
              -------------------------------------------------------------
Interlocks and Insider Participation in Compensation Decisions.
---------------------------------------------------------------

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

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

          (a) Security Ownership of Certain Beneficial Owners.  The following
              ------------------------------------------------
table lists stockholders believed by the Company to be the beneficial owners of
more than five percent of the outstanding Company Common Stock as of December
31, 1997.  Shares issuable upon exercise of options and upon vesting of
restricted shares are deemed to be outstanding for the purpose of computing the
percentage ownership and overall voting power of persons believed to
beneficially own such securities, but have not been deemed to be outstanding for
the purpose of computing the percentage ownership or overall voting power of any
other person.  Voting power in the table is computed with respect to a general
election of directors.  The number of shares in the table of Dr. Malone includes
interests in shares held by the trustee of the TCI ESPP.  So far as is known to
the Company, the persons indicated below have sole voting and investment power
with respect to the shares indicated as believed to be owned by them except as
otherwise stated in the notes to the table, and except for the shares held by
the trustee of the TCI ESPP for the benefit of Dr. Malone, which shares are
voted at the discretion of the trustee.

                                     III-11
<PAGE>

<TABLE>
<CAPTION>

                                                        Number of
                                                         Shares
            Name and Address               Title      Beneficially       Percent      Voting
          of Beneficial Owner             of Class        Owned        of Class (1)  Power (1)
          -------------------             --------  -----------------  ------------  ---------
<S>                                       <C>       <C>                <C>           <C>
The Estate of Bob Magness                 Series A       152,273 (2)          *         21.5%
   5619 DTC Parkway                       Series B     3,053,585 (2)         36.1%
   Englewood, Colorado

John C. Malone, Chairman of the Board     Series A       806,061 (3)(4)       1.4%      24.6%
   5619 DTC Parkway                       Series B     3,439,958 (4)(5)      40.6%
   Englewood, CO

The Associated Group, Inc                 Series A     1,247,997 (6)          2.2%       5.8%
   200 Gateway Towers                     Series B       707,185 (7)          8.4%
   Pittsburgh, Pennsylvania

Kim Magness (individually and             Series A       231,533 (2)(8)       *          5.0%
as Personal Representative of the         Series B       686,421 (2)(8)       8.1%
Estate of Betsy Magness)
   4000 E. Belleview
   Greenwood Village, Colorado

Harris Associates L.P.                    Series A     4,224,316 (9)          7.3%       3.0%
   2 North LaSalle Street                 Series B            --               --
   Chicago, Illinois

Snyder Capital Management L.P.            Series A     4,140,800 (10)         7.1%       2.9%
   350 California Street                  Series B            --               --
   San Francisco, California

RB Haave Associates                       Series A     2,964,400 (11)         5.1%       2.1%
   36 Grove Street                        Series B            --               --
   New Canaan, Connecticut
</TABLE>
________________________
*       Less than one percent.

(1)  Based on 58,239,136 shares of Series A Common Stock and 8,465,324 shares of
     Series B Common Stock outstanding as of December 31, 1997.

(2)  Effective January 5, 1998, Messrs, Donne F. Fisher and Daniel L. Ritchie
     resigned and Mr. Kim Magness and Mr. Gary Magness were appointed Co-
     Personal Representatives of the Estate of Bob Magness.

(3)  Assumes the exercise in full of all Add-On Company Options and Add-On
     Company SARs, whether or not then exercisable or in-the-money, in respect
     of the following: (i) stock options granted in tandem with SARs in November
     of 1992 to acquire 100,000 shares of Series A Common Stock, all of which
     options are currently exercisable; and (ii) stock options granted in tandem
     with SARs in December of 1995 to acquire 100,000 shares of Series A Common
     Stock, of which options to purchase 40,000 shares are currently
     exercisable.  Also assumes the exercise in full of options to purchase
     50,000 shares of Series A Common Stock granted pursuant to the TSAT DSOP
     effective February 3, 1997, none of which options are vested.

(4)  On July 31, 1997, Kearns-Tribune Corporation became a subsidiary of TCI.
     Pursuant to an agreement dated September 23, 1997, Dr. Malone exchanged
     911,250 shares of his Series A Common Stock for 911,250 shares of Series B
     Common Stock, which prior to such exchange, had been held by Kearns-Tribune
     Corporation.

                                     III-12
<PAGE>

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

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

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

(8)  Includes 210,533 shares of Series A Common Stock and 634,621 shares of
     Series B Common Stock held by the Estate of Betsy Magness.  Mr. Magness is
     deemed to have beneficial ownership over such shares as Personal
     Representative of the Estate of Betsy Magness. Also assumes the exercise in
     full of all Add-on Company Options and Add-on Company SARs, whether or not
     then exercisable or in-the-money of stock options granted in November of
     1994 to acquire 5,000 shares of Series A Common Stock, of which options to
     acquire 3,000 shares are currently exercisable.

(9)  The number of shares in the table is based upon a Schedule 13G, dated
     January 27, 1998, filed by Harris Associates L.P. which Schedule 13G
     reflects that said corporation has sole voting power over no shares and
     sole dispositive power over 4,222,326 shares of Series A Common Stock.

(10) The number of shares in the table is based upon a Schedule 13G, dated
     February 12, 1998, filed by Snyder Capital Management L.P. which Schedule
     13G reflects that said company has shared voting power over 3,706,900
     shares and shared dispositive power over 3,952,200 shares of Series A
     Common Stock.

(11) The number of shares in the table is based upon information provided by
     R.B. Haave Associates on March 3, 1998.  Said company has sole voting and
     dispositive power over 2,964,400 shares of Series A Common Stock.

                                     III-13
<PAGE>

          (b) Security Ownership of Management.  The following table lists the
              ---------------------------------
number of shares of Company Common Stock believed to be owned beneficially by
each director, each of the executive officers named in the above Summary
Compensation Table, and all directors and executive officers as a group as of
December 31, 1997, according to data furnished by the persons named. Shares
issuable upon exercise of options and upon vesting of restricted shares are
deemed to be outstanding for the purpose of computing the percentage ownership
and overall voting power of persons believed to beneficially own such
securities, but have not been deemed to be outstanding for the purpose of
computing the percentage ownership or overall voting power of any other person.
Voting power in the table is computed with respect to a general election of
directors. The number of shares in the table is based on amounts which include
interests of the named directors or executive officers or members of the group
of directors and executive officers in shares held by the trustee of the TSAT
ESPP, shares held by the trustee of the TCI ESPP and shares held by the trustee
of the United Artist Entertainment Employee Stock Ownership Plan for their
respective accounts. So far as is known to the Company, the persons indicated
below have sole voting and investment power with respect to the shares indicated
as believed to be owned by them except for the shares held by the trustee of the
TCI ESPP for the benefit of such person, which shares are voted at the
discretion of the trustee.
<TABLE>
<CAPTION>
                                              Number of Shares
                                             Beneficially Owned                  Percent of Class(1)
                                    -----------------------------------         ---------------------      Voting
              Name                     Series A             Series B            Series A     Series B     Power (1)
              ----                     --------             --------            --------     --------     ---------
<S>                                <C>                  <C>                 <C>          <C>              <C>
Directors:
          John C. Malone             806,061 (2)(4)     3,439,958 (3)(4)      1.4%         40.6%            24.6%
          Gary S. Howard             828,756 (5)               --             1.4%           --               *
          David P. Beddow            414,525 (6)               --               *            --               *
          William E. Johnson          51,900 (7)               10               *             *               *
          John W. Goddard             51,408 (7)(8)         1,425 (8)           *             *               *
          Leo J. Hindery, Jr.         50,000 (7)               --               *            --               *
Other Named Executive Officers:
          Christopher Sophinos       152,495 (9)               --               *            --               *
          Kenneth G. Carroll         154,713 (10)              --               *            --               *
          Lloyd S. Riddle III        156,653 (10)              --               *            --               *
          William D. Myers           154,905 (11)              --               *            --               *
All directors and executive
 officers
   as a group (ten persons)        2,821,416            3,441,393             4.7%         40.7%            25.7%
</TABLE>
_____________________________
* Less than one percent.

(1)  Based on 58,239,136 shares of Series A Common Stock and 8,465,324 shares of
     Series B Common Stock outstanding as of December 31, 1997.

(2)  Assumes the exercise in full of all Add-On Company Options and Add-On
     Company SARs, whether or not then exercisable or in-the-money, in respect
     of the following: (i) stock options granted in tandem with SARs in November
     of 1992 to acquire 100,000 shares of Series A Common Stock, all of which
     options are currently exercisable; and (ii) stock options granted in tandem
     with SARs in December of 1995 to acquire 100,000 shares of Series A Common
     Stock, of which options to purchase 40,000 shares are currently
     exercisable.  Also assumes the exercise in full of options to purchase
     50,000 shares of Series A Common Stock granted pursuant to the TSAT DSOP
     effective February 3, 1997, none of which options are vested.

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

                                     III-14
<PAGE>

(4)  On July 31, 1997, Kearns-Tribune Corporation became a subsidiary of TCI.
     Pursuant to an agreement dated September 23, 1997, Dr. Malone exchanged
     911,250 shares of his Series A Common Stock for 911,250 shares of Series B
     Common Stock, which prior to such exchange, had been held by Kearns-Tribune
     Corporation.

(5)  Assumes the exercise in full of all Add-On Company Options and Add-On
     Company SARs, whether or not then exercisable or in-the-money, in respect
     of the following: (i) stock options granted in tandem with SARs in November
     of 1992 to acquire 5,000 shares of Series A Common Stock, all of which
     options are currently exercisable; (ii) stock options in tandem with SARs
     granted in October of 1993 to acquire 5,000 shares of Series A Common
     Stock, all of which options are currently exercisable; (iii) stock options
     in tandem with SARs granted in November of 1994 to acquire 5,000 shares of
     Series A Common Stock, of which options to acquire 3,000 shares are
     currently exercisable; (iv) stock options granted in tandem with SARs in
     December of 1995 to purchase 15,000 shares of Series A Common Stock, of
     which options to acquire 6,000 shares are currently exercisable; and (v)
     stock options granted in December of 1996 to purchase 664,076 shares of
     Series A Common Stock, of which options to acquire 132,815 shares are
     currently exercisable.  Additionally assumes the vesting in full of 126,500
     restricted shares of Series A Common Stock, none of which are currently
     vested.  Also includes 1,022 shares of Series A Common Stock held by trusts
     in which Mr. Howard is beneficial owner as trustee for his children.

(6)  Assumes the exercise in full of all Add-On Company Options and Add-On
     Company SARs, whether or not then exercisable or in-the-money, in respect
     of the following: (i) stock options granted in tandem with SARs in October
     of 1993 to acquire 750 shares of Series A Common Stock, all of which
     options are currently exercisable; (ii) stock options granted in tandem
     with SARs in November of 1994 to acquire 5,000 shares of Series A Common
     Stock, of which options to purchase 3,000 shares are currently exercisable;
     (iii) stock options granted in tandem with SARs in December of 1995 to
     purchase 25,000 shares of Series A Common Stock, of which options to
     purchase 10,000 shares are currently exercisable; and (iv) stock options
     granted in December of 1996 to purchase 332,038 shares of Series A Common
     Stock, of which options to acquire 66,407 shares are currently exercisable.
     Additionally assumes the vesting in full of 1,500 restricted shares of
     Series A Common Stock, none of which are currently vested.  Also assumes
     the exercise in full, whether or not then exercisable or in-the-money, of
     options to purchase 50,000 shares of Series A Common Stock granted pursuant
     to the TSAT DSOP effective February 3, 1997, none of which options are
     vested.

(7)  Assumes the exercise in full, whether or not then exercisable or in-the-
     money, of options to purchase 50,000 shares of Series A Common Stock
     granted pursuant to the TSAT DSOP, none of which options are vested.

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

(9)  Assumes the exercise in full, whether or not then exercisable or in-the-
     money, of stock options granted in tandem with SARs in February of 1997 to
     purchase 100,000 shares of Series A Common Stock, none of which are
     currently exercisable and assumes the vesting in full of 50,000 restricted
     shares of Series A Common Stock, none of which are currently vested.

                                     III-15
<PAGE>

(10) Assumes the exercise in full of all Add-On Company Options and Add-On
     Company SARs, whether or not then exercisable or in-the-money, in respect
     of the following: (i) stock options granted in tandem with SARs in November
     of 1994 to acquire 400 shares of Series A Common Stock, of which options to
     acquire 240 shares of Series A Common Stock are currently exercisable; and
     (ii) stock options granted in tandem with SARs in December of 1995 to
     purchase 1,750 shares of Series A Common Stock, of which options to
     purchase 700 shares of Series A Common Stock are currently exercisable.
     Additionally assumes the exercise in full, whether or not then exercisable
     or in-the-money, of stock options granted in tandem with SARs in February
     of 1997 to purchase 100,000 shares of Series A Common Stock, none of which
     are currently exercisable and assumes the vesting in full of 50,000
     restricted shares of Series A Common Stock, none of which are currently
     vested.

(11) Assumes the exercise in full of all Add-On Company Options and Add-On
     Company SARs, whether or not then exercisable or in-the-money, in respect
     of the following: (i) stock options granted in tandem with SARs in November
     of 1994 to acquire 900 shares of Series A Common Stock, of which options to
     acquire 540 shares of Series A Common Stock are currently exercisable; and
     (ii) stock options granted in tandem with SARs in December of 1995 to
     purchase 1,000 shares of Series A Common Stock, of which options to
     purchase 400 shares are currently exercisable. Additionally assumes the
     exercise in full, whether or not then exercisable or in-the-money, of stock
     options granted in tandem with SARs in February of 1997 to purchase 100,000
     shares of Series A Common Stock, none of which are currently exercisable
     and assumes the vesting in full of 50,000 restricted shares of Series A
     Common Stock, none of which are currently vested.


Item 13.  Certain Relationships and Related Transactions.
--------  ----------------------------------------------

          John Malone is currently the Chairman of the Board and a director of
TCI and is also the Chairman of the Board and a director of the Company.  Dr.
Malone is also a principal stockholder of both TCI and the Company.  In
addition, as an officer of TCIC prior to the Distribution, Gary Howard, the
Chief Executive Officer and a director of the Company, had the benefit of
certain undertakings of indemnification from TCI and TCIC, which have survived
the Distribution.

          The Company was formed in connection with the Distribution to own and
operate certain businesses of TCI constituting all of TCI's interests in the
Digital Satellite Business. On the Distribution Date, TCI distributed all the
shares of Company Common Stock held by TCI to the holders of record of TCI Group
Stock (other than certain subsidiaries of TCI that waived their right to
participate in such distribution), on the basis of one share of Series A Stock
for each ten shares of Series A TCI Group Stock, and one share of Series B
Common Stock for each ten shares of Series B TCI Group Stock held by such
holders.

          TCI, through various subsidiaries, was engaged in the business of
distributing PRIMESTAR/(R)/ from December 1990 until the consummation of the
Distribution. TCI Digital Satellite Entertainment, Inc., a Colorado corporation
("Digital"), was incorporated in February 1995 in order to consolidate the
PRIMESTAR By TCI distribution business into one subsidiary. In connection with
the Distribution, Digital was merged with and into the Company, as a means of
reincorporating Digital in Delaware.

                                     III-16
<PAGE>

          Since the consummation of the Distribution, the Company and TCI have
operated independently.  However, for the purposes of governing certain of the
ongoing relationships between the Company and TCI after the Distribution, and to
provide mechanisms for an orderly transition, the Company and TCI entered into
various agreements, including the "Reorganization Agreement," the "Transition
Services Agreement," an amendment to TCI's existing "Tax Sharing Agreement," the
"Indemnification Agreements," the "Trade Name and Service Mark Agreement" and
the "Share Purchase Agreement," all of which are described below. In addition,
through December 31, 1997, TCIC provided installation, maintenance, retrieval
and other customer fulfillment services for certain customers of the Company,
pursuant to the "Fulfillment Agreement," and entered into the "TCIC Credit
Facility" with the Company, both of which are described below.

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

          Pursuant to the Reorganization Agreement, the Company assumed TCI's
obligations under options granted to Brendan R. Clouston, Larry E. Romrell and
David P. Beddow to purchase shares of Series A Common Stock representing 1.0%,
1.0% and 0.5%, respectively, of the shares of Company Common Stock issued and
outstanding on the Distribution Date, determined immediately after giving effect
to the Distribution but before giving effect to the issuance of the shares of
Series A Common Stock issuable upon exercise of such options; and granted an
option to TCI to purchase up to 4,765,000 shares of Series A Common Stock (as
such number may be adjusted to reflect stock dividends, stock splits and the
like), for a purchase price equal to the par value of such shares, as necessary
to satisfy TCI's obligations to deliver shares of Series A Common Stock upon
conversion of certain convertible securities of TCI as a result of the
Distribution.  During the year ended December 31, 1997, the Company issued
258,000 shares of Series A Common Stock to TCI for aggregate consideration of
$258,000 under this arrangement.

          Transition Services Agreement.  During 1997 and pursuant to the
Transition Services Agreement, TCI provided to the Company certain services
including (i) tax reporting, financial reporting, payroll, employee benefit
administration, workers' compensation administration, telephone, fleet
management, package delivery, management information systems, billing, lock box,
remittance processing and risk management services, (ii) other services
typically performed by TCI's accounting, finance, treasury, corporate, legal,
tax, benefits, insurance, facilities, purchasing, fleet management and advanced
information technology department personnel, (iii) use of telecommunications and
data facilities and of systems and software developed, acquired or licensed by
TCI from time to time for financial forecasting, budgeting and similar purposes,
including without limitation any such software for use on personal computers, in
any case to the extent available under copyright law or any applicable third-
party contract, (iv) technology support and consulting services, and (v) such
other management, supervisory, strategic planning or other services as the
Company and TCI may from time to time mutually determine to be necessary or
desirable.

          Pursuant to the Transition Services Agreement, TCI has also agreed to
provide the Company with certain most-favored-customer rights to programming
services that TCI or a wholly owned subsidiary of TCI may own in the future and
access to any volume discounts that may be available to TCI for purchase of
HSDs, satellite receivers and other equipment.

                                     III-17
<PAGE>

          As compensation for services rendered to the Company and for the
benefits made available to the Company pursuant to the Transition Services
Agreement, the Company is required to pay TCI a 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) per month,
commencing with the Distribution Date, up to a maximum of $3 million per month,
and reimburse TCI quarterly for direct, out-of-pocket expenses incurred by TCI
to third parties in providing the services.  During the year ending on December
31, 1997, the Company was charged $11,579,000 pursuant to the Transition
Services Agreement.  Upon consummation of the Restructuring Transaction, TSAT
and TCI have agreed that the Transition Services Agreement will be terminated.

          Indemnification Agreements.  On the Distribution Date, the Company
entered into the Indemnification Agreements with TCIC and TCI UA 1. The
Indemnification Agreement with TCIC provides for the Company to reimburse TCIC
for any amounts drawn under an irrevocable transferable letter of credit issued
by the Bank of New York for the account of TCIC to support the Company's share
of PRIMESTAR Partners' obligations under the GE-2 Agreement, with respect to
PRIMESTAR Partners' use of transponders on GE-2.  At December 31, 1997, the
drawable amount of such letter of credit was $25,000,000.

          The Indemnification Agreement with TCI UA 1 provides for the Company
to reimburse TCI UA 1 for any amounts drawn under the TCI UA 1 Letter of Credit,
which supports the PRIMESTAR Credit Facility that was obtained by PRIMESTAR
Partners to finance advances to Tempo for payments due in respect of the
construction of the Company Satellites and that is supported by letters of
credit arranged for by affiliates of the partners of the Partnership (other than
GEAS). The amount of the TCI UA 1 Letter of Credit was $141,250,000 at December
31, 1997.

          The Indemnification Agreements further provide for the Company to
indemnify and hold harmless TCIC and TCI UA 1 and certain related persons from
and against any losses, claims, and liabilities arising out of the respective
letters of credit or any drawings thereunder. The payment obligations of the
Company to TCIC and TCI UA 1, under such Indemnification Agreements are
subordinated in right of payment with respect to certain future obligations of
the Company to financial institutions.  During the year ended December 31, 1997,
the aggregate amount paid by the Company to TCI under the Indemnification
Agreements was $706,000.  Such amount represents the aggregate fees incurred by
TCI with respect to the TCI UA 1 Letter of Credit.

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

          Fulfillment Agreement.  TCIC historically provided the Company with
certain customer fulfillment services for PRIMESTAR/(R)/ customers enrolled by
the Company's direct sales force or the National Call Center. Charges for such
services were allocated to the Company by TCIC based on scheduled rates.

                                     III-18
<PAGE>

          During 1997 and pursuant to the Fulfillment Agreement, TCIC provided
fulfillment services to the Company with respect to customers of the
PRIMESTAR/(R)/ medium power service. Such services included installation,
maintenance, retrieval, inventory management and other customer fulfillment
services.  Among other matters, the Fulfillment Agreement (i) set forth the
responsibilities of TCIC with respect to fulfillment services, including
performance standards, (ii) provided for TCIC's fulfillment sites to be
connected to the billing and information systems used by the Company, allowing
for on-line scheduling and dispatch of installation and other service calls, and
(iii) provided scheduled rates to be charged to the Company for the various
customer fulfillment services to be provided by TCIC. The Company retained sole
control under the Fulfillment Agreement to establish the retail prices and other
terms and conditions on which installation and other services were provided to
the Company's customers. The Fulfillment Agreement also provided that, during
the term of the Fulfillment Agreement, TCIC would not provide fulfillment
services to any other Ku-band, Ka-band, DBS, BSS, FSS, C-band, wireless or other
similar or competitive provider or distributor of television programming
services (other than traditional cable). The Fulfillment Agreement, as amended,
terminated in accordance with its terms effective December 31, 1997.  During the
year ended December 31, 1997, the aggregate amount paid by the Company to TCIC
for fulfillment services was $54,823,000.

          TCIC Credit Facility.  In connection with the Distribution, the
Company and TCIC entered into the TCIC Credit Facility, which among other
things, provided for a revolving credit facility (the "TCIC Revolving Loans").
In connection with the February 1997 issuance of the Notes and the March 1997
determination that GE-2 was commercially operational, borrowing availability
pursuant to the TCIC Credit Facility was terminated.

          Call Center LLC.  In March 1997, TSAT and TCI agreed to form a limited
liability company (the "Call Center LLC") through which TSAT and TCI were to
conduct various customer call service operations.  The initial ownership
interests of TSAT and TCI in the Call Center LLC were to be 28% and 72%,
respectively.  In June 1997, TSAT and TCI agreed not to form the Call Center
LLC.  In March 1997, TCI began providing customer call services to TSAT based
upon a per call charge.  Charges for such services aggregated $12,173,000 in
1997.

          Other Arrangements.  On the Distribution Date, TCI and the Company
entered into the Share Purchase Agreement, which obligates TCI and the Company
to sell to each other from time to time, at the then current market price,
shares of Series A TCI Group Common Stock and Series A Common Stock,
respectively, as necessary to satisfy their respective obligations under
Adjusted TCI Options and Add-on Company Options held after the Distribution Date
by their respective employees and non-employee directors.  During the year ended
December 31, 1997, the Company issued 33,000 shares of Series A Common Stock to
TCI for aggregate consideration of $213,000 under this arrangement.

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

                                     III-19
<PAGE>

          In June 1996, 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
Brendan R. Clouston and Larry E. Romrell, executive officers of TCI, of 1.0% of
the net equity of the Company. The TCI Board also approved the acquisition by
Gary S. Howard, an executive officer of TCIC prior to the Distribution Date and
chief executive officer and a director of the Company, of 1.0% of the net equity
of the Company and the acquisition by David P. Beddow, an executive officer of
certain TCI subsidiaries and a director of the Company, of 0.5% of the net
equity of the Company. The TCI Board determined to structure such transactions
as grants to such persons of options to purchase shares of Series A Common Stock
representing 1.0% (in the case of each of Messrs. Clouston, Romrell and Howard)
and 0.5% (in the case of Mr. Beddow) of the shares of Series A Common Stock and
Series B Common Stock issued and outstanding on the Distribution Date,
determined immediately after giving effect to the Distribution, but before
giving effect to any exercise of such options ("Distribution Date Options"). The
aggregate exercise price for each such option is equal to 1.0% (in the case of
each of Messrs. Clouston, Romrell and Howard) and 0.5% (in the case of Mr.
Beddow) of TCI's Net Investment as of the Distribution Date, but excluding any
portion of TCI's Net Investment that as of such date was represented by a
promissory note or other evidence of indebtedness from the Company to TCI.
Distribution Date Options to purchase 2,324,266 shares of Series A Common Stock
at a per share price of $8.86 were granted on the Distribution Date, will vest
in 20% cumulative increments on each of the first five anniversaries of February
1, 1996, and will be exercisable for up to ten years following February 1, 1996.
Pursuant to the Reorganization Agreement, and (in the case of the options
granted to Messrs. Clouston, Romrell and Beddow) in partial consideration for
the capital contribution made by TCI to the Company in connection with the
Distribution, the Company agreed, effective as of the Distribution Date, to bear
all obligations under such options and to enter into stock option agreements
with respect to such options with each of Messrs. Clouston, Romrell, Howard and
Beddow.

          Certain members of TSAT's management and the TSAT Board have certain
interests in the Roll-up Plan, as described below:

          Directors and Officers of New PRIMESTAR.  Certain of the current
directors and officers of TSAT will become directors and officers of New
PRIMESTAR upon consummation of the Restructuring Transaction and will serve as
directors and officers of both TSAT and New PRIMESTAR until the TSAT Merger is
consummated, at which time they will cease to be officers and directors of TSAT
and will continue as officers and directors of New PRIMESTAR (unless they have
been earlier replaced in accordance with the certificate of incorporation and
bylaws of New PRIMESTAR).  These include Gary S. Howard, the Chief Executive
Officer and a director of TSAT, who will serve as a director of New PRIMESTAR,
and John C. Malone, Leo J. Hindery, Jr. and John W. Goddard, all of whom are
directors of TSAT and will serve as directors of New PRIMESTAR.

          Treatment of TSAT Options, Stock Appreciation Rights and Restricted
Stock Awards.  As of February 3, 1998, executive officers and directors of TSAT
held options ("TSAT Options") under the TSAT 1996 Plan to purchase an aggregate
of 1,064,076 shares of Series A Common Stock at various exercise prices and
subject to various vesting schedules.  All of the TSAT Options issued under the
TSAT 1996 Plan were issued in tandem with stock appreciation rights ("TSAT
SARs") with respect to Series A Common Stock.  In the case of a tandem option or
stock appreciation right, the related stock appreciation right or option, as the
case may be, is considered to have been exercised to the extent of the number of
shares of TSAT Common Stock with respect to which such related tandem option or
stock appreciation right is exercised.

                                     III-20
<PAGE>

          The TSAT Options and TSAT SARs will remain outstanding following the
consummation of the Restructuring Transaction, as obligations of TSAT, but will
be amended to provide that service as an employee of, or consultant to, New
PRIMESTAR following the closing date of the Restructuring Transaction will be
deemed to constitute service as an employee of, or consultant to, TSAT, for all
purposes of such awards and the TSAT 1996 Plan.

          At the effective time of the TSAT Merger, (x) all TSAT Options
outstanding immediately prior to the effective time of the TSAT Merger, whether
vested or unvested, (y) all obligations of TSAT under the TSAT 1996 Plan and the
TSAT DSOP (collectively, the "TSAT Plans") and (z) the agreements evidencing the
grants of such TSAT Options will be assumed by New PRIMESTAR.  Pursuant to the
TSAT Merger Agreement, at the effective time of the TSAT Merger, each TSAT
Option outstanding immediately prior to such effective time will be deemed to
constitute an option to acquire, on the same terms and conditions as were
applicable under such TSAT Option, the same number of shares of New PRIMESTAR
Class A Common Stock as the holder of such TSAT Option would have been entitled
to receive pursuant to the TSAT Merger had such holder exercised such TSAT
Option in full immediately prior to the effective time of the TSAT Merger, at a
price per share equal to the exercise price for the shares of Series A Common
Stock otherwise purchasable pursuant to such TSAT Option; provided, however,
that in the case of any option to which Section 421 of the Internal Revenue Code
of 1986, as amended (the "Code") applies by reason of its qualification under
either Section 422 or 424 of the Code ("qualified stock options"), the option
price, the number of shares purchasable pursuant to such option and the terms
and conditions of exercise of such option will be determined in order to comply
with Section 424(a) of the Code.  The TSAT Merger Agreement provides that New
PRIMESTAR will comply with the terms of the TSAT Plans and ensure, to the extent
required by, and subject to the provisions of, the TSAT Plans, that the TSAT
Options that qualified as qualified stock options prior to the effective time of
the TSAT Merger continue to qualify as qualified stock options after such
effective time.  New PRIMESTAR will be entitled to make any changes to the TSAT
Plans as will be necessary to give effect to the TSAT Merger.  TSAT SARs issued
in tandem with TSAT Options will be similarly modified.

          On November 10, 1997, the TSAT Board and the Compensation Committee of
the TSAT Board approved modifications to the vesting provisions of all TSAT
Options issued pursuant to the TSAT 1996 Plan and the TSAT DSOP, accelerating
the vesting schedules under such options from five to three years, subject to
consummation of the Restructuring Transaction.  Accordingly, if the
Restructuring Transaction is consummated, such TSAT Options will vest in three
equal annual installments, commencing February 1998.  TSAT Options granted prior
to the Distribution, which were 40% vested in February 1998, will become two-
thirds vested in February 1999 and fully vested in February 2000.  If the
Restructuring Transaction is not consummated, such options will continue to vest
in five equal annual installments, commencing February 1998.

                                     III-21
<PAGE>

          The following table indicates for each person who is an executive
officer or director of TSAT and who held TSAT Options (including TSAT Options
issued in tandem with TSAT SARs) at February 3, 1998, (a) the number of shares
of Series A Common Stock subject to such options and/or stock appreciation
rights that were vested at February 3, 1998, (b) the number of shares of Series
A Common Stock subject to such options and/or stock appreciation rights that
were not vested at such date, and (c) the exercise price per share of Series A
Common Stock of all such options and/or stock appreciation rights (whether
vested or unvested). The total number of shares of New PRIMESTAR Class A Common
Stock that would be subject to such options and/or stock appreciation rights
immediately following the effective time of the TSAT Merger assuming that all
such options and/or stock appreciation rights continue to be outstanding
immediately prior to such effective time would be equal to the number of shares
of Series A Common Stock identified in the table. The exercise or base price per
share of New PRIMESTAR Class A Common Stock of such options and/or stock
appreciation rights immediately following the effective time of the TSAT Merger
would be equal to the exercise price of the TSAT Options. The TSAT Options
listed opposite the name of each person in the table below (including TSAT
Options issued in tandem with TSAT SARs) include all TSAT Options and TSAT SARs
granted to such person under incentive plans of TSAT or otherwise. The vesting
information indicated assumes that the Restructuring Transaction is consummated.

                                     III-22
<PAGE>

<TABLE>
<CAPTION>
                        Series A Common   Series A Common   Exercise Price
      Option and        Stock Subject to  Stock Subject to     of TSAT
      ----------         Vested Options   Unvested Options  Options and/or
      SAR Holder          and/or SARs       and/or SARs          SARs
----------------------  ----------------  ----------------  --------------
<S>                     <C>               <C>               <C>
Gary S. Howard                   265,630           398,446           $8.86
Christopher Sophinos              33,333            66,667           $8.00
Kenneth G. Carroll                33,333            66,667           $8.00
Lloyd S. Riddle                   33,333            66,667           $8.00
William D. Myers                  33,333            66,667           $8.00
John C. Malone                    16,667            33,333           $8.00
William E. Johnson                16,667            33,333           $8.00
John W. Goddard                   16,667            33,333           $8.00
David P. Beddow                  132,815           199,223           $8.86
                                  16,667            33,333           $8.00
Leo J. Hindery, Jr.                   --            50,000           $6.50


</TABLE>

                                     III-23
<PAGE>

          As of February 3, 1998, executive officers and directors of TSAT held
restricted stock awards ("TSAT Restricted Stock Awards") under the TSAT 1996
Plan representing the right to receive, upon vesting as described below, an
aggregate of 325,000 shares of Series A Common Stock.  Mr. Howard held 125,000
TSAT Restricted Stock Awards and Messrs. Sophinos, Carroll, Riddle and Myers
each held 50,000 Restricted Stock Awards, all of which were not vested as of
February 3, 1998.  As originally granted, each TSAT Restricted Stock Award
vested 50% on each of January 1, 2001 and January 1, 2002.  On November 10,
1997, the TSAT Board and the Compensation Committee of the TSAT Board approved
modifications to the terms of such awards, accelerating the vesting provisions
to provide for vesting of 50% on each of the second and third anniversaries of
the date of grant, subject to consummation of the Restructuring Transaction.  At
the effective time of the TSAT Merger, pursuant to the TSAT Merger Agreement,
(x) all TSAT Restricted Stock Awards outstanding immediately prior to such
effective time, whether vested or unvested, and the agreements evidencing the
grants of such TSAT Restricted Stock Awards, will be assumed by New PRIMESTAR,
and (y) each TSAT Restricted Stock Award will be deemed to constitute a
restricted stock award, on the same terms, with respect to a number of shares of
New PRIMESTAR Class A Common Stock equal to the number of shares of Series A
Common Stock previously subject to such TSAT Restricted Stock Award.

                                     III-24
<PAGE>

          Indemnification.  The TSAT Merger Agreement provides that all rights
to indemnification for acts or omissions occurring prior to the effective time
of the TSAT Merger existing in favor of the current or former directors or
officers of TSAT and its subsidiaries will survive the consummation of the TSAT
Merger and continue in full force and effect in accordance with their respective
terms.

          Directors' and Officers' Liability Insurance.  The TSAT Merger
Agreement provides that, for a period of not less than three years from the
effective time of the TSAT Merger, directors' and officers' liability insurance
will be maintained covering current TSAT directors and officers on terms and
conditions no less advantageous than TSAT's existing insurance, to the extent
such coverage can be maintained or procured by the payment of an annual premium
not exceeding one and one-half times the current annual premium paid by TSAT for
its existing coverage.

          Registration Rights.  Pursuant to the Registration Rights Agreement,
the Specified Class B Stockholders (as defined therein), including John C.
Malone, currently Chairman of the Board and a director of TSAT, will have,
subject to certain conditions, both "demand" and "piggyback" registration rights
to require New PRIMESTAR to register all or any portion of the New PRIMESTAR
Common Stock then owned by them.

          Stockholders Agreement.  The Stockholders Agreement will provide that,
in connection with certain proposed transfers of New PRIMESTAR securities by the
parties to the Restructuring Transaction, the other such parties will have
certain rights to acquire such securities, on the terms and conditions set forth
therein.  Although immediately following the closing of the Restructuring
Transaction, John C. Malone will not own directly any shares of New PRIMESTAR
Class B Common Stock (all of which will be owned by TSAT), Dr. Malone will
execute the Stockholders Agreement on the closing date of the Restructuring
Transaction as a Specified Class B Stockholder (as defined therein), and will be
entitled to exercise certain rights thereunder, including the rights of first
refusal.  TSAT will also be a party to the Stockholders Agreement as a Specified
Class B Stockholder, prior to consummation of the TSAT Merger, and accordingly
will be bound by, and entitled to the benefits of, the rights of first refusal
set forth therein.  However, during the term of the TSAT Merger Agreement,
certain covenants provided for in the TSAT Merger Agreement may, as a practical
matter, prevent TSAT from exercising such rights.  TSAT's inability to exercise
its rights of first refusal under the Stockholders Agreement during the terms of
the TSAT Merger Agreement may have the effect of enhancing the rights of Dr.
Malone under the Stockholders Agreement during such period.

                                     III-25
<PAGE>

          In connection with the Roll-up Plan, TSAT entered into the following
related agreements:

          Stockholders Agreement.  Pursuant to the Restructuring Agreement, each
of TWE, Newhouse, Comcast, Cox and MediaOne (collectively, the "Class C
Stockholders"), the Specified Class B Stockholders (as defined below).  GE
Americom and New PRIMESTAR will enter into a Stockholders Agreement (the
"Stockholders Agreement") on the Closing Date, which will provide for, among
other things, certain provisions relating to the nomination of directors to the
New PRIMESTAR Board of Directors and certain voting agreements, transfer
restrictions, conversion restrictions, rights of first refusal and other rights
and obligations of the Class C Stockholders, the Specified Class B Stockholders
and GE Americom in connection with their respective shares of New PRIMESTAR
Common Stock.  The term of the Stockholders Agreement will be ten years.  As
used herein, the term "Specified Class B Stockholders" means (i) prior to the
TSAT Merger, TSAT (and for certain purposes, John C. Malone), and (ii) after the
TSAT Merger, John C. Malone (and, under certain circumstances, certain other
holders of New PRIMESTAR Class B Common Stock).  Although immediately following
the Closing of the Restructuring Transaction, Dr. Malone will not own directly
any shares of New PRIMESTAR Class B Common Stock (all of which will be owned by
TSAT), he will nevertheless execute the Stockholders Agreement on the Closing
Date as a Specified Class B Stockholder and be entitled to exercise certain
rights thereunder, including the rights of first refusal.

          Registration Rights Agreement.  Pursuant to the Restructuring
Agreement, at the Closing, a registration rights agreement (the "Registration
Rights Agreement") will be entered into among New PRIMESTAR, TSAT, the Class C
Stockholders, GE Americom and John C. Malone.  The registration Rights Agreement
will provide that each fo the Class C Stockholders, the Specified Class B
Stockholders, GE Americom, respectively, and their respective affiliates, will
have certain rights, under specific circumstances and subject to certain
conditions and exceptions, to require New PRIMESTAR to register under the
Securities Act all or any portion of their respective shares of New PRIMESTAR
Class A Common Stock and New PRIMESTAR Class B common Stock.

          Reimbursement Agreements.  Prior to entering into the Restructuring
Agreement, affiliates of each of the Partners (or, in the case of TSAT,
affiliates of TCI) other than GEAS provided letters of credit (collectively, the
"PRIMESTAR Letters of Credit") to secure certain obligations of the Partnership
under (i) the GE-2 Agreement and (ii) the PRIMESTAR Credit Facility.  Pursuant
to the TSAT Asset Transfer Agreement, New PRIMESTAR will assume the rights and
obligations of TSAT under the Indemnification Agreements between TSAT and the
affiliates of TCI that issued PRIMESTAR Letters of Credit, which include
reimbursement obligations in favor of such TCI affiliates with respect to such
PRIMESTAR Letters of Credit on substantially the same terms as the Reimbursement
Agreements.  Each of TWE, Comcast, Cox, MediaOne and TCI (or their respective
affiliates) will be paid a fee to be negotiated in consideration of their
agreement to maintain such PRIMESTAR Letters of Credit outstanding for a period
of time following the Closing Date.

          Letter Agreement.  In connection with the execution and delivery of
the Restructuring Agreement by the parties thereto, John C. Malone entered into
a letter of agreement, dated February 6, 1998, for the benefit of such parties
(the "Letter Agreement").  The Letter Agreement provides for, among other
things, the agreement of Dr. Malone to enter into the Stockholders Agreement and
the Registration Rights Agreement at the Closing of the Restructuring
Transaction, to cooperate in good faith in the preparation of the Registration
Statement and this Proxy Statement/Prospectus, including the provision to TSAT
and New PRIMESTAR of information regarding Dr. Malone required to be included
therein, and to use reasonable efforts to respond to any request for information
relating to the Restructuring Transaction by a governmental entity.

                                     III-26
<PAGE>

          TSAT Tempo Agreement. In connection with the execution and delivery of
the Restructuring Agreement, the Company and New PRIMESTAR entered into the TSAT
Tempo Agreement dated as of February 6, 1998, pursuant to which, among other
things, the Company granted to New PRIMESTAR the exclusive and irrevocable
option, exercisable at any time during the term of the TSAT Tempo Agreement,
upon receipt of FCC approval of the transfer of control of Tempo to New
PRIMESTAR (including approval of a transfer in anticipation of a subsequent
sale), to purchase from the Company (at the Option Holder's election) either (x)
all the issued and outstanding shares of capital stock of Tempo or (y) all the
rights, title and interests of TSAT in, to and under the Tempo Assets (as
defined below), in either case for an aggregate purchase price equal to $2.5
million plus, in the case of an asset purchase, the assumption by the Option
Holder of all obligations and liabilities of Tempo in respect of the Tempo
Assets, other than those incurred in violation of the TSAT Tempo Agreement. The
Option Holder, in its sole discretion, is entitled to assign the TSAT Tempo
Agreement and New PRIMESTAR's rights, interests and obligations thereunder at
any time. "Tempo Assets" means (i) the FCC Permit, (ii) the Tempo Satellites,
(iii) the Satellite Construction Agreement, and (iv) all rights, claims and
causes of action under the Satellite Construction Agreement, all insurance
claims in respect of the Tempo Satellites, and Tempo's rights under the Tempo
Option Agreement.

                                     III-27
<PAGE>

          TSAT Stockholders Agreement.  In connection with the execution and
delivery of the Restructuring Agreement, TSAT, John C. Malone and New PRIMESTAR
entered into a stockholders agreement dated as of February 6, 1998 (the "TSAT
Stockholders Agreement"), which provides, among other things, that until the
termination of the TSAT Merger Agreement, each TSAT Stockholder (as defined
below) will vote or act by written consent with respect to (or cause to be voted
or acted upon by written consent) all shares of TSAT Common Stock held of record
or beneficially owned by such TSAT Stockholder and all shares of TSAT Common
Stock as to which such TSAT Stockholder has voting control (1) in favor of the
TSAT Merger Agreement and the transactions contemplated thereby and (2) except
for the transactions contemplated by the TSAT Merger Agreement, against any
merger acquisition, consolidation or similar transaction that would adversely
affect the transactions contemplated by the TSAT Merger Agreement, or any
amendment of the TSAT Charter or the TSAT Bylaws, without the prior written
consent of New PRIMESTAR.  In addition, until the termination of the TSAT
Merger Agreement, each TSAT Stockholder has agreed not to convert any of its
shares of TSAT Series B Common Stock into shares of TSAT Series A Common Stock
or to transfer any of its shares of TSAT Common Stock, except to a permitted
transferee (as specified in the TSAT Stockholders Agreement) of such TSAT
Stockholder that becomes a party to the TSAT Stockholders Agreement as a TSAT
Stockholder and to the Stockholders Agreement as a potential Specified Class B
Stockholder.  Each TSAT Stockholder has also agreed, until the earliest to occur
of (i) consummation of the TSAT Merger, (ii) consummation of the transactions
contemplated by the TSAT Tempo Agreement and (iii) termination of the TSAT Tempo
Agreement, to vote or act by written consent with respect to (or cause to be
voted or acted upon by written consent) all shares of TSAT Common Stock held of
record or beneficially owned by such TSAT Stockholder and all shares of TSAT
Common Stock as to which such TSAT Stockholder has voting control, in favor of
the TSAT Tempo Agreement and the transactions contemplated thereby.  "TSAT
Stockholder" means (i) Dr. Malone for so long as he holds of record or
beneficially owns or has voting control of any TSAT Common Stock (or has an
affiliate holding TSAT Common Stock pursuant in specified provisions of the TSAT
Stockholders Agreement) and (ii) each permitted transferee (as specified in the
TSAT Stockholders Agreement) that acquires record or beneficial ownership or
voting control of any TSAT Common Stock from a TSAT Stockholder, as long as such
permitted transferee holds of record, beneficially owns or has voting control of
any TSAT Common Stock; provided that such permitted transferee becomes a party
to the TSAT Stockholders Agreement in accordance therewith.

                                     III-28
<PAGE>

                                   PART IV.


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

(a)    (1)  Financial Statements
            --------------------
Included in Part II of this Report:                                    Page No.
                                                                       --------

            Independent Auditors' Report                                II-19

            Consolidated Balance Sheets,
             December 31, 1997 and 1996                                 II-20

            Statements of Operations,
             Years ended December 31, 1997, 1996 and 1995               II-22

            Statements of Equity,
             Years ended December 31, 1997, 1996 and 1995               II-23

            Statements of Cash Flows,
             Years ended December 31, 1997, 1996 and 1995               II-24

            Notes to Financial Statements,
             December 31, 1997, 1996 and 1995                           II-25

(a)  (2)    Financial Statement Schedules
            -----------------------------

Included in Part IV of this Report:

     (i)    Financial Statement Schedules required to be filed:

            Schedule II - Valuation and Qualifying Accounts,            IV-9
            Years ended December 31, 1997, 1996 and 1995.

                                      IV-1
<PAGE>

(a)  (3)  Exhibits
          --------

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

2 - Plan of Acquisition, Reorganization, Arrangement, Liquidation or Succession:

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

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

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

            2.4  Asset Acquisition Agreement dated as of June 11, 1997, by and among The News
                 Corporation Limited ("News Corp."), MCI Telecommunications Corporation ("MCI"),
                 American Sky Broadcasting LLC ("ASkyB"), PRIMESTAR Partners L.P. (the "Partnership")
                 for certain purposes only, each of the general and limited partners of the
                 Partnership (Incorporated by reference to Exhibit 2.2 of the Company's Current Report
                 on Form 8-K dated July 1, 1997 (Commission File No. 0-21317)).

            2.5  Agreement and Plan of Merger dated as of February 6, 1998, between the Company and
                 PRIMESTAR, Inc. (d)

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

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

            2.8  Voting Agreement dated as of June 12, 1997, among John C. Malone, Time Warner Cable,
                 a division of TWE, Comcast, the Company, Cox, MediaOne, Newhouse and GE Americom. (d)
</TABLE>
                                      IV-2
<PAGE>

2 - Plan of Acquisition, Reorganization, Arrangement, Liquidation or Succession
     (continued):

<TABLE>
<CAPTION>
            <C>  <S>
            2.9  Voting Agreement dated as of June 12, 1997, among Donne F. Fisher, as Co-Personal
                 Representative of the Estate of Bob Magness, Time Warner Cable, a division of TWE,
                 Comcast, the Company, Cox, MediaOne, Newhouse and GE Americom. (d)

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

           2.11  Form of Stockholders Agreement among PRIMESTAR, Inc., the Company, TWE, Newhouse,
                 Comcast, Cox, MediaOne, Continental Satellite company, Inc./, Continental Satellite
                 Company of Chicago, Inc., Continental Satellite Company of Minnesota, Inc.,
                 Continental Satellite company of New England, Inc., Continental Satellite Company of
                 Michigan, Inc., Continental Satellite Company of Ohio, Inc., Continental Satellite
                 Company of Virginia, Inc., MediaOne Satellite II, Inc., GE Americom and John C.
                 Malone, to be entered into at the closing of the Restructuring Transaction. (d)

           2.12  Form of Registration Rights Agreement among PRIMESTAR, Inc., the Company, TWE,
                 Newhouse, Comcast, Cox, MediaOne, Continental Satellite Company, Inc., Continental
                 Satellite Company of Chicago, Inc., Continental Satellite Company of Minnesota, Inc.,
                 Continental Satellite Company of New England, Inc., Continental Satellite Company of
                 Michigan, Inc., Continental Satellite Company of Ohio, Inc., Continental Satellite
                 Company of Virginia, Inc., MediaOne Satellite II, Inc., GE Americom and John C.
                 Malone, to be entered into at the closing of the Restructuring Transaction (d).

           2.13  Stockholders Agreement dated as of February 6, 1998, among PRIMESTAR, Inc., the
                 Company and John C. Malone. (d)

           2.14  TSAT Tempo Agreement dated as of February 6, 1998, between PRIMESTAR, Inc., and the
                 Company. (d)
</TABLE>
3 - Articles of Incorporation and Bylaws:

<TABLE>
            <C>  <S>
            3.1  Amended and Restated Certificate of Incorporation of the Company. (c)

            3.2  Amended and Restated Bylaws of the Company. (a)
</TABLE>
4 - Instruments Defining the Rights of Security Holders:

<TABLE>
            <C>  <S>
            4.1
                 Specimen certificate representing shares of Series A Common Stock of the Company. (c)

            4.2  Specimen certificate representing shares of Series B Common Stock of the Company.(c)
</TABLE>
                                      IV-3
<PAGE>

4 - Instruments Defining the Rights of Security Holders (continued):

<TABLE>
            <C>  <S>
            4.3
                 Indenture dated as of February 20, 1997 between the Company and Bank of New York, as
                 Trustee, with respect to $200 million principal amount of 10-7/8% Senior Subordinated
                 Notes due 2007.(b)

            4.4  Indenture dated as of February 20, 1997 between the Company and Bank of New York, as
                 Trustee, with respect to $275 million principal amount of 12-1/4% Senior Subordinated
                 Discount Notes due 2007.(b)

            4.5  Registration Rights Agreement - Senior Subordinated Notes, dated as of February 20,
                 1997, among the Company and Donaldson, Lufkin and Jenrette Securities Corporation;
                 Merrill Lynch, Pierce, Fenner and Smith Incorporated; Nationsbanc Capital Markets,
                 Inc.; and Scotia Capital Markets (USA) Inc. (b)

            4.6  Registration Rights Agreement - Senior Subordinated Discount Notes, dated as of
                 February 20, 1997, among the Company and Donaldson, Lufkin and Jenrette Securities
                 Corporation; Merrill Lynch, Pierce, Fenner and Smith Incorporated; Nationsbanc
                 Capital Markets, Inc.; and Scotia Capital Markets (USA) Inc. (b)
</TABLE>
10 - Material Contracts

<TABLE>
          <C>   <S>
          10.1
                Indemnification Agreement dated as of December 4, 1996, by and between the Company
                and TCI UA 1, Inc. (b)

          10.2  First Amendment to Indemnification Agreement dated as of December 31, 1997 between
                the Company and TCI UA I, Inc. (a)

          10.3  Indemnification Agreement dated as of December 4, 1996, by and between the Company
                and TCIC. (b)

          10.4  First Amendment to Indemnification Agreement dated as of December 31, 1997 between
                the Company and TCI Communications, Inc. (a)

          10.5  TCI Satellite Entertainment, Inc. 1996 Stock Incentive Plan. (c)

          10.6  Qualified Employee Stock Purchase Plan of the Company. (b)

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

          10.8  Option Agreement, dated as of December 4, 1996, by and between the Company and Gary
                S. Howard. (b)
</TABLE>

                                      IV-4
<PAGE>

10 - Material Contracts (continued)

<TABLE>
          <C>   <S>
         10.9   Option Agreement, dated as of December 4, 1996, by and between the Company and Larry
                E. Romrell.(b)

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

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

          10.12  1996 Ancillary Agreement Among Partners dated as of October 18, 1996, among PRIMESTAR
                 Partners L.P., the Participating Partners named therein, GE American Services, Inc.
                 and its affiliate GE American Communications, Inc. (b)

          10.13  Annex A to the 1996 Ancillary Agreement Among Partners. (c)

          10.14  Equipment Sale Agreement, dated as of June 4, 1997, between ResNet Communications,
                 Inc. LLC ("ResNet LLC") and TCI Satellite MDU, Inc. ("TSAT-MDU"). (d)

          10.15  Subordinated Convertible Term Loan Agreement, dated as of June 4, 1997, by and
                 between ResNet LLC, as Borrower, and TSAT-MDU, as Lender. (d)

          10.16  Option Agreement, dated as of June 4, 1997, between ResNet LLC and TSAT-MDU. (d)

          10.17  Subscription Agreement dated as of June 4, 1997, between RESNet LLC and TSAT-MDU. (d)

          10.18  Limited Liability Company Agreement of ResNet LLC, dated as of June 4, 1997, between
                 TSAT-MDU and ResNet Communications, Inc. (d)

          10.19  Standstill Agreement dated as of June 4, 1997, between LodgeNet Entertainment, Corp.
                 and the Company. (d)

          10.20  Limited Partnership Agreement dated February 8, 1990, among ATC Satellite Inc.,
                 Comcast DBS, Inc., Continental Satellite Company, Inc., Cox Satellite, Inc., G.E.
                 Americom Services, Inc., New Vision Satellite, TCI K-1, UA K-1, Viacom K-Band, Inc.
                 and Warner Cable SSD, Inc. (c)

          10.21  Amendment to Limited Partnership Agreement dated September 1, 1993. (c)
</TABLE>
                                      IV-5
<PAGE>

10 - Material Contracts (continued)

<TABLE>
          <C>    <S>
          10.22  Amendment to Limited Partnership Agreement dated December 15, 1993. (c)

          10.23  Amendment to Limited Partnership Agreement dated October 18, 1996. (c)

          10.24  Tag Along Agreement dated as of February 8, 1990, among Cox Enterprises, Inc.,
                 Comcast Corporation, Continental Cablevision, Inc., Newhouse Broadcasting
                 Corporation, Tempo Satellite, Inc. ("Tempo"), TCI Development Corporation and TCI. (c)

          10.25  Option Agreement dated February 8, 1990, between Tempo and K Prime Partners, L.P. (c)

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

          10.27  Letter Agreement dated July 30, 1993, between Tempo and PRIMESTAR Partners, L.P.
                 relating to BSS. (c)

          10.28  Amended and Restated Reimbursement Agreement dated March 1, 1995, between TCI UA 1,
                 Inc., Chemical Bank and The Toronto Dominion Bank. (c)

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

          10.30  U.S. $750,000,000 Credit Agreement dated as of December 31, 1996 among the Company,
                 The Bank of Nova Scotia, Nationsbank of Texas, N.A., Credit Lyonnais New York Branch,
                 and various financial institutions.(b)

          10.31  First Amendment to Credit Agreement dated as of February 19, 1997 among the Company,
                 certain financial institutions, and the Bank of Nova Scotia, as Administrative Agent
                 for the Lenders.(b)

          10.32  Trade Name and Service Mark License Agreement dated as of December 4, 1996, between
                 TCI and the Company. (b)

          10.33  Transition Services Agreement dated as of December 4, 1996, between TCI and the
                 Company. (b)

          10.34  Fulfillment Agreement dated as of August 30, 1996, between TCIC and the Company. (c)
</TABLE>
                                      IV-6
<PAGE>

10 - Material Contracts (continued)

<TABLE>
          <C>    <S>
          10.35  Amendment No. 1 to Fulfillment Agreement dated as of July 22, 1997, between TCIC and
                 the Company (Incorporated by reference to Exhibit 10.4 of the Company's Quarterly
                 Report on Form 10-Q for the quarter ended June 30, 1997 (Commission File No.
                 0-21317)).

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

          10.37  First Amendment to Tax Sharing Agreement dated as of October 1995, among TCIC and
                 certain other subsidiaries of TCI.(c)

          10.38  Second Amendment to Tax Sharing Agreement dated as of December 3, 1996, among TCIC
                 and certain other subsidiaries of TCI. (b)

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

          10.40  Amended and Restated Credit Agreement dated as of February 19, 1997 between TCIC and
                 the Company (b)

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

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

          10.43  Indemnification Agreement dated as of June 11, 1997 among News Corp., the Company,
                 the Partnership, Time Warner, Comcast, Cox, MediaOne, Newhouse, and GE Americom. (d)

          10.44  TCI Satellite Entertainment, Inc. 1997 Nonemployee Director Plan. (d)

          21     Subsidiaries of the Registrant.(d)

          23     Consent of KPMG Peat Marwick LLP (a)

          27     Financial Data Schedule.(a)
</TABLE>
--------------
  (a)     Filed herewith.

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

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

                                      IV-7
<PAGE>

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

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


(b)  Reports on Form 8-K filed during the quarter ended December 31, 1997:

     None.

                                      IV-8

<PAGE>

                                                                     Schedule II
                                                                     -----------


                       TCI SATELLITE ENTERTAINMENT, INC.

                       Valuation and Qualifying Accounts

                  Years ended December 31, 1997, 1996 and 1995


<TABLE>
<CAPTION>
                                                           Additions         Deductions
                                                        ---------------  ------------------
                                         Balance at       Charged to         Write-offs         Balance
                                          beginning         profit             net of           at end
Description                                of year         and loss          recoveries         of year
-------------------------------------  ---------------  ---------------  ------------------  -------------
                                                              amounts in thousands
<S>                                    <C>              <C>              <C>                 <C>
Year ended
   December 31, 1997:
      Allowance for doubtful
         receivables - trade               $4,666           18,339            (17,698)          5,307
                                       ===============  ===============  =================   =============

Year ended
   December 31, 1996:
      Allowance for doubtful
         receivables - trade               $4,819           19,235            (19,388)          4,666
                                       ===============  ===============  =================   =============

Year ended
   December 31, 1995:
      Allowance for doubtful
         receivables - trade               $1,589           10,549             (7,319)          4,819
                                       ===============  ===============  =================   =============
</TABLE>

                                      IV-9
<PAGE>

                                   SIGNATURES

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

                              TCI SATELLITE ENTERTAINMENT, INC.



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

Dated March 30, 1998



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

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

          /s/John C. Malone                                   March 30, 1998
      --------------------------
            John C. Malone        Chairman of the Board and
                                   Director

       /s/Gary S. Howard                                       March 30, 1998
      --------------------------
      Gary S. Howard              Director and Chief
                                   Executive Officer



      /s/David P. Beddow                                      March 30, 1998
      --------------------------
      David P. Beddow             Director



      /s/Leo J. Hindery, Jr.                                  March 30, 1998
      --------------------------
      Leo J. Hindery, Jr.         Director



      /s/Christopher Sophinos                                 March 30, 1998
      --------------------------
      Christopher Sophinos        President



      /s/Kenneth G. Carroll                                   March 30, 1998
      --------------------------
      Kenneth G. Carroll          Senior Vice President and
                                   Chief Financial Officer
                                   (Principal Financial
                                   Officer)


      /s/Scott D. Macdonald                                   March 30, 1998
      --------------------------
      Scott D. Macdonald          Vice President and
                                   Controller (Principal
                                   Accounting Officer)
</TABLE>

                                     IV-10
<PAGE>

                                 EXHIBIT INDEX
                                 -------------


Listed below are the exhibits which are filed as a part of this Report
(according to the number assigned to them in Item 601 of Regulation S-K):

2 - Plan of Acquisition, Reorganization, Arrangement, Liquidation or Succession:

<TABLE>
<CAPTION>

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

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


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


2.4              Asset Acquisition Agreement dated as of June 11, 1997, by and among The News
                 Corporation Limited ("News Corp."), MCI Telecommunications Corporation ("MCI"),
                 American Sky Broadcasting LLC ("ASkyB"), PRIMESTAR Partners L.P. (the "Partnership")
                 for certain purposes only, each of the general and limited partners of the
                 Partnership (Incorporated by reference to Exhibit 2.2 of the Company's Current Report
                 on Form 8-K dated July 1, 1997 (Commission File No. 0-21317)).


2.5              Agreement and Plan of Merger dated as of February 6, 1998, between the Company and
                 PRIMESTAR, Inc. (d)


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


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


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

</TABLE>

<PAGE>

2 - Plan of Acquisition, Reorganization, Arrangement, Liquidation or Succession
     (continued):

<TABLE>
<CAPTION>





<C>              <S>
2.9              Voting Agreement dated as of June 12, 1997, among Donne F. Fisher, as Co-Personal
                 Representative of the Estate of Bob Magness, Time Warner Cable, a division of TWE,
                 Comcast, the Company, Cox, MediaOne, Newhouse and GE Americom. (d)


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

2.11             Form of Stockholders Agreement among PRIMESTAR, Inc., the Company, TWE, Newhouse,
                 Comcast, Cox, MediaOne, Continental Satellite company, Inc./, Continental Satellite
                 Company of Chicago, Inc., Continental Satellite Company of Minnesota, Inc.,
                 Continental Satellite company of New England, Inc., Continental Satellite Company of
                 Michigan, Inc., Continental Satellite Company of Ohio, Inc., Continental Satellite
                 Company of Virginia, Inc., MediaOne Satellite II, Inc., GE Americom and John C.
                 Malone, to be entered into at the closing of the Restructuring Transaction. (d)


2.12             Form of Registration Rights Agreement among PRIMESTAR, Inc., the Company, TWE,
                 Newhouse, Comcast, Cox, MediaOne, Continental Satellite Company, Inc., Continental
                 Satellite Company of Chicago, Inc., Continental Satellite Company of Minnesota, Inc.,
                 Continental Satellite Company of New England, Inc., Continental Satellite Company of
                 Michigan, Inc., Continental Satellite Company of Ohio, Inc., Continental Satellite
                 Company of Virginia, Inc., MediaOne Satellite II, Inc., GE Americom and John C.
                 Malone, to be entered into at the closing of the Restructuring Transaction (d).


2.13             Stockholders Agreement dated as of February 6, 1998, among PRIMESTAR, Inc., the
                 Company and John C. Malone. (d)

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

3 - Articles of Incorporation and Bylaws:

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

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

4 - Instruments Defining the Rights of Security Holders:

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

4.2              Specimen certificate representing shares of Series B Common Stock of the Company.(c)
-------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>

4 - Instruments Defining the Rights of Security Holders (continued):

    4.3   Indenture dated as of February 20, 1997 between the Company and Bank
            of New York, as Trustee, with respect to $200 million principal
            amount of 10-7/8% Senior Subordinated Notes due 2007.(b)

    4.4   Indenture dated as of February 20, 1997 between the Company and Bank
            of New York, as Trustee, with respect to $275 million principal
            amount of 12-1/4% Senior Subordinated Discount Notes due 2007.(b)

    4.5   Registration Rights Agreement - Senior Subordinated Notes, dated as of
            February 20, 1997, among the Company and Donaldson, Lufkin and
            Jenrette Securities Corporation; Merrill Lynch, Pierce, Fenner and
            Smith Incorporated; Nationsbanc Capital Markets, Inc.; and Scotia
            Capital Markets (USA) Inc. (b)

    4.6   Registration Rights Agreement - Senior Subordinated Discount Notes,
            dated as of February 20, 1997, among the Company and Donaldson,
            Lufkin and Jenrette Securities Corporation; Merrill Lynch, Pierce,
            Fenner and Smith Incorporated; Nationsbanc Capital Markets, Inc.;
            and Scotia Capital Markets (USA) Inc. (b)

10 - Material Contracts

    10.1  Indemnification Agreement dated as of December 4, 1996, by and between
            the Company and TCI UA 1, Inc. (b)

    10.2  First Amendment to Indemnification Agreement dated as of December 31,
            1997 between the Company and TCI UA I, Inc. (a)

    10.3  Indemnification Agreement dated as of December 4, 1996, by and between
            the Company and TCIC. (b)

    10.4  First Amendment to Indemnification Agreement dated as of December 31,
            1997 between the Company and TCI Communications, Inc. (a)

    10.5  TCI Satellite Entertainment, Inc. 1996 Stock Incentive Plan. (c)

    10.6  Qualified Employee Stock Purchase Plan of the Company. (b)

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

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

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

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


<PAGE>

10 - Material Contracts (continued)

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

     10.12 1996 Ancillary Agreement Among Partners dated as of October 18, 1996,
             among PRIMESTAR Partners L.P., the Participating Partners named
             therein, GE American Services, Inc. and its affiliate GE American
             Communications, Inc. (b)

     10.13 Annex A to the 1996 Ancillary Agreement Among Partners. (c)

     10.14 Equipment Sale Agreement, dated as of June 4, 1997, between ResNet
             Communications, Inc. LLC ("ResNet LLC") and TCI Satellite MDU, Inc.
             ("TSAT-MDU"). (d)

     10.15 Subordinated Convertible Term Loan Agreement, dated as of June 4,
             1997, by and between ResNet LLC, as Borrower, and TSAT-MDU, as
             Lender. (d)

     10.16 Option Agreement, dated as of June 4, 1997, between ResNet LLC and
             TSAT-MDU. (d)

     10.17 Subscription Agreement dated as of June 4, 1997, between RESNet LLC
             and TSAT-MDU. (d)

     10.18 Limited Liability Company Agreement of ResNet LLC, dated as of June
             4, 1997, between TSAT-MDU and ResNet Communications, Inc. (d)

     10.19 Standstill Agreement dated as of June 4, 1997, between LodgeNet
             Entertainment, Corp. and the Company. (d)

     10.20 Limited Partnership Agreement dated February 8, 1990, among ATC
             Satellite Inc., Comcast DBS, Inc., Continental Satellite Company,
             Inc., Cox Satellite, Inc., G.E. Americom Services, Inc., New Vision
             Satellite, TCI K-1, UA K-1, Viacom K-Band, Inc. and Warner Cable
             SSD, Inc. (c)

     10.21 Amendment to Limited Partnership Agreement dated September 1, 1993.
             (c)

     10.22 Amendment to Limited Partnership Agreement dated December 15, 1993.
             (c)

     10.23 Amendment to Limited Partnership Agreement dated October 18, 1996.
             (c)

     10.24 Tag Along Agreement dated as of February 8, 1990, among Cox
             Enterprises, Inc., Comcast Corporation, Continental Cablevision,
             Inc., Newhouse Broadcasting Corporation, Tempo Satellite, Inc.
             ("Tempo"), TCI Development Corporation and TCI. (c)


<PAGE>

10 - Material Contracts (continued)

<TABLE>
<CAPTION>

<C>              <S>

10.25            Option Agreement dated February 8, 1990, between Tempo and K Prime Partners, L.P. (c)


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


10.27            Letter Agreement dated July 30, 1993, between Tempo and PRIMESTAR Partners, L.P.
                 relating to BSS. (c)


10.28            Amended and Restated Reimbursement Agreement dated March 1, 1995, between TCI UA 1,
                 Inc., Chemical Bank and The Toronto Dominion Bank. (c)


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


10.30            U.S. $750,000,000 Credit Agreement dated as of December 31, 1996 among the Company,
                 The Bank of Nova Scotia, Nationsbank of Texas, N.A., Credit Lyonnais New York Branch,
                 and various financial institutions.(b)


10.31            First Amendment to Credit Agreement dated as of February 19, 1997 among the Company,
                 certain financial institutions, and the Bank of Nova Scotia, as Administrative Agent
                 for the Lenders.(b)


10.32            Trade Name and Service Mark License Agreement dated as of December 4, 1996, between
                 TCI and the Company. (b)


10.33            Transition Services Agreement dated as of December 4, 1996, between TCI and the
                 Company. (b)


10.34            Fulfillment Agreement dated as of August 30, 1996, between TCIC and the Company. (c)


10.35            Amendment No. 1 to Fulfillment Agreement dated as of July 22, 1997, between TCIC and
                 the Company (Incorporated by reference to Exhibit 10.4 of the Company's Quarterly
                 Report on Form 10-Q for the quarter ended June 30, 1997 (Commission File No.
                 0-21317)).


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


10.37            First Amendment to Tax Sharing Agreement dated as of October 1995, among TCIC and
                 certain other subsidiaries of TCI.(c)

10.38            Second Amendment to Tax Sharing Agreement dated as of December 3, 1996, among TCIC
                 and certain other subsidiaries of TCI. (b)
</TABLE>
<PAGE>

10 - Material Contracts (continued)

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

     10.40 Amended and Restated Credit Agreement dated as of February 19, 1997
             between TCIC and the Company (b)

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

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

     10.43 Indemnification Agreement dated as of June 11, 1997 among News Corp.,
             the Company, the Partnership, Time Warner, Comcast, Cox, MediaOne,
             Newhouse, and GE Americom. (d)

     10.44 TCI Satellite Entertainment, Inc. 1997 Nonemployee Director Plan. (d)

     21    Subsidiaries of the Registrant.(d)

     23    Consent of KPMG Peat Marwick LLP (a)

     27    Financial Data Schedule.(a)

__________________________________

  (a)     Filed herewith.

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

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

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

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