<PAGE>

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                                    FORM 10-Q


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

      For the quarterly period ended September 30, 1999
                                     ------------------

                                       OR

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

      For the transition period from__________ to __________

                         Commission File Number 0-21389
                                                -------

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



                 Delaware                                 51-0374669
                 --------                                 ----------
      (State or other jurisdiction of                     (IRS Employer
       incorporation or organization)                     Identification Number)


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


      Registrant's telephone number, including area code: (888) 438-7488
                                                          --------------

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


      Number of shares of each class of the Registrant's common stock
outstanding as of November 5, 1999:

              Class A, Common Stock, $0.01 par value                  15,157,562
              Class B, Common Stock, $0.01 par value                   4,581,900
              Non-Voting, Common Stock, $0.01 par value                       --


<PAGE>

                       PEGASUS COMMUNICATIONS CORPORATION

                                    Form 10-Q
                                Table of Contents
                For the Quarterly Period Ended September 30, 1999


                                                                           Page
                                                                           ----
Part I. Financial Information


        Item 1            Consolidated Financial Statements

                          Consolidated Balance Sheets
                           December 31, 1998 and September 30, 1999           3

                          Consolidated Statements of Operations
                           Three months ended September 30, 1998 and 1999     4

                          Consolidated Statements of Operations
                           Nine months ended September 30, 1998 and 1999      5

                          Consolidated Statements of Cash Flows
                           Nine months ended September 30, 1998 and 1999      6

                          Notes to Consolidated Financial Statements          7


        Item 2            Management's Discussion and Analysis of
                           Financial Condition and Results of Operations      13


        Item 3            Quantitative and Qualitative Disclosures About
                           Market Risk                                        23


Part II. Other Information


        Item 2            Changes in Securities and Use of Proceeds           25

        Item 5            Other Information                                   25

        Item 6            Exhibits and Reports on Form 8-K                    26

        Signature                                                             27


                                       2
<PAGE>

                       Pegasus Communications Corporation
                           Consolidated Balance Sheets

<TABLE>
<CAPTION>
                                                                                     December 31,            September 30,
                                                                                         1998                    1999
                                                                                     ------------            -------------
                                                                                                              (unaudited)
<S>                                                                                      <C>                      <C>
                              ASSETS

Current  assets:
   Cash and cash equivalents                                                          $54,505,473              $22,756,987
   Restricted cash                                                                     21,479,305                1,979,371
   Accounts receivable, less allowance for doubtful
    accounts of $567,000 and $720,000, respectively                                    20,882,260               25,164,702
   Inventory                                                                            5,426,348                6,809,943
   Program rights                                                                       3,156,715                3,962,351
   Deferred taxes                                                                       2,602,453                2,809,933
   Prepaid expenses and other                                                           1,207,312                6,358,739
                                                                                     ------------             ------------
     Total current assets                                                             109,259,866               69,842,026

Property and equipment, net                                                            34,066,502               42,601,087
Intangible assets, net                                                                729,405,657              771,971,897
Program rights                                                                          3,428,382                6,234,095
Deferred taxes                                                                          9,277,280                6,159,979
Deposits and other                                                                        872,386                6,094,777
                                                                                     ------------             ------------

     Total assets                                                                    $886,310,073             $902,903,861
                                                                                     ============             ============


                  LIABILITIES AND TOTAL EQUITY

Current liabilities:
   Current portion of long-term debt                                                  $14,399,046              $14,207,778
   Accounts payable                                                                     4,794,809                4,861,656
   Accrued interest                                                                    17,465,493               14,837,113
   Accrued satellite programming, fees and commissions                                 22,680,595               35,884,964
   Accrued expenses                                                                     9,599,049               12,619,131
   Current portion of program rights payable                                            2,431,515                4,048,455
                                                                                     ------------             ------------
     Total current liabilities                                                         71,370,507               86,459,097

Long-term debt                                                                        544,629,706              610,666,480
Program rights payable                                                                  2,472,367                4,771,662
Deferred taxes                                                                         80,671,714               73,236,343
                                                                                     ------------             ------------
     Total liabilities                                                                699,144,294              775,133,582
                                                                                     ------------             ------------

Commitments and contingent liabilities                                                         --                       --

Minority interest                                                                       3,000,000                3,000,000

Preferred Stock; $0.01 par value; 5.0 million shares authorized                                --                       --

Series A Preferred Stock; $0.01 par value; 135,073 shares
     authorized; 119,369 and 135,073 issued and outstanding                           126,027,871              138,428,209

Common stockholders' equity:
   Class A Common Stock; $0.01 par value; 50.0 million shares
     authorized; 11,315,809 and 15,153,779 issued and outstanding                         113,158                  151,537
   Class B Common Stock; $0.01 par value; 15.0 million shares
     authorized; 4,581,900 issued and outstanding                                          45,819                   45,819
   Non-Voting Common Stock; $0.01 par value; 20.0 million shares
     authorized                                                                                --                       --
   Additional paid-in capital                                                         173,870,633              240,664,640
   Deficit                                                                           (115,891,702)            (254,519,926)
                                                                                     ------------             ------------
    Total common stockholders' equity (deficit)                                        58,137,908              (13,657,930)
                                                                                     ------------             ------------

   Total liabilities and stockholders' equity                                        $886,310,073             $902,903,861
                                                                                     ============             ============
</TABLE>

           See accompanying notes to consolidated financial statements


                                       3
<PAGE>

                       Pegasus Communications Corporation
                      Consolidated Statements of Operations

<TABLE>
<CAPTION>
                                                                                       Three Months Ended September 30,
                                                                                     -------------------------------------
                                                                                         1998                     1999
                                                                                     ------------             ------------
                                                                                                  (unaudited)
<S>                                                                                      <C>                       <C>
Net revenues:
   DBS                                                                                $44,734,926             $ 75,726,952
   Broadcast                                                                            7,924,426                8,941,015
   Cable                                                                                2,847,826                6,221,682
                                                                                     ------------             ------------
     Total net revenues                                                                55,507,178               90,889,649

Operating expenses:
   DBS
      Programming, technical, general and administrative                               31,373,214               53,525,114
      Marketing and selling                                                            14,131,132               38,830,387
      Incentive compensation                                                              325,000                  350,000
      Depreciation and amortization                                                    17,892,021               20,400,826
   Broadcast
      Programming, technical, general and administrative                                4,177,612                5,766,495
      Marketing and selling                                                             1,255,995                1,369,005
      Incentive compensation                                                              112,404                       --
      Depreciation and amortization                                                       758,309                1,318,593
   Cable
      Programming, technical, general and administrative                                1,507,379                3,181,813
      Marketing and selling                                                                81,629                  218,878
      Incentive compensation                                                                4,895                  134,543
      Depreciation and amortization                                                     1,075,587                2,002,655

   Corporate expenses                                                                     936,625                1,593,228
   Corporate depreciation and amortization                                                464,882                  745,024
                                                                                     ------------             ------------
     Loss from operations                                                             (18,589,506)             (38,546,912)

Interest expense                                                                      (13,534,677)             (16,245,904)
Interest income                                                                           613,393                  279,854
Other expense, net                                                                       (112,214)                (629,677)
Gain on sale of cable systems                                                          24,726,432                       --
                                                                                     ------------             ------------
     Loss before income taxes                                                          (6,896,572)             (55,142,639)
Provision (benefit) for income taxes                                                       50,000               (3,016,173)
                                                                                     ------------             ------------
     Net loss                                                                          (6,946,572)             (52,126,466)
     Preferred stock dividends                                                          3,804,887                4,305,462
                                                                                     ------------             ------------
     Net loss applicable to common shares                                            ($10,751,459)            ($56,431,928)
                                                                                     ============             ============



Basic and diluted earnings per common share:
     Net loss                                                                              ($0.68)                  ($2.86)
                                                                                     ============             ============

     Weighted average shares outstanding                                               15,897,603               19,720,975
                                                                                     ============             ============
</TABLE>




           See accompanying notes to consolidated financial statements


                                       4
<PAGE>

                       Pegasus Communications Corporation
                      Consolidated Statements of Operations

<TABLE>
<CAPTION>
                                                                                         Nine Months Ended September 30,
                                                                                     -------------------------------------
                                                                                         1998                     1999
                                                                                     ------------             ------------
                                                                                                  (unaudited)
<S>                                                                                       <C>                      <C>
Net revenues:
   DBS                                                                               $ 95,662,160             $198,181,003
   Broadcast                                                                           23,548,743               26,512,171
   Cable                                                                               11,819,324               14,870,093
                                                                                     ------------             ------------
     Total net revenues                                                               131,030,227              239,563,267

Operating expenses:
   DBS
      Programming, technical, general and administrative                               66,324,641              137,890,623
      Marketing and selling                                                            25,017,957               88,720,057
      Incentive compensation                                                            1,158,919                1,140,000
      Depreciation and amortization                                                    38,156,719               62,333,958
   Broadcast
      Programming, technical, general and administrative                               12,244,423               15,920,497
      Marketing and selling                                                             4,217,521                4,447,811
      Incentive compensation                                                              144,457                  202,409
      Depreciation and amortization                                                     3,285,727                3,800,539
   Cable
      Programming, technical, general and administrative                                6,047,476                7,595,791
      Marketing and selling                                                               268,350                  504,216
      Incentive compensation                                                              168,500                  195,331
      Depreciation and amortization                                                     4,003,678                5,025,585

   Corporate expenses                                                                   2,418,067                4,316,474
   Corporate depreciation and amortization                                              1,342,904                2,195,243
                                                                                     ------------             ------------
     Loss from operations                                                             (33,769,112)             (94,725,267)

Interest expense                                                                      (29,849,768)             (47,540,765)
Interest income                                                                         1,333,683                1,055,340
Other expense, net                                                                       (799,333)              (1,448,705)
Gain on sale of cable system                                                           24,726,432                       --
                                                                                     ------------             ------------
     Loss before income taxes                                                         (38,358,098)            (142,659,397)
Provision (benefit) for income taxes                                                      175,000               (4,031,173)
                                                                                     ------------             ------------
     Net loss                                                                         (38,533,098)            (138,628,224)
     Preferred stock dividends                                                         10,958,593               12,400,338
                                                                                     ------------             ------------
     Net loss applicable to common shares                                            ($49,491,691)           ($151,028,562)
                                                                                     ============             ============



Basic and diluted earnings per common share:
     Net loss                                                                              ($3.66)                  ($8.13)
                                                                                     ============             ============

     Weighted average shares outstanding                                               13,533,756               18,579,058
                                                                                     ============             ============

</TABLE>





           See accompanying notes to consolidated financial statements


                                       5
<PAGE>

                       Pegasus Communications Corporation
                      Consolidated Statements of Cash Flows

<TABLE>
<CAPTION>
                                                                                         Nine Months Ended September 30,
                                                                                     -------------------------------------
                                                                                         1998                     1999
                                                                                     ------------             ------------
                                                                                                  (unaudited)
<S>                                                                                      <C>                      <C>
Cash flows from operating activities:
 Net loss                                                                            ($38,533,098)           ($138,628,224)
 Adjustments to reconcile net loss
   to net cash used for operating activities:
   Depreciation and amortization                                                       46,789,028               73,355,325
   Program rights amortization                                                          1,914,072                2,460,368
   Accretion on discount of bonds and seller notes                                        931,808                1,112,815
   Stock incentive compensation                                                         1,471,876                1,537,740
   Gain on disposal of assets                                                                  --                  (35,343)
   Gain on sale of cable systems                                                      (24,726,432)                      --
   Bad debt expense                                                                     1,773,094                4,987,939
   Change in assets and liabilities:
    Accounts receivable                                                                (3,657,763)              (8,783,027)
    Inventory                                                                          (1,647,165)              (1,212,595)
    Prepaid expenses and other                                                           (530,481)              (5,077,019)
    Accounts payable and accrued expenses                                               1,951,209               10,871,444
    Accrued interest                                                                   (1,103,101)              (2,628,380)
    Deposits and other                                                                    (94,936)              (5,217,951)
                                                                                     ------------             ------------
 Net cash used for operating activities                                               (15,461,889)             (67,256,908)
                                                                                     ------------             ------------
Cash flows from investing activities:
   Acquisitions                                                                       (89,815,402)            (104,064,329)
   Cash acquired from acquisitions                                                      3,284,382                    5,486
   Capital expenditures                                                                (6,178,866)             (10,700,128)
   Purchase of intangible assets                                                      (10,042,558)              (4,003,116)
   Payments for programming rights                                                     (1,597,782)              (2,155,482)
   Proceeds from sale of assets                                                                --                  508,988
   Proceeds from sale of cable system                                                  30,132,826                       --
                                                                                     ------------             ------------
 Net cash used for investing activities                                               (74,217,400)            (120,408,581)
                                                                                     ------------             ------------
Cash flows from financing activities:
   Repayments of long-term debt                                                        (5,558,004)             (13,620,685)
   Borrowings on bank credit facilities                                                81,500,000              124,300,000
   Repayments of bank credit facilities                                                  (200,000)             (50,600,000)
   Restricted cash                                                                      9,283,210               19,499,934
   Capital lease repayments                                                              (321,044)                (136,624)
   Proceeds from issuance of common stock                                                      --               81,131,776
   Underwriting and common stock offering costs                                                --               (4,657,398)
                                                                                     ------------             ------------
 Net cash provided by financing activities                                             84,704,162              155,917,003
                                                                                     ------------             ------------
Net decrease in cash and cash equivalents                                              (4,975,127)             (31,748,486)
Cash and cash equivalents, beginning of year                                           44,049,097               54,505,473
                                                                                     ------------             ------------
Cash and cash equivalents, end of period                                             $ 39,073,970             $ 22,756,987
                                                                                     ============             ============
</TABLE>






           See accompanying notes to consolidated financial statements


                                       6
<PAGE>

                       PEGASUS COMMUNICATIONS CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. The Company:

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

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

2. Basis of Presentation:

      The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. The financial statements include the accounts of Pegasus
and all of its subsidiaries. All intercompany transactions and balances have
been eliminated. Certain amounts for 1998 have been reclassified for comparative
purposes.

      The unaudited consolidated financial statements reflect all adjustments
consisting of normal recurring items which are, in the opinion of management,
necessary for a fair presentation, in all material respects, of the financial
position of the Company and the results of its operations and its cash flows for
the interim period. For further information, refer to the consolidated financial
statements and footnotes thereto for the year ended December 31, 1998 included
in the Company's Annual Report on Form 10-K for the year then ended.

3. Common Stock:

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

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

      As of September 30, 1999, the Company had three classes of Common Stock:
Class A Common Stock, Class B Common Stock and Non-Voting Common Stock. Holders
of Class A Common Stock and Class B Common Stock are entitled to one vote per
share and ten votes per share, respectively.

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

4. Preferred Stock:

      As of December 31, 1998 and September 30, 1999, the Company had 5.0
million shares of Preferred Stock authorized of which 135,073 shares have been
designated as 12.75% Series A Cumulative Exchangeable Preferred Stock (the
"Series A Preferred Stock").

      The Company had approximately 119,369 and 135,073 shares of Series A
Preferred Stock issued and outstanding at December 31, 1998 and September 30,
1999, respectively. On July 1, 1999, the Company paid dividends on the Series A
Preferred Stock of approximately 8,095 shares in the aggregate of Series A
Preferred Stock to stockholders of record on June 15, 1999.


                                       7
<PAGE>

                       PEGASUS COMMUNICATIONS CORPORATION
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

4. Preferred Stock: - (Continued)

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

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


5. Long-Term Debt:

<TABLE>
<CAPTION>

Long-term debt consists of the following :                                         December 31,     September 30,
                                                                                       1998              1999
                                                                                   ------------     -------------
<S>                                                                                    <C>                <C>
Series B Senior Notes payable by Pegasus, due 2005,
   interest at 9.625%, payable semi-annually in
   arrears on April 15 and October 15.......................................       $115,000,000      $115,000,000
Series B Senior Notes payable by Pegasus, due 2006,
   interest at 9.75%, payable semi-annually in
   arrears on June 1 and December 1.........................................        100,000,000       100,000,000
Senior six-year $180.0 million revolving credit
   facility, payable by PM&C, interest at PM&C's
   option at either the bank's base rate plus an
   applicable margin or LIBOR plus an applicable margin.....................         27,500,000        85,900,000
Senior six-year $70.0 million revolving credit
   facility, payable by DTS, interest at DTS'
   option at either the bank's base rate plus an
   applicable margin or the Eurodollar Rate plus an
   applicable margin........................................................         26,800,000        42,700,000
Senior six-year $20.0 million term loan facility,
   payable by DTS, interest at DTS' option at
   either the bank's base rate plus an applicable
   margin or the Eurodollar Rate plus an applicable
   margin...................................................................         19,600,000        19,000,000
Series B Notes payable by PM&C, due 2005, interest
   at 12.5%, payable semi-annually in arrears on
   January 1 and July 1, net of unamortized
   discount of $2,621,878 and $2,323,529 as of
   December 31, 1998 and September 30, 1999,
   respectively.............................................................         82,378,122        82,676,471
Series B Notes payable by DTS, due 2007, interest
   at 12.5%, payable semi-annually in arrears on
   February 1 and August 1, net of unamortized
   discount of $1,784,844 and $1,582,585 as of
   December 31, 1998 and September 30, 1999,
   respectively.............................................................        153,215,156       153,417,415
Mortgage payable, due 2000, interest at 8.75%...............................            454,965           436,783
Sellers' notes, due 1999 to 2005, interest at 3% to 8%......................         33,537,788        25,337,492
Capital leases and other....................................................            542,721           406,097
                                                                                   ------------      ------------
                                                                                    559,028,752       624,874,258
Less current maturities.....................................................         14,399,046        14,207,778
                                                                                   ------------      ------------
Long-term debt..............................................................       $544,629,706      $610,666,480
                                                                                   ============      ============
</TABLE>


                                       8
<PAGE>

                       PEGASUS COMMUNICATIONS CORPORATION
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


5. Long-Term Debt: - (Continued)

      DTS maintains a $70.0 million senior revolving credit facility and a $20.0
million senior term credit facility (collectively, the "DTS Credit Facility")
which expires in 2003 and is collateralized by substantially all of the assets
of DTS and its subsidiaries. The DTS Credit Facility is subject to certain
financial covenants as defined in the loan agreement, including a debt to
adjusted cash flow covenant. As of September 30, 1999, $14.4 million of stand-by
letters of credit were issued pursuant to the DTS Credit Facility, including
$6.7 million collateralizing certain of the Company's outstanding sellers'
notes.

      PM&C maintains a $180.0 million senior revolving credit facility (the
"PM&C Credit Facility") which expires in 2003 and is collateralized by
substantially all of the assets of PM&C and its subsidiaries. The PM&C Credit
Facility is subject to certain financial covenants as defined in the loan
agreement, including a debt to adjusted cash flow covenant. As of September 30,
1999, $29.7 million of stand-by letters of credit were issued pursuant to the
PM&C Credit Facility, including $14.5 million collateralizing certain of the
Company's outstanding sellers' notes.

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

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

6. Earnings Per Common Share:

Calculation of basic and diluted earnings per common share:

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

<TABLE>
<CAPTION>
                                                                                Three Months Ended September 30,
                                                                               ---------------------------------
                                                                                   1998                 1999
                                                                               ------------         ------------
<S>                                                                            <C>                  <C>
Net loss applicable to common shares                                           ($10,751,459)        ($56,431,928)
                                                                               ============         ============

Weighted average common shares outstanding                                       15,897,603           19,720,975
                                                                               ============         ============

Total shares used for calculation of basic earnings per common share             15,897,603           19,720,975
Stock options and warrants                                                               --                   --
                                                                               ------------         ------------

Total shares used for calculation of diluted earnings per common share           15,897,603           19,720,975
                                                                               ============         ============
</TABLE>


                                       9
<PAGE>

                       PEGASUS COMMUNICATIONS CORPORATION
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

6. Earnings Per Common Share: - (Continued)

<TABLE>
<CAPTION>
                                                                                Nine Months Ended September 30,
                                                                               ---------------------------------
                                                                                   1998                 1999
                                                                               ------------         ------------
<S>                                                                            <C>                 <C>
Net loss applicable to common shares                                           ($49,491,691)       ($151,028,562)
                                                                               ============         ============

Weighted average common shares outstanding                                       13,533,756           18,579,058
                                                                               ============         ============

Total shares used for calculation of basic earnings per common share             13,533,756           18,579,058
Stock options and warrants                                                               --                   --
                                                                               ------------         ------------

Total shares used for calculation of diluted earnings per common share           13,533,756           18,579,058
                                                                               ============         ============
</TABLE>

      Basic earnings per common share amounts are based on net income, after
deducting preferred stock dividend requirements, divided by the weighted average
number of shares of Class A, Class B and Non-Voting Common Stock outstanding
during the year. The total shares used for the calculation of diluted earnings
per common share were not adjusted for securities that have not been issued as
they are antidilutive.

      For the three and nine months ended September 30, 1998 and 1999, net loss
per common share was determined by dividing net loss, as adjusted by the
aggregate amount of dividends on the Company's Series A Preferred Stock,
approximately $3.8 million, $11.0 million, $4.3 million and $12.4 million,
respectively, by applicable shares outstanding.

7. Acquisitions:

      In the first three quarters of 1999, the Company acquired, from twelve
independent DIRECTV(R) ("DIRECTV") providers, the rights to provide DIRECTV
programming in certain rural areas of Alabama, Colorado, Illinois, Indiana,
Minnesota, Nebraska, North Dakota, Ohio and Texas and the related assets in
exchange for total consideration of approximately $68.1 million, which consisted
of $61.8 million in cash, 12,339 shares of the Company's Class A Common Stock
(amounting to $550,000 at the time of issuance), warrants to purchase a total of
25,000 shares of the Company's Class A Common Stock (amounting to $814,000 at
the time of issuance), $4.7 million in promissory notes and $252,000 in assumed
net liabilities.

      Effective March 31, 1999, the Company purchased a cable system serving
Aguadilla, Puerto Rico and neighboring communities for a purchase price of
approximately $42.1 million in cash. At March 31, 1999, the Aguadilla cable
system served approximately 21,000 subscribers and passed approximately 81,000
of the 90,000 homes in the franchise area. The Aguadilla cable system is
contiguous to the Company's other Puerto Rico cable system and the Company has
consolidated the Aguadilla cable system with its existing cable system.


                                       10
<PAGE>

                       PEGASUS COMMUNICATIONS CORPORATION
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

8. Supplemental Cash Flow Information:

      Significant noncash investing and financing activities are as follows:

<TABLE>
<CAPTION>
                                                                                Nine Months Ended September 30,
                                                                               ---------------------------------
                                                                                    1998                 1999
                                                                               ------------         ------------
<S>                                                                              <C>                  <C>
Barter revenue and related expense...........................................    $4,861,900           $5,656,907
Acquisition of program rights and assumption of related program payables.....     4,828,024            6,071,717
Acquisition of plant under capital leases....................................        36,500                   --
Capital contribution and related acquisition of intangibles..................   123,162,284            1,363,592
Notes payable and related acquisition of intangibles.........................   220,828,844            4,690,000
Series A Preferred Stock dividend and reduction of paid-in capital...........    10,958,593           12,400,338
Deferred taxes, net and related acquisition of intangibles...................    82,934,179               29,029
</TABLE>

      For the nine months ended September 30, 1998 and 1999, the Company paid
cash for interest in the amount of $26.0 million and $50.2 million,
respectively. The Company paid no federal income taxes for the nine months ended
September 30, 1998 and 1999.

9. Commitments and Contingent Liabilities:

Legal Matters:

      In connection with the pending license renewal application of one of the
Company's television stations, it has come to the attention of the Company that,
at that station, there were violations of the FCC's rules establishing limits on
the amount of commercial material in programs directed to children.

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

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

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

10. Industry Segments:

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


                                       11
<PAGE>

                       PEGASUS COMMUNICATIONS CORPORATION
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

10. Industry Segments: - (Continued)

      All of the Company's revenues are derived from external customers. Capital
expenditures for the Company's DBS segment were $1.1 million and $2.0 million
for the nine months ended September 30, 1998 and 1999, respectively. Capital
expenditures for the Company's Broadcast segment were $3.6 million and $3.0
million for the nine months ended September 30, 1998 and 1999, respectively.
Capital expenditures for the Company's Cable segment were $1.3 million and $4.4
million for the nine months ended September 30, 1998 and 1999, respectively.
Identifiable total assets for the Company's DBS segment were $715.6 million and
$705.1 million as of December 31, 1998 and September 30, 1999, respectively.
Identifiable total assets for the Company's Broadcast segment were $67.1 million
and $71.1 million as of December 31, 1998 and September 30, 1999, respectively.
Identifiable total assets for the Company's Cable segment were $47.0 million and
$88.2 million as of December 31, 1998 and September 30, 1999, respectively.

11. Other Events:

      In October 1999, the Company acquired, from two independent DIRECTV
providers, the rights to provide DIRECTV programming in certain rural areas of
Minnesota and the related assets in exchange for total consideration of
approximately $4.6 million, which consisted of $2.8 million in cash and a $1.8
million promissory note, payable over four years.


                                       12
<PAGE>

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

      This Report contains certain forward-looking statements (as such term is
defined in the Private Securities Litigation Reform Act of 1995) and information
relating to us that are based on the beliefs of our management, as well as
assumptions made by and information currently available to our management. When
used in this Report, the words "estimate," "project," "believe," "anticipate,"
"intend," "expect" and similar expressions are intended to identify
forward-looking statements. Such statements reflect our current views with
respect to future events and are subject to unknown risks, uncertainties and
other factors that may cause actual results to differ materially from those
contemplated in such forward-looking statements. Such factors include, among
other things, the following: general economic and business conditions, both
nationally, internationally and in the regions in which we operate;
relationships with and events affecting third parties like DIRECTV, Inc.;
demographic changes; existing government regulations and changes in, or the
failure to comply with government regulations; competition; the loss of any
significant numbers of subscribers or viewers; changes in business strategy or
development plans; technological developments and difficulties (including any
associated with the year 2000); the ability to attract and retain qualified
personnel; our significant indebtedness; the availability and terms of capital
to fund the expansion of our businesses; and other factors referenced in this
Report and in reports and registration statements filed from time to time with
the Securities and Exchange Commission. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as the date
hereof. We do not undertake any obligation to publicly release any revisions to
these forward-looking statements to reflect events or circumstances after the
date hereof or to reflect the occurrence of unanticipated events.

      The following discussion of the financial condition and results of
operations of Pegasus should be read in conjunction with the consolidated
financial statements and related notes which are included on pages 3-12 herein.


General

      Pegasus Communications Corporation is:

      o   The largest independent provider of DIRECTV with 653,000 subscribers
          at October 31, 1999. We have the exclusive right to distribute DIRECTV
          digital broadcast satellite services to 4.9 million rural households
          in 36 states. We distribute DIRECTV through the Pegasus retail
          network, a network in excess of 2,000 independent retailers.

      o   The owner or programmer of nine TV stations affiliated with either
          Fox, UPN or the WB and the owner of a large cable system in Puerto
          Rico serving approximately 54,000 subscribers.

      DBS revenues are principally derived from monthly customer subscriptions
and pay-per-view services. Broadcast revenues are derived from the sale of
broadcast airtime to local and national advertisers. Cable revenues are derived
from monthly customer subscriptions, pay-per-view services, subscriber equipment
rentals and installation charges.

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

      o   interest;

      o   income taxes;

      o   depreciation and amortization;

      o   non-cash charges;


                                       13
<PAGE>

      o   corporate overhead; and

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

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

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

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

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

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


Results of Operations

Three months ended September 30, 1999 compared to three months ended September
30, 1998

      Total net revenues for the three months ended September 30, 1999 were
$90.9 million, an increase of $35.4 million, or 64%, compared to total net
revenues of $55.5 million for the same period in 1998. The increase in total net
revenues for the three months ended September 30, 1999 is primarily due to an
increase in DBS revenues of $31.0 million attributable to acquisitions and
internal growth in Pegasus' DBS subscriber base. Total operating expenses for
the three months ended September 30, 1999 were $129.4 million, an increase of
$55.3 million, or 75%, compared to total operating expenses of $74.1 million for
the same period in 1998. The increase is primarily due to an increase of $49.4
million in operating expenses attributable to the growth in Pegasus' DBS
business.

      Total corporate expenses, including corporate depreciation and
amortization, were $2.3 million for the three months ended September 30, 1999,
an increase of $937,000, or 67%, compared to $1.4 million for the same period in
1998. The increase in corporate expenses is attributable to the growth in
Pegasus' business. The increase in corporate depreciation and amortization is
primarily due to amortization of deferred financing costs associated with the
issuance of $100.0 million of senior notes in November 1998.

      Interest expense was $16.2 million for the three months ended September
30, 1999, an increase of $2.7 million, or 20%, compared to interest expense of
$13.5 million for the same period in 1998. The increase in interest expense is
primarily due to interest on Pegasus' $100.0 million senior notes issued in
November 1998 and an increase in bank borrowings and sellers' notes associated
with Pegasus' DBS acquisitions. Interest income was $280,000 for the three
months ended September 30, 1999, a decrease of $334,000, or 54%, compared to
interest income of $613,000 for the same period in 1998. The decrease in
interest income is due to lower average cash balances for the three months ended
September 30, 1999 compared to the same period in 1998.

      Other expenses were $630,000 for the three months ended September 30,
1999, an increase of $517,000, or 461%, compared to other expenses of $112,000
for the same period in 1998. The increase is primarily due to increased investor
relation activities and other non-operating expenses.

      Pegasus sold its New England cable systems effective July 1, 1998 for
$30.1 million resulting in a nonrecurring gain of $24.7 million in the third
quarter of 1998.


                                       14
<PAGE>

      The provision for income taxes declined by approximately $3.1 million
primarily as a result of the amortization of the deferred tax liability that
originated from the acquisition of Digital Television Services, Inc. in April
1998.

      Preferred stock dividends were $4.3 million for the three months ended
September 30, 1999, an increase of $501,000, or 13%, compared to $3.8 million in
preferred stock dividends for the same period in 1998. The increase is
attributable to a greater number of shares of Pegasus' preferred stock
outstanding during the third quarter of 1999 compared to the third quarter of
1998 as the result of payment of dividends in kind.

DBS

      Pegasus' DBS business has experienced significant growth. During the last
twelve months, Pegasus acquired, through acquisitions, approximately 43,000
subscribers and the exclusive DIRECTV distribution rights to approximately
378,000 households in rural areas of the United States. At September 30, 1999,
Pegasus had exclusive DIRECTV distribution rights to 4.8 million households and
631,000 subscribers as compared to 4.5 million households and 387,000
subscribers at September 30, 1998. Pegasus had 5.1 million households and
654,000 subscribers at September 30, 1999, including pending acquisitions. At
September 30, 1998, subscribers would have been 444,000, including pending and
completed acquisitions. Subscriber penetration increased from 8.8% at September
30, 1998 to 12.9% at September 30, 1999, including pending and completed
acquisitions.

      Total DBS net revenues were $75.7 million for the three months ended
September 30, 1999, an increase of $31.0 million, or 69%, compared to DBS net
revenues of $44.7 million for the same period in 1998. The increase is primarily
due to an increase in the average number of subscribers in the third quarter of
1999 compared to the third quarter of 1998. The average monthly revenue per
subscriber was $44.80 for the three months ended September 30, 1999 compared to
$41.50 for the same period in 1998. Pro forma DBS net revenues, including
pending acquisitions at September 30, 1999, were $79.1 million, an increase of
$25.3 million, or 47%, compared to pro forma DBS net revenues of $53.9 million
for the same period in 1998.

      Programming, technical, and general and administrative expenses were $53.5
million for the three months ended September 30, 1999, an increase of $22.2
million, or 71%, compared to $31.4 million for the same period in 1998. The
increase is attributable to significant growth in subscribers and territory
during the last twelve months. As a percentage of revenue, programming,
technical, and general and administrative expenses were 70.7% for the three
months ended September 30, 1999 compared to 70.1% for the same period in 1998.

      Subscriber acquisition costs were $38.8 million for the three months ended
September 30, 1999, an increase of $24.7 million compared to $14.1 million for
the same period in 1998. Gross subscriber additions were 121,600 for the three
months ended September 30, 1999 compared to 40,900 for the same period in 1998.
The total subscriber acquisition costs per gross subscriber addition were $319
for the three months ended September 30, 1999 compared to $345 for the same
period in 1998. The decrease in subscriber acquisition costs per gross
subscriber addition is due to a decrease in promotional programming.

      Incentive compensation, which is calculated based on increases in pro
forma location cash flow, was $350,000 for the three months ended September 30,
1999, an increase of $25,000, or 8%, compared to $325,000 for the same period in
1998. The increase resulted from a larger gain in pro forma location cash flow
during the third quarter of 1999 as compared to the third quarter of 1998.

      Depreciation and amortization was $20.4 million for the three months ended
September 30, 1999, an increase of $2.5 million, or 14%, compared to $17.9
million for the same period in 1998. The increase in depreciation and
amortization is primarily due to an increase in the fixed and intangible asset
base as the result of DBS acquisitions that occurred during the last two years.


                                       15
<PAGE>

Broadcast

      During the three months ended September 30, 1999, Pegasus owned or
programmed nine broadcast television stations in six markets. Two new stations
were launched during the second half of 1998. Total net broadcast revenues for
the three months ended September 30, 1999 were $8.9 million, an increase of $1.0
million, or 13%, compared to net broadcast revenues of $7.9 million for the same
period in 1998. The increase is primarily attributable to an increase of
$429,000 in net broadcast revenues from the four stations launched in 1997 and
1998, a $394,000 increase in barter revenue and an increase in local and
national advertising sales.

      Programming, technical, and general and administrative expenses were $5.8
million for the three months ended September 30, 1999, an increase of $1.6
million, or 38%, compared to $4.2 million for the same period in 1998. The
increase is primarily due to an increase in expenses from the two new stations
launched in 1998 and an increase in news related expenses associated with the
launch of self-produced news in our Portland, Maine and Chattanooga, Tennessee
markets.

      Marketing and selling expenses were $1.4 million for the three months
ended September 30, 1999, an increase of $113,000, or 9%, compared to $1.3
million for the same period in 1998. The increase in marketing and selling
expenses is due to an increase in promotional costs associated with the launch
of the new stations and news programs.

      There was no incentive compensation, which is calculated based on
increases in pro forma location cash flow, for the three months ended September
30, 1999 compared to incentive compensation of $112,000 for the same period in
1998. No incentive compensation resulted from a decline in pro forma location
cash flow during the third quarter of 1999 compared to the third quarter of
1998.

      Depreciation and amortization was $1.3 million for the three months ended
September 30, 1999, an increase of $560,000, or 74%, compared to $758,000 for
the same period in 1998. The increase is due to capital expenditures associated
with the launch of the new stations and our news initiative.

Cable

      Total net cable revenues were $6.2 million for the three months ended
September 30, 1999, an increase of $3.4 million, or 118%, compared to net cable
revenues of $2.8 million for the same period in 1998. The increase is primarily
attributable to the acquisition of the Aguadilla, Puerto Rico cable system
effective March 31, 1999. Net revenues derived from Pegasus' existing Puerto
Rico cable system were $3.6 million for the three months ended September 30,
1999, an increase of $760,000, or 27%, compared to net cable revenues of $2.8
million for the same period in 1998. The Aguadilla, Puerto Rico cable system
generated net revenues of $2.6 million for the three months ended September 30,
1999. The average monthly revenue per subscriber was $38.89 for the three months
ended September 30, 1999 compared to $32.71 for the same period in 1998. On a
pro forma basis, including the completed acquisition of the Aguadilla, Puerto
Rico cable system and the disposition of the New England cable systems, there
were 53,900 subscribers as of September 30, 1999 compared to 51,100 subscribers
as of September 30, 1998.

      Programming, technical, and general and administrative expenses were $3.2
million for the three months ended September 30, 1999, an increase of $1.7
million, or 111%, compared to $1.5 million for the same period in 1998. The
increase is primarily attributable to the acquisition of the Aguadilla, Puerto
Rico cable system effective March 31, 1999.

      Marketing and selling expenses were $219,000 for the three months ended
September 30, 1999, an increase of $137,000, or 168%, compared to $82,000 for
the same period in 1998. The increase is a result of the acquisition of the
Aguadilla, Puerto Rico cable system.


                                       16
<PAGE>

      Incentive compensation, which is calculated based on increases in pro
forma location cash flow, was $135,000 for the three months ended September 30,
1999, an increase of $130,000 compared to $5,000 for the same period in 1998.
The increase resulted from a larger gain in pro forma location cash flow during
the third quarter of 1999 as compared to the third quarter of 1998.

      Depreciation and amortization was $2.0 million for the three months ended
September 30, 1999, an increase of $927,000, or 86%, compared to $1.1 million
for the same period in 1998. The increase in depreciation and amortization is
primarily due to the acquisition of the Aguadilla, Puerto Rico cable system.


Nine months ended September 30, 1999 compared to nine months ended September 30,
1998

      Total net revenues for the nine months ended September 30, 1999 were
$239.6 million, an increase of $108.5 million, or 83%, compared to total net
revenues of $131.0 million for the same period in 1998. The increase in total
net revenues for the nine months ended September 30, 1999 is primarily due to an
increase in DBS revenues of $102.5 million attributable to acquisitions and
internal growth in Pegasus' DBS subscriber base. Total operating expenses for
the nine months ended September 30, 1999 were $334.3 million, an increase of
$169.5 million, or 103%, compared to total operating expenses of $164.8 million
for the same period in 1998. The increase is primarily due to an increase of
$159.4 million in operating expenses attributable to the growth in Pegasus' DBS
business.

      Total corporate expenses, including corporate depreciation and
amortization, were $6.5 million for the nine months ended September 30, 1999, an
increase of $2.8 million, or 73%, compared to $3.8 million for the same period
in 1998. The increase in corporate expenses is attributable to the growth in
Pegasus' business. The increase in corporate depreciation and amortization is
primarily due to amortization of deferred financing costs associated with the
issuance of $100.0 million of senior notes in November 1998.

      Interest expense was $47.5 million for the nine months ended September 30,
1999, an increase of $17.7 million, or 59%, compared to interest expense of
$29.8 million for the same period in 1998. The increase in interest expense is
primarily due to interest on Pegasus' $100.0 million senior notes issued in
November 1998, Digital Television Service, Inc.'s $155.0 million senior notes,
which were assumed by Pegasus in April 1998, and an increase in bank borrowings
and sellers' notes associated with Pegasus' DBS acquisitions. Interest income
was $1.1 million for the nine months ended September 30, 1999, a decrease of
$278,000, or 21%, compared to interest income of $1.3 million for the same
period in 1998. The decrease in interest income is due to lower average cash
balances for the nine months ended September 30, 1999 compared to the same
period in 1998.

      Other expenses were $1.4 million for the nine months ended September 30,
1999, an increase of $649,000, or 81%, compared to other expenses of $799,000
for the same period in 1998. The increase is primarily due to increased investor
relation activities and other non-operating expenses.

      Pegasus sold its New England cable systems effective July 1, 1998 for
$30.1 million resulting in a nonrecurring gain of $24.7 million for the nine
months ended September 30, 1998.

      The provision for income taxes declined by approximately $4.2 million
primarily as a result of the amortization of the deferred tax liability that
originated from the acquisition of Digital Television Services, Inc. in April
1998.

      Preferred stock dividends were $12.4 million for the nine months ended
September 30, 1999, an increase of $1.4 million, or 13%, compared to $11.0
million in preferred stock dividends for the same period in 1998. The increase
is attributable to a greater number of shares of Pegasus' preferred stock
outstanding during the first three quarters of 1999 compared to the first three
quarters of 1998 as the result of payment of dividends in kind.


                                       17
<PAGE>

DBS

      Total DBS net revenues were $198.2 million for the nine months ended
September 30, 1999, an increase of $102.5 million, or 107%, compared to DBS net
revenues of $95.7 million for the same period in 1998. The increase is primarily
due to an increase in the average number of subscribers in the first three
quarters of 1999 compared to the first three quarters of 1998. The average
monthly revenue per subscriber was $43.33 for the nine months ended September
30, 1999 compared to $41.76 for the same period in 1998. Pro forma DBS net
revenues, including pending acquisitions at September 30, 1999, were $213.2
million, an increase of $59.7 million, or 39%, compared to pro forma DBS net
revenues of $153.5 million for the same period in 1998.

      Programming, technical, and general and administrative expenses were
$137.9 million for the nine months ended September 30, 1999, an increase of
$71.6 million, or 108%, compared to $66.3 million for the same period in 1998.
The increase is attributable to significant growth in subscribers and territory
during the last twelve months. As a percentage of revenue, programming,
technical, and general and administrative expenses were 69.6% for the nine
months ended September 30, 1999 compared to 69.3% for the same period in 1998.

      Subscriber acquisition costs were $88.7 million for the nine months ended
September 30, 1999, an increase of $63.7 million compared to $25.0 million for
the same period in 1998. Gross subscriber additions were 249,200 for the nine
months ended September 30, 1999 compared to 80,000 for the same period in 1998.
The total subscriber acquisition costs per gross subscriber addition were $356
for the nine months ended September 30, 1999 compared to $313 for the same
period in 1998. The increase in subscriber acquisition costs per gross
subscriber addition is due to an increase in commissions and an increase in
promotional programming during the first half of 1999.

      Incentive compensation, which is calculated based on increases in pro
forma location cash flow, was $1.1 million for the nine months ended September
30, 1999, a decrease of $19,000, or 2%, compared to $1.2 million for the same
period in 1998. The decrease resulted from a lower gain in pro forma location
cash flow during the first three quarters of 1999 as compared to the first three
quarters of 1998.

      Depreciation and amortization was $62.3 million for the nine months ended
September 30, 1999, an increase of $24.2 million, or 63%, compared to $38.2
million for the same period in 1998. The increase in depreciation and
amortization is primarily due to an increase in the fixed and intangible asset
base as the result of DBS acquisitions that occurred during the last two years.

Broadcast

      During the nine months ended September 30, 1999, Pegasus owned or
programmed nine broadcast television stations in six markets. Two new stations
were launched during the second half of 1998. Total net broadcast revenues for
the nine months ended September 30, 1999 were $26.5 million, an increase of $3.0
million, or 13%, compared to net broadcast revenues of $23.5 million for the
same period in 1998. The increase is primarily attributable to an increase of
$1.2 million in net broadcast revenues from the four stations launched in 1997
and 1998, a $795,000 increase in barter revenue and an increase in local and
national advertising sales.

      Programming, technical, and general and administrative expenses were $15.9
million for the nine months ended September 30, 1999, an increase of $3.7
million, or 30%, compared to $12.2 million for the same period in 1998. The
increase is primarily due to an increase in expenses from the two new stations
launched in 1998 and an increase in news related expenses associated with the
launch of self-produced news in our Portland, Maine and Chattanooga, Tennessee
markets.

      Marketing and selling expenses were $4.4 million for the nine months ended
September 30, 1999, an increase of $230,000, or 5%, compared to $4.2 million for
the same period in 1998. The increase in marketing and selling expenses is due
to an increase in promotional costs associated with the launch of the new
stations and news programs.


                                       18
<PAGE>

      Incentive compensation, which is calculated based on increases in pro
forma location cash flow, was $202,000 for the nine months ended September 30,
1999, an increase of $58,000, or 40% compared to $144,000 for the same period in
1998. The increase resulted from a larger gain in pro forma location cash flow
during the first three quarters of 1999 as compared to the first thee quarters
of 1998.

      Depreciation and amortization was $3.8 million for the nine months ended
September 30, 1999, an increase of $515,000, or 16%, compared to $3.3 million
for the same period in 1998. The increase is due to capital expenditures
associated with the launch of the new stations and our news initiative.

Cable

      Total net cable revenues were $14.9 million for the nine months ended
September 30, 1999, an increase of $3.1 million, or 26% compared to net cable
revenues of $11.8 million for the same period in 1998. The increase is primarily
due to the acquisition of the Aguadilla, Puerto Rico cable system effective
March 31, 1999, partially offset by the sale of Pegasus' New England cable
systems effective July 1, 1998. Net cable revenues from the New England Cable
systems were $3.3 million for the nine months ended September 30, 1998. The net
revenues derived from Pegasus' existing Puerto Rico cable system were $10.0
million for the nine months ended September 30, 1999, an increase of $1.4
million, or 17%, compared to net cable revenues of $8.5 million for the same
period in 1998. The Aguadilla, Puerto Rico cable system generated net revenues
of $4.9 million for the nine months ended September 30, 1999. The average
monthly revenue per subscriber was $37.02 for the nine months ended September
30, 1999 compared to $34.14 for the same period in 1998. On a pro forma basis,
including the completed acquisition of the Aguadilla, Puerto Rico cable system
and the disposition of the New England cable systems, there were 53,900
subscribers as of September 30, 1999 compared to 51,100 subscribers as of
September 30, 1998.

      Programming, technical, and general and administrative expenses were $7.6
million for the nine months ended September 30, 1999, an increase of $1.5
million, or 26%, compared to $6.0 million for the same period in 1998. The
increase is primarily attributable to the acquisition of the Aguadilla, Puerto
Rico cable system partially offset by the sale of Pegasus' New England cable
systems.

      Marketing and selling expenses were $504,000 for the nine months ended
September 30, 1999, an increase of $236,000, or 88%, compared to $268,000 for
the same period in 1998. The increase is a result of the acquisition of the
Aguadilla, Puerto Rico cable system.

      Incentive compensation, which is calculated based on increases in pro
forma location cash flow, was $195,000 for the nine months ended September 30,
1999, an increase of $27,000, or 16%, compared to $169,000 for the same period
in 1998. The increase resulted from a larger gain in pro forma location cash
flow during the first three quarters of 1999 as compared to the first three
quarters of 1998.

         Depreciation and amortization was $5.0 million for the nine months
ended September 30, 1999, an increase of $1.0 million, or 26%, compared to $4.0
million for the same period in 1998. The increase in depreciation and
amortization is primarily due to the acquisition of the Aguadilla, Puerto Rico
cable system.

Liquidity and Capital Resources

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

      Pre-marketing cash flow increased by approximately $9.7 million, or 57%,
for the three months ended September 30, 1999 as compared to the same period in
1998. The increase in pre-marketing cash flow for the three months ended
September 30, 1999 is primarily due to an increase in DBS pre-marketing cash
flow of $8.8 million, or 66%, attributable to acquisitions and internal growth
in Pegasus' DBS subscriber base.


                                       19
<PAGE>

      Pre-marketing cash flow increased by approximately $31.3 million, or 75%,
for the nine months ended September 30, 1999 as compared to the same period in
1998. The increase in pre-marketing cash flow for the nine months ended
September 30, 1999 is primarily due to an increase in DBS pre-marketing cash
flow of $31.0 million, or 106%, attributable to acquisitions and internal growth
in Pegasus' DBS subscriber base.

      During the nine months ended September 30, 1999, $54.5 million of cash on
hand at the beginning of the year, together with $155.9 million of net cash
provided by Pegasus' financing activities, was used to fund operating activities
of approximately $67.3 million and investing activities of $120.4 million.
Investing activities consisted of:

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

      o   the acquisition of DBS assets from twelve independent DIRECTV
          providers during the first three quarters of 1999 for approximately
          $61.8 million;

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

      o   broadcast expenditures associated with the launch of self-produced
          news in our Portland, Maine and Chattanooga, Tennessee markets
          totaling $825,000;

      o   DBS facility upgrades of $2.0 million;

      o   the expansion and enhancements of the Puerto Rico cable system
          amounting to $3.6 million, including $213,000 related to hurricane
          damage;

      o   payments of programming rights amounting to $2.2 million;

      o   capitalized costs relating to Pegasus' financing of approximately $1.7
          million;

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

      o   new business development costs of approximately $286,000; and

      o   other capital expenditures and intangibles totaling $4.7 million.

      Financing activities consisted of:

      o   the issuance of approximately 3.8 million shares of Class A common
          stock resulting in net proceeds to Pegasus of approximately $76.5
          million;

      o   net borrowings on bank credit facilities totaling $73.7 million;

      o   the repayment of approximately $13.8 million of long-term debt,
          primarily sellers' notes and capital leases; and

      o   net restricted cash draws of approximately $18.5 million for interest
          payments and $1.0 million in connection with the acquisition of the
          Aguadilla, Puerto Rico cable system.

      As of September 30, 1999, cash on hand amounted to $22.8 million plus
restricted cash of $2.0 million.


                                       20
<PAGE>

      Pegasus Media & Communications maintains a $180.0 million senior, reducing
revolving credit facility. Borrowings under the credit facility are available
for acquisitions, subject to the approval of the lenders in certain
circumstances, working capital, capital expenditures and for general corporate
purposes. As of September 30, 1999, $85.9 million was outstanding and stand-by
letters of credit amounting to $29.7 million were issued under its $180.0
million credit facility. The credit facility expires in December 2003.

      Digital Television Services maintains a $70.0 million senior, reducing
revolving credit facility and a $20.0 million senior term credit facility.
Borrowings under the credit facilities are available to refinance certain
indebtedness and for acquisitions, subject to the approval of the lenders in
certain circumstances, working capital, capital expenditures and for general
corporate purposes. As of September 30, 1999, $61.7 million was outstanding and
stand-by letters of credit amounting to $14.4 million were issued under its
$90.0 million credit facilities. The credit facilities expire in July 2003.

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

      As defined in the Certificate of Designation governing Pegasus' Series A
Preferred Stock and the indentures governing Pegasus' senior notes, Pegasus is
required to provide Adjusted Operating Cash Flow data for Pegasus and its
Restricted Subsidiaries on a consolidated basis where Adjusted Operating Cash
Flow is defined as "for the four most recent fiscal quarters for which internal
financial statements are available, Operating Cash Flow of such Person and its
Restricted Subsidiaries less DBS Cash Flow for the most recent four-quarter
period plus DBS Cash Flow for the most recent quarterly period, multiplied by
four." Operating Cash Flow is income from operations before income taxes,
depreciation and amortization, interest expense, extraordinary items and
non-cash charges. Although Adjusted Operating Cash Flow is not a measure of
performance under generally accepted accounting principles, we believe that
Location Cash Flow, Operating Cash Flow and Adjusted Operating Cash Flow are
accepted within our business segments as generally recognized measures of
performance and are used by analysts who report publicly on the performance of
companies operating in such segments. Restricted Subsidiaries carries the same
meaning as in the Certificate of Designation. Digital Television Services, Inc.,
among certain other Pegasus' subsidiaries, are not included in the definition of
Restricted Subsidiaries and, accordingly, their operating results are not
included in the Adjusted Operating Cash Flow data provided below. Pro forma for
the acquisition of the Aguadilla, Puerto Rico cable system, the two completed
DBS acquisitions occurring in the third quarter of 1999 and the sale of our New
England cable systems, as if such acquisitions/disposition occurred on October
1, 1998, Adjusted Operating Cash Flow would have been approximately $67.4
million as follows:

<TABLE>
<CAPTION>
                                                                                       Four Quarters Ended
                               (in thousands)                                           September 30,1999
                                                                                       -------------------
<S>                                                                                          <C>
Revenues........................................................................             $219,131
Direct operating expenses, excluding depreciation, amortization and other
  non-cash charges..............................................................              147,330
                                                                                             --------
Income from operations before incentive compensation, corporate
  expenses, depreciation and amortization and other non-cash charges............               71,801
Corporate expenses..............................................................                4,396
                                                                                             --------
Adjusted operating cash flow ...................................................             $ 67,405
                                                                                             ========
</TABLE>

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


                                       21
<PAGE>

agreements with respect to our indebtedness contain numerous covenants that,
among other things, restrict our ability to:

      o   pay dividends and make certain other payments and investments;

      o   borrow additional funds;

      o   create liens; and

      o   sell our assets.

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

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


Year 2000

      The year 2000 issue is a general term used to describe the various
problems that may result from the improper processing of dates and
date-sensitive calculations by computers and other equipment as the year 2000
approaches and is reached. These problems generally arise from the fact that
most computer hardware and software have historically used only two digits to
identify the year in a date, often resulting in the computer failing to
distinguish dates in the 2000s from dates in the 1900s. These problems may also
arise from additional sources, such as the use of special codes and conventions
in software utilizing the date field.

      Pegasus has reviewed its critical systems as to the year 2000 issue.
Pegasus' primary focus has been on its own internal systems. Pegasus has in the
past three years replaced or upgraded its TV traffic systems, cable billing
systems and corporate accounting systems. However, if any additional necessary
changes are not made or completed in a timely fashion or unanticipated problems
arise, the year 2000 issue may take longer for Pegasus to address and may have a
material adverse impact on Pegasus' financial condition and its results of
operations.

      Pegasus relies on outside vendors for the operation of its DBS satellite
control and billing systems, including DIRECTV, the National Rural
Telecommunications Cooperative and their respective vendors. Pegasus has
established a policy to ensure that these vendors are currently in compliance
with the year 2000 issue or have a plan in place to be in compliance with the
year 2000 issue. In addition, Pegasus has had initial communications with
certain of its other significant suppliers, distributors, financial institutions
and parties with which it conducts business to evaluate their year 2000
compliance plans and state of readiness and to determine the extent to which
Pegasus' systems may be affected by the failure of others to remediate their own
year 2000 issues. To date, however, Pegasus has received only preliminary
feedback from such parties and has not independently confirmed any information
received from other parties with respect to the year 2000 issue. As such, we
cannot assure you that these other parties will complete their year 2000
conversion in a timely fashion or will not suffer a year 2000 business
disruption that may adversely affect Pegasus' financial condition and its
results of operations.

      Because Pegasus' year 2000 conversion is expected to be completed prior to
any potential disruption to Pegasus' business, Pegasus has not yet completed the
development of a year 2000-specific contingency plan. If Pegasus determines that
its business or a segment thereof is at material risk of disruption due to the
year 2000 issue or anticipates that its year 2000 conversion will not be
completed in a timely fashion, it will work to enhance its contingency plan.
Costs to date relating to the year 2000 issue amounted to approximately
$300,000. Costs to be incurred beyond September 30, 1999, relating to the year
2000 issue are expected to be approximately $50,000.


                                       22
<PAGE>

Dividend Policy

      As a holding company, Pegasus' ability to pay dividends is dependent upon
the receipt of dividends from its direct and indirect subsidiaries. Credit
facilities and publicly held debt securities of Pegasus' principal subsidiaries
restrict them from paying dividends to Pegasus. In addition, Pegasus' ability to
pay dividends and Pegasus' and its subsidiaries' ability to incur indebtedness
are subject to certain restrictions contained in Pegasus' and its subsidiaries'
credit facilities and publicly held debt securities and in the terms of Pegasus'
Series A preferred stock.


Seasonality

      Pegasus' revenues vary throughout the year. As is typical in the broadcast
television industry, Pegasus' first quarter generally produces the lowest
revenues for the year and the fourth quarter generally produces the highest
revenues for the year. Pegasus' operating results in any period may be affected
by the incurrence of advertising and promotion expenses that do not necessarily
produce commensurate revenues in the short-term until the impact of such
advertising and promotion is realized in future periods.


Inflation

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


New Accounting Pronouncements

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


ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

      Information about our market sensitive financial instruments is provided
below and constitutes a "forward- looking statement." Our major market risk
exposure is changing interest rates under our credit facilities. Our objective
in managing our exposure to interest rate changes is to limit the impact of
interest rate changes in earnings and cash flow and to lower our overall
borrowing costs. The Company has entered into interest rate protection
agreements on its credit facilities to limit its exposure to market interest
rate fluctuations.

      Pegasus Media & Communications maintains a $180.0 million senior, reducing
revolving credit facility. As of September 30, 1999, $85.9 million was
outstanding and stand-by letters of credit amounting to $29.7 million were
issued under its $180.0 million credit facility. Interest on the credit facility
is calculated on either the bank's base rate or LIBOR, plus an applicable
margin. Availability of borrowings under the revolving credit facility reduces
by specified amounts quarterly effective September 30, 1999 through maturity.
The credit facility expires in December 2003.


                                       23
<PAGE>

      Digital Television Services maintains a $70.0 million senior, reducing
revolving credit facility and a $20.0 million senior term credit facility. As of
September 30, 1999, $42.7 million was outstanding and stand-by letters of credit
amounting to $14.4 million were issued under its $70.0 million revolving credit
facility. Availability on the revolving credit facility reduces by specified
amounts on December 31, 1998 and quarterly effective September 30, 1999 through
maturity. As of September 30, 1999, $19.0 million was outstanding under its
$20.0 million term credit facility. The term credit facility is to be repaid in
20 consecutive quarterly installments of $200,000, commencing on September 30,
1998, with $16.0 million due as a final payment at maturity. Interest on the
credit facilities is calculated at either the bank's base rate or the Eurodollar
Rate, plus an applicable margin. The credit facilities expire in July 2003.


                                       24
<PAGE>

PART II. OTHER INFORMATION


ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

      On July 13, 1999, Pegasus issued 7,500 shares of its Class A Common Stock
upon the exercise of a warrant previously issued on June 18, 1998 in connection
with an acquisition of DIRECTV rights and related assets from an independent
provider of DIRECTV in certain rural portions of Texas. The exercise price of
the warrant was $24.26, resulting in consideration of $181,950 being received by
Pegasus. In issuing these shares, Pegasus relied upon the exemption from
registration set forth in Section 4(2) of the Securities Act of 1933, as
amended.

      Effective as of September 14, 1999, Pegasus issued 12,339 shares of Class
A Common Stock as partial consideration for the acquisition of DIRECTV rights
and related assets from an independent provider of DIRECTV in certain rural
portions of North Dakota. In issuing the shares, Pegasus relied upon exemption
from registration set forth in Section 4(2) of the Securities Act of 1933, as
amended.


ITEM 5. OTHER INFORMATION


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

      On September 9, 1999, the National Rural Telecommunications Cooperative
filed a response to DIRECTV's counterclaim contesting DIRECTV's interpretations
of the end of term and right of first refusal provisions. On August 26, 1999,
the National Rural Telecommunications Cooperative filed a separate lawsuit in
federal court against DIRECTV claiming that DIRECTV had failed to provide to the
National Rural Telecommunications Cooperative its share of launch fees and other
benefits that DIRECTV and its affiliates have received relating to programming
and other services. While we are not a party to the pending litigation between
the National Rural Telecommunications Cooperative and DIRECTV, the outcome of
the litigation could have a material adverse effect on our direct broadcast
satellite business because we are an associate of the National Rural
Telecommunications Cooperative with contract rights that are affected by the
contractual relationship between the National Rural Telecommunications
Cooperative and DIRECTV.


                                       25
<PAGE>

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

    Exhibit 10.1     Agreement, effective as of September 13, 1999, by and
                     among ADS Alliance Data Systems, Inc., Pegasus Satellite
                     Television, Inc. and Digital Television Services, Inc.
                     (Portions of this document were redacted and filed
                     separately with the Securities and Exchange Commission
                     pursuant to a request by the Company for confidential
                     treatment pursuant to Rule 24b-2 under the Securities
                     Exchange Act of 1934, as amended, in connection with the
                     filing of this Report on Form 10-Q).

    Exhibit 27.1     Financial Data Schedule.

(b) Reports on Form 8-K

      There were no Current Reports on Form 8-K filed during the quarter ended
September 30, 1999.


                                       26
<PAGE>

                                    SIGNATURE


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


                               Pegasus Communications Corporation



November 12, 1999              By: /s/ M. Kasin Smith
------------------------       -----------------------
Date                           M. Kasin Smith
                               Vice President and Acting Chief Financial Officer
                               (Principal Financial and Accounting Officer)


                                       27
<PAGE>

                                  EXHIBIT INDEX


    Exhibit 10.1     Agreement, effective as of September 13, 1999, by and
                     among ADS Alliance Data Systems, Inc., Pegasus Satellite
                     Television, Inc. and Digital Television Services, Inc.
                     (Portions of this document were redacted and filed
                     separately with the Securities and Exchange Commission
                     pursuant to a request by the Company for confidential
                     treatment pursuant to Rule 24b-2 under the Securities
                     Exchange Act of 1934, as amended, in connection with the
                     filing of this Report on Form 10-Q).



    Exhibit 27.1     Financial Data Schedule.