PEGASUS COMMUNICATIONS CORP, 10-K/A, 1998-04-20

PEGASUS COMMUNICATIONS CORP
10-K/A, 1998-04-20
TELEVISION BROADCASTING STATIONS

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

FORM 10-K/A

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

/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
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 (I.R.S. Employer
incorporation or organization) Identification Number)

c/o Pegasus Communications Management Company; 19087
- ------------------------------------------------ ----------
5 Radnor Corporate Center; Suite 454, Radnor, PA (Zip Code)
(Address of principal executive offices)

Registrant's telephone number, including area code: (888) 438-7488
-------------------------
Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

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

Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No
----

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

The aggregate market value of the voting stock (Common Stock, Class A)
held by non-affiliates of the Registrant as of the close of business on
February 27, 1998 was approximately $108,928,365 based on the average bid and
asked prices of the Class A Common Stock on such date on the Nasdaq National
Market. (Reference is made to the paragraph captioned "Calculation of Aggregate
Market Value of Nonaffiliate Shares" of "Part II, Item 5 herein for a statement
of assumptions upon which this calculation is based.)

Number of shares of each class of the registrant's common stock outstanding
as of March 8, 1998:

Class A, Common Stock, $0.01 par value 5,751,850
Class B, Common Stock, $0.01 par value 4,581,900

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<TABLE>
<CAPTION>
Page
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<S> <C> <C>
PART I
Item 1. Business .................................................................................. 3
Item 2. Properties ................................................................................ 34
Item 3. Legal Proceedings ......................................................................... 35
Item 4. Submission of Matters to a Vote of Security Holders ....................................... 35
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters ................. 35
Item 6. Selected Financial Data ................................................................... 36
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ..... 38
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ................................ 45
Item 8. Financial Statements and Supplementary Data ............................................... 45
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ...... 45
PART III
Item 10. Directors and Executive Officers of the Registrant ........................................ 46
Item 11. Executive Compensation .................................................................... 47
Item 12. Security Ownership of Certain Beneficial Owners and Management ............................ 51
Item 13. Certain relationships and Related Transactions ............................................ 53
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K .......................... 55
</TABLE>

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PEGASUS COMMUNICATIONS CORPORATION

PART I

For definitions of certain terms used in this Report, see Glossary of
Defined Terms" on (pages 32 to 34) of this Report.

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 the Company that are based on the beliefs of the
management of the Company, as well as assumptions made by and information
currently available to the Company's 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 the current views of the Company with respect to future
events and are subject to unknown risks, uncertainties and other factors that
may cause actual results to differ materially from those contemplated in such
forward-looking statements. Such factors include, among others, the following:
general economic and business conditions, both nationally, internationally and
in the regions in which the Company operates; 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; the significant
indebtedness of the Company; the availability and terms of capital to fund the
expansion of the Company's businesses; and other factors referenced in this
Report.

Item 1: Business

General

Pegasus is a diversified company that operates in growing segments of the
media and communications industries.

The Company owns and operates five TV stations affiliated with Fox and has
or plans to enter into LMAs to operate three television stations, two of which
are to be affiliated with WB and one affiliated with UPN. The Company is the
largest independent provider of DIRECTV(R) ("DIRECTV"). Giving effect to the
Pending DBS Acquisitions and the acquisition (the "DTS Acquisition") of Digital
Television Services, Inc. ("DTS"), the Company will have the exclusive right to
provide DIRECTV services to approximately 4.3 million U.S. television
households in rural areas of 35 states serving a subscriber base, as of
February 28, 1998, of approximately 318,000 subscribers. The Company also
provides cable service to approximately 43,000 subscribers in New England and
Puerto Rico. On January 16, 1998 the Company entered into an agreement to sell
its New England cable systems.

Acquisition Strategy

The Company's acquisition strategy is to identify media and communications
businesses exhibiting the following characteristics:

Significant Revenue Growth Potential. The Company targets media segments
whose revenues are growing (and in which it believes revenues will continue to
grow) consistently at rates of growth exceeding that of the U.S. economy as a
whole (as measured by gross domestic product).

Fragmented Ownership. The Company targets media segments where ownership
is fragmented and where it believes consolidation will result in benefits to
consumers as well as improved profitability.

Opportunity to Increase Market Share. The Company seeks to acquire or
start companies within media segments whose market share can be significantly
increased.

Operating Leverage. The Company seeks businesses in media segments
characterized by high levels of operating leverage and where Location Cash Flow
margins rise with increases in revenues.

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Operating Strategy

The Company's operating strategy is designed to capitalize upon these
business characteristics in order to generate consistent and significant
increases in Location Cash Flow by:

Aggressive Sales and Marketing. The Company builds aggressive sales and
marketing organizations to enable it to significantly increase its market
share.

Careful Cost Controls. The Company maintains careful cost controls to
capitalize upon the operating leverage intrinsic to its businesses.

Focus on Cash Flow Growth. The Company rewards all of its employees for
growth in Location Cash Flow through an innovative profit-sharing plan which it
believes ensures that all employees of the Company are focused on the goal of
consistent and significant increases in Location Cash Flow.

Multichannel Television

DBS -- DIRECTV

DIRECTV is a multichannel DBS programming service initially introduced to
U.S. television households in 1994. DIRECTV currently offers in excess of 175
channels of near laser disc quality video and CD quality audio programming and
transmits via three high-power Ku band satellites, each containing 16
transponders. As of December 31, 1997, there were approximately 3.2 million
DIRECTV subscribers.

The equipment required for reception of DIRECTV services (a DSS unit)
includes an 18-inch satellite antenna, a digital receiver approximately the
size of a standard VCR and a remote control, all of which are used with
standard television sets. Each DSS receiver includes a "smart card" which is
uniquely addressed to it. The smart card, which can be removed from the
receiver, prevents unauthorized reception of DIRECTV services and retains
billing information on pay-per-view usage, which information is sent at regular
intervals from the DSS receiver telephonically to DIRECTV's authorization and
billing system. DSS units also enable subscribers to receive United States
Satellite Broadcasting Company, Inc. ("USSB") programming. USSB is a DBS
service whose programming consists of 28 channels of video programming
transmitted via five transponders it owns on DIRECTV's first satellite. USSB
primarily offers Time Warner and Viacom premium satellite programming services,
such as multiple channels of HBO and Showtime, which are not available through
DIRECTV but which are generally complementary to DIRECTV programming.

The commercial launch of DSS equipment, which was introduced in 1994, is
widely regarded as the most successful major consumer electronics product
launch in U.S. history, eclipsing the television, the VCR and the compact disc
player. DSS equipment is now produced by major manufacturers under the brand
names RCA, GE, ProScan, Sony, Hughes, Panasonic, Hitachi, Toshiba, Uniden,
Magnavox, Sanyo, Samsung, Daewoo and Memorex. DSS equipment is currently sold
through over 30,000 retail outlets throughout the U.S. for prices typically
ranging from $149 to $299, depending upon the generation of the equipment, the
level of features and the retail outlet. Prices for DSS equipment have declined
consistently since introduction, thereby further stimulating demand for DIRECTV
services.

The Company believes that DIRECTV services are superior to those provided
by other DTH service providers. The Company believes DIRECTV's extensive
programming, including up to 60 channels of pay-per-view movies and events,
various sports packages and the exclusive NFL Sunday Ticket(TM), will continue
to contribute to the growth of DIRECTV's subscriber base and DIRECTV's market
share for direct-to-home ("DTH") services in the future. In addition, the
Company believes that DIRECTV's national marketing campaign provides the
Company with significant marketing advantages over other DTH competitors.
DIRECTV's share of current DBS and medium power DTH subscribers was
approximately 51% as of December 31, 1997, and DIRECTV obtained approximately
50% of all new subscribers to DBS and medium power DTH services for each
calendar quarter in 1996, despite the entrance of two new competitors in the
DTH marketplace. During the year ended December 31, 1997, DIRECTV added 832,000
new subscribers (net of churn), which was a greater increase than any other DBS
provider and accounted for approximately 46% of all new DBS subscribers.
Although DIRECTV's share of new subscribers can be expected to decline as
existing and new DTH providers aggressively compete for new subscribers, the
Company expects DIRECTV to remain the leading provider of DBS and medium power
DTH services in an expanding market.

4
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Business Strategy

As the exclusive provider of DIRECTV services in its purchased
territories, the Company provides a full range of services, including
installation and authorization for new subscribers as well as billing,
collections and customer service support for existing subscribers. The
Company's operating strategy in DBS is to (i) establish strong relationships
with retailers, (ii) build its own direct sales and distribution channels and
(iii) develop local and regional marketing and promotion to supplement
DIRECTV's national advertising.

As of February 28, 1998, after giving effect to the Pending DBS
Acquisitions and the DTS Acquisition, the Company would have served
approximately 318,000 DBS subscribers representing a penetration rate of
approximately 7.4%. There are approximately 38 million U.S. television
households in rural areas, of which approximately nine million are located in
exclusive service territories operated by members and affiliate members of the
NRTC. Penetration of DBS for the industry as a whole is currently estimated at
12% in rural areas, and DIRECTV subscribers account for approximately 51% of
all DBS subscribers. The Company anticipates continued growth in subscribers
and operating profitability in DBS through increased penetration of DIRECTV
territories it currently owns and through additional acquisitions. As of
February 28, 1998, the Company's DIRECTV subscribers generated revenues of
approximately $41 per month at an average gross margin of 38%, after deducting
variable expenses. The Company's other expenses consist of regional sales
costs, advertising and promotion, and commissions and subsidies incurred to
build its growing base of subscribers and overhead costs which are
predominantly fixed.

The Company believes that there is an opportunity for additional growth
through the acquisition of DIRECTV territories held by the approximately 165
NRTC members and affiliate members, which are the only independent providers of
DIRECTV services. NRTC territories represent approximately 23% of DIRECTV's 3.2
million current subscribers. As the largest independent provider of DIRECTV
services, the Company believes that it is well positioned to achieve economies
of scale through the acquisition of DIRECTV territories held by NRTC members
and other affiliate members. However, the Company also believes that other
well-financed organizations will seek to acquire DIRECTV territories held by
other NRTC members and affiliate members, which the Company expects will
increase acquisition prices.

The Company's DBS Operations

After giving effect to the Pending DBS Acquisitions and the DTS
Acquisition, the Company will own, through agreements with the NRTC, the
exclusive right to provide DIRECTV services in certain rural areas of 35
states. The Company is the largest independent provider of DIRECTV services not
affiliated with Hughes. Set forth below is certain information with respect to
the Company's DIRECTV territories and territories to be acquired upon
completion of the Pending DBS Acquisitions and the DTS Acquisition.

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<TABLE>
<CAPTION>
Monthly
Average
DIRECTV Total Homes not Homes Total Revenue
Homes in passed by passed by subscribers Monthly Penetration per
Territory Territory(1) cable cable(2) (3) Total Cabled Uncabled Subscriber(4)
- -------------------- -------------- ----------- ----------- ------------- --------- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Owned:
Central 347,556 121,216 226,340 25,793 7.4% 16.3% 2.7%
Midwest 566,847 143,180 423,667 35,940 6.3 18.6 2.2
Northeast 732,882 143,210 589,672 36,142 4.9 18.9 1.5
Southeast 418,368 126,472 291,896 33,937 8.1 22.5 1.9
West 117,141 36,002 81,139 8,988 7.7 16.9 3.6
Total Owned 2,182,794 570,080 1,612,714 140,800 5.2% 18.9% 2.0% $ 40.68
To be Acquired:
Central 456,267 109,312 346,955 36,867 8.1% 28.2% 1.7%
Midwest 135,774 27,096 108,678 13,645 10.0 30.9 4.8
Northeast 310,820 105,860 204,960 35,275 11.3 30.1 1.7
Southeast 855,291 278,863 576,428 60,162 7.0 17.3 2.1
West 369,378 73,224 296,154 31,147 8.7 29.3 3.3
Total 2,127,530 594,355 1,533,175 177,096 8.3 23.7% 2.4 $ 42.24
Pending
DBS Acquisitions
Total 4,310,324 1,164,435 3,145,889 317,896 7.4% 21.4% 2.2% $ 41.55
</TABLE>

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(1) Total homes in territory extracted from demographic data obtained from
Claritas, Inc. Does not include business locations. Includes approximately
277,000 seasonal residences.

(2) A home is deemed to be "passed" by cable if it can be connected to the
distribution system without any further extension of the cable
distribution plant. Does not include business locations. Includes
approximately 124,000 seasonal residences.

(3) As of February 28, 1998.

(4) Based upon December 1997 revenues and weighted average December 1997
subscribers.

Pending DBS Acquisitions

As of March 12, 1998, without giving effect to the DTS Acquisition, the
Company had entered into either letters of intent or definitive agreements to
acquire DIRECTV distribution rights and related assets from 14 independent
providers of DIRECTV services, which have exclusive DIRECTV service territories
in certain rural portions of six states and whose territories include, in the
aggregate, approximately 339,000 television households (including 29,000
seasonal residences), 50,000 business locations and 37,000 subscribers. In the
aggregate, the consideration for the Pending DBS Acquisitions amounts to $64.1
million and consists of $52.9 million of cash, $10.3 million in promissory
notes and $854,000 in shares of Class A Common Stock. All of the Pending
Pegasus DBS Acquisitions are subject to the negotiation of definitive
agreements, if not already entered into, and all are subject, among other
conditions, to the prior approval of Hughes and the NRTC, if not already
obtained. In addition to these conditions, each of the Pending DBS Acquisitions
is also expected to be subject to conditions typical in acquisitions of this
nature, certain of which conditions like the Hughes and NRTC consents, may be
beyond the Company's control. There can be no assurance that definitive
agreements will be entered into with respect to all of the Pending DBS
Acquisitions or, if entered into, that all or any of the Pending DBS
Acquisitions will be completed.

DIRECTV Programming

DIRECTV programming includes (i) cable networks, broadcast networks and
audio services available for purchase in tiers for a monthly subscription, (ii)
premium services available a la carte or in tiers for a monthly subscription,
(iii) sports programming (including regional sports networks and seasonal
college and major professional league sports packages) available for a yearly,
seasonal or monthly subscription and (iv) movies and

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events available for purchase on a pay-per-view basis. Satellite and premium
services available a la carte or for a monthly subscription are priced
comparably to cable. Pay-per-view movies are $2.99 per movie. Movies recently
released for pay-per-view are available for viewing on multiple channels at
staggered starting times so that a viewer generally would not have to wait more
than 30 minutes to view a particular pay-per-view movie.

Distribution, Marketing and Promotion

In general, subscriptions to DIRECTV programming are offered through
commissioned sales representatives who are also authorized by the manufacturers
to sell DSS units. DIRECTV programming is offered (i) directly through national
retailers (e.g., Sears, Circuit City and Best Buy) selected by DIRECTV, (ii)
through consumer electronics dealers authorized by DIRECTV to sell DIRECTV
programming, (iii) through satellite dealers and consumer electronics dealers
authorized by regional sales management agents ("SMAs") selected by DIRECTV,
and (iv) through members and affiliate members of the NRTC who, like the
Company, have agreements with the NRTC to provide DIRECTV services. All
programming packages currently must be authorized by the Company in its service
areas.

The Company markets DIRECTV programming services and DSS units in its
distribution area in separate but overlapping ways. In residential market
segments where authorized DSS dealers offer the purchase, inventory and sale of
the DSS unit, the Company seeks to develop close, cooperative relationships
with these dealers and provides marketing, subscriber authorization,
installation and customer service support. In these circumstances, the dealer
earns a profit on the sale of the DSS unit and from a commission payable by the
Company for the sale of DIRECTV programming, while the Company may receive a
profit from a subscriber's initial installation and receives the programming
service revenues payable by the subscriber.

The Company has also developed a network of its own sales agents
("Programming Sales Agents") from among local satellite dealers, utilities,
cable installation companies, retailers and other contract sales people or
organizations. Programming Sales Agents earn commissions on the lease or sale
of DSS units, as well as on the sale of DIRECTV programming.

Late in 1996, the Company launched a "$299 Installed" promotion, which
provided an all-inclusive, low-cost entry to DIRECTV. The components of the
promotion are such that consumers may purchase a base model DSS unit for only
$199, and receive a professional installation for $100 without any prepaid
programming commitments. In the first quarter of 1997, the Company separated
the "$299 Installed" promotion and, through its dealer network, offered a $199
equipment retail price, allowing consumers to purchase the equipment exclusive
of a professional installation. The customer was, however, obligated to
maintain 12 consecutive months of any Total Choice package, paid monthly.
Effective October 1, 1997, the Company dropped this customer programming
commitment. Dealers that participate in this promotion are not paid
commissions, but are provided the equipment at no charge.

The Company also continues to introduce new promotions each quarter, such
as our "Silver Screen Sensation" promotion, in the fourth quarter of 1997 and
"Let Pegasus Take You to the Movies" promotion in the first quarter of 1998.
These promotions are designed to offer consumers incentives unmatched by
competing DBS services and to emphasize the value of DIRECTV's unique
complement of pay-per-view movies, sports and entertainment.

The Company seeks to identify and target market segments within its
service area in which it believes DIRECTV programming services will have strong
appeal. Depending upon their individual circumstances, potential subscribers
may subscribe to DIRECTV services as a source of multichannel television where
no other source currently exists, as a substitute for existing cable service
due to its high price or poor quality or as a source of programming which is
not available via cable but which is purchased as a supplement to existing
cable service. The Company seeks to develop promotional campaigns, marketing
methods and distribution channels designed specifically for each market
segment.

The Company's primary target market consists of residences which are not
passed by cable or which are passed by older cable systems with fewer than 40
channels. After giving effect to the Pending DBS Acquisitions and the DTS
Acquisition, the Company estimates that out of its total 4.3 million television
households in its exclusive DIRECTV territories that approximately 1.2 million
television households are not passed by cable and

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approximately 1.7 million television households are passed by older cable
systems with fewer than 40 channels. The Company actively markets DIRECTV
services as a primary source of television programming to potential subscribers
in this market segment since the Company believes that it will achieve its
largest percentage penetration in this segment.

The Company also targets potential subscribers who are likely to be
attracted by specific DIRECTV programming services. This market segment
includes (i) residences in which a high percentage of the viewing is devoted to
movie rentals or sports, (ii) residences in which high fidelity audio or video
systems have been installed and (iii) commercial locations (such as bars,
restaurants, hotels and private offices) which currently subscribe to pay
television or background music services. After giving effect to the Pending DBS
Acquisitions and the DTS Acquisition, the Company estimates that its exclusive
DIRECTV territories will contain approximately 479,000 commercial locations.

The Company also targets seasonal residences in which it believes that the
capacity to start and discontinue DIRECTV programming seasonally or at the end
of a rental term has significant appeal. These subscribers are easily
accommodated on short notice without the requirement of a service call because
DIRECTV programming is a fully "addressable" digital service. After giving
effect to the Pending DBS Acquisitions and the DTS Acquisition, the Company
estimates that its exclusive DIRECTV territories will contain approximately
277,000 seasonal residences in this market segment.

Additional target markets include apartment buildings, multiple dwelling
units and private housing developments. RCA/Thomson has begun commercial sales
of DSS units designed specifically for use in such locations.

The Company benefits from national promotion expenditures incurred by
DIRECTV, USSB and licensed manufacturers of DSS, such as RCA/Thomson and Sony,
to increase consumer awareness and demand for DIRECTV programming and DSS
units. The Company benefits as well from national, regional and local
advertising placed by national retailers, satellite dealers and consumer
electronics dealers authorized to sell DIRECTV programming and DSS units. The
Company also undertakes advertising and promotion cooperatively with local
dealers designed for specific market segments in its distribution area, which
are placed through local newspapers, television, radio and yellow pages. The
Company supplements its advertising and promotion campaigns with direct mail,
telemarketing and door-to-door direct sales.

Cable

Business Strategy

The Company operates cable systems whose revenues and Location Cash Flow
it believes can be increased with limited increases in fixed costs. In general,
the Company's cable systems (i) have the capacity to offer in excess of 50
channels of programming, (ii) are "addressable" and (iii) serve communities
where off-air reception is poor. The Company's business strategy in cable is to
achieve revenue growth by (i) adding new subscribers through improved signal
quality, increases in the quality and the quantity of programming, housing
growth and line extensions and (ii) increasing revenues per subscriber through
new program offerings and rate increases. The Company emphasizes the
development of strong engineering management and the delivery of a reliable,
high-quality signal to subscribers. The Company adds new programming (including
new cable services, premium services and pay-per-view movies and events) and
invests in additional channel capacity, improved signal delivery and line
extensions to the extent it believes that it can add subscribers at a low
incremental fixed cost.

The Company believes that significant opportunities for growth in revenues
and Location Cash Flow exist in Puerto Rico from the delivery of traditional
cable services. Cable penetration in Puerto Rico averages 34% (versus a U.S.
average of 65% to 70%). The Company believes that this low penetration is due
principally to the limited amount of Spanish language programming offered on
Puerto Rico's cable systems. In contrast, Spanish language programming
represents virtually all of the programming offered by television stations in
Puerto Rico. The Company believes that cable penetration in its Puerto Rico
cable systems will increase over the next five years as it substitutes Spanish
language programming for much of the English language cable programming
currently offered. The Company may also selectively expand its presence in
Puerto Rico.

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The Cable Systems

The following table sets forth general information for the Company's cable
systems.

<TABLE>
<CAPTION>
Average Monthly
Channel Homes in Homes Passed Basic Basic Service Revenue per
Cable Systems Capacity Franchise Area(1) by Cable(2) Subscribers(3) Penetration(4) Subscriber(5)
- -------------------- ---------- ------------------- -------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Puerto Rico ........ 62 110,700 81,700 28,100 34% $ 33.56
New England ........ (6) 22,900 22,500 15,100 67% $ 35.38
------- ------ ------ -- -------
Total .............. 133,600 104,200 43,200 41% $ 34.20
======= ======= ====== == =======
</TABLE>

- ------------
(1) Based on information obtained from municipal offices.

(2) These data are the Company's estimates as of December 31, 1997.

(3) A home with one or more television sets connected to a cable system is
counted as one basic subscriber. Bulk accounts (such as motels or
apartments) are included on a "subscriber equivalent" basis whereby the
total monthly bill for the account is divided by the basic monthly charge
for a single outlet in the area. This information is as of February 28,
1998.

(4) Basic subscribers as a percentage of homes passed by cable.

(5) Based upon February 1998 revenues and average February 1998 subscribers.

(6) The channel capacities of the New England cable systems are 40, 50 and 64,
and represent approximately 24%, 8% and 68% of the Company's New England
cable subscribers, respectively.

Puerto Rico Cable System

The Company's Puerto Rico cable system serves franchised areas of
approximately 111,000 households consisting of the port city of Mayaguez and
ten contiguous communities, eight of which are currently served by the
Company's Puerto Rico cable system. At February 28, 1998, the system had
approximately 28,100 subscribers. The Company consolidated the headends,
offices, billing systems, channel lineup and rates of the two separate
franchised areas in May 1997. The consolidated system consists of one headend
passing approximately 82,000 homes with 740 miles of plant. The system
currently offers 62 channels of programming and has a 62 channel capacity. The
Company anticipates that the system consolidation will result in significant
expense savings and will also enable it to increase revenues in the upgraded
franchised area from the addition of pay-per-view movies, additional
programming (including Spanish language channels) and improvements in picture
quality. The Company is also in the process of expanding the system to pass an
additional 8,950 homes.

New England Cable Systems

The Company's New England cable systems consist of five headends serving
13 towns in Connecticut and Massachusetts. At February 28, 1998, these systems
had approximately 15,100 subscribers. New England cable systems historically
have had higher than national average basic penetration rates due to the
region's higher household income levels and poor off air reception. The
Company's systems offer addressable converters to all premium and pay-per-view
customers, which allow the Company to activate these services without the
requirement of a service call. The Massachusetts system was acquired in June
1991 (with the exception of the North Brookfield, Massachusetts cable system,
which was acquired in July 1992), and the Connecticut system was acquired in
August 1991.

On January 16, 1998, the Company entered into an agreement to sell its New
England cable systems to Avalon Cable of New England, LLC for a purchase price
of at least $28 million and not more than $31 million, based on the systems'
cash flow for the trailing 12 months prior to closing, multiplied by nine. The
completion of the sale of the New England cable systems is subject to the prior
approval of the local franchising authorities and other conditions typical in
transactions of this nature, certain of which are beyond the Company's control.
It is anticipated that the sale of the New England cable systems will be
consummated in the second quarter of 1998. There can be no assurance that this
sale will be consummated on the terms described herein or at all.

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Business Strategy

The Company's operating strategy in television is focused on (i)
developing strong local sales forces and sales management to maximize the value
of its stations' inventory of advertising spots, (ii) improving the stations'
programming, promotion and technical facilities in order to maximize their
ratings in a cost-effective manner and (iii) maintaining strict control over
operating costs while motivating employees through the use of incentive plans,
which rewards Company employees in proportion to annual increases in Location
Cash Flow.

The Company seeks to maximize demand for each station's advertising
inventory and thereby increase its revenue per spot. Each station's local sales
force is provided incentive to attract first-time television advertisers as
well as provide a high level of service to existing advertisers. Sales
management seeks to "oversell" the Company's share of the local audience. A
television station oversells its audience share if its share of its market's
television revenues exceeds its share of the viewing devoted to all stations in
the market. The Company's stations have generally achieved oversell ratios
ranging from 110% to 200%. The Company recruits and develops sales managers and
salespeople who are aggressive, opportunistic and highly motivated.

In addition, the Company seeks to make cost-effective improvements in its
programming, promotion and transmitting and studio equipment in order to enable
its stations to increase audience ratings in its targeted demographic segments.

In purchasing programming, the Company seeks to avoid competitive program
purchases and to take advantage of group purchasing efficiencies resulting from
the Company's ownership of multiple stations. The Company also seeks to
counter-program its local competitors in order to target specific audience
segments which it believes are underserved.

The Company utilizes its own market research together with national
audience research from its national advertising sales representative and
program sources to select programming that is consistent with the demographic
appeal of its network affiliates, the tastes and lifestyles characteristic of
the Company's markets and the counter-programming opportunities it has
identified. Examples of programs purchased by the Company's stations include
"Home Improvement," "Drew Carey," "Friends," "Third Rock from the Sun,"
"Seinfeld," "The Simpsons," "Mad About You," and "Frasier" (off-network); "Star
Trek: The Next Generation" and "Baywatch" (syndication); and "Jenny Jones,"
"Rosie O'Donnell," and various game shows (first run). In addition, the
Company's stations purchase children's programs to complement the Fox
Children's Network's and WB Kids' Monday through Saturday programs. Each of the
Company's stations is its market leader in children's viewing audiences, with
popular syndicated programming such as Disney's "Aladdin" and "Gargoyles"
complementing childrens programs such as the "Mighty Morphin Power Rangers,"
"Tiny Tune Adventures," "Batman and Robin," and "R.L. Stine's Goosebumps."

The Company's acquisition strategy in television seeks to identify
stations in mid-size markets which have no more than four separately operated
competitive commercial television stations licensed to them and which have a
stable and diversified economic base. The Company has focused upon these
markets because it believes that they have exhibited consistent and stable
increases in local advertising and that television stations in them have fewer
and less aggressive direct competitors. In these markets, the Company seeks
television stations whose revenues and market revenue share can be
substantially improved with limited increases in their fixed costs.

The Company is actively seeking to acquire additional stations in new
markets and to enter into LMAs with owners of stations or construction permits
in markets where it currently owns and operates television stations. The
Company has purchased or launched TV stations affiliated with the "emerging
networks" of Fox, WB and UPN, because, while affiliates of these networks
generally have lower revenue shares than stations affiliated with ABC, CBS and
NBC, the Company believes that they will experience growing audience ratings
and therefore afford the Company greater opportunities for increasing their
revenue share. The Company is pursuing expansion in its existing markets
through LMAs because LMAs provide additional opportunities for increasing
revenue share with limited additional operating expenses. However, the FCC is
considering proposals which, if adopted by the FCC, could prohibit the Company
from expanding in its existing markets through LMAs and require the Company to
modify or terminate its existing LMAs. The Company has or plans to enter into
LMAs to program two stations as affiliates of WB and has entered into an LMA to
program an additional station as an affiliate of UPN.

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The Stations

The following table sets forth general information for each of the
Company's stations.

Acquisition Station Market
Station Date Affiliation Area DMA
- ------------- ----------------- ------------- -------------- -----
<S> <C> <C> <C> <C>
WWLF-56/
WILF-53 (6) May 1993 Fox Northeastern 47
PA
WOLF-38 (6) (6) WB Northeastern 47
PA
WPXT-51 January 1996 Fox Portland, ME 79
WPME-35 (7) (7) UPN Portland, ME 79
WDSI-61 May 1993 Fox Chattanooga, 82
TN
WDBD-40 May 1993 Fox Jackson, MS 91
WTLH-49/
WFXU (8) March 1996 Fox Tallahassee, 116
FL
WGFL-53 (9) (9) WB Gainesville, 167
FL
<CAPTION>
Number
of TV Oversell
Station Households(1) Competitors(2) Prime(3) Access(4) Ratio(5)
- ------------- --------------- ---------------- -------------- -------------- ---------
<S> <C> <C> <C> <C> <C>
WWLF-56/
WILF-53 (6) 566,000 3 4 2(tie) 170%
WOLF-38 (6) 566,000 3 N/A N/A N/A
WPXT-51 353,000 3 3(tie) 4 119%
WPME-35 (7) 353,000 3 N/A N/A N/A
WDSI-61 332,000 4 3 3(tie) 164%
WDBD-40 298,000 3 2(tie) 2 124%
WTLH-49/
WFXU (8) 221,000 3 2 2(tie) 118%
WGFL-53 (9) 101,000 2 N/A N/A N/A
</TABLE>
- ------------
(1) Represents total homes in a DMA for each television station as estimated by
Broadcast Investment Analysts ("BIA").

(2) Commercial stations not separately operated by the Company which are
licensed to and operating in the DMA.

(3) "Prime" represents local station rank in the 18 to 49 age category during
"prime time" based on A.C. Nielsen Company ("Nielsen") estimates for May
1997.

(4) "Access" indicates local station rank in the 18 to 49 age category during
"prime time access" (6:00 p.m. to 8:00 p.m.) based on Nielsen estimates
for May 1997.

(5) The oversell ratio is the station's share of the television market net
revenue divided by its in-market commercial audience share. The oversell
ratio is calculated using 1996 BIA market data and 1996 Nielsen audience
share data.

(6) WOLF, WILF and WWLF are currently simulcast. Assuming receipt of certain
FCC approvals and no adverse change in current FCC regulatory rulings or
requirements, the Company intends to sell WOLF to another entity not owned
or controlled by the Company, and then separately to program WOLF pursuant
to an LMA as an affiliate of WB. See Item 13 (Certain Relationships and
Related Transactions -- Relationship with KB Prime Media and Affiliated
Entities).

(7) The Company began programming WPME in August 1997 pursuant to an LMA as an
affiliate of UPN.

(8) The Company has an agreement to program WFXU pursuant to an LMA. It is
anticipated that WFXU will simulcast the programming of WTLH commencing in
April 1998.

(9) The Company began programming WGFL in October 1997 pursuant to an LMA as an
affiliate of WB.
11
<PAGE>

Northeastern Pennsylvania

Northeastern Pennsylvania is the 47th largest DMA in the U.S. comprising
17 counties in Pennsylvania with a total of 566,000 television households and a
population of 1,473,000. In the past, the economy was primarily based on steel
and coal mining, but in recent years has diversified to emphasize
manufacturing, health services and tourism. In 1996, annual retail sales in
this market totaled approximately $12.0 billion and total television
advertising revenues in the Northeastern Pennsylvania DMA increased 7.5% from
approximately $44.0 million to approximately $47.3 million. Northeastern
Pennsylvania is the only one among the top 50 DMAs in the country in which all
television stations licensed to it are UHF. In addition to WOLF, WWLF and WILF,
which are licensed to Scranton, Hazelton and Williamsport, respectively, there
are three commercial stations and one educational station operating in the
Northeastern Pennsylvania DMA. The Northeastern Pennsylvania DMA also has an
allocation for an additional channel, which is not operational.

Portland, Maine

Portland is the 79th largest DMA in the U.S., comprising 12 counties in
Maine, New Hampshire and Vermont with a total of 353,000 television households
and a population of 911,000. Portland's economy is based on financial services,
lumber, tourism, and its status as a transportation and distribution gateway
for central and northern Maine. In 1996, annual retail sales in the Portland
market totaled approximately $9.3 billion and the total television revenues in
this market increased 7.7% from approximately $41.6 million to approximately
$44.8 million. In addition to WPXT, there are four VHF and two UHF stations
authorized in the Portland DMA, including one VHF and two UHF educational
stations. The Portland DMA has allocations for five other UHF stations, four of
which are educational.

The Company entered into agreements with the holder of a construction
permit for a new TV station, WPME, licensed to Lewiston, Maine and operating in
the Portland, Maine DMA. As part of the agreements, the Company entered into
and LMA (the "Portland LMA") to provide the station with programming and retain
the advertising revenue in exchange for a fee paid to the owner. The Company
also provides certain equipment for the station which is leased to the licensee
during the term of the LMA. The Company has certain rights to acquire the
station in the future. WPME commenced operations on August 1, 1997.

Chattanooga, Tennessee

Chattanooga is the 82nd largest DMA in the U.S., comprising 18 counties in
Tennessee, Georgia, North Carolina and Alabama with a total of 332,000
television households and a population of 865,000. Chattanooga's economy is
based on insurance and financial services in addition to manufacturing and
tourism. In 1996, annual retail sales in the Chattanooga market totaled
approximately $7.9 billion and total television revenues in this market
increased 8.3% from approximately $38.5 million to approximately $41.7 million.
In addition to WDSI, there are three VHF and four UHF stations operating in the
Chattanooga DMA, including one religious and two educational stations. The
Company acquired WDSI in May 1993.

Jackson, Mississippi

Jackson is the 91st largest DMA in the U.S., comprising 24 counties in
central Mississippi with a total of 298,000 television households and a
population of 832,000. Jackson is the capital of Mississippi and its economy
reflects the state and local government presence as well as agriculture and
service industries. Because of its central location, it is also a major
transportation and distribution center. In 1996, annual retail sales in the
greater Jackson market totaled approximately $6.5 billion and total television
revenues in the market increased 6.9% from approximately $36.0 million to
approximately $38.5 million. In addition to WDBD, there are two VHF and two UHF
television stations operating in the Jackson DMA, including one educational
station. The Jackson DMA also has an allocation for an additional television
channel which is not operational.

Tallahassee, Florida

The Tallahassee DMA is the 116th largest in the U.S. comprising 18
counties in northern Florida and southern Georgia with a total of 221,000
television households and a population of 599,000. Tallahassee is the

12
<PAGE>

state capital of Florida and its major industries include state and local
government as well as firms providing commercial service to North Florida's
cattle, lumber, tobacco and farming industries. In 1996, annual retail sales in
this market totaled approximately $4.4 billion and total television advertising
revenues increased 7.0% from approximately $19.9 million in 1995 to
approximately $21.3 million. In addition to WTLH, which is licensed to
Bainbridge, Georgia, there are two VHF and two UHF television stations
operating in the Tallahassee DMA, including one educational VHF station. An
additional station licensed to Valdosta, Georgia broadcasts from a transmission
facility located in the Albany, Georgia DMA. The Tallahassee DMA has
allocations for four UHF stations that are not operational, one of which is
educational.

In March 1996, the Company acquired the principal tangible assets of WTLH
and in August 1996, the Company acquired WTLH's FCC licenses and its Fox
affiliation agreements. The Company has filed an application which will enable
the Company to move WTLH's tower and transmitter facilities to a site closer to
Tallahassee and to increase its tower height and power. The Company intends to
relocate WTLH's transmitter and tower in 1998 to increase its audience coverage
in the Tallahassee market subject to FCC approval. In August 1996, the Company
also acquired the license for translator station W53HI, Valdosta, Georgia. In
October 1996, the FCC consented to the assignment of the construction permit
for translator station W13BO, Valdosta, Georgia. Special temporary authorities
have been granted by the FCC for continued operation of both translators at
relocated facilities. Such authorities expire September 5, 1998.

In May 1997, the Company signed an agreement by which it received an
option to acquire the construction permit for unbuilt TV station WFXU, Live
Oak, Florida, and an LMA to program the station once it has been constructed.
The Company will construct the station and lease the facilities to the licensee
during the term of the LMA. The Company intends to assign its option to another
entity who will exercise that option and, if approved by the FCC, acquire the
station's license. The Company plans to operate the station pursuant to the
LMA. See Item 13 (Certain Relationships and Related Transactions --
Relationship with KB Prime Media and Affiliated Entities). Pursuant to the LMA,
it is anticipated that WFXU will rebroadcast WTLH. The WFXU construction permit
was to expire on November 1, 1997, however the holder of the construction
permit received extensions, from the FCC, of this permit until July 15, 1998.
If construction is not complete by July 15, 1998, it will need to seek another
extension. If that extension were to be denied by the FCC, the station could
not be constructed or programmed by the Company.

Gainesville, Florida

The Gainesville DMA is the 167th largest in the U.S., comprising four
counties in northern Florida with a total of 101,000 television households and
a population of 257,000. Gainesville is also the home of the Gainesville campus
of the University of Florida and its economy reflects the educational
institution's presence as well as that of healthcare and other service
industries. In 1996, annual retail sales in this market totaled approximately
$2.0 billion and total television advertising revenues increased 7.7% from
approximately $13.0 million to approximately $14.0 million. In addition to
WGFL, there is one VHF station and two UHF stations operating in the
Gainesville DMA, including one VHF educational station. The Gainesville DMA has
allocations for two additional UHF stations that are not operational, one of
which is religious.

The Company entered into agreements with the holder of a construction
permit for WGFL, a new TV station licensed to High Springs, Florida and
operating in the Gainesville market. As part of these agreements, the Company
has entered into an LMA (the "Gainesville LMA") to provide the station with
programming and retain the advertising revenue in exchange for a fee paid to
the owner of the station. The Company also provides certain equipment for the
station, which is leased to the licensee during the LMA term. The Company has
certain rights to acquire the license in the future. WGFL commenced operations
pursuant to the LMA on October 17, 1997.

Recent and Pending Transactions

Completed Sale

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

13
<PAGE>

Completed Acquisitions

On February 14, 1997, the Company acquired, from an independent DIRECTV
provider, the rights to provide DIRECTV programming in certain rural areas of
Mississippi and the related assets in exchange for approximately $14.8 million
in cash.

As of March 10, 1997, the Company acquired, from two independent DIRECTV
providers, the rights to provide DIRECTV programming in certain rural areas of
Arkansas, Virginia and West Virginia and the related assets in exchange for
approximately $10.4 million in cash, $200,000 in assumed liabilities, $3.0
million in preferred stock of a subsidiary of Pegasus and warrants to purchase
a total of 283,969 shares of Pegasus' Class A Common Stock. The $3.0 million in
preferred stock of a subsidiary of Pegasus has been accounted for as a minority
interest.

As of April 9, 1997, the Company acquired, from an independent DIRECTV
provider, the rights to provide DIRECTV programming in certain rural areas of
Georgia and the related assets in exchange for approximately $3.3 million in
cash, $143,000 in assumed liabilities, 42,187 shares of Pegasus' Class A Common
Stock, and a $600,000 obligation, payable over four years, for consultancy and
non-compete agreements.

As of May 9, 1997, the Company acquired, from four independent DIRECTV
providers, the rights to provide DIRECTV programming in certain rural areas of
Colorado, Florida, Maryland, Minnesota, Nevada, New Hampshire, Oklahoma, Texas,
Virginia, Washington, Wisconsin and Wyoming and the related assets in exchange
for approximately $18.6 million in cash, $502,000 in assumed liabilities, a
$350,000 note due January 1998, $200,000 of Pegasus' Class A Common Stock, and
$600,000 in cash for consultancy and non-compete agreements.

As of July 9, 1997, the Company acquired, from two independent DIRECTV
providers, the rights to provide DIRECTV programming in certain rural areas of
Ohio and Texas and the related assets in exchange for approximately $17.4
million in cash and $503,000 in assumed liabilities.

As of August 8, 1997, the Company acquired, from four independent DIRECTV
providers, the rights to provide DIRECTV programming in certain rural areas of
Indiana, Minnesota and South Dakota and the related assets in exchange for
approximately $15.5 million in cash, $464,000 in assumed liabilities, a
$988,000 note due January 1998, and $750,000 in cash for endorsement and
non-compete agreements.

As of September 8, 1997, the Company acquired, from four independent
DIRECTV providers, the rights to provide DIRECTV programming in certain rural
areas of Illinois, Minnesota and Utah and the related assets in exchange for
approximately $9.1 million in cash and $165,000 in assumed liabilities.

As of October 8, 1997, the Company acquired, from two independent DIRECTV
providers, the rights to provide DIRECTV programming in certain rural areas of
Alabama and Texas and the related assets in exchange for approximately $24.2
million in cash, $219,000 in assumed liabilities, a $2.2 million note, payable
over four years, and $589,000 in cash and a $772,000 obligation, payable over
four years, for consultancy and non-compete agreements.

Effective October 31, 1997, the Company acquired, from an independent
DIRECTV provider, the rights to provide DIRECTV programming in certain rural
areas of Georgia and the related assets and liabilities in exchange for
approximately $6.4 million in cash and 397,035 shares of Pegasus' Class A
Common Stock.

As of November 7, 1997, the Company acquired, from three independent
DIRECTV providers, the rights to provide DIRECTV programming in certain rural
areas of Nebraska, Minnesota, Utah and Wyoming and the related assets in
exchange for approximately $3.1 million in cash, $147,000 in assumed
liabilities, a $1.7 million note, payable over two years, and a $446,000 note
due November 2000.

As of January 7, 1998, the Company acquired, from an independent DIRECTV
provider, the rights to provide DIRECTV programming in certain rural areas of
Minnesota and the related assets in exchange for approximately $1.9 million in
cash and $32,000 in assumed liabilities.

14
<PAGE>

LMAs

On August 1, 1997, Pegasus commenced operations of TV station WPME, which
is affiliated with UPN. WPME is in the Portland, Maine DMA and is being
operated under an LMA. WPME's offices, studio and transmission facilities are
co-located with WPXT, a TV station in the Portland market the Company has owned
and operated since January 1996.

On October 17, 1997, Pegasus commenced operations of TV station WGFL,
which is affiliated with WB. WGFL is in the Gainesville, Florida DMA and is
being operated under an LMA.

Pending Sale

On January 16, 1998, the Company entered into an agreement to sell its
remaining New England cable systems for a purchase price of at least $28
million and not more than $31 million, based on the systems' cash flow for the
trailing 12 months prior to closing, multiplied by nine.

Pending Acquisitions

Pending DBS Acquisitions. As of March 12, 1998, the Company had entered
into 14 letters of intent or definitive agreements to acquire, from various
independent DIRECTV providers, the rights to provide DIRECTV programming in
certain rural areas of Idaho, Nebraska, New Mexico, Oregon, South Dakota and
Texas and the related assets (the "Pending DBS Acquisitions") in exchange for
approximately $52.9 million of cash, $10.3 million in promissory notes and
$854,000 in shares of Class A Common Stock. Each of the Pending DBS
Acquisitions for which there is only a letter of intent is subject to
negotiation of a definitive agreement, and all of the Pending DBS Acquisitions
are subject, if not already obtained, to the prior approval of Hughes
Electronics Corporation or one of its subsidiaries ("Hughes") and the NRTC. In
addition to these conditions, each of the Pending DBS Acquisitions will be
subject to conditions typical in acquisitions of this nature, certain of which
conditions, like the Hughes and NRTC consents, may be beyond the Company's
control. There can be no assurance that definitive agreements will be entered
into with respect to all of the Pending DBS Acquisitions or, if entered into,
that all or any of the Pending DBS Acquisitions will be completed.

DTS Acquisition. On January 8, 1998, the Company entered into an agreement
and plan of merger (the "Agreement and Plan of Merger") to acquire Digital
Television Services, Inc. ("DTS"), for approximately 5.5 million shares of
Pegasus' Class A Common Stock. As of February 28, 1998, DTS' operations
consisted of providing DIRECTV services to approximately 139,600 subscribers in
certain rural areas of 11 states in which DTS holds the exclusive right to
provide such services. Upon completion of the acquisition of DTS (the "DTS
Acquisition"), DTS will become a wholly owned subsidiary of Pegasus.

Public Offerings

On January 27, 1997, the Company consummated an offering of 100,000 units
(the "Unit Offering") in which it sold 100,000 shares of 12.75% Series A
Cumulative Exchangeable Preferred Stock (the "Series A Preferred Stock") and
warrants to purchase 193,600 shares of Class A Common Stock at an exercise
price of $15 per share to the public at a price of $1,000 per unit, resulting
in net proceeds to the Company of $95.8 million. The Company applied the net
proceeds from the Unit Offering as follows: (i) $30.1 million to the repayment
of all outstanding indebtedness under the PM&C Credit Facility (as defined) and
expenses related thereto, and (ii) $56.5 million for the payment of the cash
portion of the purchase price for the acquisition of DBS assets from nine
independent DIRECTV providers. The remaining net proceeds were used for working
capital, general corporate purposes and to finance other acquisitions.

On October 21, 1997, Pegasus completed the Senior Notes Offering in which
it sold $115.0 million of its 9.625% Series A Senior Notes due 2005 (the
"Series A Senior Notes"), resulting in net proceeds to the Company of
approximately $111.0 million. The Company applied the net proceeds from the
Senior Notes Offering as follows: (i) $94.2 million to the repayment of all
outstanding indebtedness under the PSH Credit Facility (as defined), and (ii)
$16.8 million for the payment of the cash portion of the purchase price for the
acquisition of DBS assets from various independent DIRECTV providers.

15
<PAGE>

On February 26, 1998, pursuant to a registered exchange offer, Pegasus
exchanged all $115.0 million of its Series A Senior Notes for $115.0 million of
its 9.625% Series B Senior Notes due 2005 (the "Series B Senior Notes"). The
Series B Notes have substantially the same terms and provisions as the Series A
Senior Notes. No gain or loss was recorded in connection with the exchange of
the notes.

New Credit Facility

In December 1997, PM&C entered into a $180.0 million six-year senior
revolving credit facility (the "Credit Facility"), which is collateralized by
substantially all of the assets of PM&C and its subsidiaries. Interest on the
Credit Facility is, at the Company's option, at either the bank's base rate
plus an applicable margin or LIBOR plus an applicable margin. The Credit
Facility is subject to certain financial covenants as defined in the loan
agreement, including a debt to adjusted cash flow covenant. The Credit Facility
will be used to finance future acquisitions and for working capital, capital
expenditures and general corporate purposes. There were no borrowings
outstanding on December 31, 1997.

Competition

The Company's TV stations compete for audience share, programming and
advertising revenue with other television stations in their respective markets,
and compete for advertising revenue with other advertising media, such as
newspapers, radio, magazines, outdoor advertising, transit advertising, yellow
page directories, direct mail and local cable systems. Competition for audience
share is primarily based on program popularity, which has a direct effect on
advertising rates. Advertising rates are based upon the size of the market in
which the station operates, a program's popularity among the viewers that an
advertiser wishes to attract, the number of advertisers competing for the
available time, the demographic composition of the market served by the
station, the availability of alternative advertising media in the market area,
aggressive and knowledgeable sales forces and the development of projects,
features and programs that tie advertiser messages to programming. The Company
believes that its focus on a limited number of markets and the strength of its
programming allows it to compete effectively for advertising within its
markets.

DIRECTV faces competition from cable (including in New England, the
Company's cable systems), wireless cable and other microwave systems and other
DTH and DBS operators. Cable currently possesses certain advantages over
DIRECTV in that cable is an established provider of programming, offers local
programming and does not require that its subscribers purchase receiving
equipment in order to begin receiving cable services. DIRECTV, however, offers
significantly expanded service compared to most cable systems. Additionally,
upgrading cable companies' coaxial systems to offer expanded digital video and
audio programming similar to that offered by DIRECTV will be costly. While
local programming is not currently available through DIRECTV directly, DIRECTV
provides programming from affiliates of national broadcast networks to
subscribers who are unable to receive networks over-the-air and who have not
subscribed to cable. DIRECTV faces additional competition from wireless cable
systems such as multichannel multipoint distribution systems ("MMDS") which use
microwave frequencies to transmit video programming over the air from a tower
to specially equipped homes within the line of sight of the tower. The Company
is unable to predict whether wireless video services, such as MMDS, will
continue to develop in the future or whether such competition will have a
material impact on the operations of the Company.

DIRECTV also faces competition from other providers and potential
providers of DBS services. Of the eight orbital locations within the BSS band
allocated for U.S. licensees, three orbital positions enable full coverage of
the contiguous forty-eight U.S states ("CONUS"). The remaining orbital
positions are situated to provide coverage to either the eastern or western
U.S., but cannot provide full coverage of the contiguous U.S. This provides
companies licensed to the three orbital locations with full coverage a
significant advantage in providing DBS service to the entire U.S., as they must
place satellites in service at only one and not two orbital locations. The
orbital location licensed to DIRECTV and USSB is generally recognized as the
most centrally located for coverage of the contiguous U.S.

In March 1996, EchoStar Communications Corp. ("EchoStar") commenced
national broadcasting of programming and currently broadcasts over 120 video
channels and 30 audio channels. EchoStar has 21 licensed channel frequencies at
the 119- W.L. full-CONUS orbital position and has 69 frequencies in other
partial CONUS orbital locations. At December 31, 1997, EchoStar reported
approximately 1.0 million subscribers.

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<PAGE>

On June 11, 1997, PrimeStar Partners ("PrimeStar") announced that it had
entered into an agreement to combine its assets with American Sky Broadcasting
("ASkyB"). According to press releases, each of PrimeStar's cable company
partners will contribute its PrimeStar customers and partnership interests into
a newly formed entity. ASkyB has announced that it will contribute two
satellites under construction and 28 full-CONUS frequencies at the 110o W.L.
orbital location. This proposed transaction requires certain federal regulatory
approvals. In addition, Tempo Satellite, Inc. has a license for a satellite
using 11 full-CONUS frequencies at the 119o W.L. orbital location, and recently
launched a satellite to that location. PrimeStar reported having approximately
2.0 million subscribers at February 24, 1998.

Cable operators face competition from television stations, private
satellite master antenna television ("SMATV") systems that serve condominiums,
apartment complexes and other private residential developments, wireless cable,
DTH and DBS systems. As a result of the passage of the Telecommunications Act
1996 (the "1996 Act"), electric utilities and telephone companies will be
allowed to compete directly with cable operators both inside and outside of
their telephone service areas. In September 1996, an affiliate of Southern New
England Telephone Company, which is the dominant provider of local telephone
service in Connecticut, was granted a non-exclusive franchise to provide cable
television service throughout Connecticut. Currently, there is only limited
competition from SMATV, wireless cable, DTH and DBS systems in the Company's
franchise areas. The only DTH and DBS systems with which the Company's cable
systems currently compete are DIRECTV, USSB, EchoStar and PrimeStar. However,
the Company cannot predict whether additional competition will develop in its
service areas in the future. Additionally, cable systems generally operate
pursuant to franchises granted on a non-exclusive basis and, thus, more than
one applicant could secure a cable franchise for an area at any time. It is
possible that a franchising authority might grant a second franchise to another
cable company containing terms and conditions more favorable than those
afforded the Company. Although the potential for "overbuilds" exists, there are
presently no overbuilds in any of the Company's franchise areas and, except as
noted above with respect to its Connecticut franchise, the Company is not aware
of any other company that is actively seeking franchises for areas currently
served by the Company.

Both the television and cable industries are continuously faced with
technological change and innovation, the possible rise in popularity of
competing entertainment and communications media, and governmental restrictions
or actions of federal regulatory bodies, including the FCC, any of which could
possibly have a material effect on the Company's operations and results.

Employees

As of February 28, 1998, the Company had 421 full-time and 69 part-time
employees. The Company is not a party to any collective bargaining agreement
and considers its relations with its employees to be good.

Executive Officers of the Registrant

For biographies and other information relating to the executive officers
of Pegasus, see Item 10 (Directors and Executive Officers of the Registrant).

Licenses, LMAs, DBS Agreements and Cable Franchises

FCC Licensing. The broadcast television industry is subject to regulation
by the FCC pursuant to the Communications Act of 1934, as amended (the
"Communications Act"). Approval by the FCC is required for the issuance,
renewal, transfer and assignment of broadcast station operating licenses. The
FCC adopted a Report and Order on January 24, 1997 extending television license
terms to eight years as provided in the 1996 Act, reserving the right to renew
licenses for shorter terms. While in the vast majority of cases such licenses
are renewed by the FCC, there can be no assurance that the Company's licenses
will be renewed at their expiration dates or that such renewals will be for
full terms. The licenses with respect to TV stations WOLF/WWLF/WILF, WPXT,
WDSI, WTLH and WDBD are scheduled to expire on August 1, 1999, April 1, 1999,
August 1, 2005, April 1, 2005 and June 1, 1997, respectively. An application
has been filed with the FCC for renewal of the WDBD license and the station has
continuing authority to operate pending the FCC's action on the renewal
application.

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<PAGE>

Fox Affiliation Agreement. Each of the Company's TV stations which are
affiliated with Fox is a party to a substantially identical station affiliation
agreement with Fox (as amended, the "Fox Affiliation Agreements"). Each Fox
Affiliation Agreement provides the Company's Fox-affiliated stations with the
right to broadcast all programs transmitted by Fox, on behalf of itself and its
wholly-owned subsidiary, the Fox Children's Network, Inc. ("FCN"), which
include programming from Fox as well as from FCN. In exchange, Fox has the
right to sell a substantial portion of the advertising time associated with
such programs and to retain the revenue from the advertising it has sold. The
stations are entitled to sell the remainder of the advertising time and retain
the associated advertising revenue. The stations are also compensated by Fox
according to a ratings-based formula for Fox programming and a share of the
programming net profits of FCN programming, as specified in the Fox Affiliation
Agreements. Each Fox Affiliation Agreement is for a term ending October 31,
1998 with the exception of the WTLH Fox Affiliation Agreement, which expires on
December 31, 2000. The Fox Affiliation Agreements are renewable for a two-year
extension, at the discretion of Fox and upon acceptance by the Company. The Fox
Affiliation Agreements may be terminated generally (a) by Fox upon (i) a
material change in the station's transmitter location, power, frequency,
programming format or hours of operation, with 30 days' written notice, (ii)
acquisition by Fox, directly or indirectly, of a significant ownership and/or
controlling interest in any television station in the same market, with 60
days' written notice, (iii) assignment or attempted assignment by the Company
of the Fox Affiliation Agreements, with 30 days written notice, (iv) three or
more unauthorized preemptions of Fox programming within a 12-month period, with
30 days written notice, or (b) by either Fox or the affiliate station upon
occurrence of a force majeure event which substantially interrupts Fox's
ability to provide programming or the station's ability to broadcast the
programming. The Company's Fox Affiliation Agreements have been renewed in the
past. The Company believes that it enjoys good relations with Fox.

Each Fox Affiliation Agreement provides the Company's Fox-affiliated
stations with all programming which Fox and FCN make available for broadcasting
in the community to which the station is licensed by the FCC. Fox has committed
to supply approximately six hours of programming per day during specified time
periods. Each of the Company's stations have agreed to broadcast all such Fox
programs in their entirety, including all commercial announcements. In return
for a station's full performance of its obligations under its respective
affiliation agreement, Fox will pay such station compensation determined in
accordance with Fox's current, standard, performance-based station compensation
formula.

As part of the agreement with Fox to extend the stations' Fox Affiliation
Agreements, each of the stations granted Fox the right to negotiate with the
cable operators in their respective markets for retransmission consent
agreements. Under the Fox "Win/Win Plan," the cable operators received the
right to retransmit the programming of the Company's TV stations in exchange
for the carriage by the cable operators of a new cable channel owned by Fox.
The Company's TV stations are to receive consideration from Fox based on the
number of subscribers carrying the new Fox channel within the stations' market.
Fox has reached agreements in principle with most of the largest cable
operators in the country.

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

The term of the UPN Affiliation Agreement expires January 15, 2001, and
automatically renews for a three-year period unless either party has given
written notice to the other party of its election not to renew. The UPN
Affiliation Agreement may be terminated (a) by UPN, upon prior written notice,
in the event of (i) a material reduction or modification of WPME's transmitter
location, power, frequency, programming format or hours of operation, (ii) any
assignment or transfer of control of the Company's license, (iii) three or more
unauthorized preemptions of UPN programming by the Company during any 12-month
period, which have actually occurred

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<PAGE>

or which UPN reasonably believes will occur, or (b) by either UPN or the
Company upon the occurrence of a force majeure event that causes UPN
substantially to fail to provide programming or the Company substantially to
fail to telecast UPN's programming, for either (i) four consecutive weeks or
(ii) an aggregate of six weeks in any 12-month period.

WB Affiliation Agreement. The Company has entered into commitments to
program TV stations WOLF and WGFL as affiliates of WB. The Company is in the
process of negotiating affiliation agreements with respect to these stations.
TV station WGFL has only committed to be an affiliate of WB for one year.

LMAs. Current FCC rules preclude the ownership of more than one television
station in a market, unless such stations are operated as a satellite of a
primary station. WWLF and WILF are currently authorized as satellites of WOLF.
In recent years, in a number of markets across the country, certain television
owners have entered into agreements to provide the bulk of the broadcast
programming on stations owned by other licensees, and to retain the advertising
revenues generated from such programming. Such agreements are commonly referred
to as Local Marketing Agreements, or LMAs.

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

The Company programs WPME, Portland and WGFL, Gainesville, and expects to
program other television stations, through the use of LMAs, but there can be no
assurance that the licensees of such stations will not unreasonably exercise
their right to preempt the programming of the Company, or that the licensees of
such stations will continue to maintain the transmission facilities of the
stations in a manner sufficient to broadcast a high quality signal over the
station. As the licensee must also maintain all of the qualifications necessary
to be a licensee of the FCC, and as the principals of the licensee are not
under the control of the Company, there can be no assurances that these
licenses will be maintained by the entities which currently hold them. Pursuant
to the 1996 Act, the continued performance of then existing LMAs was generally
grandfathered. The FCC suggested in a rulemaking proposal that LMAs entered
into after November 5, 1996 will not be grandfathered. The Company cannot
predict whether the Portland LMA, or its other LMAs, will be grandfathered.
Currently, television LMAs are not considered attributable interests under the
FCC's multiple ownership rules. However, the FCC is considering proposals which
would make LMAs attributable, as they generally are in the radio broadcasting
industry. If the FCC were to adopt an order that makes such interests
attributable, without modifying its current prohibitions against the ownership
of more than one television station in a market, the Company could be
prohibited from entering into such arrangements with other stations in markets
in which it owns television stations and could be required to modify or
terminate existing LMA arrangements. Such a change in the FCC rules could
affect the contemplated LMA with the new owner of WOLF, and could affect the
LMAs with the owners of WFXU and WPME.

DBS Agreements

Prior to the launch of the first DIRECTV satellite in 1993, Hughes entered
into various agreements intended to assist it in the introduction of DIRECTV
services, including agreements with RCA/Thomson for the development and
manufacture of DSS units and with USSB for the sale of five transponders on the
first satellite. At this time, Hughes also offered the NRTC and its members and
affiliate members the opportunity to become the exclusive providers of DIRECTV
services in rural areas of the U.S. in which an NRTC member purchased such a
right. The NRTC is a cooperative organization whose members and affiliate
members are engaged in the distribution of telecommunications and other
services in predominantly rural areas of the U.S. Pursuant to the DBS
Agreements (as defined), participating NRTC members and affiliate members
acquired the exclusive right to provide DIRECTV programming services to
residential and commercial subscribers in certain service areas. Service areas
purchased by participating NRTC members and affiliate members comprise
approximately 9 million television households and were acquired for aggregate
purchase payments exceeding $100 million.

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<PAGE>

The DBS Agreements provide the NRTC and participating NRTC members and
affiliate members in their service areas substantially all of the rights and
benefits otherwise retained by DIRECTV in other areas, including the right to
set pricing (subject to certain obligations to honor national pricing on
subscriptions sold by national retailers), to bill subscribers and retain all
subscription remittances and to appoint sales agents within their distribution
areas (subject to certain obligations to honor sales agents appointed by
DIRECTV and its regional SMAs). In exchange, the NRTC and participating NRTC
members and affiliate members paid to DIRECTV a one-time purchase price. In
addition to the purchase price, NRTC members and affiliate members are required
to reimburse DIRECTV for the allocable share of certain common expenses (such
as programming, satellite-specific costs and expenses associated with the
billing and authorization systems) and to remit to DIRECTV a 5% royalty on
subscription revenues.

The DBS Agreements authorize the NRTC and participating NRTC members and
affiliate members to provide all commercial services offered by DIRECTV that
are transmitted from the frequencies that the FCC has authorized for DIRECTV's
use at its present orbital location for a term running through the life of
DIRECTV's current satellites. The NRTC has advised the Company that the NRTC
Agreement also provides the NRTC a right of first refusal to acquire comparable
rights in the event that DIRECTV elects to launch successor satellites upon the
removal of the present satellites from active service. The financial terms of
any such purchase are likely to be the subject of negotiation and the Company
is unable to predict whether substantial additional expenditures of the NRTC
will be required in connection with the exercise of such right of first
refusal. Finally, under a separate agreement with Hughes (the "Dealer
Agreement"), the Company is an authorized agent for sale of DIRECTV programming
services to subscribers outside of its service area on terms comparable to
those of DIRECTV's other authorized sales agents.

The agreement between the NRTC and participating NRTC members and
affiliate members (the "NRTC Member Agreement") terminates when the DIRECTV
satellites are removed from their orbital location, although under the Dealer
Agreement the right of the Company to serve as a DIRECTV sales agent outside of
its designated territories may be terminated upon 60 days' notice by either
party. If the satellites are removed earlier than June 2004, the tenth
anniversary of the commencement of DIRECTV services, the Company will receive a
prorated refund of its original purchase price for the DIRECTV rights. The NRTC
Member Agreement may be terminated prior to the expiration of its term as
follows: (a) if the agreement between Hughes and the NRTC (the "Hughes/NRTC
Agreement" and, together with the NRTC Member Agreement, the "DBS Agreements")
is terminated because of a breach by DIRECTV, the NRTC may terminate the NRTC
Member Agreement, but the NRTC will be responsible for paying to the Company
its pro rata portion of any refunds that the NRTC receives from DIRECTV, (b) if
the Company fails to make any payment due to the NRTC or otherwise breaches a
material obligation of the NRTC Member Agreement, the NRTC may terminate the
NRTC Member Agreement in addition to exercising other rights and remedies
against the Company and (c) if the Hughes/NRTC Agreement is terminated because
of a breach by the NRTC, DIRECTV is obligated to continue to provide DIRECTV
services to the Company (i) by assuming the NRTC's rights and obligations under
the NRTC Member Agreement or (ii) under a new agreement containing
substantially the same terms and conditions as the NRTC Member Agreement.

The Company is not permitted under the NRTC Member Agreement or the Dealer
Agreement to assign or transfer, directly or indirectly, its rights under these
agreements without the prior written consent of the NRTC and Hughes, which
consents cannot be unreasonably withheld.

The NRTC has adopted a policy requiring any party acquiring DIRECTV
distribution rights from an NRTC member or affiliate member to post a letter of
credit to secure payment of NRTC's billings if the acquiring person's monthly
payments to the NRTC (including payments on account of the acquired territory)
exceeds a specified amount. Pursuant to this policy, the Company has posted a
letter of credit of approximately $8.5 million in connection with certain of
the completed DBS acquisitions and will be required to increase the amount of
the letter of credit to approximately $18.0 million after completing the
Pending DBS Acquisitions and the DTS Acquisition. Although this requirement can
be expected to reduce somewhat the Company's acquisition capacity inasmuch as
it ties up capital that could otherwise be used to make acquisitions, the
Company expects this reduction to be manageable. There can be no assurance,
however, that the NRTC will not in the future seek to institute other policies,
or to change this policy, in ways that would be material to the Company.

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<PAGE>

Cable Franchises

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

The Company holds 11 cable franchises, all of which are non-exclusive. The
Cable Communications Policy Act of 1984 (the "1984 Cable Act") prohibits
franchising authorities from imposing annual franchise fees in excess of 5% of
gross revenues and permits the cable system operator to seek renegotiation and
modification of franchise requirements if warranted by changed circumstances.

The table below groups the Company's franchises by date of expiration and
presents the number of franchises per group and the approximate number and
percent of basic subscribers of the Company in each group as of December 31,
1997.

<TABLE>
<CAPTION>
Number of Number of Percent of
Year of Franchise Basic Franchises Basic Subscribers Subscribers
- ----------------------------- ------------------ ------------------- ------------
<S> <C> <C> <C>
1997-1998 ................... 1 2,900 7%
1999-2002 ................... 3 9,500 22%
2003 and thereafter ......... 7 30,800 71%
Total ....................... 11 43,200 100%
</TABLE>

The Company has never had a franchise revoked. All of the franchises of
the systems eligible for renewal have been renewed or extended at or prior to
their stated expirations. The 1992 Cable Act provides, among other things, for
an orderly franchise renewal process in which renewal will not be unreasonably
withheld. In addition, the 1992 Cable Act establishes comprehensive renewal
procedures which require that an incumbent franchisee's renewal application be
assessed on its own merit and not as part of a comparative process with
competing applications. The Company believes that it has good relations with
its franchising authorities.

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<PAGE>

Legislation and Regulation

On February 1, 1996, the Congress passed the Telecommunications Act of
1996 (the "1996 Act"). On February 8, 1996, President Clinton signed it into
law. This new law has altered and will alter federal, state and local laws and
regulations regarding telecommunications providers and services, including the
Company and the cable television and other telecommunications services provided
by the Company. There are numerous rulemakings undertaken and to be undertaken
by the FCC which will interpret and implement the provisions of the 1996 Act.
It is not possible at this time to predict the outcome of such rulemakings that
remain pending.

The ownership, operation and sale of television stations, including those
licensed to subsidiaries of the Company, are subject to the jurisdiction of the
FCC under authority granted it pursuant to the Communications Act. Matters
subject to FCC oversight include, but are not limited to, the assignment of
frequency bands for broadcast television; the approval of a television
station's frequency, location and operating power; the issuance, renewal,
revocation or modification of a television station's FCC license; the approval
of changes in the ownership or control of a television station's licensee; the
regulation of equipment used by television stations; and the adoption and
implementation of regulations and policies concerning the ownership, operation
and employment practices of television stations. The FCC has the power to
impose penalties, including fines or license revocations, upon a licensee of a
television station for violations of the FCC's rules and regulations. The
following is a brief summary of certain provisions of the Communications Act
and of specific FCC regulations and policies affecting broadcast television.
Reference should be made to the Communications Act, FCC rules and the public
notices and rulings of the FCC for further information concerning the nature
and extent of FCC regulation of broadcast television stations.

License Renewal. Under law in effect prior to the 1996 Act, television
station licenses were granted for a maximum allowable period of five years and
were renewable thereafter for additional five year periods. The 1996 Act,
however, authorized the FCC to grant television broadcast licenses, and
renewals thereof, for terms of up to eight years. The FCC has extended
television license terms to the eight-year maximum provided in the 1996 Act,
reserving the right to renew licenses for shorter terms. The FCC may revoke or
deny licenses, after a hearing, for serious violations of its regulations, and
it may impose fines on licensees for less serious infractions. Petitions to
deny renewal of a license may be filed on or before the first day of the last
month of a license term. Generally, however, in the absence of serious
violations of FCC rules or policies, license renewal is expected in the
ordinary course. The 1996 Act prohibits the FCC from considering competing
applications for the frequency used by the renewal applicant if the FCC finds
that the station seeking renewal has served the public interest, convenience
and necessity, that there have been no serious violations by the licensee of
the Communications Act or the rules and regulations of the FCC, and that there
have been no other violations by the licensee of the Communications Act or the
rules and regulations of the FCC that, when taken together, would constitute a
pattern of abuse. The licenses with respect to TV stations WOLF/WWLF/WILF,
WPXT, WDSI, WTLH and WDBD are scheduled to expire on August 1, 1999, April 1,
1999, August 1, 2005, April 1, 2005 and June 1, 1997, respectively. An
application for renewal of the WDBD license is on file with the FCC and the
station has continuing authority to operate pending FCC action on such
application. The Company is not aware of any facts or circumstances that might
reasonably be expected to prevent any of its stations from having its current
license renewed at the end of its respective term.

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

Attribution Rules. The FCC generally applies its ownership limits to
"attributable" interests held by an individual, corporation, partnership or
other association. In the case of corporations holding (or through subsidiaries
controlling) broadcast licenses, the interests of officers, directors and those
who, directly or indirectly, have the right to vote 5% or more of the
corporation's stock (or 10% or more of such stock in the case of insurance

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<PAGE>

companies, investment companies and bank trust departments that are passive
investors) are generally attributable, except that, in general, no minority
voting stock interest will be attributable if there is a single holder of more
than 50% of the outstanding voting power of the corporation. The FCC has
outstanding a notice of proposed rulemaking that, among other things, seeks
comment on whether the FCC should modify its attribution rules by (i)
restricting the availability of the single majority shareholder exemption and
(ii) attributing under certain circumstances certain interests such as
non-voting stock or debt. The Company cannot predict the outcome of this
proceeding or how it will affect the Company's business.

Alien Ownership Restrictions. The Communications Act restricts the ability
of foreign entities to own or hold interests in broadcast licenses. Foreign
governments, representatives of foreign governments, non-citizens and
representatives of non-citizens, corporations and partnerships organized under
the laws of a foreign nation are barred from holding broadcast licenses.
Non-citizens, foreign governments, foreign corporations and representatives of
any of the foregoing, collectively, may directly or indirectly own or vote up
to 20% of the capital stock of a broadcast licensee. In addition, a broadcast
license may not be granted to or held by any corporation that is controlled,
directly or indirectly, by any other corporation more than one-fourth of whose
capital stock is owned or voted by non-citizens or their representatives, by
foreign governments or their representatives, or by non-U.S. corporations, if
the FCC finds that the public interest will be served by the refusal or the
revocation of such license. The FCC has interpreted this provision of the
Communications Act to require an affirmative public interest finding before a
broadcast license may be granted to or held by any such corporation. To the
Company's knowledge, the Commission has made such a finding in only one case
involving a broadcast licensee. Because of these provisions, Pegasus may be
prohibited from having more than one-fourth of its stock owned or voted
directly or indirectly by non-citizens, foreign governments, foreign
corporations or representatives of any of the foregoing.

Multiple Ownership Rules. FCC rules limit the number of television
stations any one entity can acquire or own. The FCC's television national
multiple ownership rule limits the combined audience of television stations in
which an entity may hold an attributable interest to 35% of total U.S. audience
reach. The FCC's television multiple ownership local contour overlap rule
generally prohibits ownership of attributable interests by a single entity in
two or more television stations with certain overlapping contours; however,
changes in these rules are under consideration, but the Company cannot predict
the outcome of the proceeding in which such changes are being considered.

Cross-Ownership Rules. FCC rules have generally prohibited or restricted
the cross-ownership, operation or control of a radio station and a television
station serving the same geographic market, of a television station and a cable
system serving the same geographic market, and of a television station and a
daily newspaper serving the same geographic market. As required by the 1996
Act, the FCC has amended its rules to allow a person or entity to own or
control a network of broadcast stations and a cable system. In addition, the
1996 Act eliminates the statutory prohibition against the ownership of
television stations and cable systems in the same geographic market, although
FCC rules prohibiting such ownership are still in place. The 1996 Act also
directs the FCC to presumptively waive, in the top 50 markets, its prohibition
on ownership of a television and one AM or one FM station in the same
geographic market. Under these rules, absent waivers, the Company would not be
permitted to acquire any daily newspaper, radio broadcast station or cable
system in a geographic market in which it now owns or controls any TV
properties. The FCC is currently considering a rulemaking to change the
radio/television cross-ownership restrictions. The Company cannot predict the
outcome of that rulemaking.

Programming and Operation. The Communications Act requires broadcasters to
serve the "public interest." Since the late 1970s, the FCC gradually has
relaxed or eliminated many of the formal procedures it had developed to promote
the broadcast of certain types of programming responsive to the needs of a
station's community of license. However, broadcast station licensees continue
to be required to present programming that is responsive to local community
problems, needs and interests and to maintain certain records demonstrating
such responsiveness. Complaints from viewers concerning a station's programming
often will be considered by the FCC when it evaluates license renewal
applications, although such complaints may be filed at any time and generally
may be considered by the FCC at any time. It has been reported that the FCC may
initiate a proceeding to clarify the public interest obligations of
broadcasters, although the Company cannot predict the outcome of any such
proceeding. Stations also must follow various rules promulgated under the
Communications Act that

23
<PAGE>

regulate, among other things, political advertising, sponsorship
identifications, the advertisements of contests and lotteries, programming
directed to children, obscene and indecent broadcasts and technical operations,
including limits on radio frequency radiation. In August 1996, the FCC adopted
new children's television rules mandating, among other things, that stations
must now identify and provide information concerning children's programming to
publishers of program guides and listings and must broadcast three hours each
week of educational and informational programming directed to children. The
1996 Act contains a number of provisions relating to television violence,
which, among other things, direct the television industry or the FCC to develop
a television ratings system and require commercial television stations to
report on complaints concerning violent programming in their license renewal
applications. In addition, most broadcast licensees, including the Company's
licensees, must develop and implement affirmative action programs designed to
promote equal employment opportunities and must submit reports to the FCC with
respect to these matters on an annual basis and in connection with a license
renewal application. The 1996 Act also directs the FCC to adopt rules requiring
closed captioning of all broadcast television programming, except where
captioning would be "economically burdensome." The FCC has recently adopted
such rules. The rules require generally that (i) 95% of all new programming
first published or exhibited on or after January 1, 1998 must be closed
captioned within eight years, and (ii) 75% of "old" programming which first
aired prior to January 1, 1998 must be closed captioned within ten years,
subject to certain exemptions. In connection with the transition to digital
operations, a governmental commission has been appointed to consider whether
additional public service obligations should be imposed on television
broadcasters. The Company cannot predict the likely outcome of such
considerations.

Must Carry and Retransmission Consent. The 1992 Cable Act requires each
television broadcaster to make an election to exercise either certain "must
carry" or, alternatively, "retransmission consent" rights in connection with
its carriage by cable systems in the station's local market. If a broadcaster
chooses to exercise its must carry rights, it may demand carriage on a
specified channel on cable systems within its defined market. Must carry rights
are not absolute, and their exercise is dependent on variables such as the
number of activated channels on, and the location and size of, the cable system
and the amount of duplicative programming on a broadcast station. Under certain
circumstances, a cable system may decline carriage of a given station. If a
broadcaster chooses to exercise its retransmission consent rights, it may
prohibit cable systems from carrying its signal, or permit carriage under a
negotiated compensation arrangement. The FCC's must carry requirements took
effect on June 2, 1993; however, stations had until June 17, 1993 to make their
must carry/retransmission consent elections. Under the Company's Fox
Affiliation Agreements, the Company appointed Fox as its irrevocable agent to
negotiate such retransmission consents with the major cable operators in the
Company's respective markets. Fox exercised the Company's stations'
retransmission consent rights. Television stations must make a new election
between must carry and retransmission consent rights every three years. The
last required election date was October 1, 1996. Although the Company expects
the current retransmission consent agreements to be renewed upon their
expiration, there can be no assurance that such renewals will be obtained.

In April 1993, the U.S. District Court for the District of Columbia upheld
the constitutionality of the legislative must carry provision. This decision
was vacated by the U.S. Supreme Court in June 1994, and remanded to the
District Court for further development of a factual record. The District Court
again upheld the must carry rules and in March 1997 the Supreme Court affirmed
the District Court's decision and thereby let stand the must-carry rules.

Digital Television. The FCC has taken a number of steps to implement
digital television ("DTV") broadcasting service in the U.S. In December 1996,
the FCC adopted a DTV broadcast standard and, in April 1997 and February 1998,
adopted decisions in several pending rulemaking proceedings that establish
service rules and a plan for implementing DTV. The FCC adopted a DTV Table of
Allotments that provides all television stations authorized as of April 1997
with a second channel on which to broadcast a DTV signal. The FCC has attempted
to provide DTV coverage areas that are comparable to stations' existing service
areas. The FCC has ruled that television broadcast licenses may use their
digital channels for a wide variety of services such as high-definition
television, multiple standard definition television programming, audio, data,
and other types of communications, subject to the requirement that each
broadcaster provide at least one free video channel equal in quality to the
current technical standard.

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<PAGE>

The FCC is requiring that affiliates of ABC, CBS, Fox and NBC in the top
ten television markets begin digital broadcasting by May 1, 1999, and that
affiliates of these networks in markets 11 through 30 begin digital
broadcasting by November 1999, and that all other stations begin digital
broadcasting by May 1, 2002. The FCC's plan calls for the DTV transition period
to end in the year 2006 at which time the FCC expects that television
broadcasters will have ceased broadcasting on their non-digital channels,
allowing that spectrum to be recovered by the government for other uses. Under
the Balanced Budget Act signed into law by President Clinton, however, the FCC
is authorized to extend the December 31, 2006 deadline for reclamation of a
television station's non-digital channel if, in any given case: (a) one or more
television stations affiliated with one of the four major networks in a market
are not broadcasting digitally, and the FCC determines that the station(s)
has(have) "exercised due diligence" in attempting to convert to digital
broadcasting; (b) less than 85% of the television households in the station's
market subscribe to a multichannel video service (cable, wireless cable or DBS)
that carries at least one digital channel from each of the local stations in
that market; or (c) less than 85% of the television households in the station's
market can receive digital signals off the air using either a set-top converter
box for an analog television set or a new digital television set. The Balanced
Budget Act also directs the FCC to auction the non-digital channels by
September 30, 2002 even though they are not to be reclaimed by the government
until at least December 31, 2006. The Balanced Budget Act also permits
broadcasters to bid on the non-digital channels in cities with populations
greater than 400,000 provided the channels are used for DTV. Thus it is
possible a broadcaster could own two channels in a market. The FCC has opened a
separate proceeding to consider the surrender of existing television channels
and how those frequencies will be used after they are eventually recovered from
television broadcasters. Additionally, the FCC will open a separate proceeding
to consider to what extent the cable must-carry requirements will apply to DTV
signals.

In addition, the digital order restricts current stations' abilities to
relocate transmitter sites and otherwise change technical facilities in any
manner which could impact proposed digital television stations. This may
preclude the improvement of the facilities of certain stations owned or
programmed by the Company. The order also allotted digital television stations
at the current analog transmitter sites. Changes in the location of digital
stations are dependant on the lack of interference to other digital and analog
stations. Thus, digital operation of Company stations at new transmitter sites
constructed between now and the date of digital conversion, such as those
planned for WWLF and WILF, may not be possible.

Implementation of digital television will improve the technical quality of
television signals receivable by viewers. Under certain circumstances, however,
conversion to digital operation may reduce a station's geographic coverage area
or result in some increased interference. The FCC's DTV allotment plan also
results in current UHF stations having considerably less signal power within
their service areas than present VHF stations that move to DTV channels. While
the February 1998 orders of the FCC present current UHF stations with some
options to overcome this power disparity, it is unknown at this time whether
the Company will be able to benefit from these options. Implementation of
digital television will also impose substantial additional costs on television
stations because of the need to replace equipment and because some stations
will need to operate at higher utility costs. The FCC is also considering
imposing new public interest requirements on television licensees in exchange
for their receipt of DTV channels. The Company cannot predict what future
actions the FCC might take with respect to DTV, nor can it predict the effect
of the FCC's present DTV implementation plan or such future actions on the
Company's business.

Pending or Proposed Legislation and FCC Rulemakings. The FCC is now
conducting a rulemaking proceeding to consider changes to the multiple
ownership rules that could, under certain limited circumstances, permit common
ownership of television stations with overlapping service areas, while imposing
restrictions on television LMAs. Certain of these changes, if adopted, could
allow owners of television stations who currently cannot buy a television
station or an additional television station in the Company's markets to acquire
television properties in such markets. This may increase competition in such
markets, but may also work to the Company's advantage by permitting it to
acquire additional stations in its present markets and by enhancing the value
of the Company's stations by increasing the number of potential buyers.
Alternatively, if no changes are made in the multiple ownership rules relating
to local ownership, and LMAs are made attributable, certain plans of the
Company may be prohibited. Proposed changes in the FCC's "attribution" rules
may also limit the ability of certain investors to invest in the Company. The
FCC also has adopted more restrictive standards for the exposure

25
<PAGE>

of the public and workers to potentially harmful radio frequency radiation
emitted by broadcast station transmitting facilities. Other matters which could
affect the Company's broadcast properties include technological innovations
affecting the mass communications industry and technical allocation matters,
including assignment by the FCC of channels for additional broadcast stations,
low-power television stations and wireless cable systems and their relationship
to and competition with full power television service, as well as possible
spectrum fees or other changes imposed on broadcasters for the use of their
channels. The ultimate outcome of these pending proceedings cannot be predicted
at this time.

The FCC has initiated a Notice of Inquiry proceeding seeking comment on
whether the public interest would be served by establishing limits on the
amount of commercial matter broadcast by television stations. No prediction can
be made at this time as to whether the FCC will impose any commercial limits at
the conclusion of its deliberations. The Company is unable to determine what
effect, if any, the imposition of limits on the commercial matter broadcast by
television stations would have upon the Company's operations. In connection
with the conversion to digital, a governmental commission has been appointed to
study whether additional public interest obligations should be imposed on
television broadcasters. The Company cannot predict the likely outcome of this
study.

The Congress and the FCC have considered in the past and may consider and
adopt in the future, (i) other changes to existing laws, regulations and
policies or (ii) new laws, regulations and policies regarding a wide variety of
matters that could affect, directly or indirectly, the operation, ownership,
and profitability of the Company's broadcast stations, result in the loss of
audience share and advertising revenues for these stations or affect the
ability of the Company to acquire additional broadcast stations or finance such
acquisitions.

Additionally, irrespective of the FCC rules, the Antitrust Agencies have
the authority to determine that a particular transaction presents antitrust
concerns. The Antitrust Agencies have recently increased their scrutiny of the
television and radio industries, and have indicated their intention to review
matters related to the concentration of ownership within markets (including
LMAs) even when the ownership or LMA in question is permitted under the
regulations of the FCC. There can be no assurance that future policy and
rulemaking activities of the Antitrust Agencies will not impact the Company's
operations (including existing stations or markets) or expansion strategy.

DBS

Unlike a common carrier, such as a telephone company, or a cable operator,
DBS operators such as DIRECTV are free to set prices and serve customers
according to their business judgment, without rate of return or other
regulation or the obligation not to discriminate among customers. However,
there are laws and regulations that affect DIRECTV and, therefore, affect the
Company. As an operator of a privately owned United States satellite system,
DIRECTV is subject to the regulatory jurisdiction of the FCC, primarily with
respect to (i) the licensing of individual satellites (i.e., the requirement
that DIRECTV meet minimum financial, legal and technical standards), (ii)
avoidance of interference with radio stations and (iii) compliance with rules
that the FCC has established specifically for DBS satellite licenses. As a
distributor of television programming, DIRECTV is also affected by numerous
other laws and regulations. The 1996 Act clarifies that the FCC has exclusive
jurisdiction over DTH satellite services and that criminal penalties may be
imposed for piracy of DTH satellite services. The 1996 Act also offers DTH
operators relief from private and local government-imposed restrictions on the
placement of receiving antennae. In some instances, DTH operators have been
unable to serve areas due to laws, zoning ordinances, homeowner association
rules, or restrictive property covenants banning the installation of antennae
on or near homes. The FCC recently promulgated rules designed to implement
Congress' intent by prohibiting any restriction, including zoning, land use or
building regulation, or any private covenant, homeowners' association rule, or
similar restriction on property within the exclusive use or control of the
antenna user where the user has a direct or indirect ownership interest in the
property, to the extent it impairs the installation, maintenance or use of a
DBS receiving antenna that is one meter or less in diameter or diagonal
measurement, except where such restriction is necessary to accomplish a clearly
defined safety objective or to preserve a recognized historic district. Local
governments and associations may apply to the FCC for a waiver of this rule
based on local concerns of a highly specialized or unusual nature. The FCC also
issued a further notice of proposed rulemaking seeking comment on whether the
1996 Act applies to restrictions on property not within the

26
<PAGE>

exclusive use or control of the viewer and in which the viewer has no direct or
indirect property interest. The 1996 Act also preempted local (but not state)
governments from imposing taxes or fees on DTH services, including DBS.
Finally, the 1996 Act required that multichannel video programming distributors
such as DTH operators fully scramble or block channels providing indecent or
sexually explicit adult programming. If a multi-channel video programming
distributor cannot fully scramble or block such programming, it must restrict
transmission to those hours of the day when children are unlikely to view the
programming (as determined by the FCC). On March 24, 1997, the U.S. Supreme
Court let stand a lower court ruling that allows enforcement of this provision
pending a constitutional challenge. In response to this ruling, the FCC
declared that its rules implementing the scrambling provision would become
effective on May 18, 1997.

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

The Cable Act also requires the FCC to conduct a rulemaking that will
impose public interest requirements for providing video programming on DTH
licensees, including, at a minimum, reasonable and non-discriminatory access by
qualified candidates for office and the obligation to set aside four to seven
percent of the licensee's channel capacity for non-commercial programming of an
educational or informational nature. Within this set-aside requirement, DTH
providers must make capacity available to "national educational programming
suppliers" at below-cost rates. The FCC is conducting a rulemaking to implement
this statutory provision.

While DTH operators like DIRECTV currently are not subject to the "must
carry" requirements of the Cable Act, the cable industry has argued that DTH
operators should be subject to these requirements. In the event the "must
carry" requirements of the Cable Act are revised to include DTH operators, or
to the extent that new legislation of a similar nature is enacted, DIRECTV's
future plans to provide local programming will be adversely affected, and such
must-carry requirements could cause the displacement of possibly more
attractive programming.

The Satellite Home Viewer Act (the "SHVA") establishes a "compulsory"
copyright license that allows a DTH operator, for a statutorily-established
fee, to retransmit network programming to subscribers for private home viewing
so long as that retransmission is limited to those persons in unserved
households. In general, an "unserved household" is one that cannot receive,
through the use of a conventional outdoor rooftop antenna, a sufficient
over-the-air network signal, and has not, within 90 days prior to subscribing
to the DTH service, subscribed to a cable service that provides that network
signal. Although DIRECTV and the Company have implemented guidelines to
safeguard against violations of the SHVA, certain subscribers within the
Company's service territories receive network programming despite their
misrepresentation that they are unserved households. Although not mandated by
law, DIRECTV and the Company presently disconnect such subscribers which any
local network affiliate maintains are not unserved households. Pending
Congressional action or administrative rulemaking, the inability of DIRECTV and
the Company to provide network programming to subscribers in DIRECTV service
territories could adversely affect the Company's average programming revenue
per subscriber and subscriber growth.

Cable

1984 Cable Act and 1992 Cable Act. The Cable Communications Policy Act of
1984 (the "1984 Cable Act") created uniform national standards and guidelines
for the regulation of cable systems. Among other things,

27
<PAGE>

the 1984 Cable Act generally preempted local control over cable rates in most
areas. In addition, the 1984 Cable Act affirmed the right of franchising
authorities (state or local, depending on the practice in individual states) to
award one or more franchises within their jurisdictions. It also prohibited
non-grandfathered cable systems from operating without a franchise in such
jurisdictions.

The Cable Television Consumer Protection and Competition Act of 1992 (the
"1992 Cable Act") amended the 1984 Cable Act in many respects and significantly
changed the legislative and regulatory environment in which the cable industry
operates. The 1992 Cable Act allows for a greater degree of regulation with
respect to, among other things, cable system rates for both basic and certain
nonbasic services; programming access and exclusivity arrangements; access to
cable channels by unaffiliated programming services; leased access terms and
conditions; horizontal and vertical ownership of cable systems; customer
service requirements; franchise renewals; television broadcast signal carriage
and retransmission consent; technical standards; subscriber privacy; consumer
protection issues; cable equipment compatibility; obscene or indecent
programming; and cable system requirements that subscribers subscribe to tiers
of service other than basic service as a condition of purchasing premium
services. Additionally, the legislation encourages competition with existing
cable systems by allowing municipalities to own and operate their own cable
systems without having to obtain a franchise; preventing franchising
authorities from granting exclusive franchises or unreasonably refusing to
award additional franchises covering an existing cable system's service area;
and prohibiting the common ownership of cable systems and co-located wireless
systems known as MMDS and private SMATV. The 1992 Cable Act also precludes
video programmers affiliated with cable television companies from favoring
cable operators over competitors and requires such programmers to sell their
programming to other multichannel video distributors. This provision may limit
the ability of cable program suppliers to offer exclusive programming
arrangements to cable television companies. The FCC, the principal federal
regulatory agency with jurisdiction over cable television, has adopted many
regulations to implement the provisions of the 1992 Cable Act.

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

Cable Rate Regulation. In June 1995, the FCC adopted rules which provide
significant rate relief for small cable operators, which include operators the
size of the Company. The Company's current rates are below the maximum presumed
reasonable under the FCC's rules for small operators, and the Company may use
this new rate relief to justify current rates, rates already subject to pending
rate proceedings and new rates. The 1996 Act eliminates cable programming
service tier ("CPST") rate regulation effective March 31, 1999, for all cable
operators. In the interim, CPST rate regulation can be triggered only by a
local unit of government (commonly referred to as local franchising authorities
or "LFA") complaint to the FCC. Since the Company is a small cable operator
within the meaning of the 1996 Act, CPST rate regulation for the Company ended
upon the enactment of the 1996 Act. The Company's status as a small cable
operator may be affected by future acquisitions. The 1996 Act does not disturb
existing rate determinations of the FCC. The Company's basic tier of cable
service ("BST") rates remain subject to LFA regulation under the 1996 Act.

Rate regulation is precluded wherever a cable operator faces "effective
competition." The 1996 Act expands the definition of effective competition to
include any franchise area where a local exchange carrier ("LEC") (or
affiliate) provides video programming services to subscribers by any means
other than through DBS. There is no penetration minimum for the local exchange
carrier to qualify as an effective competitor, but it must provide "comparable"
programming services in the franchise area. The Company filed a petition
requesting the FCC to find that its Puerto Rico system is subject to effective
competition, and on December 29, 1997, the FCC granted the Company's petition.

Under the 1996 Act, the Company is allowed to aggregate, on a franchise,
system, regional or company level, its equipment costs into broad categories,
such as converter boxes, regardless of the varying levels of functionality of
the equipment within each such broad category. The 1996 Act allows the Company
to average together costs of different types of converters (including
non-addressable, addressable, and digital). The statutory changes will also
facilitate the rationalizing of equipment rates across jurisdictional
boundaries. These favorable cost-aggregation rules do not apply to the limited
equipment used by "BST-only" subscribers.

Anti-Buy Through Provisions. In March 1993, the FCC adopted regulations
pursuant to the 1992 Cable Act which require cable systems to permit customers
to purchase video programming on a per channel or a per

28
<PAGE>

program basis without the necessity of subscribing to any tier of service,
other than the basic service tier, unless the cable system is technically
incapable of doing so. Generally, this exemption from compliance with the
statute for cable systems that do not have such technical capability is
available until a cable system obtains the capability, but not later than
December 2002. The Company's systems have the necessary technical capability
and have complied with this regulation.

Indecent Programming on Leased Access Channels. FCC regulations pursuant
to the 1992 Cable Act permit cable operators to restrict or refuse the carriage
of indecent programming on so-called "leased access" channels, i.e., channels
the operator must set aside for commercial use by persons unaffiliated with the
operator. Operators were also permitted to prohibit indecent programming on
public access channels. In June 1996, the Supreme Court ruled unconstitutional
the indecency prohibitions on public access programming as well as the
"segregate and block" restriction on indecent leased access programming.

Scrambling. The 1996 Act requires that upon the request of a cable
subscriber, the cable operator must, free of charge, fully scramble or
otherwise fully block the audio and video programming of each channel carrying
adult programming so that a non-subscriber does not receive it.

Cable operators must also fully scramble or otherwise fully block the
video and audio portion of sexually explicit or other programming that is
indecent on any programming channel that is primarily dedicated to sexually
oriented programming so that a non-subscriber to such channel may not receive
it. Until full scrambling or blocking occurs, cable operators must limit the
carriage of such programming to hours when a significant number of children are
not likely to view the programming ("safe-harbor period"). The Company's
systems do not presently have the necessary technical capability to comply with
the scrambling requirement; however, such programming is only carried during
the safe-harbor period.

Cable Entry Into Telecommunications. The 1996 Act declares that no state
or local laws or regulations may prohibit or have the effect of prohibiting the
ability of any entity to provide any interstate or intrastate
telecommunications service. States are authorized to impose "competitively
neutral" requirements regarding universal service, public safety and welfare,
service quality, and consumer protection. The 1996 Act further provides that
cable operators and affiliates providing telecommunications services are not
required to obtain a separate franchise from LFAs for such services. The FCC
has held that LFAs may not place telecommunications conditions in their grants
of cable construction permits. The 1996 Act prohibits LFAs from requiring cable
operators to provide telecommunications service or facilities as a condition of
a grant of a franchise, franchise renewal, or franchise transfer, except that
LFAs can seek "institutional networks" as part of franchise negotiations.

The 1996 Act clarifies that traditional cable franchise fees may only be
based on revenues related to the provision of cable television services.
However, when cable operators provide telecommunications services, LFAs may
require reasonable, competitively neutral compensation for management of the
public rights-of-way.

Interconnection and Other Telecommunications Carrier Obligations. To
facilitate the entry of new telecommunications providers including cable
operators, the 1996 Act imposes interconnection obligations on all
telecommunications carriers. All carriers must interconnect their networks with
other carriers and may not deploy network features and functions that interfere
with interoperability. On August 8, 1996, the FCC released its First Report and
Order to implement the interconnection provisions of the 1996 Act. Several
parties have sought reconsideration of the order by the FCC, and a number of
parties petitioned for review of the order in several federal courts of appeal.
Those petitions were consolidated before the U.S. Court of Appeals for the
Eighth Circuit, which on July 18, 1997 overturned several parts of the
interconnection order, as it relates to the ability of the FCC to set
interconnection rates. The FCC has appealed the ruling to the Supreme Court.

Telephone Company Entry Into Cable Television. The 1996 Act allows
telephone companies to compete directly with cable operators by repealing the
telephone company-cable cross-ownership ban and the FCC's video dialtone
regulations. This will allow LECs, including the Bell Operating Companies, to
compete with cable both inside and outside their telephone service areas.

The 1996 Act replaces the FCC's video dialtone rules with an "open video
system" ("OVS") plan by which LECs can provide cable service in their telephone
service area. LECs complying with FCC OVS regulations will receive relaxed
oversight. Only the program access, negative option billing prohibition,
subscriber privacy, Equal

29
<PAGE>

Employment Opportunity, PEG, must-carry and retransmission consent provisions
of the Communications Act will apply to LECs providing OVS. Franchising, rate
regulation, consumer service provisions, leased access and equipment
compatibility will not apply. Cable copyright provisions will apply to
programmers using OVS. LFAs may require OVS operators to pay "franchise fees"
only to the extent that the OVS provider or its affiliates provide cable
services over the OVS. OVS operators will be subject to LFA general
right-of-way management regulations. Such fees may not exceed the franchise
fees charged to cable operators in the area, and the OVS provider may pass
through the fees as a separate subscriber bill item.

As required by the 1996 Act, the FCC has adopted regulations prohibiting
an OVS operator from discriminating among programmers, and ensuring that OVS
rates, terms, and conditions for service are reasonable and nondiscriminatory.
Further, the FCC has adopted regulations prohibiting a LEC-OVS operator, or its
affiliates, from occupying more than one-third of a system's activated channels
when demand for channels exceeds supply, although there are no numeric limits.
The FCC also has adopted OVS regulations governing channel sharing; extending
the FCC's sports exclusivity, network nonduplication, and syndex regulations;
and controlling the positioning of programmers on menus and program guides. The
1996 Act does not require LECs to use separate subsidiaries to provide
incidental inter Local Access and Transport Area ("interLATA") video or audio
programming services to subscribers or for their own programming ventures.

Cable and Broadcast Television Cross-Ownership. As required by the 1996
Act, the FCC has amended its rules to allow a person or entity to own or
control a network of broadcast stations and a cable system. In addition, the
1996 Act eliminates the statutory prohibition against the ownership of cable
systems and television stations in the same geographic market, although FCC
rules prohibiting such ownership are still in place.

Signal Carriage. The 1992 Cable Act imposed obligations and restrictions
on cable operator carriage of non-satellite delivered television stations.
Under the must-carry provision of the 1992 Cable Act, a cable operator, subject
to certain restrictions, must carry, upon request by the station, all
commercial television stations with adequate signals which are licensed to the
same market as the cable system. Cable operators are also obligated to carry
all local non-commercial stations. If a non-satellite delivered commercial
broadcast station does not request carriage under the must-carry provisions of
the 1992 Cable Act, a cable operator may not carry that station without that
station's explicit written consent for the cable operator to retransmit its
programming. The Company is carrying all television stations that have made
legitimate requests for carriage. All other television stations are carried
pursuant to written retransmission consent agreements.

Closed Captioning. In August 1997, in accordance with the 1996 Act, the
FCC adopted rules requiring closed captioning of most programming for persons
with hearing disabilities. The FCC's rules establish a schedule of gradual
compliance. The Company, like all other video programming distributors, is
responsible for ensuring that these goals are met.

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

Copyright Licensing. Cable systems are subject to federal copyright
licensing covering carriage of broadcast signals. In exchange for making
semi-annual payments to a federal copyright royalty pool and meeting certain
other obligations, cable operators obtain a blanket license to retransmit
broadcast signals. Bills have been introduced in Congress over the past several
years that would eliminate or modify the cable compulsory license. The 1992
Cable Act's retransmission consent provisions expressly provide that
retransmission consent agreements between television stations and cable
operators do not obviate the need for cable operators to obtain a copyright
license for the programming carried on each broadcaster's signal.

Electric Utility Entry Into Telecommunications. The 1996 Act provides that
registered utility holding companies and subsidiaries may provide
telecommunications services (including cable) notwithstanding the Public
Utility Holding Company Act. Electric utilities must establish separate
subsidiaries, known as "exempt telecommunications companies" and must apply to
the FCC for operating authority. It is anticipated that large utility holding
companies will become significant competitors to both cable television and
other telecommunications providers.

30
<PAGE>

State and Local Regulation. Because a cable system uses streets and
rights-of-way, cable systems are subject to state and local regulation,
typically imposed through the franchising process. State and/or local officials
are usually involved in franchisee selection, system design and construction,
safety, consumer relations, billing practices and community-related programming
and services among other matters. Cable systems generally are operated pursuant
to nonexclusive franchises, permits or licenses granted by a municipality or
other state or local government entity. Franchises generally are granted for
fixed terms and in many cases are terminable if the franchise operator fails to
comply with material provisions. The 1992 Cable Act prohibits the award of
exclusive franchises and allows franchising authorities to exercise greater
control over the operation of franchised cable systems, especially in the area
of customer service and rate regulation. The 1992 Cable Act also allows
franchising authorities to operate their own multichannel video distribution
system without having to obtain a franchise and permits states or LFAs to adopt
certain restrictions on the ownership of cable systems. Moreover, franchising
authorities are immunized from monetary damage awards arising from regulation
of cable systems or decisions made on franchise grants, renewals, transfers and
amendments. Under certain circumstances, LFAs may become certified to regulate
basic cable service rates.

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

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

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

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

31
<PAGE>

Glossary of Defined Terms

<TABLE>
<S> <C>
Certificate of Designation Pegasus' Certificate of Designation, Preferences and Relative,
Participating, Optional and Other Special Rights thereof relating
to the Series A Preferred Stock.

Class A Common Stock Pegasus' Class A Common Stock, par value $.01 per share.

Class B Common Stock Pegasus' Class B Common Stock, par value $.01 per share.

Common Stock The Class A Common Stock and the Class B Common Stock.

Company Pegasus and its direct and indirect subsidiaries.

Credit Facility PM&C's $180.0 million credit facility.

DBS Direct broadcast satellite television.

DIRECTV The video, audio and data services provided via satellite by DIRECTV
Enterprises, Inc., or the entity, as applicable.

DSS Digital satellite system or DSS(R). DSS(R) is a registered trademark of DIRECTV,
Inc.

DTS Digital Television Services, Inc. and its subsidiaries, as applicable.

Exchange Notes Pegasus' 12 3/4% Senior Subordinated Exchange Notes due 2007, which are
issuable at Pegasus' option in exchange for the Series A Preferred Stock.

FCC Federal Communications Commission.

Fox Fox Broadcasting Company.

Hughes Hughes Electronics Corporation or one of its subsidiaries, including DIRECTV,
Inc., as applicable.

LMAs Local marketing agreements, program service agreements or time brokerage
agreements between broadcasters and television station licensees pursuant to
which broadcasters provide programming to and retain the advertising revenues
of such stations in exchange for fees paid to television station licensees.

Location Cash Flow Location Cash Flow is defined as new revenues less location operating expenses.
Location operating expenses consist of programming, barter programming,
general and administrative, technical and operations, marketing and selling
expenses. Operating Cash Flow is defined as income (loss) from operations plus,
(i) depreciation and amortization and (ii) non-cash incentive compensation. The
difference between Location Cash Flow and Operating Cash Flow is that
Operating Cash Flow includes cash incentive compensation and corporate expenses.
Although Location Cash Flow and Operating Cash Flow are not measures of
performance under generally accepted accounting principles, the Company
believes that Location Cash Flow and Operating Cash Flow are accepted within
the Company's 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. Nevertheless, these measures should not be
considered in isolation or as a substitute for income from operations, net income,
net cash provided by operating activities or any other measure for determining
the Company's operating performance or liquidity which is calculated in accordance
with generally accepted accounting principles.
</TABLE>
32
<PAGE>

<TABLE>
<S> <C>
NRTC The National Rural Telecommunications Cooperative, the only entity authorized
to provide DIRECTV services that is independent of DIRECTV, Inc. Approximately
165 NRTC members and affiliate members are authorized to provide DIRECTV
services in exclusive territories granted to members and affiliate members
of the NRTC by DIRECTV, Inc.

Pegasus Pegasus Communications Corporation.

Pending DBS Acquisitions The acquisition of DBS territories and related assets from 14 independent
providers of DIRECTV services.

PM&C Pegasus Media & Communications, Inc., a wholly-owned subsidiary of Pegasus.

PM&C Notes Indenture The indenture dated July 7, 1995 by and among PM&C, certain of its subsidiaries
and First Union National Bank, as trustee, relating to the PM&C Notes.

PM&C Notes PM&C's 12 1/2% Series B Senior Subordinated Notes due 2005 issued in an
aggregate principal amount of $85.0 million.

PSH Pegasus Satellite Holdings, Inc., a wholly-owned subsidiary of Pegasus, which
concurrently with the consummation of the Senior Notes Offering sold all of its
assets to PM&C in connection with the Subsidiaries Combination.

Senior Notes Pegasus' 9 5/8% Series A Senior Notes due 2005 (the "Series A Senior Notes")
issued in an aggregate principal amount of $115.0 million or Pegasus' 9 5/8%
Series B Senior Notes due 2005 (the "Series B Senior Notes"), which were
issued upon exchange of the Series A Senior Notes and which have terms
substantially similar to the Series A Senior Notes, as applicable.

Senior Notes Indenture The indenture between Pegasus and First Union National Bank, as trustee,
governing the Senior Notes.

Senior Notes Offering Pegasus' offering of the 9 5/8% Series A Senior Notes due 2005 issued in an
aggregate principal amount of $115.0 million.

Series A Preferred Stock Pegasus' 12 3/4% Series A Cumulative Exchangeable Preferred Stock, which was
offered in connection with the Unit Offering.

Subsidiaries Combination The acquisitions of the assets of PSH by PM&C, which occurred concurrently
with the consummation of the Senior Notes Offering.

Unit Offering Pegasus' public offering of 100,000 Units consisting of 100,000 shares of Series
A Preferred Stock and 100,000 Warrants, which was completed on January 27,
1997.

Units The units consisting of Series A Preferred Stock and Warrants offered in the Unit
Offering.

UPN United Paramount Network.

WB The WB Television Network.
</TABLE>
33
<PAGE>

Item 2: Properties

<TABLE>
<CAPTION>
Owned or Expiration of Lease
Location and Type of Property Leased Approximate Size or Renewal Options
- ----------------------------- -------- ---------------- -------------------
<S> <C> <C> <C>
Corporate Office Radnor, PA Leased 6,686 sq. ft. 3/31/99
TV Stations Jackson, MS (transmitting equipment) Leased 1,125 foot tower 2/28/04
Jackson, MS (television station and transmitter (1) Lease/ 5,600 sq. ft. bldg.; 900 sq. ft. bldg. N/A
building) Purchase
West Mountain, PA (tower & transmitter) Leased 9.6 acres 1/31/00
Scranton, PA (television station) Leased 9,032 sq. ft. 4/30/00
Bald Eagle Mtn, PA (transmitting equip.) Owned 179' tower N/A
Nescopec Mountain, PA (transmitting) Owned 400 foot tower N/A
Williamsport, PA (tower) Owned 175 foot tower N/A
Williamsport, PA (land) Owned 40,000 sq. ft. N/A
Chattanooga, TN (transmitting) Owned 577 foot tower N/A
Chattanooga, TN (television station) Owned 16,240 sq. ft. bldg. on 3.17 acres N/A
Portland, ME (television station) Leased 8,000 sq. ft. 12/31/00
Gray, ME (tower site) Owned 18.6 acres N/A
Midway, FL (television station) Owned 16,000 sq. ft. bldg. on 3.55 acres N/A
Jasper, FL Owned 118 acres N/A
Nickleville, GA (tower) Owned 22.5 acres N/A
Cairo, GA DBS Offices Owned 18 acres N/A
Marlborough, MA (office) Leased 11,450 sq. ft. 6/30/02
Charlton, MA (warehouse) Cable Systems Leased 1,750 sq. ft. area Monthly
Winchester, CT (headend) Owned 15.22 acres N/A
Winsted, CT (office) Owned 2,000 sq. ft. N/A
North Brookfield, MA (headend) Leased 60,000 sq. ft. / 100' tower 6/01/04
Charlton, MA (office, headend site) Leased 38,223 sq. ft. 5/9/99
Hinsdale, MA (headend site) Leased 30,590 sq. ft. 2/1/04
Lanesboro, MA (headend site) Leased 62,500 sq. ft. 4/13/03
West Stockbridge, MA (headend site) Leased 1.59 acres 4/4/05
Mayaguez, Puerto Rico (office) Leased 2,520 sq. ft. building 8/14/00
Mayaguez, Puerto Rico (headend) Leased 530 sq. ft. building 8/30/98
Mayaguez, Puerto Rico (warehouse) Leased 1,750 sq. ft. area monthly
San German, Puerto Rico (headend site) Owned 1,200 sq. ft. N/A
San German, Puerto Rico (tower & transmitter) Owned 60' tower N/A
San German, Puerto Rico (land) Leased 192 sq. meters 30 yr. term
San German, Puerto Rico (office) Leased 2,928 sq. ft. 2/1/01
Anasco, Puerto Rico (office) Leased 500 sq. ft 2/28/99
Anasco, Puerto Rico (headend site) Leased 1,200 sq. meters monthly
Anasco, Puerto Rico (headend) Owned 59 foot tower N/A
Guanica, Puerto Rico (headend site) Leased 121 sq. meters 2/28/04
Cabo Rojo, Puerto Rico (headend site) Leased 121 sq. meters 11/10/04
Hormigueros, Puerto Rico (warehouse) Leased 2,000 sq. ft. monthly
</TABLE>
- ------------
(1) The Company entered into a Lease/Purchase agreement in July 1993 which
calls for 60 monthly payments of $4,500 at the end of which the property
is conveyed to the Company.

34
<PAGE>

Item 3: Legal Proceedings

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 will not have a material adverse effect on the
consolidated operations, cash flows or financial position of the Company.

Item 4: Submission of Matters to a Vote of Security Holders

No matters were submitted to a vote of stockholders of Pegasus
Communications Corporation during the fourth quarter of fiscal year 1997.

PART II

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

The Class A Common Stock is traded on the Nasdaq National Market under the
symbol "PGTV." The following table sets forth the high and low bids per share
of Class A Common Stock, as reported by Nasdaq for the periods subsequent to
Pegasus' initial public offering on October 3, 1996. The quotations reflect
inter-dealer prices, without retail mark-ups, mark-downs or commissions, and
may not necessarily represent actual transactions.

High Low
--------- ----------
1996
Fourth Quarter (from October 4, 1996) ......... $16 $11 1/4
1997
First Quarter ................................. $14 $10 3/4
Second Quarter ................................ $11 3/8 $ 8 1/8
Third Quarter ................................. $21 1/2 $10 1/2
Fourth Quarter ................................ $25 1/2 $19

As of March 27, 1998, Pegasus had approximately 128 holders of Class A
Common Stock (excluding holders whose securities were held in street or nominee
name).

No established public trading market exists for shares of Pegasus' Class B
Common Stock. Each share of Class B Common Stock is convertible at the option
of the holder into one share of Class A Common Stock. All of the Class B Common
Stock is owned beneficially by Marshall W. Pagon, Pegasus' President and Chief
Executive Officer. Further information on the Class B Common Stock is provided
in Item 12 (Security Ownership of Certain Beneficial Owners and Management)
herein.

Calculation of Aggregate Market Value of Nonaffiliate Shares

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

Dividend Policy

Pegasus has not paid any cash dividends and does not anticipate paying
cash dividends on its Common Stock in the foreseeable future. Payment of cash
dividends on the Common Stock is restricted by the terms of the Series A
Preferred Stock, and the Exchange Notes, if issued. The terms of the Series A
Preferred Stock and the Exchange Notes permit Pegasus to pay dividends and
interest thereon by issuance, in lieu of cash, of additional shares of Series A
Preferred Stock and additional Exchange Notes, if issued, respectively. The
Senior

35
<PAGE>

Notes Indenture restricts Pegasus' ability to pay cash dividends on the Series
A Preferred Stock or cash interest on the Exchange Notes, if issued, prior to
July 1, 2002. Pegasus' ability to obtain cash from its subsidiaries with which
to pay cash dividends is also restricted by the Credit Facility and the PM&C
Indenture. Under the terms of the PM&C Indenture, PM&C is prohibited from
paying dividends prior to July 1, 1998.

Recent Sales of Unregistered Securities

On October 21, 1997, in reliance upon Rule 144A and Regulation S of the
general rules and regulations under the Securities Act of 1933, as amended (the
"Securities Act"), Pegasus sold $115.0 million of its 9.625% Series A Senior
Notes due 2005 in a private placement for which CIBC Wood Gundy Securities
Corp. acted as initial purchaser. After giving effect to the initial
purchaser's discount of $3.45 million and other expenses of the private
placement, the sale of the notes resulted in approximately $111.0 million in
net proceeds to the Company.

On November 7, 1997, Pegasus issued 397,035 shares of its Class A Common
Stock as partial consideration for the acquisition of DIRECTV rights and
related assets from ViewStar Entertainment Services, Inc. In issuing these
shares, Pegasus relied upon the exemption from registration set forth in
Section 4(2) of the Securities Act. See Note 18 to the Consolidated Financial
Statements and Item 13 (Certain Relationships and Related Transactions)
included herein for information relating to this acquisition.

Item 6: Selected Financial Data

The selected historical consolidated financial data for the year ended
December 31, 1993 have been derived from the Company's audited Consolidated
Financial Statements for such period. The selected historical consolidated
financial data for the years ended December 31, 1994, 1995, 1996 and 1997 have
been derived from the Company's Consolidated Financial Statements for such
periods, which have been audited by Coopers & Lybrand L.L.P., as indicated in
their report included elsewhere herein. The information should be read in
conjunction with the Consolidated Financial Statements and the notes thereto,
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations," which are included elsewhere herein.

<TABLE>
<CAPTION>
1993 1994 1995 1996 1997
------------ ----------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net revenues
DBS ......................................... $ -- $ 174 $ 1,469 $ 5,829 $ 38,254
Cable ....................................... 9,134 10,148 10,606 13,496 16,688
TV(a) ....................................... 10,353 17,869 20,073 28,604 31,876
-------- -------- -------- --------- ---------
Total net revenues ........................ 19,487 28,191 32,148 47,929 86,818
-------- -------- -------- --------- ---------
Direct operating expenses(b)
DBS ......................................... -- 210 1,379 4,958 32,014
Cable ....................................... 4,655 5,545 5,791 7,192 8,693
TV .......................................... 7,580 12,398 13,971 18,754 21,377
Incentive compensation(c) .................... 192 432 528 985 1,274
Corporate expenses ........................... 1,265 1,506 1,364 1,429 2,256
Depreciation and amortization ................ 5,978 6,940 8,751 12,061 27,792
-------- -------- -------- --------- ---------
Income (loss) from operations ................ (183) 1,160 364 2,550 (6,588)
Interest expense ............................. (4,402) (5,973) (8,817) (12,455) (16,094)
Interest income .............................. -- -- 370 232 1,539
Other expense, net ........................... (220) (65) (44) (171) (723)
Provision (benefit) for income taxes ......... -- 140 30 (120) 200
Gain on sale of cable system ................. -- -- -- -- 4,451
Extraordinary gain (loss), net ............... -- (633) 10,211 (250) (1,656)
-------- -------- -------- --------- ---------
Net income (loss) ............................ (4,805) (5,651) 2,054 (9,974) (19,272)
Dividends on Preferred Stock ................. -- -- -- -- 12,215
Net income (loss) applicable to Common
shares ...................................... $ (4,805) $ (5,651) $ 2,054 $ (9,974) $ (31,487)
======== ======== ======== ========= =========
</TABLE>

36
<PAGE>

<TABLE>
<CAPTION>
1993 1994 1995 1996 1997
------------ ------------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C>
Income (loss) per share:
Loss before extraordinary item ............. $ (1.59) $ (1.56) $ (3.02)
Extraordinary item ......................... 1.99 ( 0.04) ( 0.17)
========= ========= ==========
Net income (loss) per share ................ $ 0.40 $ (1.60) $ (3.19)
========= ========= ==========
Weighted average shares Outstanding ......... 5,140 6,240 9,858
OTHER DATA:
Pre-SAC Location Cash Flow(d) ............... $ 7,252 $ 10,038 $ 11,007 $ 17,671 $ 30,706
Location Cash Flow(d) ....................... 7,252 10,038 11,007 17,025 24,733
Operating Cash Flow(d) ...................... 5,795 8,100 9,287 15,596 22,478
Capital expenditures ........................ 885 1,264 2,640 6,294 9,929
Net cash provided by (used for):
Operating activities ....................... 1,694 4,103 6,195 4,332 8,478
Investing activities ....................... (106) (3,571) (6,459) (82,451) (142,109)
Financing activities ....................... (1,020) (658) 10,859 74,727 169,098
BALANCE SHEET DATA:
Net working capital (deficiency) ............ $ (3,844) $ (23,074) $ 17,566 $ 6,747 $ 32,347
Total assets ................................ 76,386 75,394 95,770 173,680 380,862
Total debt .................................. 72,127 61,629 82,896 115,575 208,355
Total liabilities ........................... 78,954 68,452 95,521 133,354 239,234
Total equity (deficiency)(e) ................ (2,568) 6,942 249 40,326 141,628
</TABLE>

- ------------
(a) Net revenues are shown net of agency commissions and national
representation fees.

(b) Direct operating expenses consist of programming, barter programming,
general and administrative, technical and operations, marketing and
selling and incentive compensation expense.

(c) Incentive compensation represents compensation expenses pursuant to the
Restricted Stock Plan and 401(k) Plans. See Item 11 (Executive
Compensation -- Incentive Program.)

(d) Pre-SAC Location Cash Flow is defined as Location Cash Flow plus subscriber
acquisition costs. Location Cash Flow is defined as net revenues less
location operating expenses. Location operating expenses consist of
programming, barter programming, general and administrative, technical and
operations, marketing and selling expenses. Operating Cash Flow is defined
as income (loss) from operations plus (i) depreciation and amortization
and (ii) non-cash incentive compensation. The difference between Location
Cash Flow and Operating Cash Flow is that Operating Cash Flow includes
cash incentive compensation and corporate expenses. Although Operating
Cash Flow and Location Cash Flow are not measures of performance under
generally accepted accounting principles, the Company believes that
Location Cash Flow and Operating Cash Flow are accepted within the
Company's 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. Nevertheless, these
measures should not be considered in isolation or as a substitute for
income from operations, net income, net cash provided by operating
activities or any other measure for determining the Company's operating
performance or liquidity which is calculated in accordance with generally
accepted accounting principles.

(e) The Company has not paid any cash dividends and does no anticipate paying
cash dividends on its Common Stock in the foreseeable future. Payment of
cash dividends on the Company's Common Stock are restricted by the terms
of the Series A Preferred Stock and the Exchange Notes, if issued. The
terms of the Series A Preferred Stock and the Exchange Notes, if issued,
permit the Company to pay dividends and interest thereon by issuance, in
lieu of cash, of additional shares of Series A Preferred Stock and
additional Exchange Notes, respectively.

37
<PAGE>

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

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

General

The Company is a diversified company operating in growing segments of the
media and communications industries: multichannel television and broadcast
television. Pegasus Multichannel Television includes DBS and cable businesses.
As of December 31, 1997, the Company's DBS operations consisted of providing
DIRECTV services to approximately 132,000 subscribers in certain rural areas of
27 states in which the Company holds the exclusive right to provide such
services. Its cable operations consist of systems in New England (Connecticut
and Massachusetts) and Puerto Rico. The Company sold its New Hampshire cable
system effective January 31, 1997. On January 16, 1998, the Company entered
into an agreement to sell its remaining New England cable systems. Pegasus
Broadcast Television owns and operates five TV stations affiliated with Fox and
operates one affiliated with UPN and another affiliated with WB. It has entered
into an agreement to operate an additional TV station, which will be affiliated
with WB and will commence operations in 1998.

On January 8, 1998, the Company entered into an agreement to acquire DTS.
Upon completion of the merger of a subsidiary of Pegasus into DTS, DTS will
become a wholly owned subsidiary of Pegasus. As of December 31, 1997, DTS'
operations, pro forma for its pending acquisition, consisted of providing
DIRECTV services to approximately 131,000 subscribers in certain rural areas of
11 states in which DTS holds the exclusive right to provide such services.

Multichannel revenues are derived from monthly customer subscriptions,
pay-per-view services, subscriber equipment rentals, home shopping commissions,
advertising time sales and installation charges. Broadcast revenues are derived
from the sale of broadcast airtime to local and national advertisers.

The Company's location operating expenses consist of (i) programming
expenses, (ii) marketing and selling costs, including advertising and promotion
expenses, local sales commissions, and ratings and research expenditures, (iii)
technical and operations costs, (iv) general and administrative expenses, and
(v) expensed subscriber acquisition costs. Multichannel programming expenses
consist of amounts paid to program suppliers, DSS authorization charges and
satellite control fees, each of which is paid on a per subscriber basis, and
DIRECTV royalties which are equal to 5% of DBS program service revenues.
Broadcast programming expenses include the amortization of long-term program
rights purchases, music license costs and "barter" programming expenses which
represent the value of broadcast air time provided to television program
suppliers in lieu of cash.

The Company no longer requires new DBS customers to sign a one-year
programming contract and, as a result, subscriber acquisition costs ("SAC"),
which were being capitalized and amortized over a twelve-month period, are
currently being charged to operations in the period incurred. This change
became effective October 1, 1997. Subscriber acquisition costs charged to
operations are excluded from pre-SAC location operating expenses.

Results of Operations

Year ended December 31, 1997 compared to year ended December 31, 1996

The Company's net revenues increased by approximately $38.9 million or 81%
for the year ended December 31, 1997 as compared to the same period in 1996.
Multichannel Television net revenues increased $35.6 million or 184% and
Broadcast Television net revenues increased $3.3 million or 11%. The net
revenues increased as a result of (i) a $32.4 million or 556% increase in DBS
revenues of which $2.6 million or 8% was due to the increased number of DBS
subscribers in territories owned at the beginning of 1996 and $29.8 million or
92% resulted from acquisitions made subsequent to the third quarter of 1996,
(ii) a $3.2 million or 24% increase in Cable revenues which was the net result
of a $804,000 or 8% increase in same system revenues due primarily to rate
increases, a $3.9 million increase due to the system acquired effective
September 1, 1996 and

38
<PAGE>

a $1.6 million reduction due to the sale of the Company's New Hampshire cable
system effective January 31, 1997, (iii) a $3.2 million or 11% increase in TV
revenues of which $1.9 million or 57% was due to ratings growth which the
Company was able to convert into higher revenues, $1.1 million or 34% was the
result of acquisitions made in the first quarter of 1996 and $289,000 or 9% was
due to the two new stations launched on August 1, 1997 and October 17, 1997,
and (iv) a $34,000 increase in Tower rental income.

The Company's total location operating expenses, as described above,
before DBS subscriber acquisition costs increased by approximately $25.9
million or 85% for the year ended December 31, 1997 as compared to the same
period in 1996. Multichannel Television pre-SAC location operating expenses
increased $23.2 million or 202% and Broadcast Television location operating
expenses increased $2.6 million or 14%. The pre-SAC location operating expenses
increased as a result of (i) a $21.7 million or 504% increase in operating
expenses generated by the Company's DBS operations due to a same territory
increase in programming and other operating costs totaling $1.5 million
(resulting from the increased number of DBS subscribers in territories owned at
the beginning of 1996) and a $20.2 million increase attributable to territories
acquired subsequent to the third quarter of 1996, (ii) a $1.5 million or 21%
increase in Cable operating expenses as the net result of a $157,000 or 3%
increase in same system operating expenses due primarily to increases in
programming costs, a $2.2 million increase attributable to the system acquired
effective September 1, 1996 and a $852,000 reduction due to the sale of the
Company's New Hampshire cable system effective January 31, 1997, and (iii) a
$2.6 million or 14% increase in TV operating expenses as the result of a
$535,000 or 4% increase in same station operating expenses, a $1.4 million
increase attributable to stations acquired in the first quarter of 1996 and a
$650,000 increase attributable to the two new stations launched on August 1,
1997 and October 17, 1997.

DBS subscriber acquisition costs, which consist of regional sales costs,
advertising and promotion, and commissions and subsidies, totaled $10.5 million
or $281 per gross subscriber addition for the year ended December 31, 1997, of
which $6.0 million was expensed.

Incentive compensation, which is calculated from increases in pro forma
Location Cash Flow, increased by approximately $289,000 or 29% for the year
ended December 31, 1997 as compared to the same period in 1996.

Corporate expenses increased by $827,000 or 58% for the year ended
December 31, 1997 as compared to the same period in 1996 primarily due to
increased staffing as a result of internal and acquisition related growth,
enhanced public relations activities and additional public reporting
requirements for the Company.

Depreciation and amortization expense increased by approximately $15.7
million or 130% for the year ended December 31, 1997 as compared to the same
period in 1996 as the Company increased its fixed and intangible asset base as
a result of five completed acquisitions during 1996 and twenty-five completed
acquisitions during 1997.

As a result of these factors, the Company reported a loss from operations
of $6.6 million for the year ended December 31, 1997 as compared to income from
operations of $2.6 million for the same period in 1996.

Interest expense increased by approximately $3.6 million or 29% for the
year ended December 31, 1997 as compared to the same period in 1996 as a result
of an increase in debt associated with the Company's acquisitions (see
"Liquidity and Capital Resources - Financings").

The Company's net loss increased by approximately $9.3 million for the
year ended December 31, 1997 as compared to the same period in 1996 as a net
result of an increase in the loss from operations of approximately $9.1
million, an increase in interest expense of $3.6 million, an increase in the
provision for income taxes of $320,000, a decrease in other expenses of
approximately $755,000, an increase in the extraordinary loss on extinguishment
of debt of $1.4 million and a gain on the sale of the New Hampshire cable
system of approximately $4.5 million.

The Company declared preferred stock dividends amounting to $12.2 million
which were paid by issuing shares of Series A Preferred Stock.

Year ended December 31, 1996 compared to year ended December 31, 1995

The Company's net revenues increased by approximately $15.8 million or 49%
for the year ended December 31, 1996 as compared to the same period in 1995 as
a result of (i) a $8.5 million or 43% increase in TV revenues of which $1.5
million or 17% was due to ratings growth which the Company was able to convert
into

39
<PAGE>

higher revenues and $7.0 million or 83% was the result of acquisitions made in
the first quarter of 1996, (ii) a $4.4 million or 297% increase in DBS revenues
of which $2.7 million or 63% was due to the increased number of DBS subscribers
and $1.7 million or 37% resulting from acquisitions made in the fourth quarter
of 1996, (iii) a $2.0 million or 51% increase in Puerto Rico cable revenues due
primarily to an acquisition effective September 1, 1996, (iv) a $864,000 or 13%
increase in New England cable revenues due primarily to rate increases and new
combined service packages, and (v) a $16,000 increase in Tower rental income.

The Company's total location operating expenses increased by approximately
$9.8 million or 46% for the year ended December 31, 1996 as compared to the
same period in 1995 as a result of (i) a $4.8 million or 34% increase in TV
operating expenses as the net result of a $115,000 or 1% decrease in same
station direct operating expenses and a $4.9 million increase attributable to
stations acquired in the first quarter of 1996, (ii) a $3.6 million or 260%
increase in operating expenses generated by the Company's DBS operations due to
an increase in programming costs of $1.4 million, royalty costs of $138,000,
marketing expenses of $455,000, customer support charges of $199,000 and other
DIRECTV costs such as security, authorization fees and telemetry and tracking
charges totaling $237,000, all generated from the increased number of DBS
subscribers, and a $1.1 million increase attributable to territories acquired
in the fourth quarter of 1996, (iii) a $912,000 or 37% increase in Puerto Rico
cable operating expenses as the net result of a $64,000 or 3% decrease in same
system direct operating expenses and a $976,000 increase attributable to the
system acquired effective September 1, 1996, (iv) a $489,000 or 15% increase in
New England cable operating expenses due primarily to increases in programming
costs associated with the new combined service packages, and (v) a $10,000
decrease in Tower administrative expenses.

As a result of these factors, incentive compensation which is calculated
from increases in pro forma Location Cash Flow increased by approximately
$457,000 or 87% for the year ended December 31, 1996 as compared to the same
period in 1995.

Corporate expenses increased by $65,000 or 5% for the year ended December
31, 1996 as compared to the same period in 1995 primarily due to the initiation
of public reporting requirements for PM&C and Pegasus.

Depreciation and amortization expense increased by approximately $3.3
million or 38% for the year ended December 31, 1996 as compared to the same
period in 1995 as the Company increased its fixed and intangible assets as a
result of five completed acquisitions during 1996.

As a result of these factors, income from operations increased by
approximately $2.2 million for the year ended December 31, 1996 as compared to
the same period in 1995.

Interest expense increased by approximately $3.6 million or 42% for the
year ended December 31, 1996 as compared to the same period in 1995 as a result
of a combination of the Company's issuance of the PM&C Notes on July 7, 1995
and an increase in debt associated with the Company's 1996 acquisitions. A
portion of the proceeds from the issuance of the PM&C Notes was used to retire
floating debt on which the effective interest rate was lower than the 12.5%
interest rate under the PM&C Notes. The PM&C Notes, however, have more
favorable terms such as no requirement for principal repayment, subject to
certain conditions, until the end of the term.

The Company reported a net loss of approximately $10.0 million for the
year ended December 31, 1996 as compared to net income of approximately $2.0
million for the same period in 1995. The $12.0 million change was the net
result of an increase in income from operations of approximately $2.2 million,
an increase in interest expense of $3.6 million, a decrease in extraordinary
items of $10.5 million from extinguishment of debt, a decrease in the provision
for income taxes of $150,000 and an increase in other expenses of approximately
$265,000.

Liquidity and Capital Resources

The Company's primary sources of liquidity have been the net cash provided
by its TV and cable operations, credit available under its credit facilities
and proceeds from public and private offerings. The Company's principal use of
its cash has been to fund acquisitions, to meet debt service obligations, to
fund investment in its TV and cable technical facilities and to fund subscriber
acquisition costs.

40
<PAGE>

As of March 12, 1998, the Company had entered into 14 letters or
definitive agreements to acquire, from various independent DIRECTV providers,
the rights to provide DIRECTV programming in certain rural areas of Idaho,
Nebraska, New Mexico, Oregon, South Dakota and Texas and related assets in
exchange for approximately $52.9 million of cash, $10.3 million in promissory
notes and $854,000 in shares of Class A Common Stock. The cash portion of the
Pending Pegasus DBS Acquisitions will be funded with cash on hand and proceeds
from the New England Cable Sale. If the New England Cable Sale is not
completed, the Company will use borrowings from the Credit Facility to fund the
cash portion of these acquisitions in excess of its cash on hand.

Pre-SAC Location Cash Flow increased by $13.0 million or 74% for the year
ended December 31, 1997 as compared to the same period in 1996. Multichannel
Television Pre-SAC Location Cash Flow increased $12.4 million or 158% and
Broadcast Television Location Cash Flow increased $649,000 or 7%. Pre-SAC
Location Cash Flow increased as a result of (i) a $10.7 million or 705%
increase in DBS Pre-SAC Location Cash Flow of which $1.0 million or 10% was due
to an increase in same territory Pre-SAC Location Cash Flow and $9.7 million or
90% was attributable to territories acquired subsequent to the third quarter of
1996, (ii) a $1.7 million or 27% increase in Cable Location Cash Flow which was
the net result of a $646,000 or 14% increase in same system Location Cash Flow,
a $1.7 million increase due to the system acquired effective September 1, 1996
and a $703,000 reduction due to the sale of the Company's New Hampshire cable
system effective January 31, 1997, (iii) a $615,000 or 6% increase in TV
Location Cash Flow as the net result of a $1.3 million or 17% increase in same
station Location Cash Flow, a $343,000 decrease attributable to stations
acquired in the first quarter of 1996 and a $361,000 decrease attributable to
the two new stations launched on August 1, 1997 and October 17, 1997, and (iv)
a $34,000 increase in Tower Location Cash Flow.

The Company is required to maintain a letter of credit in favor of the
NRTC to collateralize payment of the NRTC billings. As of December 31, 1997,
this letter of credit amounted to approximately $8.5 million. The Company is
required to increase this amount with any DBS acquisition by an amount equal to
the acquired DBS entity's highest month of billings times three.

During the year ended December 31, 1997, net cash provided by operating
activities was approximately $8.5 million, which together with $8.6 million of
cash on hand, $6.9 million of net proceeds from the sale of the New Hampshire
cable system and $169.1 million of net cash provided by the Company's financing
activities was used to fund other investing activities totaling $149.1 million.
Financing activities consisted of raising $95.8 million in net proceeds from
the Unit Offering and $111.0 million in net proceeds from the Senior Notes
Offering, borrowing $94.2 million under PSH's credit facility (the "PSH Credit
Facility"), repayment of $94.2 million of indebtedness under the PSH Credit
Facility and $29.6 million of indebtedness under PM&C's credit facility (the
"PM&C Credit Facility"), net repayment of approximately $657,000 of other
long-term debt, placing $1.2 million in restricted cash to collateralize a
letter of credit and the incurrence of approximately $6.2 million in debt
issuance costs associated with the PSH Credit Facility and the Credit Facility.
Investing activities, net of the proceeds from the sale of the New Hampshire
cable system, consisted of (i) the acquisition of DBS assets from four
independent DIRECTV providers during the first quarter of 1997 for
approximately $34.0 million, (ii) the acquisition of DBS assets from five
independent DIRECTV providers during the second quarter of 1997 for
approximately $22.5 million, (iii) the acquisition of DBS assets from ten
independent DIRECTV providers during the third quarter of 1997 for
approximately $42.7 million, (iv) the acquisition of DBS assets from six
independent DIRECTV providers during the fourth quarter of 1997 for
approximately $34.4 million, (v) broadcast television transmitter, tower and
facility constructions and upgrades totaling approximately $5.8 million, (vi)
the interconnection and expansion of the Puerto Rico cable systems amounting to
approximately $1.8 million, (vii) payments of programming rights amounting to
$2.6 million, and (viii) maintenance and other capital expenditures and
intangibles totaling approximately $5.4 million. As of December 31, 1997, the
Company's cash on hand approximated $44.0 million.

Location Cash Flow increased by $6.0 million or 55% for the year ended
December 31, 1996 as compared to the same period in 1995 as a result of (i) a
$3.7 million or 62% increase in TV Location Cash Flow of which $1.6 million or
42% was due to an increase in same station Location Cash Flow and $2.1 million
or 58% was due to an increase attributable to stations acquired in the first
quarter of 1996, (ii) a $781,000 or 868% increase in DBS Location Cash Flow of
which $312,000 or 40% was due to an increase in same territory Location Cash

41
<PAGE>

Flow and $469,000 or 60% was due to an increase attributable to the territories
acquired in the fourth quarter of 1996, (iii) a $1.1 million or 72% increase in
Puerto Rico cable Location Cash Flow of which $126,000 or 11% was due to an
increase in same system Location Cash Flow and $998,000 or 89% was due to the
system acquired effective September 1, 1996, (iv) a $375,000 or 11% increase in
New England cable Location Cash Flow, and (v) a $26,000 increase in Tower
Location Cash Flow.

During the year ended December 31, 1996, net cash provided by operating
activities was approximately $3.1 million, which together with $12.0 million of
cash on hand, $9.9 million of restricted cash and $74.7 million of net cash
provided by the Company's financing activities was used to fund investing
activities totaling $81.2 million. Investment activities consisted of (i) the
Portland, Maine and Tallahassee, Florida TV acquisitions for approximately
$16.6 million, (ii) the San German, Puerto Rico cable acquisition for
approximately $26.0 million, (iii) the acquisition of DBS assets from two
independent DIRECTV providers during the third quarter of 1996 for
approximately $29.9 million, (iv) the purchase of the Pegasus Cable Television
of Connecticut, Inc. ("PCT-CT") office facility and headend facility for
$201,000, (v) the fiber upgrade in the PCT-CT cable system amounting to
$323,000, (vi) the purchase of DSS units used as rental and lease units
amounting to $832,000, (vii) payments of programming rights amounting to $1.8
million, and (viii) maintenance and other capital expenditures and intangibles
totaling approximately $6.7 million. As of December 31, 1996, the Company's
cash on hand approximated $8.6 million.

During the year ended December 31, 1995, net cash provided by operations
was approximately $5.8 million, which together with $1.4 million of cash on
hand and $10.9 million of net cash provided by the Company's financing
activities was used to fund a $12.5 million distribution to Pegasus' parent and
to fund investing activities totaling $6.1 million. Investment activities
consisted of (i) the final payment of the deferred purchase price for the
Company's New England DBS rights of approximately $1.9 million, (ii) the
purchase of a new WDSI studio and office facility for $520,000, (iii) the
purchase of a LIBOR cap for $300,000, (iv) the purchase of DSS units used as
rental and lease units for $157,000, (v) payments of programming rights
amounting to $1.2 million, and (vi) maintenance and other capital expenditures
and intangibles totaling approximately $1.9 million.

As defined in the Certificate of Designation governing the Series A
Preferred Stock and the indenture governing the Senior Notes, the Company 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 (Satellite Segment Operating 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,
the Company believes that Location Cash Flow, Operating Cash Flow and Adjusted
Operating Cash Flow are accepted within the Company's 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 Pro forma for the twenty-five completed DBS acquisitions occurring
in 1997 and the disposition of the New Hampshire cable system, as if such
acquisitions/disposition occurred on January 1, 1997. Adjusted Operating Cash
Flow woudl have been approximately $35.2 million as follows:

<TABLE>
<CAPTION>
Four Quarters
Ended
(in thousands) December 31,
1997
--------------
<S> <C>
Revenues ............................................................................ $108,543
Direct operating expenses, excluding depreciation, amortization and other non-cash
charges ........................................................................... 71,264
--------
Income from operations before incentive compensation corporate expenses, depreciation
and amortization and other non-cash charges ....................................... 37,279
Corporate expenses .................................................................. 2,256
--------
Adjusted operating cash flow ........................................................ $ 35,023
========
</TABLE>

42
<PAGE>

Financings

On January 27, 1997, the Company completed the Unit Offering ("Unit
Offering") in which it sold 100,000 units, consisting of 100,000 shares of
12.75% Series A Cumulative Exchangeable Preferred Stock and 100,000 Warrants to
purchase 193,600 shares of Class A Common Stock ("Warrants"). The Unit Offering
resulted in net proceeds to the Company of $95.8 million. The Company applied
the net proceeds from the Unit Offering as follows: (i) $30.1 million to the
repayment of all outstanding indebtedness under the PM&C Credit Facility and
expenses related thereto, and (ii) $56.5 million for the payment of the cash
portion of the purchase price in the acquisition of DBS assets from nine
independent DIRECTV providers. The remaining net proceeds were used for working
capital, general corporate purposes and to finance other acquisitions.

On July 9, 1997, PSH entered into a $130.0 million credit facility (the
"PSH Credit Facility"), which was collateralized by substantially all of the
assets of PSH and its subsidiaries. The facility consisted of a $40.0 million
seven-year senior term loan and a $90.0 million six-year senior revolving
credit facility. As of October 21, 1997, the Company had drawn $94.2 million
under the PSH Credit Facility in connection with various DBS acquisitions. On
October 21, 1997, outstanding balances under the PSH Credit Facility were
repaid from the proceeds of the Senior Notes Offering, and commitments under
the PSH Credit Facility were terminated. Deferred financing fees relating to
the $130.0 million revolving credit facility were written off, resulting in an
extraordinary loss of $1.2 million on the refinancing transaction.

On October 21, 1997, the Company completed the Senior Notes Offering in
which it sold $115.0 million of 9.625% Series A Senior Notes, resulting in net
proceeds to the Company of approximately $111.0 million. The Company applied
the net proceeds from the Senior Notes Offering as follows: (i) $94.2 million
to the repayment of all outstanding indebtedness under the PSH Credit Facility,
and (ii) $16.8 million for the payment of the cash portion of the purchase
price for the acquisition of DBS assets from various independent DIRECTV
providers.

On December 10, 1997, PM&C entered into the Credit Facility. The Credit
Facility is a $180.0 million six-year, collateralized, 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.
Concurrently with the closing of the Credit Facility, the PM&C Credit Facility
was terminated. A portion of the deferred fees relating to the PM&C Credit
Facility were written off, resulting in an extraordinary loss of $460,000 on
the refinancing transaction.

The Company is highly leveraged. As of December 31, 1997, the Company has
indebtedness of $208.4 million, total common stockholders' equity of $27.4
million, preferred stock of $111.3 million and, assuming certain conditions are
met, $171.5 million available under the Credit Facility. For the year ended
December 31, 1997, the Company's earnings were inadequate to cover its combined
fixed charges and dividends on Series A Preferred Stock by approximately $31.3
million.

The Company is restricted by the Senior Notes Indenture from paying
dividends on the Series A Preferred Stock in cash prior to July 1, 2002.
Additionally, the PM&C Indenture and Credit Facility contains certain financial
and operating covenants, including restrictions on PM&C to incur additional
indebtedness, create liens and to pay dividends.

Pre-SAC Location Cash Flow is defined as net revenues less location
operating expenses before subscriber acquisition costs. Location Cash Flow is
defined as net revenues less location operating expenses. Although Pre-SAC
Location Cash Flow and Location Cash Flow are not measures of performance under
generally accepted accounting principles, the Company believes that Pre-SAC
Location Cash Flow and Location Cash Flow are accepted within the Company's
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. Nevertheless, these measures should not be considered in
isolation or as a substitute for income from operations, net income, net cash
provided by operating activities or any other measures for determining the
Company's operating performance or liquidity which is calculated in accordance
with generally accepted accounting principles.

43
<PAGE>

The Company closely monitors conditions in the capital markets to identify
opportunities for the effective and prudent use of financial leverage. In
financing its future expansion and acquisition requirements, the Company would
expect to avail itself of such opportunities and thereby increase its
indebtedness, which could result in increased debt service requirements. There
can be no assurance that such debt financing can be completed on terms
satisfactory to the Company or at all. The Company may also issue additional
equity to fund its future expansion and acquisition requirements.

Capital Expenditures

The Company's capital expenditures aggregated $9.9 million in 1997 as
compared to $6.3 million in 1996. The Company expects recurring renewal and
refurbishment capital expenditures to total approximately $2.0 million per
year. In addition to these maintenance capital expenditures, the Company's 1998
capital projects include (i) DBS facility upgrades of approximately $500,000,
and (ii) approximately $2.6 million of TV expenditures for broadcast television
transmitter, tower and facility constructions and upgrades. Effective October
1, 1997, the Company no longer requires new DBS customers to sign a one-year
programming contract and, as a result, subscriber acquisition costs, which were
being capitalized through September 30, 1997 and amortized over a twelve-month
period, will be charged to operations in the period incurred. The Company
commenced the programming of two new TV stations, WPME on August 1, 1997 and
WGFL on October 17, 1997 and its plans are to commence programming of an
additional station in 1998. There can be no assurance that the Company's
capital expenditure plans will not change in the future. The Company's policy
is to capitalize subscriber acquisition costs directly related to new
subscribers, such as commissions and equipment subsidies, who sign a
programming contract. These costs are amortized over the life of the contract.
The Company expenses it subscriber acquisition costs when no new contract is
obtained. The Company currently 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 occurred.

Other

The Company has reviewed all of its system as to the Year 2000 issue. The
Company has in the past three years replaced or upgraded, or is in the process
of replacing or upgrading, all of its TV traffic systems, cable billing systems
and corporate accounting systems. All of these new systems will be in place by
the third quarter of 1998. The Company relies on outside vendors for the
operation of its DBS satellite control and billing systems, including DIRECTV,
the NRTC and their respective vendors. The Company has established a policy to
ensure that its 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 by the first
quarter of 1999. Costs to be incurred beyond 1997, relating to the Year 2000
issue are not expected to be significant.

The Company believes that it has adequate resources to meet its working
capital, maintenance capital expenditure and debt service obligations. The
Company believes that cash on hand, together with available borrowings under
the Credit Facility and future indebtedness which may be incurred by the
Company and its subsidiaries will give the Company the ability to fund
acquisitions and other capital requirements in the future. The Company engages
in discussions with respect to acquisition opportunities in media and
communications businesses on a regular basis. However, there can be no
assurance that the future cash flows of the Company will be sufficient to meet
all of the Company's obligations and commitments.

On January 8, 1998, the Company entered into the Agreement and Plan of
Merger to acquire DTS for approximately 5.5 million shares of Pegasus' Class A
Common Stock. As of December 31, 1997, DTS' operations, pro forma for its
pending acquisition, consisted of providing DIRECTV services to approximately
131,000 subscribers in certain rural areas of eleven states in which DTS holds
the exclusive right to provide such services. Upon completion of the DTS
Acquisition, DTS will become a wholly owned subsidiary of Pegasus.

On January 16, 1998, the Company entered into an agreement to sell its
remaining New England cable systems to Avalon Cable of New England, LLC for a
purchase price of at least $28 million and not more than $31 million.

As a holding company, Pegasus' ability to pay dividends is dependent upon
the receipt of dividends from its direct and indirect subsidiaries. Under the
terms of the PM&C Notes Indenture, PM&C is prohibited from

44
<PAGE>

paying dividends prior to July 1, 1998. Under the terms of the Credit Facility,
PM&C is restricted from paying dividends. In addition, Pegasus' ability to pay
dividends and Pegasus' and its subsidiaries' ability to incur indebtedness are
subject to certain restrictions contained in the Senior Notes Indenture and
Certificate of Designation governing the Series A Preferred Stock.

PM&C's ability to incur additional indebtedness is limited under the terms
of the PM&C Notes Indenture and the Credit Facility. These limitations take the
form of certain leverage ratios and are dependent upon certain measures of
operating profitability. Under the terms of the Credit Facility, capital
expenditures and business acquisitions in excess of certain agreed upon levels
will require lender consent.

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

The Company believes that inflation has not been a material factor
affecting the Company's business. In general, the Company's revenues and
expenses are impacted to the same extent by inflation. Substantially all of the
Company's indebtedness bears interest at a fixed rate.

The Company has adopted the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings Per Share." The Company has
reviewed the provisions of SFAS No. 130, "Reporting Comprehensive Income" and
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information", and the implementation of the above standards is not expected to
have any significant impact on its consolidated financial statements.

Item 7A: Quantitative and Qualitative Disclosures About Market Risk

Not Applicable

Item 8: Financial Statements and Supplementary Data

The information required by this item is set forth on pages F-1 through
F-25.

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

None.

45
<PAGE>

PART III

Item 10: Directors and Executive Officers of the Registrant

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

<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Marshall W. Pagon .............. 42 Chairman of the Board, President and Chief Executive Officer
Robert N. Verdecchio ........... 41 Senior Vice President, Chief Financial Officer, Treasurer, Assistant
Secretary and Director
Ted S. Lodge ................... 41 Senior Vice President, Chief Administrative Officer, General Counsel
and Secretary
Howard E. Verlin ............... 36 Vice President and Assistant Secretary
James J. McEntee, III .......... 40 Director
Mary C. Metzger ................ 52 Director
Donald W. Weber ................ 61 Director
</TABLE>

Marshall W. Pagon has served as President, Chief Executive Officer and
Chairman of the Board of Pegasus since its incorporation, and served as
Treasurer of Pegasus from its incorporation to June 1997. Mr. Pagon also serves
as Chief Executive Officer and Director of each of Pegasus' subsidiaries. From
1991 to October 1994, when the assets of various affiliates of PM&C,
principally limited partnerships that owned and operated the Company's TV and
cable operations, were transferred to PM&C's subsidiaries, entities controlled
by Mr. Pagon served as the general partner of these partnerships and conducted
the business of the Company. Mr. Pagon's background includes over 17 years of
experience in the media and communications industry.

Robert N. Verdecchio has served as Pegasus' Senior Vice President, Chief
Financial Officer and Assistant Secretary since its inception and as Pegasus'
Treasurer since June 1997. He has also served similar functions for PM&C's
affiliates and predecessors in interest since 1990. Mr. Verdecchio has been a
Director of Pegasus and PM&C since December 18, 1997. Mr. Verdecchio is a
certified public accountant and has over 12 year of experience in the media and
communications industry.

Ted S. Lodge has served as Senior Vice President, Chief Administrative
Officer, General Counsel and Assistant Secretary of Pegasus since July 1, 1996.
In June 1997, Mr. Lodge became Pegasus' Secretary. From June 1992 through June
1996, Mr. Lodge practiced law with the law firm of Lodge & Company. During such
period, Mr. Lodge was engaged by the Company as its outside legal counsel in
connection with various matters.

Howard E. Verlin is a Vice President and Assistant Secretary of Pegasus
(and was until June 1997 its Secretary) and is responsible for operating
activities of the Company's DBS and cable subsidiaries, including supervision
of their general managers. Mr. Verlin has served similar functions with respect
to the Company's predecessors in interest and affiliates since 1987 and has
over 14 years of experience in the media and communications industry.

James J. McEntee, III has been a Director of Pegasus since October 8,
1996. Mr. McEntee has been a member of the law firm of Lamb, Windle & McErlane,
P.C. for the past five years and a principal of that law firm for the past four
years.

Mary C. Metzger has been a Director of Pegasus since November 14, 1996.
Ms. Metzger has been Chairman of Personalized Media Communications L.L.C. and
its predecessor company, Personalized Media Communications Corp. since February
1989. Ms. Metzger has also been Managing Director of Video Technologies
International, Inc. since June 1986.

Donald W. Weber has been a Director of Pegasus since its incorporation and
a director of PM&C since November 1995. Until its acquisition by Pegasus in
November 1997, Mr. Weber had been the President and Chief Executive Officer of
ViewStar Entertainment Services, Inc., an NRTC associate that distributes
DIRECTV services in North Georgia, since August 1993. From November 1991
through August 1993, Mr. Weber was a private investor and consultant to various
communication companies. Prior to that time, Mr. Weber was President and Chief
Executive Officer of Contel Corporation until its merger with GTE Corporation
in 1991. Mr. Weber is currently a member of the boards of directors of
Powertel, Inc. and Healthdyne Information Enterprises, Inc., which are
publicly-traded companies.

46
<PAGE>

In connection with the acquisition of DIRECTV rights and related assets
from Harron Communications Corp., Pegasus Communications Holdings, Inc.,
Pegasus' parent corporation, agreed to nominate a designee of Harron as a
member of Pegasus' Board of Directors. Effective October 8, 1996, James J.
McEntee, III, was appointed to Pegasus' Board of Directors as Harron's
designee.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires Pegasus' executive officers and directors and persons
who own more than ten percent of a registered class of Pegasus' equity
securities (collectively, the "reporting persons") to file reports of ownership
and changes in ownership with the Securities and Exchange Commission and to
furnish Pegasus with copies of these reports. Based on Pegasus' review of the
copies of these reports received by it, and written representations, if any,
received from reporting persons with respect to the filing of reports on Form
3, 4 and 5, Pegasus believes that all filings required to be made by the
reporting persons for 1997 were made on a timely basis, other than a Form 4
filed for Howard Verlin, an executive officer of Pegasus, for December 1997
which reported only one of the two sales made by Mr. Verlin during the month.
Mr. Verlin's December 1997 Form 4 was amended 11 days after it was due to
reflect the previously unreported sale.

Item 11: Executive Compensation

The following table sets forth certain information for the Company's last
three fiscal years concerning the compensation paid to the Chief Executive
Officer and to each of the Company's most highly compensated officers, whose
total annual salary and bonus for the fiscal year ended December 31, 1997
exceeded $100,000.

Long Term
Compensation Awards
Annual --------------------------
Compensation (1) Restricted Securities
------------------- Stock Underlying All Other
Name Principal Position Year Salary Award(2) Options Compensation(3)
- ------------------------------ ------------------------------ ------ ----------- ------------ ------------ ----------------
<S> <C> <C> <C> <C> <C> <C>
Marshall W. Pagon ............ President and Chief 1997 $200,000 $100,558 85,000 $ 63,228(4)
Executive Officer 1996 $150,000 -- -- $ 62,253(4)
1995 $150,000 -- -- --

Robert N. Verdecchio ......... Senior Vice President and 1997 $150,000 $ 50,279 40,000 $ 9,500
Chief Financial Officer 1996 $125,000 $555,940 -- $ 6,875
1995 $122,083 $133,450 -- --

Ted S. Lodge(5) .............. Senior Vice President, Chief 1997 $150,000 $ 40,223 40,000 $ 1,800
Adminisrtative Officer and 1996 $ 75,000 -- -- --
General Counsel

Howard E. Verlin ............. Vice President, Satellite 1997 $135,000 $100,558 40,000 $ 1,685
and Cable Television 1996 $100,000 $ -- -- $ 1,100
1995 $100,000 $ 95,321 -- --
</TABLE>

- ------------
(1) Prior to the consummation of the Initial Public Offering, the Company's
executive officers never received any salary or bonus compensation from
the Company. The salary amounts presented above for 1995 and for January
1, 1996 through October 8, 1996 were paid by an affiliate of the Company.
After October 8, 1996, the Company's executive officers' salaries were
paid by the Company. There are no employment agreements between the
Company and its executive officers.

(2) Awards presented for 1995 represent grants of the non-voting common stock
of Pegasus Communications Holdings, Inc., the parent of the Company (the
"Parent"). In 1995, 875 shares and 625 shares of the Parent's non-voting
common stock were granted to Mr. Verdecchio and Mr. Verlin, respectively.
The amounts shown in the table for 1995 are based on a valuation prepared
for the Parent at the time of the grants. Upon the completion of the
Initial Public Offering, all shares of the Parent's non-voting common
stock were exchanged for shares of Class A Common Stock pursuant to the
Management Share Exchange Agreement. As a result, Messrs. Verdecchio and
Verlin received an aggregate of 131,193 and 39,321 shares of Class A

47
<PAGE>

Common Stock, respectively. In addition, upon the Initial Public Offering,
certain shares of Class B Common Stock were exchanged for shares of Class
A Common Stock and distributed to certain members of management, including
38,807 shares of Class A Common Stock that were distributed to Mr.
Verdecchio. One-fourth of the aggregate shares granted in 1995 and 1996
vested or will vest on December 31 of each of 1995, 1996, 1997 and 1998.
In 1996, Mr. Verdecchio also received a grant of 903 shares pursuant to
the Company's Restricted Stock Plan, which shares were immediately vested.
On December 31, 1997, Messrs. Verdecchio and Verlin had an aggregate of
42,500 and 9,830 shares of Class A Common Stock, respectively, which were
unvested and had a value as of December 31, 1997 of $881,875 and $203,973,
respectively, based on the closing price of the Class A Common Stock on
such date of $20.75.

(3) Unless otherwise indicated, the amounts listed represent the Company's
contributions under its 401(k) Plans. The amounts listed for 1997 do not
include discretionary contributions that may be made by the Company since
such contributions, if any, have not been determined to date.

(4) Of the amounts listed for Mr. Pagon for 1997 and 1996, $9,500 and $8,525,
respectively, represent the Company's contributions under its 401(k) Plans
and $53,727 and $53,728, respectively, represent the actuarial benefit to
Mr. Pagon of premiums paid by the Company in connection with the split
dollar agreement entered into by the Company with the trustees of an
insurance trust established by Mr. Pagon. See Item 13 (Certain
Relationships and Related Transactions -- Split Dollar Agreement).

(5) Mr. Lodge became an employee of the Company on July 1, 1996.

Option Grants in 1997
Potential Realizable Value

<TABLE>
<CAPTION>
% of Total
Options Granted Exercise
Options to Employees in Price Expiration
Name Granted Fiscal Year(1) Per Share Date 5%(2) 10%(2)
- ------------------------------ --------- ----------------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Marshall W. Pagon ............ 85,000 38.6% $ 11.00 3-21-07 $588,016 $1,490,149
Robert N. Verdecchio ......... 40,000 18.2% $ 11.00 3-21-07 $276,714 $ 701,247
Howard E. Verlin ............. 40,000 18.2% $ 11.00 3-21-07 $276,714 $ 701,247
Ted S. Lodge ................. 40,000 18.2% $ 11.00 3-21-07 $276,714 $ 701,247
</TABLE>

- ------------
(1) The Company granted options to employees to purchase a total of 220,000
shares during 1997.

(2) These amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. These gains
are based on assumed rates of stock appreciation of 5% and 10% compounded
annually from the date the respective options were granted to their
expiration date.

Aggregated Option Exercises in 1997 and 1997 Year-End Option Values

<TABLE>
<CAPTION>
Number of Unexercised Value of Unexercised
Options at Fiscal In-the-Money Options
Shares Year-End at Fiscal Year-End(1)
Acquired on Value ------------------------------- ------------------------------
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- ------------------------------ ------------- ---------- ------------- --------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Marshall W. Pagon ............ -- -- -- 85,000 -- $828,750
Robert N. Verdecchio ......... -- -- -- 40,000 -- $390,000
Howard E. Verlin ............. -- -- -- 40,000 -- $390,000
Ted S. Lodge ................. -- -- -- 40,000 -- $390,000
</TABLE>

- ------------
(1) In-the-money options are those where the fair market value of the
underlying securities exceeds the exercise price of the option. The
closing price of Pegasus' Class A Common Stock on December 31, 1997 was
$20.75 per share.

48
<PAGE>

Compensation of Directors

Under Pegasus' By-Laws, each director is entitled to receive such
compensation, if any, as may from time to time be fixed by the Board of
Directors, Pegasus currently pays its directors who are not employees or
officers of Pegasus an annual retainer of $5,000 plus $500 for each Board
meeting attended in person and $250 for each Board meeting held by telephone.
Pegasus also reimburses each director for all reasonable expenses incurred in
traveling to and from the place of each meeting of the Board or committee of
the Board.

On March 21, 1997 and February 17, 1998, James J. McEntee, III, Mary C.
Metzger, and Donald W. Weber, representing all of Pegasus' nonemployee
directors, each received options under the Stock Option Plan (as defined) to
purchase 5,000 shares of Class A Common Stock under the Pegasus Communications
1996 Stock Option Plan. Each option vests in annual installments of 2,500
shares, was issued at an exercise price of $11.00 and $21.375, respectively per
share (the price equal to the closing price of the Class A Common Stock at the
time of the grant), and is exercisable until the tenth anniversary from the
date of grant.

Compensation Committee Interlocks and Insider Participation

During 1997, decisions concerning executive compensation of executive
officers were generally made by the Board of Directors, which included Marshall
W. Pagon, the President and Chief Executive Officer of Pegasus, and since
December 18, 1997, Robert N. Verdecchio, Pegasus' Senior Vice President and
Chief Financial Officer. The Compensation Committee, however, made decisions
regarding option grants under the Stock Option Plan (as defined) and
discretionary awards and special recognition awards to officers under the
Restricted Stock Plan (as defined).

Incentive Program

General

The Incentive Program, which includes the Restricted Stock Plan (as
defined), the 401(k) Plans (as defined) and the Stock Option Plan (as defined),
is designed to promote growth in stockholder value by providing employees with
restricted stock awards in the form of Class A Common Stock and grants of
options to purchase Class A Common Stock. Awards under the Restricted Stock
Plan (other than excess and discretionary awards) and the 401(k) Plans (other
than matching contributions) are in proportion to annual increases in Location
Cash Flow. For this purpose Location Cash Flow is automatically adjusted for
acquisitions such that, for the purpose of calculating the annual increase in
Location Cash Flow, the Location Cash Flow of the acquired properties is
included as if it had been a part of the Company's financial results for the
comparable period of the prior year.

The Company believes that the Restricted Stock Plan and 401(k) Plans
result in greater increases in stockholder value than result from a
conventional stock option program, because these plans create a clear cause and
effect relationship between initiatives taken to increase Location Cash Flow
and the amount of incentive compensation that results therefrom.

Although the Restricted Stock Plan and 401(k) Plans like conventional
stock option programs provide compensation to employees as a function of growth
in stockholder value, the tax and accounting treatments of these programs are
different. For tax purposes, incentive compensation awarded under the
Restricted Stock Plan (upon vesting) and the 401(k) Plans is fully tax
deductible as compared to conventional stock option grants which generally are
only partially tax deductible upon exercise. For accounting purposes,
conventional stock option programs generally do not result in a charge to
earnings while compensation under the Restricted Stock Plan and the 401(k)
Plans do result in a charge to earnings. The Company believes that these
differences result in a lack of comparability between the EBITDA of companies
that utilize conventional stock option programs and the EBITDA of the Company.
The table below lists the specific maximum components of the Restricted Stock
Plan (other than excess and discretionary awards) and the 401(k) Plans (other
than matching contributions) in terms of a $1 increase in annual Location Cash
Flow.

49
<PAGE>

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

As of February 28, 1998, the Company has seven general managers, 35
department managers and four corporate managers.

Executive officers and non-employee directors are not eligible to receive
profit sharing awards under the Restricted Stock Plan. Executive officers are
eligible to receive awards under the Restricted Stock Plan consisting of (i)
special recognition awards, (ii) excess awards made to the extent that an
employee does not receive a matching contribution under the 401(k) Plans
because of restrictions of the Internal Revenue Code of 1986, as amended (the
"Code") and (iii) discretionary restricted stock awards determined by a Board
committee, or the full Board. Executive officers and non-employee directors are
eligible to receive options under the Stock Option Plan.

Restricted Stock Plan

In September 1996, Pegasus adopted the Pegasus Restricted Stock Plan (the
"Restricted Stock Plan" and, together with the 401(k) Plans and the Stock
Option Plan, the "Incentive Program"), which was also approved by Pegasus'
stockholders in September 1996. The Restricted Stock Plan will terminate in
September 2006. Under the Restricted Stock Plan, 270,000 shares of Class A
Common Stock (to be increased to 350,000 shares upon shareholder approval) are
available for granting restricted stock awards to eligible employees of the
Company. The Restricted Stock Plan provides for four types of restricted stock
awards that are made in the form of Class A Common Stock as shown in the table
above: (i) profit sharing awards to general managers, department managers and
corporate managers (other than executive officers); (ii) special recognition
awards for consistency (team award), initiative (a team or individual award),
problem solving (a team or individual award) and individual excellence; and
(iii) excess awards that are made to the extent that an employee does not
receive a matching contribution under the U.S. 401(k) Plan or Puerto Rico
401(k) Plan because of restrictions of the Internal Revenue Code of 1986, as
amended or the Puerto Rico Internal Revenue Code, respectively; and (iv)
discretionary restricted stock awards. Restricted Stock Awards other than
special recognition awards vest 34% after two years of service with the Company
(including years before the Restricted Stock Plan was established), 67% after
three years of service and 100% after four years of service. Effective April
30, 1998, special recognition awards (including outstanding awards) will become
fully vested on the later of April 30, 1998, or the date the special
recognition award is granted.

Stock Option Plan

In September 1996, Pegasus adopted the Pegasus Communications 1996 Stock
Option Plan (the "Stock Option Plan"), which was also approved by Pegasus'
stockholders in September 1996. The Stock Option Plan terminates in September
2006. Under the Stock Option Plan, up to 450,000 shares of Class A Common Stock
(to be increased to 970,000 shares upon shareholder approval) are available for
the granting of nonqualified stock options ("NQSOs") and options qualifying as
incentive stock options ("ISOs") under Section 422 of the Code. Executive
officers, who are not eligible to receive profit sharing awards under the
Restricted Stock Plan, are eligible to receive NQSOs or ISOs under the Stock
Option Plan, but no executive officer may be granted options covering more than
275,000 shares (to be increased to 550,000 shares upon shareholder approval) of
Class A Common Stock under the Stock Option Plan. Directors of Pegasus who are
not employees of the Company are eligible to receive NQSOs under the Stock
Option Plan. Currently, four executive officers and three non-employee
directors are eligible to receive options under the Stock Option Plan.

50
<PAGE>

401(k) Plans

Effective January 1, 1996, PM&C adopted the Pegasus Communications Savings
Plan (the "U.S. 401(k) Plan") for eligible employees of PM&C and its domestic
subsidiaries. In 1996, the Company's Puerto Rico subsidiary adopted the Pegasus
Communications Puerto Rico Savings Plan (the "Puerto Rico 401(k) Plan" and,
together with the U.S. 401(k) Plan, the "401(k) Plans") for eligible employees
of the Company's Puerto Rico subsidiaries. Substantially all Company employees
who, as of the enrollment date under the 401(k) Plans, have completed at least
one year of service with the Company are eligible to participate in one of the
401(k) Plans. Participants may make salary deferral contributions of 2% to 6%
of salary to the 401(k) Plans.

The Company may make three types of contributions to the 401(k) Plans,
each allocable to a participant's account if the participant completes at least
1,000 hours of service in the applicable plan year, and is employed on the last
day of the applicable plan year: (i) the Company matches 100% of a
participant's salary deferral contributions to the extent the participant
invested his or her salary deferral contributions in Class A Common Stock at
the time of his or her initial contribution to the 401(k) Plans; (ii) the
Company, in its discretion, may contribute an amount that equals up to 10% of
the annual increase in Company-wide Location Cash Flow (these Company
discretionary contributions, if any, are allocated to eligible participants'
accounts based on each participant's salary for the plan year); and (iii) the
Company also matches a participant's rollover contribution, if any, to the
401(k) Plans, to the extent the participant invests his or her rollover
contribution in Class A Common Stock at the time of his or her initial
contribution to the 401(k) Plans. Discretionary Company contributions and
Company matches of employee salary deferral contributions and rollover
contributions are made in the form of Class A Common Stock, or in cash used to
purchase Class A Common Stock. The Company has authorized and reserved for
issuance up to 205,000 shares of Class A Common Stock in connection with the
401(k) Plans. Company contributions to the 401(k) Plans are subject to
limitations under applicable laws and regulations.

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

Item 12: Security Ownership of Certain Beneficial Owners and Management

The following table sets forth certain information, as of February 28,
1998, with respect to the beneficial holdings of each director, each of the
executive officers named in the Summary Compensation Table, and all executive
officers and directors as a group, as well as the holdings of each stockholder
who was known to Pegasus to be the beneficial owner, as defined in Rule 13d-3
under the Exchange Act, of more than 5% of the Class A Common Stock and Class B
Common Stock, based upon Company records or records of the Commission. The
information does not give effect to the shares of Class A Common Stock issuable
upon exercise of the Warrants or certain stock options. Holders of Class A
Common Stock are entitled to one vote per share on all matters submitted to a
vote of stockholders generally, and holders of Class B Common Stock are
entitled to ten votes per share. Shares of Class B Common Stock are convertible
immediately into shares of Class A Common Stock on a one-for-one basis, and
accordingly, holders of Class B Common Stock are deemed to own the same number
of shares of Class A Common Stock. Pegasus Communications Holdings, Inc. (the
"Parent"), two subsidiaries of the Parent and Pegasus Capital, L.P. hold in the
aggregate all shares of Class B Common Stock, representing 44.4% of the Common
Stock (and 88.9% of the combined voting power of all voting stock) of Pegasus
on a fully diluted basis. Marshall W. Pagon is deemed to be the beneficial
owner of all of the Class B Common Stock. The outstanding capital stock of the
Parent consists of 64,119 shares of Class A Voting Common Stock and 5,000
shares of Non-Voting Stock, all of which are beneficially owned by Marshall W.
Pagon.

51
<PAGE>

<TABLE>
<CAPTION>
Pegasus Class B Common
Pegasus Class A Common Stock Stock
Beneficially Owned Beneficially Owned
---------------------------- -----------------------
Shares % Shares %
<S> <C> <C> <C> <C>
Marshall W. Pagon(1)(2) ..................... 4,611,599(3) 44.6% 4,581,900 100.0%
Robert N. Verdecchio ........................ 165,242(4)(5) 2.8% -- --
Howard E. Verlin ............................ 52,153(4)(5) (6) -- --
Ted S. Lodge ................................ 15,669(5)(7) (6) -- --
James J. McEntee, III ....................... 3,000(8) (6) -- --
Mary C. Metzger ............................. 3,000(8) (6) -- --
Donald W. Weber ............................. 390,920(9) 6.8% -- --
Harron Communications Corp.(10)(11) ......... 852,110 14.8% -- --
T. Rowe Price Associates, Inc. and related
entities(12) .............................. 480,400 8.4% -- --
Wellington Management Company,
LLP(13) ................................... 494,500 8.6% -- --
PAR Investment Partners, L.P. and related
entities(14) .............................. 355,200 6.2% -- --
Directors and Executive Officers as a
group(15)(7 persons) ...................... 5,241,583 50.4% 4,581,900 100.0%
</TABLE>

- ------------
(1) The address of this person is c/o Pegasus Communications Management
Company, 5 Radnor Corporate Center, Suite 454, 100 Matsonford Road,
Radnor, PA 19087.

(2) Pegasus Capital, L.P. holds 1,217,348 shares of Class B Common Stock. Mr.
Pagon is the sole shareholder of the general partner of Pegasus Capital,
L.P. and is deemed to be the beneficial owner of these shares. All of the
3,364,552 remaining shares of Class B Common Stock are owned by the Parent
and two subsidiaries of the Parent. All shares of Class A Voting Common
Stock of the Parent are held by Pegasus Communications Limited
Partnership. Mr. Pagon controls Pegasus Communications Limited Partnership
by reason of his ownership of all the outstanding voting stock of the sole
general partner of a limited partnership that is, in turn, the sole
general partner in Pegasus Communications Limited Partnership. As such,
Mr. Pagon is the beneficial owner of 100% of Class B Common Stock with
sole voting and investment power over all such shares.

(3) Includes 4,581,900 shares of Class B Common Stock, which are convertible
into shares of Class A Common Stock on a one-for-one basis and 17,000
shares of Class A Common Stock which are issuable upon the exercise of the
vested portion of outstanding stock options.

(4) On March 26, 1997, the Commission declared effective a registration
statement filed by Pegasus which would permit Messrs. Verdecchio and
Verlin to sell shares of Class A Common Stock subject to certain vesting
and other restrictions. As of February 28, 1998, Messrs. Verdecchio and
Verlin are permitted to sell 150,000 and 29,321 shares of Class A Common
Stock, respectively, pursuant to the registration statement. Messrs.
Verdecchio and Verlin have sole voting and investment power over their
shares, subject to certain vesting restrictions.

(5) Includes 9,090 shares of Class A Common Stock which are issuable upon the
exercise of the vested portion of outstanding stock options.

(6) Represents less than 1% of the outstanding shares of Class A Common Stock.

(7) Also includes 1,500 shares of Class A Common Stock owned by Ted S. Lodge's
wife, for which Mr. Lodge disclaims beneficial ownership, and 5,079 shares
of Class A Common Stock issued to Mr. Lodge and his wife, subject to
certain vesting restrictions.

(8) Includes 2,500 shares of Class A Common Stock which are issuable upon the
exercise of the vested portion of outstanding stock options.

52
<PAGE>

(9) Includes 5,885 shares of Class A Common Stock issuable upon the exercise
of the vested portion of outstanding stock options.

(10) Under the terms of a stockholder's agreement entered into by the Company
in connection with the acquisition of direct broadcast satellite
television rights in Michigan and Texas, the Company has until October 8,
1998 a right of first offer to purchase any shares sold by Harron
Communications Corp. in a private transaction exempt from registration
under the Securities Act.

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

(12) T. Rowe Price Associates ("T. Rowe Price") is deemed to be the beneficial
owner of 480,400 shares, over which it has sole investment power and with
respect to 13,000 shares sole voting power. The address of T.Rowe Price is
10 East Pratt St., Baltimore, MD 21202.

(13) Consists of 207,400 shares over which Wellington Management Company, LLP
("WMC") has shared voting power and 494,500 shares over which WMC has
shared investment power. The address of WMC is 75 State Street, Boston, MA
02109.

(14) PAR Investment Partners, L.P. ("PIP") has sole voting and investment power
with respect to 355,200 shares. The sole general partner of PIP is PAR
Group, L.P. ("PAR Group"), whose sole general partner is PAR Capital
Management, Inc. ("PAR Capital"). As a consequence, each of PAR Group and
PAR Capital may be deemed to be the beneficial owner of the 355,200 shares
held by PIP with sole voting and investment power with respect to such
shares. The address of PIP is Suite 1600, One Financial Center, Boston, MA
02111.

(15) See footnotes (2), and (3) with respect to Mr. Pagon, (4), (6) and (7)
with respect to Messrs. Verdecchio, Verlin and Lodge, (8) with respect to
Mr. McEntee and Ms. Metzger, and (9) with respect to Mr. Weber.

Item 13: Certain Relationships And Related Transactions

Split Dollar Agreement

In December 1996, the Company entered into a split dollar agreement with
the trustees of an insurance trust established by Marshall W. Pagon. Under the
split dollar agreement, the Company agreed to pay a portion of the premiums for
certain life insurance policies covering Mr. Pagon owned by the insurance
trust. The agreement provides that the Company will be repaid for all amounts
it expends for such premiums, either from the cash surrender value or the
proceeds of the insurance policies. For 1996 and 1997, the actuarial benefit to
Mr. Pagon of premiums paid by the Company amounted to $53,728 and $53,727,
respectively.

Loan Program

In February 1997, the Company adopted a program to assist its employees in
obtaining loans for various purposes, including to enable employees to pay
income taxes as a result of grants of Class A Common Stock by the Company.
Assistance may take the form of direct loans by the Company, guarantees by the
Company of loans made by third parties, or other forms of credit support or
credit enhancement, including without limitation, agreements by the Company to
purchase such loans, purchase any collateral securing such loans (including
Class A Common Stock), lend money or otherwise provide funds for the repayment
of such loans. Any direct loan by the Company may not exceed 75 percent of the
market value of the Class A Common Stock at the time that the loan is made.

In April 1997, Robert N. Verdecchio, Howard E. Verlin and Guyon W. Turner,
a former executive officer of Pegasus, obtained loans of $432,000, $68,000 and
$414,000, respectively, from a bank and pledged their shares of Class A Common
Stock as security. Proceeds from the loans were used to pay tax liabilities
arising from grants of Pegasus' Class A Common Stock. Pursuant to the loan
program, the Company agreed, upon any default by these officers under the
loans, to purchase from the bank the Class A Common Stock securing the loans
for prices (ranging from $3.71 to $5.66 per share) sufficient to repay the
loans.

53
<PAGE>

Harron Designee

In connection with the acquisition of DBS rights and related assets from
Harron Communications Corp. ("Harron") in October 1996, the Parent agreed to
nominate a designee of Harron as a member of the Company's Board of Directors.
James J. McEntee, III was appointed to the Company's Board of Directors as
Harron's designee. Harron's right to name a designee terminates on October 8,
1998.

ViewStar DBS Acquisition

Effective October 31, 1997, the Company acquired DIRECTV distribution
rights for certain rural areas of Georgia and related assets (the "ViewStar DBS
Acquisition") from ViewStar Entertainment Services, Inc. ("ViewStar"). Prior to
the acquisition, Donald W. Weber, a director of Pegasus, was the President and
Chief Executive Officer of ViewStar and together with his son owned
approximately 73% of the outstanding stock of ViewStar. The ViewStar DBS
Acquisition was effected through a merger of ViewStar into a subsidiary of
Pegasus. The purchase price of the ViewStar DBS Acquisition consisted of
approximately $6.4 million in cash and 397,035 shares of Class A Common Stock.
The acquisition involved the execution of noncompetition agreements by Mr.
Weber and his son and the execution of a shareholders agreement (which included
the granting of certain registration rights on the shares of Class A Common
Stock issued in connection with the acquisition).

Relationship with KB Prime Media and Affiliated Entities

The Company intends to enter into an agreement to sell to KB Prime Media,
L.L.C. ("KB Prime Media") the license for TV station WOLF, one of the Company's
TV stations serving the Northeastern Pennsylvania DMA, and certain related
assets, including leases and subleases for studio, office, tower and
transmitter space and equipment, for a cash payment of $500,000 and ongoing
rental payments of approximately $25,000 per year. The closing of this
transaction will be subject to FCC consent. KB Prime Media is a corporation
owned 80% by W.W. Keen Butcher, the stepfather of Marshall W. Pagon. The
Company will have an option to repurchase WOLF's license, subject to applicable
FCC rules and regulations, and related assets for a cash payment of $500,000
plus interest accruing at the rate of 12% per annum until the option is
exercised. Concurrently with the closing under the agreement described above,
the Company and KB Prime Media will enter into an LMA, pursuant to which the
Company will provide programming to WOLF and retain all revenues generated from
advertising in exchange for certain payments to KB Prime Media. The financial
terms of the LMA have not been finalized; however, the term of the LMA will be
seven years, with two automatic renewals.

The Company also intends to enter into an agreement to sell to KB Prime
Media the option to acquire the construction permit for unbuilt television
station WFXU and certain related assets, including leases and subleases for
studio, office, tower and transmitter space and equipment. WFXU will
rebroadcast WTLH pursuant to the terms of an LMA agreement between the Company
and KB Prime Media. The terms of this transaction have not been finalized, and
the closing of the transaction is subject to FCC consent.

In addition to these two transactions, the Company expects to enter into
other transactions with companies controlled by Mr. Butcher relating to FCC
licenses, LMAs and similar arrangements that the Company determines to be of
benefit to it. In connection with such transactions, the Company anticipates
that it will provide guarantees or other forms of credit support for bank loans
to Mr. Butcher or companies controlled by him. To date the Company has pledged
approximately $1.1 million of bank deposits to collateralize loans to Mr.
Butcher the proceeds of which were contributed into another entity controlled
by Mr. Butcher and used as deposits for auctions of television licenses and
other operating expenses. The Company's board of directors has authorized the
Company to provide similar credit support for up to $3.0 million of credit to
Mr. Butcher for transactions that the Company determines to be to its
advantage.

The Company believes that all of these transactions, including those with
respect to WOLF and WFXU, will be done at fair value.

The proposed LMAs with WOLF and WFXU are currently subject to no adverse
regulatory rulings or requirements. Because of the pendency of certain
rulemaking proceedings at the FCC, this situation cannot be guaranteed to
continue.

54
<PAGE>

PART IV

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

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

(1) Financial Statements

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

(2) Financial Statement Schedules

Page
-----
Report of Coopers & Lybrand L.L.P. ....................... S-1
Schedule II - Valuation and Qualifying Accounts .......... S-2

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

(3) Exhibits

<TABLE>
<CAPTION>
Exhibit
Number Description of Document
- -------- -----------------------------------------------------------------------------------------------------
<S> <C>
2.1 Contribution and Exchange Agreement by and between the Parent and Harron dated as of May 30,
1996 (including form of Joinder Agreement, Stockholder's Agreement and Noncompetition Agreement)
(which is incorporated by reference to Exhibit 2.2 to Pegasus' Registration Statement on Form
S-1 (File No. 333-05057)).
2.2 Amendment No. 1 to Exhibit 2.1 (which is incorporated by reference to Pegasus' Form 8-K, dated
October 8, 1996).
2.3 Amendment No. 2 to Exhibit 2.1 (which is incorporated by reference to Exhibit 2.5 to Pegasus'
Registration Statement on Form S-1 (File No. 333-057057)).
2.4 Amendment No. 3 to Exhibit 2.1 (which is incorporated by reference to Exhibit 4 to Pegasus' Form
8-K dated October 8, 1996).
2.5 Joinder Agreement by and among Pegasus Communications Holdings, Inc., Pegasus Communications
Corporation and Harron Communications Corp. dated as of October 8, 1996 (which is incorporated
by reference to Exhibit 5 to Pegasus' Form 8-K dated October 8, 1996).
2.6 Stockholders' Agreement by and among Pegasus Communications Holdings, Inc., Pegasus Communications
Corporation and Harron Communications Corporation dated as of October 8, 1996 (which
is incorporated by reference to Exhibit 6 to Pegasus' Form 8-K dated as of October 8, 1996).
2.7 Non-Competition Agreement by and among Pegasus Communications Holdings, Inc., Pegasus Communications
Corporation and Harron Communications Corp. dated October 8, 1996 (which is incorporated by
reference to Exhibit 7 to Pegasus Form 8-K dated as of October 8, 1996).
2.8 Agreement and Plan of Merger dated January 8, 1998 among Pegasus Communications Corporation
and certain of its shareholders, Pegasus DTS Merger Sub, Inc., and Digital Television Services, Inc.
and certain of its shareholders, including forms of Registration Rights Agreement and Voting
Agreement as exhibits (which is incorporated by reference herein to Exhibit 2.1 to Pegasus's Form 8-K
dated December 10, 1997).
2.9 Asset Purchase Agreement dated as of January 16, 1998 between Avalon Cable of New England,
LLC and Pegasus Cable Television, Inc. and Pegasus Cable Television of Connecticut, Inc. (which
is incorporated by reference herein to Pegasus' Form 8-K dated January 16, 1998).
</TABLE>

55
<PAGE>

<TABLE>
<CAPTION>
3.1 Certificate of Incorporation of Pegasus, as amended (which is incorporated by reference to Exhibit
3.1 to Pegasus' Registration Statement on Form S-1 (File No. 333-05057)).
<S> <C>
3.2 By-Laws of Pegasus (which is incorporated by reference to Exhibit 3.2 to Pegasus' Registration
Statement on Form S-1 (File No. 333-05057)).
3.3 Certificate of Designation, Preferences and Relative, Participating, Optional and Other Special Rights
of Preferred Stock and Qualifications, Limitations and Restrictions Thereof which is incorporated by
reference to Exhibit 3.3 to Pegasus' Registration Statement on Form S-1 (File No. 333-23595).
4.1 Indenture, dated as of July 7, 1995, by and among Pegasus Media & Communications, Inc., the
Guarantors (as this term is defined in the Indenture), and First Fidelity Bank, National Association,
as Trustee, relating to the 12 1/2 % Series B Senior Subordinated Notes due 2005 (including the form
of Notes and Subsidiary Guarantee) (which is incorporated herein by reference to Exhibit 4.1 to
Pegasus Media & Communications, Inc.'s Registration Statement on Form S-4 (File No. 33-95042)).
4.2 Form of 12 1/2% Series B Senior Subordinated Notes due 2005 (included in Exhibit 4.1 above).
4.3 Form of Subsidiary Guarantee with respect to the 12 1/2% Series B Senior Subordinated Notes due
2005 (included in Exhibit 4.1 above).
4.4 Indenture by and between Pegasus and First Union National Bank, as trustee, relating to the
Exchange Notes (included in Exhibit 3.3 above).
4.5 Indenture, dated as of October 21, 1997, by and between Pegasus Communications Corporation and
First Union National Bank, as trustee, relating to the Senior Notes (which is incorporated by
reference herein to Exhibit 4.1 to Amendment No. 1 to Pegasus' Form 8-K dated September 8, 1997).
10.1 Station Affiliation Agreement, dated March 30, 1992, between Fox Broadcasting Company and D. &
K. Broadcast Properties L.P. relating to television station WDBD (which is incorporated herein by
reference to Exhibit 10.5 to Pegasus Media & Communications, Inc.'s Registration Statement on
Form S-4 (File No. 33-95042)).
10.2 Agreement and Amendment to Station Affiliation Agreement, dated as of June 11, 1993, between Fox
Broadcasting Company and Donatelli & Klein Broadcast relating to television station WDBD (which
is incorporated herein by reference to Exhibit 10.6 to Pegasus Media & Communications, Inc.'s
Registration Statement on Form S-4 (File No. 33-95042)).
10.3 Station Affiliation Agreement, dated March 30, 1992, between Fox Broadcast Company and Scranton
TV Partners Ltd. relating to television station WOLF (which is incorporated herein by reference
to Exhibit 10.8 to Pegasus Media & Communications, Inc.'s Registration Statement on Form S-4
(File No. 33-95042)).
10.4 Agreement and Amendment to Station Affiliation Agreement, dated June 11, 1993, between Fox
Broadcasting Company and Scranton TV Partners, Ltd. relating to television station WOLF (which
is incorporated herein by reference to Exhibit 10.9 to Pegasus Media & Communications, Inc.'s
Registration Statement on Form S-4 (File No. 33-95042)).
10.5 Amendment to Fox Broadcasting Company Station Affiliation Agreement Regarding Network Nonduplication
Protection, dated December 2, 1993, between Fox Broadcasting Company and Pegasus Broadcast
Television, L.P. relating to television stations WOLF, WWLF, and WILF (which is incorporated
herein by reference to Exhibit 10.10 to Pegasus Media & Communications, Inc.'s Registration
Statement on Form S-4 (File No. 33-95042)).
10.6 Consent to Assignment, dated May 1, 1993, between Fox Broadcasting Company and Pegasus
Broadcast Television, L.P. relating to television station WOLF (which is incorporated herein by
reference to Exhibit 10.11 to Pegasus Media & Communications, Inc.'s Registration Statement on Form
S-4 (File No. 33-95042)).
</TABLE>

56
<PAGE>

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

10.8 Agreement and Amendment to Station Affiliation Agreement, dated June 11, 1993, between Fox
Broadcasting Company and Pegasus Broadcast Television, L.P. relating to television station WDSI
(which is incorporated herein by reference to Exhibit 10.13 to Pegasus Media & Communications,
Inc.'s Registration Statement on Form S-4 (File No. 33-95042)).
10.9 Franchise Agreement for Mayaguez, Puerto Rico (which is incorporated herein by reference to
Exhibit 10.14 to Pegasus Media & Communications, Inc.'s Registration Statement on Form S-4 (File
No. 33-95042)).
10.10 NRTC/Member Agreement for Marketing and Distribution of DBS Services, dated June 24, 1993,
between the National Rural Telecommunications Cooperative and Pegasus Cable Associates, Ltd.
(which is incorporated herein by reference to Exhibit 10.28 to Pegasus Media & Communications,
Inc.'s Registration Statement on Form S-4 (File No. 33-95042) (other similar agreements with the
National Rural Telecommunications Cooperative are not being filed but will be furnished upon
request, subject to restrictions on confidentiality)).
10.11 Amendment to NRTC/Member Agreement for Marketing and Distribution of DBS Services, dated
June 24, 1993, between the National Rural Telecommunications Cooperative and Pegasus Cable
Associates, Ltd. (which is incorporated herein by reference to Exhibit 10.29 to Pegasus Media &
Communications, Inc.'s Registration Statement on Form S-4 (File No. 33-95042)).
10.12 DIRECTV Sign-Up Agreement, dated May 3, 1995, between DIRECTV, Inc. and Pegasus Satellite
Television, Inc. (which is incorporated herein by reference to Exhibit 10.30 to Pegasus Media &
Communications, Inc.'s Registration Statement on Form S-4 (File No. 33-95042)).
10.13 Franchise Agreement granted to Dom's Tele-Cable, Inc., to build and operate cable television
systems for the municipalities of Cabo Rojo, San German, Lajas, Hormigueros, Guanica, Sabana
Grande and Maricao (which is incorporated herein by reference to Exhibit 2 to Pegasus Media &
Communications, Inc.'s Form 8-K dated March 21, 1996).
10.14 Franchise Agreement granted to Dom's Tele-Cable, Inc. to build and operate cable television systems
for the municipalities of Anasco, Rincon and Las Marias (which is incorporated herein by reference
to Exhibit 3 to Pegasus Media & Communications, Inc.'s Form 8-K dated March 21, 1996).
10.15 Credit Agreement dated as of December 9, 1997 by and among Pegasus Media & Communications,
Inc., the lenders thereto, and Bankers Trust Company, as agent for the lenders (which is incorporated
by reference herein to Exhibit 10.1 to Pegasus' Form 8-K dated December 10, 1997).
10.16+ Pegasus Restricted Stock Plan (which is incorporated by reference to Exhibit 10.28 to Pegasus'
Registration Statement on Form S-1 (File No. 333-05057)).
10.17+ Option Agreement for Donald W. Weber (which is incorporated by reference to Exhibit 10.29
Pegasus' Registration Statement on Form S-1 (File No. 333-05057)).
10.18+ Pegasus 1996 Stock Option Plan (which is incorporated by reference to Exhibit 10.30 to Pegasus'
Registration Statement on Form S-1 (File No. 333-05057)).
10.19+ Amendment to Option Agreement for Donald W. Weber, dated December 19, 1996 (which is incorporated
by reference to Exhibit 10.31 to Pegasus' Registration Statement on Form S-1 (File No.
333-18739)).
10.20 Warrant Agreement between Pegasus and First Union National Bank, as Warrant Agent relating to
the Warrants (which is incorporated by reference to Exhibit 10.32 to Pegasus' Registration Statement
on Form S-1 (File No. 333-23595)).
</TABLE>

57
<PAGE>

<TABLE>
<CAPTION>
<S> <C>
10.21 Amendment to Credit Agreement executed as of March 10, 1998, by and among Pegasus Media &
Communications, Inc., the lenders thereto, and Bankers Trust Company, as agent for the lenders
(which is incorporated by reference to Exhibit 10.21 to Pegasus's Registration Statement on Form
S-4 (File No. 333044929)).

21.1 Subsidiaries of Pegasus (which is incorporated by reference to 21.1 to Pegasus's Registration
Statement on Form S-4 (File No. 333-44929)).
23.1* Consent of Coopers & Lybrand L.L.P.
24.1* Powers of Attorney (included in Signatures and Powers of Attorney).
27.1* Financial Data Schedule.
</TABLE>

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

(b) Reports on Form 8-K.

On October 8, 1997, Pegasus filed a Current Report on Form 8-K dated
September 8, 1997 reporting under Item 5 the following events: (i) the
completion of certain DBS acquisitions that had been made from January 1, 1997
to an effective date of September 8, 1997, (ii) Pegasus' intention to offer
senior notes in a private offering, (iii) information relating to certain
pending DBS acquisitions, (iv) the acquisition by PM&C of the assets of Pegasus
Satellite Holdings, Inc. upon completion of the senior notes offering (the
"Subsidiaries Combination"), and (v) Pegasus' intention to enter into a new
credit facility. The Form 8-K included under Item 7 certain financial
statements relating to completed and pending DBS acquisitions and pro forma
consolidated financial information giving effect, among other things, to the
completed and pending DBS acquisitions and to the offering of the senior notes.
On October 31, 1997, Pegasus filed Amendment No. 1 to its Current Report on
Form 8-K to report updated information relating to events (i) through (v)
above, including the consummation on October 21, 1997 of a private offering of
$115.0 million aggregate principal amount of 9.625% Series A Senior Notes and
the completion of the Subsidiaries Combination, and to provide certain updated
pro forma consolidated financial information.

On November 13, 1997, Pegasus filed a Current Report on Form 8-K dated
November 5, 1997 reporting under Item 5 (i) Pegasus entering into an agreement
in principle to acquire Digital Television Services, Inc., the second largest
independent provider of DIRECTV programming, and (ii) Pegasus' entering into a
letter of intent to sell its New England cable systems, consisting of five
headends serving 13 towns in Connecticut and Massachusetts. The Form 8-K
contained no pro forma or other financial information.

58
<PAGE>

SIGNATURES AND POWERS OF ATTORNEY

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

PEGASUS COMMUNICATIONS CORPORATION

By: /s/ Marshall W. Pagon
-------------------------------------

Marshall W. Pagon
Chief Executive Officer and President

Date: April 17, 1998

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

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

<TABLE>
<CAPTION>
Signature Title Date
- ------------------------------------------------ ----------------------------------- ---------------
<S> <C> <C>
/s/ Marshall W. Pagon
- -------------------------------
Marshall W. Pagon President, Chief Executive Officer April 17, 1998
(Principal Executive Officer) And Chairman of the Board

/s/ Robert N. Verdecchio Senior Vice President, Chief April 17, 1998
- ------------------------------- Financial Officer, Assistant
Robert N. Verdecchio Secretary, and Director
(Principal Financial and Accounting Officer)

/s/ James J. McEntee, III
- -------------------------------
James J. McEntee, III Director April 17, 1998

/s/ Mary C. Metzger
- -------------------------------
Mary C. Metzger Director April 17, 1998

/s/ Donald W. Weber
- -------------------------------
Donald W. Weber Director April 17, 1998

</TABLE>

59
<PAGE>

PEGASUS COMMUNICATIONS CORPORATION
INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
Page
-----
<S> <C>
Report of Coopers & Lybrand L.L.P. ....................................................... F-2
Consolidated Balance Sheets as of December 31, 1996 and 1997 ............................. F-3
Consolidated Statements of Operations for the years ended December 31, 1995, 1996 and
1997 ................................................................................... F-4
Consolidated Statements of Changes in Total Equity for the years ended December 31, 1995,
1996 and 1997 .......................................................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1996 and
1997 ................................................................................... F-6
Notes to Consolidated Financial Statements ............................................... F-7
</TABLE>

F-1
<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of
Pegasus Communications Corporation

We have audited the accompanying consolidated balance sheets of Pegasus
Communications Corporation as of December 31, 1996 and 1997, and the related
consolidated statements of operations, changes in total equity, and cash flows
for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Pegasus
Communications Corporation as of December 31, 1996 and 1997, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1997 in conformity with generally accepted accounting
principles.

COOPERS & LYBRAND L.L.P.

2400 Eleven Penn Center
Philadelphia, Pennsylvania
February 26, 1998

F-2
<PAGE>

Pegasus Communications Corporation
Consolidated Balance Sheets

<TABLE>
<CAPTION>
December 31,
----------------------------------
1996 1997
--------------- ----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ........................................... $ 8,582,369 $ 44,049,097
Restricted cash ..................................................... -- 1,220,056
Accounts receivable, less allowance for doubtful accounts of $243,000
and $319,000, respectively ......................................... 9,155,545 13,819,571
Program rights ...................................................... 1,289,437 2,059,346
Inventory ........................................................... 697,957 974,920
Deferred taxes ...................................................... 1,290,397 2,602,453
Prepaid expenses and other .......................................... 851,592 788,669
------------- -------------
Total current assets ............................................. 21,867,297 65,514,112
Property and equipment, net ............................................ 24,115,138 27,686,646
Intangible assets, net ................................................. 126,236,128 284,774,027
Program rights ......................................................... 1,294,985 2,262,299
Deposits and other ..................................................... 166,498 624,629
------------- -------------
Total assets ........................................................ $ 173,680,046 $ 380,861,713
============= =============
LIABILITIES AND TOTAL EQUITY
Current liabilities:
Current portion of long-term debt ................................... $ 363,833 $ 6,357,320
Accounts payable .................................................... 5,075,981 10,240,615
Accrued interest .................................................... 5,592,083 8,177,261
Accrued expenses .................................................... 3,803,993 6,973,297
Current portion of program rights payable ........................... 601,205 1,418,581
------------- -------------
Total current liabilities ........................................ 15,437,095 33,167,074
Long-term debt, net .................................................... 115,211,610 201,997,811
Program rights payable ................................................. 1,365,284 1,416,446
Deferred taxes ......................................................... 1,339,859 2,652,454
------------- -------------
Total liabilities ................................................ 133,353,848 239,233,785
Commitments and contingent liabilities ................................. -- --
Minority interest ...................................................... -- 3,000,000
Series A preferred stock ............................................... -- 111,264,424
Common stockholders' equity:
Class A common stock ................................................ 46,632 57,399
Class B common stock ................................................ 45,819 45,819
Additional paid-in capital .......................................... 57,736,011 64,034,687
Deficit ............................................................. (17,502,264) (36,774,401)
------------- -------------
Total common stockholders' equity ................................ 40,326,198 27,363,504
------------- -------------
Total liabilities and stockholders' equity .......................... $ 173,680,046 $ 380,861,713
============= =============

</TABLE>

See accompanying notes to consolidated financial statements

F-3
<PAGE>

Pegasus Communications Corporation
Consolidated Statements of Operations

<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------------
1995 1996 1997
--------------- ---------------- ----------------
<S> <C> <C> <C>
Revenues:
Basic and satellite service .............................. $10,002,579 $ 16,645,428 $ 49,305,330
Premium services ......................................... 1,652,419 2,197,188 4,665,823
Broadcasting revenue, net of agency commissions .......... 14,862,734 21,813,409 23,927,876
Barter programming revenue ............................... 5,110,662 6,337,220 7,520,000
Other .................................................... 519,682 935,387 1,399,397
----------- ------------ ------------
Total revenues ........................................ 32,148,076 47,928,632 86,818,426
----------- ------------ ------------
Operating expenses:
Programming .............................................. 5,475,623 9,889,895 24,340,556
Barter programming expense ............................... 5,110,662 6,337,220 7,520,000
Technical and operations ................................. 2,740,670 3,271,564 3,741,708
Marketing and selling .................................... 3,928,073 5,481,315 14,352,775
General and administrative ............................... 3,885,473 5,923,247 12,129,765
Incentive compensation ................................... 527,663 985,365 1,273,872
Corporate expenses ....................................... 1,364,323 1,429,252 2,256,233
Depreciation and amortization ............................ 8,751,489 12,060,498 27,791,903
----------- ------------ ------------
Income (loss) from operations ......................... 364,100 2,550,276 (6,588,386)
Interest expense ............................................ (8,793,823) (12,454,891) (16,094,037)
Interest expense - related party ............................ (22,759) -- --
Interest income ............................................. 370,300 232,361 1,538,569
Other expenses, net ......................................... (44,488) (171,289) (723,439)
Gain on sale of cable system ................................ -- -- 4,451,320
----------- ------------ ------------
Loss before income taxes and extraordinary items ......... (8,126,670) (9,843,543) (17,415,973)
Provision (benefit) for income taxes ........................ 30,000 (120,000) 200,000
----------- ------------ ------------
Loss before extraordinary items .......................... (8,156,670) (9,723,543) (17,615,973)
Extraordinary gain (loss) from extinguishment of debt, net 10,210,580 (250,603) (1,656,164)
----------- ------------ ------------
Net income (loss) ........................................ 2,053,910 (9,974,146) (19,272,137)
Preferred stock dividends ................................ -- -- 12,215,000
----------- ------------ ------------
Net income (loss) applicable to common shares ............ $ 2,053,910 ($ 9,974,146) ($ 31,487,137)
=========== ============ ============
Basic and diluted earnings per common share:
Loss before extraordinary items .......................... ($ 1.59) ($ 1.56) ($ 3.02)
Extraordinary gain (loss) ................................ 1.99 ( 0.04) ( 0.17)
----------- ------------ ------------
Net income (loss) ........................................ $ 0.40 ($ 1.60) ($ 3.19)
=========== ============ ============
Weighted average shares outstanding ...................... 5,139,929 6,239,646 9,858,244
=========== ============ ============

</TABLE>

See accompanying notes to consolidated financial statements

F-4
<PAGE>

Pegasus Communications Corporation
Consolidated Statements of Changes in Total Equity

F-5

<TABLE>
<CAPTION>
Common Stock
Series A --------------------------
Preferred Number Par
Stock of Shares Value
--------------- ------------- -----------
<S> <C> <C> <C>
Balances at January 1, 1995 ................... 494 $ 494
Net income (loss) .............................
Distributions to Partners .....................
Distributions to Parent .......................
Exchange of common stock ...................... 161,006 1,121
Issuance of Class B common stock .............. 8,500 85
------- --------
Balances at December 31, 1995 ................. 170,000 1,700
Net loss ......................................
Contributions by Parent .......................
Distributions to Parent .......................
Issuance of Class A common stock due to:
Initial Public Offering ..................... 3,000,000 30,000
WPXT Acquisition ............................ 82,143 821
MI/TX DBS Acquisition ....................... 852,110 8,521
Awards ...................................... 3,614 36
Issuance of Class B common stock due to:
WPXT Acquisition ............................ 71,429 714
Conversions of partnerships ...................
Exchange of PM&C Class B ...................... 183,275 1,833
Exchange of PM&C Class A ...................... 4,882,541 48,826
--------- --------
Balances at December 31, 1996 ................. 9,245,112 92,451
Net loss ......................................
Issuance of Class A common stock due to:
Acquisitions of DBS properties .............. 923,860 9,239
Liveoak Transaction ......................... 34,000 340
Incentive compensation and awards ........... 118,770 1,188
Issuance of Class A preferred stock due to:
Unit Offering ............................... $100,000,000
Paid and accrued dividends .................. 12,215,000
Issuance of warrants due to:
Acquisition of DBS properties ...............
Unit Offering ............................... (950,576)
============ ========== ========
Balances at December 31, 1997 ................. $111,264,424 10,321,742 $103,218
============ ========== ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Total
Additional Retained Partners' Common
Paid-In Earnings Capital Stockholders'
Capital (Deficit) (Deficit) Equity
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Balances at January 1, 1995 ................... $ 16,382,054 ($ 3,905,909) ($ 5,535,017) $ 6,941,622
Net income (loss) ............................. 5,731,192 (3,677,282) 2,053,910
Distributions to Partners ..................... (246,515) (246,515)
Distributions to Parent ....................... (12,500,000) (12,500,000)
Exchange of common stock ...................... (1,121)
Issuance of Class B common stock .............. 3,999,915 4,000,000
-------------- ---------------- --------------- --------------
Balances at December 31, 1995 ................. 7,880,848 1,825,283 (9,458,814) 249,017
Net loss ...................................... (5,934,261) (4,039,885) (9,974,146)
Contributions by Parent ....................... 579,152 105,413 684,565
Distributions to Parent ....................... (2,946,379) (2,946,379)
Issuance of Class A common stock due to:
Initial Public Offering ..................... 38,153,000 38,183,000
WPXT Acquisition ............................ 1,149,179 1,150,000
MI/TX DBS Acquisition ....................... 11,921,025 11,929,546
Awards ...................................... 50,559 50,595
Issuance of Class B common stock due to:
WPXT Acquisition ............................ 999,286 1,000,000
Conversions of partnerships ................... (13,393,286) 13,393,286
Exchange of PM&C Class B ...................... (1,833)
Exchange of PM&C Class A ...................... (48,826)
-------------- ---------------- --------------- --------------
Balances at December 31, 1996 ................. 57,736,011 (17,502,264) -- 40,326,198
Net loss ...................................... (19,272,137) (19,272,137)
Issuance of Class A common stock due to:
Acquisitions of DBS properties .............. 14,827,014 14,836,253
Liveoak Transaction ......................... 360,910 361,250
Incentive compensation and awards ........... 1,307,453 1,308,641
Issuance of Class A preferred stock due to:
Unit Offering ...............................
Paid and accrued dividends .................. (12,215,000) (12,215,000)
Issuance of warrants due to:
Acquisition of DBS properties ............... 1,067,723 1,067,723
Unit Offering ............................... 950,576 950,576
============== ============ =========== ==============
Balances at December 31, 1997 ................. $ 64,034,687 ($ 36,774,401) -- $ 27,363,504
============== ============ =========== ==============
</TABLE>

See accompanying notes to consolidated financial
statements
<PAGE>

Pegasus Communications Corporation
Consolidated Statements of Cash Flows

<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------------
1995 1996 1997
---------------- ---------------- -----------------
<S> <C> <C> <C>
Cash flows from operating activities ......................... $ 2,053,910 ($ 9,974,146) ($ 19,272,137)
Net income (loss)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities;
Extraordinary (gain) loss on extinguishment of debt,
net ...................................................... (10,210,580) 250,603 1,656,164
Depreciation and amortization ............................. 8,751,489 12,060,498 27,791,903
Program rights amortization ............................... 1,263,190 1,514,122 1,715,556
Accretion on discount of bonds ............................ 195,454 392,324 394,219
Stock incentive compensation .............................. -- 50,595 --
Gain on sale of cable system .............................. -- -- (4,451,320)
Bad debt expense .......................................... 146,147 335,956 1,141,913
Change in assets and liabilities:
Accounts receivable ...................................... (815,241) (4,607,356) (5,608,113)
Inventory ................................................ (389,318) 402,942 (115,800)
Prepaid expenses and other ............................... 490,636 (521,697) 305,066
Accounts payable and accrued expenses .................... (796,453) 4,552,633 7,308,021
Advances payable - related party ......................... 326,279 (468,327) --
Accrued interest ......................................... 5,173,745 418,338 2,585,178
Capitalized subscriber acquisition costs ................. (411,696) (1,272,383) (4,514,874)
Deposits and other ....................................... 5,843 (74,173) (458,131)
------------- ------------ -------------
Net cash provided by operating activities ................. 5,783,405 3,059,929 8,477,645
------------- ------------ -------------
Cash flows from investing activities:
Acquisitions, net of cash acquired ....................... -- (72,567,216) (133,886,247)
Cash acquired from acquisitions .......................... -- -- 379,044
Capital expenditures ..................................... (2,640,475) (6,294,352) (9,929,181)
Purchase of intangible assets ............................ (1,922,960) (486,444) (3,033,471)
Payments of programming rights ........................... (1,233,777) (1,830,903) (2,584,241)
Proceeds from sale of cable system ....................... -- 6,945,270
Other .................................................... (250,000) -- --
------------- ------------ -------------
Net cash used for investing activities ...................... (6,047,212) (81,178,915) (142,108,825)
------------- ------------ -------------
Cash flows from financing activities:
Proceeds from long-term debt ............................. 81,455,919 -- 115,000,000
Repayments of long-term debt ............................. (48,095,692) (103,639) (320,612)
Borrowings on revolving credit facilities ................ 2,591,335 41,400,000 94,726,250
Repayments of revolving credit facilities ................ (2,591,335) (11,800,000) (124,326,250)
Proceeds from borrowings from related parties ............ 20,000 -- --
Restricted cash .......................................... (9,881,198) 9,881,198 (1,220,056)
Debt issuance costs ...................................... (3,974,454) (304,237) (10,236,923)
Capital lease repayments ................................. (166,050) (267,900) (336,680)
Contributions by Parent .................................. -- 684,565
Distributions to Parent .................................. (12,500,000) (2,946,379) --
Proceeds from issuance or common stock ................... 4,000,000 42,000,000 --
Underwriting and IPO costs ............................... (3,817,000) --
Proceeds from issuance of Series A preferred stock -- -- 100,000,000
Underwriting and preferred offering costs ................ -- -- (4,187,920)
------------- ------------ -------------
Net cash provided by financing activities .................... 10,858,525 74,726,608 169,097,909
------------- ------------ -------------
Net increase (decrease) in cash and cash equivalents ......... 10,594,718 (3,392,378) 35,466,728
Cash and cash equivalents, beginning of year ................. 1,380,029 11,974,747 8,582,369
------------- ------------ -------------
Cash and cash equivalents end of year ........................ $ 11,974,747 $ 8,592,369 $ 44,049,097
============= ============ =============
</TABLE>

See accompanying notes to consolidated financial statements

F-6
<PAGE>

PEGASUS COMMUNICATIONS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. The Company:

Pegasus Communications Corporation ("Pegasus" or together with its
subsidiaries stated below, the "Company"), is a diversified media and
communications company, incorporated under the laws of the State of Delaware in
May 1996, and is a direct subsidiary of Pegasus Communications Holdings, Inc.
("PCH" or the "Parent"). Pegasus' direct subsidiaries are Pegasus Media &
Communications, Inc. ("PM&C"), Pegasus Development Corporation ("PDC"), Pegasus
Towers, Inc. ("Towers") and Pegasus Communications Management Company ("PCMC").

PM&C is a diversified media and communications company whose subsidiaries
provide direct broadcast satellite television ("DBS") services to customers in
certain rural areas which encompass portions of twenty-seven states, own and
operate cable television ("Cable") systems that provide service to individual
and commercial subscribers in New England and Puerto Rico, own and operate
broadcast television ("TV") stations affiliated with the Fox Broadcasting
Company ("Fox") and operate, pursuant to local marketing agreements, stations
affiliated with United Paramount Network ("UPN") and The WB Television Network
("WB").

PDC provides capital for various satellite initiatives such as subscriber
acquisitions costs. Towers owns and operates transmitting towers located in
Pennsylvania and Tennessee. PCMC provides certain management and accounting
services for the Company.

In October 1996, Pegasus completed an initial public offering (the
"Initial Public Offering") in which it sold 3,000,000 shares of its Class A
Common Stock to the public at a price of $14 per share, resulting in net
proceeds to the Company of $38.1 million.

In January 1997, Pegasus completed a unit offering (the "Unit Offering")
in which it sold 100,000 shares of 12.75% Series A Cumulative Exchangeable
Preferred Stock (the "Series A Preferred Stock") and warrants to purchase
193,600 shares of Class A Common Stock at an exercise price of $15 per share,
to the public at a price of $1,000 per unit, resulting in net proceeds to the
Company of $95.8 million. The Company applied the net proceeds from the Unit
Offering as follows: (i) $30.1 million to the repayment of all outstanding
indebtedness under the PM&C Credit Facility (as defined) and expenses related
thereto, and (ii) $56.5 million for the payment of the cash portion of the
purchase price for the acquisition of DBS assets from nine independent DIRECTV
providers. The remaining net proceeds were used for working capital, general
corporate purposes and to finance other acquisitions.

In October 1997, the Company completed a senior notes offering (the
"Senior Notes Offering") in which it sold $115.0 million of 9.625% Series A
Senior Notes (the "Senior Notes"), resulting in net proceeds to the Company of
approximately $111.0 million. The Company applied the net proceeds from the
Senior Notes Offering as follows: (i) $94.2 million to the repayment of all
outstanding indebtedness under the PSH Credit Facility (as defined), and (ii)
$16.8 million for the payment of the cash portion of the purchase price for the
acquisition of DBS assets from various independent DIRECTV providers.

2. Summary of Significant Accounting Policies:

Basis of Presentation:

The accompanying consolidated financial statements include the accounts of
Pegasus and all of its subsidiaries or affiliates. All intercompany
transactions and balances have been eliminated.

Use of Estimates in the Preparation of Financial Statements:

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

F-7
<PAGE>

PEGASUS COMMUNICATIONS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

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

Cash and Cash Equivalents:

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

Restricted Cash:

The Company has restricted cash held in escrow of approximately $1.2
million at December 31, 1997 to collateralize loans made by banks to employees
enabling them to pay income taxes as a result of grants of Class A Common Stock
by the Company.

Inventories:

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

Long-Lived Assets:

The Company's assets are reviewed for impairment whenever events or
circumstances provide evidence that suggest that the carrying amounts may not
be recoverable. The Company assesses the recoverability of its assets by
determining whether the depreciation or amortization of the respective asset
balance can be recovered through projected undiscounted future cash flows.

Property and Equipment:

Property and equipment are stated at cost. The cost and related
accumulated depreciation of assets sold, retired or otherwise disposed of are
removed from the respective accounts, and any resulting gains or losses are
included in the statement of operations. For cable television systems, initial
subscriber installation costs, including material, labor and overhead costs of
the hookup are capitalized as part of the distribution facilities. The costs of
disconnection and reconnection are charged to expense. Satellite equipment that
is leased to customers is stated at cost.

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

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

Intangible Assets:

Intangible assets are stated at cost and amortized by the straight-line
method. Costs of successful franchise applications are capitalized and
amortized over the lives of the related franchise agreements, while
unsuccessful franchise applications and abandoned franchises are charged to
expense. Financing costs incurred in obtaining long-term financing are
amortized over the term of the applicable loan.

The Company's policy is to capitalize subscriber acquisition costs
directly related to new subscribers such as commissions and equipment
subsidies, who sign a programming contract. These costs are amortized over the
life of the contract. The Company expenses its subscriber acquisition costs
when no new contract is obtained. The Company currently 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.

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

F-8
<PAGE>

PEGASUS COMMUNICATIONS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

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

Broadcast licenses ..................... 40 years
Network affiliation agreements ......... 40 years
Goodwill ............................... 40 years
DBS rights ............................. 10 years
Other intangibles ...................... 2 to 14 years
Subscriber acquisition costs ........... 1 year

Financial Instruments:

The Company uses interest rate cap contracts for the purpose of hedging
interest rate exposures, which involve the exchange of fixed and floating rate
interest payments without the exchange of the underlying principal amounts. The
amounts to be paid or received are accrued as interest rates change and
recognized over the life of the contracts as an adjustment to interest expense.
Gains and losses are realized from the termination of interest rate hedges are
recognized over the remaining life of the hedge contract. As a policy, the
Company does not engage in speculative or leveraged transactions, nor does the
Company hold or issue financial instruments for trading purposes. The Company
had no such instruments at December 31, 1997.

Revenue:

The Company operates in growing segments of the media and communications
industries: multichannel television (DBS and Cable) and broadcast television
(TV). The Company recognizes revenue in its multichannel operations when video
and audio services are provided. The Company recognizes revenue in its
broadcast operations when advertising spots are broadcast.

Barter Programming:

The Company obtains a portion of its TV programming, including pre-sold
advertisements, through its network affiliation agreements with Fox, UPN and
WB, and also through independent producers. The Company does not make any
direct payments for this programming. For running network programming, the
Company received payments from Fox, which totaled approximately $215,000, and
$73,000 in 1995 and 1996, respectively. The Company received no such payments
in 1997. For running independent producers' programming, the Company received
no direct payments. Instead, the Company retains a portion of the available
advertisement spots to sell on its own account. Barter programming revenue and
the related expense are recognized when the pre-sold advertisements are
broadcast. These amounts are presented gross as barter programming revenue and
expense in the accompanying consolidated statements of operations.

Advertising Costs:

Advertising costs are charged to operations in the period incurred and
totaled approximately $613,000, $1.1 million and $3.6 million for the years
ended December 31, 1995, 1996 and 1997, respectively.

Program Rights:

The Company enters into agreements to show motion pictures and syndicated
programs on television. The Company records the right and associated
liabilities for those films and programs when they are currently available for
showing. These rights are recorded at the lower of unamortized cost or
estimated net realizable value and are amortized on the straight-line method
over the license period which approximates amortization based on the estimated
number of showings during the contract period. Amortization of $1.3 million,
$1.5 million and $1.7 million is included in programming expense for the years
ended December 31, 1995, 1996 and 1997, respectively. The obligations arising
from the acquisition of film rights are recorded at the gross amount. Payments
for the contracts are made pursuant to the contractual terms over periods which
are generally shorter than the license periods.

F-9
<PAGE>

PEGASUS COMMUNICATIONS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

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

The Company has entered into agreements totaling $6.6 million as of
December 31, 1997, for film rights and programs that are not yet available for
showing at December 31, 1997, and accordingly, are not recorded by the Company.
At December 31, 1997, the Company has commitments for future program rights of
approximately $1.7 million, $1.0 million, $417,000, $123,000 and $15,000 in
1998, 1999, 2000, 2001 and 2002, respectively.

Income Taxes:

The Company accounts for income taxes under SFAS No. 109, "Accounting for
Income Taxes" ("SFAS 109"). SFAS 109 is an asset and liability approach,
whereby deferred tax assets and liabilities are recorded to the extent of the
tax effect of differences between the financial statement carrying values and
tax bases of assets and liabilities. A valuation allowance is recorded for
deferred taxes where it appears more likely than not that the Company will not
be able to recover the deferred tax asset. MCT Cablevision, L.P. is treated as
a partnership for federal and state income tax purposes, but taxed as a
corporation for Puerto Rico income tax purposes.

Stock Based Compensation:

The Company applies Accounting Principles Board Opinion No. 25 --
"Accounting for Stock Issued to Employees" ("APB 25") in accounting for its
stock plans. The Company has adopted the disclosure-only provisions of
Statement of Financial Accounting Standards No. 123 -- "Accounting for
Stock-Based Compensation ("SFAS 123").

Earnings Per Share:

The Company has adopted SFAS No. 128 "Earnings per share" issued in
February 1997. This statement requires the disclosure of basic and diluted
earnings per share and revises the method required to calculate these amounts.
The adoption of this standard did not significantly impact previously reported
earnings per share amounts.

Concentration of Credit Risk:

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

Concentrations of credit risk with respect to trade receivables are
limited due to the large number of customers comprising the Company's customer
base, and their dispersion across different businesses and geographic regions.
As of December 31, 1995, 1996 and 1997 the Company had no significant
concentrations of credit risk.

New Accounting Pronouncements:

In June 1997, the Financial Accounting Standards Board issued SFAS No.
130, "Reporting Comprehensive Income" ("SFAS 130") and SFAS No. 131
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS
131"). SFAS 130 requires that all items that are required to be recognized
under accounting standards as components of comprehensive income be reported in
a financial statement table that is displayed with the same prominence as other
financial statements. SFAS 131 requires that all public business enterprises
report information about operating segments, as well as specific revised
guidelines for determining an entity's operating segments and the type and
level of financial information to be disclosed. These new standards, which are
efective for the fiscal year ending December 31, 1998, will not have a
significant impact on the Company.

F-10
<PAGE>

PEGASUS COMMUNICATIONS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

3. Property and Equipment:

Property and equipment consist of the following:

<TABLE>
<CAPTION>
December 31, December 31,
1996 1997
---------------- ----------------
<S> <C> <C>
Land .......................................... $ 862,298 $ 947,712
Reception and distribution facilities ......... 29,140,040 27,012,297
Transmitter equipment ......................... 11,643,812 15,306,589
Building and improvements ..................... 1,553,548 2,293,755
Equipment, furniture and fixtures ............. 1,509,588 3,091,363
Vehicles ...................................... 766,192 983,256
Other equipment .............................. 2,295,446 2,612,332
------------- -------------
47,770,924 52,247,304
Accumulated depreciation ...................... (23,655,786) (24,560,658)
------------- -------------
Net property and equipment .................... $ 24,115,138 $ 27,686,646
============= =============
</TABLE>

Depreciation expense amounted to $4.1 million, $5.2 million and $5.7
million for the years ended December 31, 1995, 1996 and 1997, respectively.

4. Intangibles:

Intangible assets consist of the following:

<TABLE>
<CAPTION>
December 31, December 31,
1996 1997
---------------- ----------------
<S> <C> <C>
Goodwill ............................................ $ 28,490,035 $ 28,490,035
Franchise costs ..................................... 35,972,374 35,332,755
Broadcast licenses & affiliation agreements ......... 18,930,324 19,094,212
Deferred financing costs ............................ 4,020,665 16,654,186
Subscriber acquistion costs ......................... 1,272,282 5,787,156
DBS rights .......................................... 45,829,174 203,379,952
Consultancy & non-compete agreements................. 2,700,000 6,010,838
Organization & other deferred costs ................. 6,368,426 8,571,281
------------- -------------
143,583,280 323,320,415
Accumulated amortization ............................ (17,347,152) (38,546,388)
------------- -------------
Net intangible assets ............................... $ 126,236,128 $ 284,774,027
============= =============
</TABLE>

Amortization expense amounted to $4.6 million, $6.9 million and $22.1
million for the years ended December 31, 1995, 1996 and 1997, respectively.

The Company's intangible assets increased primarily due to the $166
million increase in DBS rights and other intangibles relating to the 25
acquisitions completed by the Company during 1997 (see footnote 12 Acquisitions
and Disposition), as well as the net $12.6 million increase in deferred
financing costs related to the three completed financings (see footnote 6 --
Redeemable Preferred Stock and footnote 7 -- Long-Term Debt).

F-11
<PAGE>

PEGASUS COMMUNICATIONS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

5. Common Stock:

At December 31, common stock consists of the following:

<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Pegasus Class A common stock, $0.01 par value; 30.0 million shares
authorized; 4,663,229 and 5,739,842 issued and outstanding,
respectively ...................................................... $46,632 $ 57,399
Pegasus Class B common stock, $0.01 par value; 15.0 million shares
authorized; 4,581,900 and 4,581,900 issued and outstanding,
respectively ...................................................... 45,819 45,819
======= ========
Total common stock .............................................. $92,451 $103,218
======= ========
</TABLE>

The Company's ability to pay dividends on its Common Stock is subject to
certain restrictions (see footnote 6 -- Redeemable Preferred Stock and footnote
7 -- Long-Term Debt).

6. Redeemable Preferred Stock:

As a result of the Unit Offering and dividends subsequently declared on
the Series A Preferred Stock, the Company has outstanding approximately 112,215
shares of Series A Preferred Stock with a liquidation preference of $1,000 per
share (the "Liquidation Preference"). Cumulative dividends, at a rate of 12.75%
are payable semi-annually on January 1 and July 1. Dividends may be paid,
occurring on or prior to January 1, 2002, at the option of the Company, either
in cash or by the issuance of additional shares of Series A Preferred Stock.
Subject to certain conditions, the Series A Preferred Stock is exchangeable in
whole, but not in part, at the option of the Company, for Pegasus' 12.75%
Senior Subordinated Exchange Notes due 2007 (the "Exchange Notes"). The
Exchange Notes would contain substantially the same redemption provisions,
restrictions and other terms as the Series A Preferred Stock. Pegasus is
required to redeem all of the Series A Preferred Stock outstanding on January
1, 2007 at a redemption price equal to the Liquidation Preference thereof, plus
accrued dividends.

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

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

At December 31, 1997, 5,000,000 shares of Series A Preferred Stock are
authorized and 112,215 shares are issued and outstanding.

Basic earnings per share amounts are based on net income after deducting
preferred stock dividend requirements divided by the weighted average number of
Class A and Class B Common shares outstanding during the year.

For the year ended December 31, 1997, net loss per common share was
determined by dividing net loss, as adjusted by the aggregate amount of
dividends on the Company's Series A Preferred Stock, approximately $12,215,000,
by applicable shares outstanding.

F-12
<PAGE>

PEGASUS COMMUNICATIONS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

7. Long-Term Debt:

Long-term debt consists of the following:

<TABLE>
<CAPTION>
December 31, December 31,
1996 1997
-------------- ---------------
<S> <C> <C>
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 $3,412,222 and $3,018,003 as of December
31, 1996 and December 31, 1997, respectively ....................... $ 81,587,778 $ 81,981,997
Series A Senior Notes payable by Pegasus, due 2005, interest at
9.625%, payable semi-annually in arrears on April 15 and October
15, commencing on April 15, 1998 ................................... -- 115,000,000
Senior seven-year $50.0 million revolving credit facility, payable by
PM&C, interest at the Company's option at either the bank's prime
rate plus an applicable margin or LIBOR plus an applicable margin. 29,600,000 --
Senior six-year $180.0 million revolving credit facility, payable by
PM&C, interest at the Company's option at either the bank's base
rate plus an applicable margin or LIBOR plus an applicable margin . -- --
Mortgage payable, due 2000, interest at 8.75% ....................... 498,468 477,664
Note payable, due 1998, interest at 10% ............................. 3,050,000 3,050,000
Sellers' notes, various maturities and interest rates ............... 277,130 7,171,621
Capital leases and other ............................................ 562,067 673,849
------------ ------------
115,575,443 208,355,131
Less current maturities ............................................. 363,833 6,357,320
------------ ------------
Long-term debt ...................................................... $115,211,610 $201,997,811
============ ============
</TABLE>

In July 1995, PM&C sold 85,000 units consisting of $85.0 million in
aggregate of 12.5% Series A Senior Subordinated Notes due 2005 (the "PM&C
Series A Notes" and, together with the PM&C Series B Notes, the "PM&C Notes")
and 8,500 shares of Class B Common Stock of PM&C (the "PM&C Note Offering").
The PM&C Class B Shares were subsequently exchanged for an aggregate of 191,775
shares of Pegasus' Class A Common Stock.

In November 1995, PM&C exchanged its PM&C Series B Notes for the PM&C
Series A Notes. The PM&C Series B Notes have substantially the same terms and
provisions as the PM&C Series A Notes. The PM&C Series B Notes are guaranteed
on a full, unconditional, senior subordinated basis, jointly and severally by a
majority of the wholly owned direct and indirect subsidiaries of PM&C. PM&C's
indebtedness contain certain financial and operating covenants, including
restrictions on PM&C to incur additional indebtedness, create liens and to pay
dividends

In August 1996, in conjunction with the acquisition of the WTLH
Tallahassee, Florida FCC license and Fox affiliation agreement, the Company
incurred indebtedness of $3.1 million.

In August 1996, PM&C entered into a $50.0 million seven-year senior
revolving credit facility (the "PM&C Credit Facility"), which was
collateralized by substantially all of the assets of PM&C and its subsidiaries.
Deferred financing fees relating to the retired $10.0 million revolving credit
facility were written off, resulting in an extraordinary loss of $251,000 on
the refinancing transaction. Outstanding balances under the PM&C Credit
Facility were repaid from the proceeds of the Unit Offering. Concurrently with
the closing of the New Credit Facility, the PM&C Credit Facility was repaid in
full and commitments thereunder were terminated. Deferred financing fees
relating to the $50.0 million revolving credit facility were written off,
resulting in an extraordinary loss of $460,000 on the refinancing transaction.

F-13
<PAGE>

PEGASUS COMMUNICATIONS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

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

In October 1997, Pegasus completed the Senior Notes Offering in which it
sold $115.0 million of its 9.625% Series A Senior Notes due 2005 (the "9.625%
Series A Senior Notes"), resulting in net proceeds to the Company of
approximately $111.0 million. A portion of the proceeds from the Senior notes
Offering were used to retire an existing $130.0 million credit facility (the
"PSH Credit Facility"). The PSH Credit Facility was financed with the New
Credit Facility. Deferred financing fees relating to the PSH Credit Facility
were written off, resulting in an extraordinary loss of approximately $1.2
million on the refinancing transaction.

In December 1997, PM&C entered into a $180.0 million six-year senior
revolving credit facility (the "New Credit Facility"), which is collateralized
by substantially all of the assets of PM&C and its subsidiaries. Interest on
the New Credit Facility is, at the Company's option, at either the bank's base
rate plus an applicable margin or LIBOR plus an applicable margin. The New
Credit Facility is subject to certain financial covenants as defined in the
loan agreement, including a debt to adjusted cash flow covenant. The New Credit
Facility will be used to finance future acquisitions and for working capital,
capital expenditures and general corporate purposes. There were no borrowings
outstanding at December 31, 1997.

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

At December 31, 1997, maturities of long-term debt and capital leases are
as follows:

1998 ................. $ 6,357,320
1999 ................. 1,905,265
2000 ................. 1,930,290
2001 ................. 1,125,561
2002 ................. 54,698
Thereafter ........... 196,981,997
------------
$208,355,131
============

8. Net Income Per Common Share:

Calculation of Basic and Diluted net income per common share:

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

<TABLE>
<CAPTION>
1995 1996 1997
------------- ---------------- -----------------
<S> <C> <C> <C>
Net income (less) applicable to common shares ............. $2,053,910 ($ 9,974,146) ($ 31,487,137)
========== =========== ============
Weighted average common shares outstanding ................ 5,139,910 6,239,646 9,858,244
========== =========== ============
Total shares used for calculation of basic net income per
common share ............................................. 5,139,929 6,239,646 9,858,244
Stock options ............................................. -- -- --
---------- ----------- ------------
Total shares used for calculation of diluted net income per
common share ............................................. 5,139,929 6,239,646 9,858,244
========== =========== ============
</TABLE>

Securities that have not been issued and are antidilutive amounted to
2,539 shares in 1996 and 582,493 shares in 1997.

F-14
<PAGE>

PEGASUS COMMUNICATIONS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

9. Leases:

The Company leases certain studios, towers, utility pole attachments, and
occupancy of underground conduits and headend sites under operating leases. The
Company also leases office space, vehicles and various types of equipment
through separate operating lease agreements. The operating leases expire at
various dates through 2005. Rent expense for the years ended December 31, 1995,
1996 and 1997 was $503,000, $712,000 and $1.1 million, respectively. The
Company leases equipment under long-term leases and has the option to purchase
the equipment for a nominal cost at the termination of the leases. The related
obligations are included in long-term debt. Property and equipment at December
31 include the following amounts for leases that have been capitalized:

1996 1997
------------- -------------
Equipment, furniture and fixtures .......... $ 215,112 $ 700,807
Vehicles ................................... 446,372 516,642
---------- ----------
661,484 1,217,449
Accumulated depreciation ................... (250,288) (512,307)
========== ==========
Total ...................................... $ 411,196 $ 705,142
========== ==========

Future minimum lease payments on noncancellable operating and capital
leases at December 31, 1997 are as follows:

<TABLE>
<CAPTION>
Operating Capital
Leases Leases
------------- -----------
<S> <C> <C>
1998 .............................................................. $ 649,802 $259,574
1999 .............................................................. 427,794 184,631
2000 .............................................................. 331,283 164,726
2001 .............................................................. 248,206 140,681
2002 .............................................................. 143,958 53,612
Thereafter ........................................................ 59,154 --
---------- --------
Total minimum payments ............................................ $1,860,197 803,224
==========
Less: amount representing interest ................................ 153,375
========
Present value of net minimum lease payments including current
maturities of $199,273 ........................................... $649,849
========
</TABLE>

10. Income Taxes:

The following is a summary of the components of income taxes from
operations:

<TABLE>
<CAPTION>
1995 1996 1997
---------- -------------- -----------
<S> <C> <C> <C>
Federal -- deferred .............................. $23,000 ($ 169,000)
State and local -- current ....................... 7,000 49,000 $200,000
------- --------- --------
Provision (benefit) for income taxes .......... $30,000 ($ 120,000) $200,000
======= ========= ========
</TABLE>

F-15
<PAGE>

PEGASUS COMMUNICATIONS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

10. Income Taxes: -- (Continued)

The deferred income tax assets and liabilities recorded in the
consolidated balance sheets at December 31, 1996 and 1997 are as follows:

<TABLE>
<CAPTION>
1996 1997
---------------- ---------------
<S> <C> <C>
Assets:
Receivables ......................................................... $ 47,887 $ 73,547
Excess of tax basis over book basis from tax gain recognized upon
incorporation of subsidiaries ..................................... 1,890,025 1,890,025
Loss carryforwards .................................................. 14,197,578 18,046,889
Other ............................................................... 870,305 870,305
------------ ------------
Total deferred tax assets ......................................... 17,005,795 20,880,766
Liabilities:
Excess of book basis over tax basis of property, plant and equipment (1,754,621) (1,938,899)
Excess of book basis over tax basis of amortizable intangible assets. (4,616,997) (5,695,313)
------------ ------------
Total deferred tax liabilities .................................... (6,371,618) (7,634,212)
------------ ------------
Net deferred tax assets ............................................. 10,634,177 13,246,554
Valuation allowance ............................................... (10,683,639) (13,296,554)
------------ ------------
Net deferred tax liabilities ........................................ ($ 49,462) ($ 50,000)
============ ============
</TABLE>

The Company has recorded a valuation allowance to reflect the estimated
amount of deferred tax assets which may not be realized due to the expiration
of the Company's net operating loss carryforwards and portions of other
deferred tax assets related to prior acquisitions. The valuation allowance
increased primarily as the result of net operating loss carryforwards generated
during 1997, which may not be utilized.

At December 31, 1997, the Company has net operating loss carryforwards of
approximately $53.1 million which are available to offset future taxable income
and expire through 2017.

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

<TABLE>
<CAPTION>
1995 1996 1997
------------- ------------- -----------
<S> <C> <C> <C>
U.S. statutory federal income tax rate .......... 34.00% 34.00% 34.00%
Foreign net operating loss ...................... 27.09 1.73 --
Valuation allowance ............................. (60.72) (36.92) (34.38)
Other ........................................... -- -- 1.43
------- ------- -------
Effective tax rate .............................. ( 0.37%) ( 1.19%) 1.05%
======= ======= =======
</TABLE>

F-16
<PAGE>

PEGASUS COMMUNICATIONS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

11. Supplemental Cash Flow Information:

Significant noncash investing and financing activities are as follows:

<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------------------
1995 1996 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Barter revenue and related expense ............................. $ 5,110,662 $ 6,337,220 $ 7,520,000
Acquisition of program rights and assumption of related
program payables .............................................. 1,335,275 1,140,072 3,452,779
Acquisition of plant under capital leases ...................... 121,373 312,578 529,072
Redemption of minority interests and related receivable ........ 246,515 -- --
Capital contribution and related acquisition of intangibles..... -- 14,079,546 15,197,503
Execution of license agreement option .......................... -- 3,050,000 --
Stock incentive compensation and related expense/ accrued
expense ....................................................... -- -- 1,273,872
Minority interest and related acquisition of intangibles ....... -- -- 3,000,000
Notes payable and related acquisition of intangibles ........... -- -- 7,113,689
Series A Preferred Stock dividend and reduction of paid-in
capital ....................................................... -- -- 12,215,000
</TABLE>

For the years ended December 31, 1995, 1996 and 1997 the Company paid cash
for interest in the amount of $3.6 million, $12.0 million and $13.5 million,
respectively. The Company paid no federal income taxes for the years ended
December 31, 1995, 1996 and 1997.

12. Acquisitions and Disposition:

In January 1996, PCH, the parent of the Company, acquired all of the
outstanding stock of Portland Broadcasting, Inc. ("PBI"), which owns the
tangible assets of WPXT, Portland, Maine. PCH immediately transferred ownership
of PBI to the Company. The aggregate purchase price of PBI was approximately
$11.7 million of which $1.5 million was allocated to fixed and tangible assets
and $10.2 million to intangible assets. In June 1996, PCH acquired the FCC
license of WPXT for aggregate consideration of $3.0 million. PCH immediately
transferred the ownership of the license to the Company.

Effective March 1, 1996, the Company acquired the principal tangible
assets of WTLH, Inc., Tallahassee, Florida and certain of its affiliates for
approximately $5.0 million, except for the FCC license and Fox affiliation
agreement. Additionally, the Company entered into a put/call agreement
regarding the FCC license and Fox affiliation agreement with the licensee of
WTLH. In August 1996, the Company exercised its rights and recorded $3.1
million in intangible assets and long term debt. The aggregate purchase price
of WTLH, Inc. and the related FCC licenses and Fox affiliation agreement is
approximately $8.1 million of which $2.2 million was allocated to fixed and
tangible assets and $5.9 million to various intangible assets. In addition, PCH
granted the sellers of WTLH a warrant to purchase $1.0 million of stock of one
of its subsidiaries at $14.00 per share. The warrant expired in February 1997.

Effective August 29, 1996, the Company acquired all of the assets of Dom's
for approximately $25.0 million in cash and $1.0 million in assumed
liabilities. Dom's operates cable systems serving ten communities contiguous to
the Company's Mayaguez, Puerto Rico cable system. The aggregate purchase price
of the principal assets of Dom's amounted to $26.0 million of which $4.7
million was allocated to fixed and tangible assets and $21.3 million to various
intangible assets.

On October 8, 1996, the Company acquired, from an independent DIRECTV
provider, the rights to provide DIRECTV programming in certain rural areas of
Texas and Michigan and the related assets in exchange for total consideration
of approximately $29.8 million, which consisted of $17.9 million in cash and
$11.9 million of the Company's Class A Common Stock.

F-17
<PAGE>

PEGASUS COMMUNICATIONS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

12. Acquisitions and Disposition: -- (Continued)

On November 8, 1996, the Company acquired, from an independent DIRECTV
provider, the rights to provide DIRECTV programming in certain rural areas of
Ohio and the related assets, including receivables, in exchange for
approximately $12.0 million in cash.

On January 31, 1997, the Company acquired, from an independent DIRECTV
provider, the rights to provide DIRECTV programming in certain rural areas of
Indiana and the related assets and liabilities in exchange for total
consideration of approximately $14.4 million, which consisted of for
approximately $8.8 million in cash and 466,667 shares of the Company's Class A
Common Stock (amounting to $5.6 million at the time of issuance).

As of March 10, 1997, the Company acquired, from two independent DIRECTV
providers, the rights to provide DIRECTV programming in certain rural areas of
Arkansas, Virginia and West Virginia and the related assets in exchange for
total consideration of approximately $14.6 million, which consisted of $10.4
million in cash, $200,000 in assumed liabilities, $3.0 million in preferred
stock of a subsidiary of Pegasus and warrants to purchase a total of 283,969
shares of the Company's Class A Common Stock (amounting to $951,000 at the time
of issuance). The $3.0 million in preferred stock of a subsidiary of Pegasus
has been accounted for as a minority interest.

As of April 9, 1997, the Company acquired, from an independent DIRECTV
provider, the rights to provide DIRECTV programming in certain rural areas of
Georgia and the related assets in exchange for total consideration of
approximately $4.5 million, which consisted of $3.3 million in cash, $143,000
in assumed liabilities, 42,187 shares of the Company's Class A Common Stock
(amounting to $500,000 at the time of issuance), and a $600,000 obligation,
payable over four years, for consultancy and non-compete agreements.

As of May 9, 1997, the Company acquired, from four independent DIRECTV
providers, the rights to provide DIRECTV programming in certain rural areas of
Colorado, Florida, Maryland, Minnesota, Nevada, New Hampshire, Oklahoma, Texas,
Virginia, Washington, Wisconsin and Wyoming and the related assets in exchange
for total consideration of approximately $20.3 million, which consisted of
$18.6 million in cash, $502,000 in assumed liabilities, a $350,000 note due
January 1998, 17,971 shares of the Company's Class A Common Stock (amounting to
$200,000 at the time of issuance), and $600,000 in cash for consultancy and
non-compete agreements.

As of July 9, 1997, the Company acquired, from two independent DIRECTV
providers, the rights to provide DIRECTV programming in certain rural areas of
Ohio and Texas and the related assets in exchange for total consideration of
approximately $17.9 million, which consisted of $17.4 million in cash and
$503,000 in assumed liabilities.

As of August 8, 1997, the Company acquired, from four independent DIRECTV
providers, the rights to provide DIRECTV programming in certain rural areas of
Indiana, Minnesota and South Dakota and the related assets in exchange for
total consideration of approximately $17.7 million, which consisted of $15.5
million in cash, $464,000 in assumed liabilities and a $988,000 note due
January 1998; and $750,000 in cash for endorsement and non-compete agreements.

As of September 8, 1997, the Company acquired, from four independent
DIRECTV providers, the rights to provide DIRECTV programming in certain rural
areas of Illinois, Minnesota and Utah and the related assets in exchange for
total consideration of approximately $9.3 million, which consisted of $9.1
million in cash and $165,000 in assumed liabilities.

F-18
<PAGE>

PEGASUS COMMUNICATIONS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

12. Acquisitions and Disposition: -- (Continued)

As of October 8, 1997, the Company acquired, from two independent DIRECTV
providers, the rights to provide DIRECTV programming in certain rural areas of
Alabama and Texas and the related assets in exchange for total consideration of
approximately $28.0 million, which consisted of $24.2 million in cash, $219,000
in assumed liabilities, a $2.2 million note, payable over four years, and
$589,000 in cash and a $772,000 obligation, payable over four years, for
consultancy and non-compete agreements.

Effective October 31, 1997 the Company acquired, from an independent
DIRECTV provider, the rights to provide DIRECTV programming in certain rural
areas of Georgia and the related assets and liabilities in exchange total
consideration of approximately $14.9 million, which consisted of $6.4 million
in cash and 397,035 shares of the Company's Class A Common Stock (amounting to
$8.5 million at the time of issuance).

As of November 7, 1997 the Company acquired, from three independent
DIRECTV providers, the rights to provide DIRECTV programming in certain rural
areas of Nebraska, Minnesota, Utah and Wyoming and the related assets in
exchange for total consideration of approximately $5.4 million, which consisted
of $3.1 million in cash, $147,000 in assumed liabilities, a $1.7 million note,
payable over two years, and a $446,000 note due November 2000.

The value assigned to the Class A Common Stock was computed by multiplying
the number of shares issued by the closing price per share on the day prior to
the date of consummation of the acquisition.

The following unaudited summary, prepared on a pro forma basis, combines
the results of operations as if the above TV stations, DBS territories, cable
system and TV stations had been acquired or sold as of the beginning of the
periods presented, after including the impact of certain adjustments, such as
the Company's payments to related parties, amortization of intangibles,
interest expense, preferred stock dividends and related income tax effects. The
pro forma information does not purport to be indicative of what would have
occurred had the acquisitions/disposition been made on those dates or of
results which may occur in the future. This pro forma information does not
include any acquisitions that occurred subsequent to December 31, 1997.

<PAGE>

<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------
1996 1997
-------------- --------------
(in thousands, except earnings per share) (unaudited)
<S> <C> <C>
Net revenues ...................................... $ 83,916 $ 104,357
--------- ---------
Operating loss .................................... ($ 11,564) ($ 16,250)
--------- ---------
Net loss .......................................... ($ 34,820) ($ 39,002)
Less: Preferred stock dividends ................... (13,156) (13,156)
--------- ---------
Net loss available to common stockholders ......... ($ 47,976) ($ 52,158)
========= =========
Net loss per common share ......................... $ 6.70) $ 5.09)
========= =========
</TABLE>

13. Financial Instruments:

The carrying values and fair values of the Company's financial instruments
at December 31 consisted of:

<TABLE>
<CAPTION>
1996 1997
------------------------ ------------------------
Carrying Fair Carrying Fair
Value Value Value Value
---------- ----------- ---------- -----------
(in thousands)
<S> <C> <C> <C> <C>
Long-term debt, including current portion $115,575 $125,788 $208,355 $240,086
Series A Preferred Stock ................ -- -- 111,264 114,750
</TABLE>

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

F-19
<PAGE>

PEGASUS COMMUNICATIONS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

13. Financial Instruments: -- (Continued)

Series A Preferred Stock: The fair value of Series A Preferred Stock is
estimated based on the quoted market price for the same or similar instruments.
All other financial instruments are stated at cost which approximates fair
market value.

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

14. Warrants:

In January 1997, in connection with the Unit Offering, the Company issued
warrants to purchase 193,600 shares of Class A Common Stock at an exercise
price of $15 per share. These warrants are exercisable through January 1, 2007.
At December 31, 1997, none of these warrants have been exercised. The fair
value, value of these warrants was estimated using the Black-Scholes pricing
model and was approximately $1.1 million. The value assigned to these warrants
reduced the carrying amount of the Series A Preferred Stock and was effected by
an increase in additional paid-in capital.

In March, in connection witht he acquisition of DBS properties, the
Company issued warrants to purchase 283,969 shares of Class A Common Stock at
an exercise price of $11.81 per share. These warrants are exercisable through
March 10, 2006. At December 31, 1997, none of these warrants have been
exercised. The fair value of these warrants was estimated using the
Black-Scholes pricing model and was approximately $951,000. The value assigned
to these warrants increased the carrying amount of the DBS rights acquired and
was effected by an increase in additional paid-in-capital.

15. Employee Benefit Plans:

The Company has two active stock plans available to grant stock options
(the "Stock Option Plan") and restricted stock awards (the "Restricted Stock
Plan") to eligible employees, executive officers and non-employee directors of
the Company.

Stock Option Plan

The Stock Option Plan provides for the granting of nonqualified and
qualified options to purchase a maximum of 450,000 shares (subject to
adjustment to reflect stock dividends, stock splits, recapitalizations and
similar changes in the capitalization of Pegasus) of Class A Common Stock of
the Company. Executive officers, who are not eligible to receive profit sharing
awards under the Restricted Stock Plan, are eligible to receive stock options
under the Stock Option Plan, but no executive officer may be granted options to
purchase more than 275,000 shares of Class A Common Stock under the Stock
Option Plan. Directors of Pegasus who are not employees of the Company are
eligible to receive nonqualified options. The Stock Option Plan terminates in
September 2006. As of December 31, 1997, options to purchase an aggregate of
223,385 shares of Class A Common Stock were outstanding, including 220,000
options outstanding under the Stock Option Plan. All options granted under the
Stock Option Plan have been granted at fair market value at the time of grant.

The Financial Accounting Standards Board issued SFAS No. 123, "Accounting
for Stock-Based Compensation" ("SFAS 123"), in October 1995. Under SFAS 123,
companies can either continue to account for stock compensation plans pursuant
to existing accounting standards or elect to expense the value derived from
using an option pricing model. The Company is continuing to apply existing
accounting standards. However, SFAS 123 requires disclosures of pro forma net
income and earnings per share as if the Company had adopted the expensing
provisions of SFAS 123.

The fair value of options was estimated using the Black-Scholes option
pricing model with the following weighted average assumptions for 1996 and
1997:

F-20
<PAGE>

PEGASUS COMMUNICATIONS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

15. Employee Benefit Plans: -- (Continued)

1996 1997
---------- ----------
Risk-free interest rate ................. 5.56% 6.35%
Dividend Yield .......................... 0.00% 0.00%
Volatility Factor ....................... 0.00 0.403
Weighted average expected life .......... 5 years 5 years

Pro forma net losses for 1996 and 1997 would have been $9,976,114 and
$19,480,852, respectively; pro forma net losses per common share for 1996 and
1997 would have been $1.60 and $3.22, respectively. The weighted average fair
value of options granted were $3.40 and $4.99 for 1996 and 1997, respectively.

The following table summarizes stock option activity over the past two
years under the Company's plan:

<TABLE>
<CAPTION>
Weighted
Number of Average
Shares Exercise Price
----------- ---------------
<S> <C> <C>
Outstanding at January 1, 1996 ................... -- --
Granted .......................................... 3,385 $ 14.00
Exercised ........................................ -- --
Canceled or expired .............................. -- --
----- -------
Outstanding at December 31, 1996 ................. 3,385 14.00
Granted .......................................... 220,000 11.00
Exercised ........................................ -- --
Canceled or expired .............................. -- --
======= =======
Outstanding at December 31, 1997 ................. 223,385 $ 11.05
======= =======
Options exercisable at December 31, 1996 ......... 3,385 14.00
Options exercisable at December 31, 1997 ......... 3,385 14.00
</TABLE>

Restricted Stock Plan

The Restricted Stock Plan provides for the granting of restricted stock
awards representing a maximum of 270,000 shares (subject to adjustment to
reflect stock dividends, stock splits, recapitalizations and similar changes in
the capitalization of Pegasus) of Class A Common Stock of the Company to
eligible employees who have completed at least one year of service. Restricted
stock received under the Restricted Stock Plan vests over four years. The Plan
terminates in September 2006. As of December 31, 1997, 94,159 shares of Class A
Common Stock had been granted under the Restricted Stock Plan. The expense for
this plan amounted to $501,139 and $800,768 in 1996 and 1997, respectively.

401(k) Plans

Effective January 1, 1996, PM&C adopted the Pegasus Communications Savings
Plan (the "US 401(k) Plan") for eligible employees of PM&C and its domestic
subsidiaries. In 1996, the Company's Puerto Rico subsidiary adopted the Pegasus
Communications Puerto Rico Savings Plan (the "Puerto Rico 401(k) Plan" and,
together with the US 401(k) Plan, the "401(k) Plans") for eligible employees of
the Company's Puerto Rico subsidiaries. Substantially all Company employees
who, as of the enrollment date under the 401(k) Plans, have completed at least
one year of service with the Company are eligible to participate in one of the
401(k) Plans. Participants may make salary deferral contributions of 2% to 6%
of their salary to the 401(k) Plans. The expense for this plan amounted to
$484,226 and $473,104 in 1996 and 1997, respectively.

F-21
<PAGE>

PEGASUS COMMUNICATIONS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

15. Employee Benefit Plans: -- (Continued)

on the last day of the applicable plan year: (i) the Company matches 100% of a
participant's salary deferral contributions to the extent the participant
invested his or her salary deferral contributions in Class A Common Stock at
the time of his or her initial contribution to the 401(k) Plans, (ii) the
Company, in its discretion, may contribute an amount that equals up to 10% of
the annual increase in Company-wide Location Cash Flow (these Company
discretionary contributions, if any, are allocated to eligible participants'
accounts based on each participant's salary for the plan year), and (iii) the
Company also matches a participant's rollover contribution, if any, to the
401(k) Plans, to the extent the participant invested his or her rollover
contribution in Class A Common Stock at the time of his or her initial
contribution to the 401(k) Plans. Discretionary Company contributions and
Company matches of employee salary deferral contributions and rollover
contributions are made in the form of Class A Common Stock, or in cash used to
purchase Class A Common Stock. The Company has authorized and reserved for
issuance up to 205,000 shares of Class A Common Stock in connection with the
401(k) Plans. Company contributions to the 401(k) Plans are subject to
limitations under applicable laws and regulations.

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

16. Commitments and Contingent Liabilities:

Legal Matters:

17. Other Events:

In August 1997, Pegasus commenced operations of TV station WPME, which is
affiliated with UPN. WPME is in the Portland, Maine Designated Market Area
("DMA") and is being operated under a local marketing agreement ("LMA"). WPME's
offices, studio and transmission facilities are co-located with WPXT, a TV
station in the Portland market the Company has owned and operated since January
1996.

In October 1997, Pegasus commenced operations of TV station WGFL, which is
affiliated with WB. WGFL is in the Gainesville, Florida DMA and is being
operated under a LMA.

18. Related Party Transaction:

The Company has advanced to KB Prime Media, L.L.C. ("KB Prime Media")
approximately $212,000 to be used as deposits for auctions of television
licenses and other operating expenses. KB Prime Media is a corporation owned
80% by W.W. Keen Butcher, the stepfather of Marshall W. Pagon, the Company's
President and Chief Executive Officer.

F-22
<PAGE>

PEGASUS COMMUNICATIONS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

19. Industry Segments:

The Company operates in growing segments of the media and communications
industries: multichannel television (DBS and Cable) and broadcast television
(TV). TV consists of five Fox-affiliated television stations, one of which also
simulcasts its signal in Hazelton and Williamsport, Pennsylvania, one
UPN-affiliated television station and two WB-affiliated television stations,
one of which is pending launch. Cable and DBS consist of providing cable
television services and direct broadcast satellite services, respectively, in
twenty-seven states and Puerto Rico, as of December 31, 1997. Information
regarding the Company's business segments in 1995, 1996, and 1997 is as follows
(in thousands):

<TABLE>
<CAPTION>
TV DBS Cable Other Consolidated
----------- ------------ ----------- ---------- -------------
<S> <C> <C> <C> <C> <C>
1995
Revenues ............................ $ 19,973 $ 1,469 $ 10,606 $ 100 $ 32,148
Operating income (loss) ............. 2,252 (752) (1,103) (33) 364
Identifiable assets ................. 36,906 5,577 34,395 18,892 95,770
Incentive compensation .............. 415 9 104 -- 528
Corporate expenses .................. 782 114 450 18 1,364
Depreciation & amortization ......... 2,591 719 5,364 77 8,751
Capital expenditures ................ 1,403 216 953 69 2,641
1996
Revenues ............................ $ 28,488 $ 5,829 $ 13,496 $ 116 $ 47,929
Operating income (loss) ............. 3,925 (1,239) 190 (326) 2,550
Identifiable assets ................. 61,817 53,090 54,346 4,427 173,680
Incentive compensation .............. 691 95 148 51 985
Corporate expenses .................. 756 158 497 18 1,429
Depreciation & amortization ......... 4,000 1,786 5,245 1,029 12,060
Capital expenditures ................ 2,289 855 3,070 80 6,294
1997
Revenues ............................ $ 31,726 $ 38,254 $ 16,688 $ 150 $ 86,818
Operating income (loss) ............. 5,357 (11,990) 1,622 (1,577) (6,588)
Identifiable assets ................. 63,016 209,507 51,714 56,625 380,862
Incentive compensation .............. 298 525 181 270 1,274
Corporate expenses .................. 840 744 617 55 2,256
Depreciation & amortization ......... 3,927 17,042 5,643 1,180 27,792
Capital expenditures ................ 6,425 506 2,914 84 9,929

</TABLE>

20. Subsequent Events:

As of January 7, 1998 the Company acquired, from an independent DIRECTV
provider, the rights to provide DIRECTV programming in certain rural areas of
Minnesota and the related assets in exchange for approximately $1.9 million in
cash and $32,000 in assumed liabilities.

In January 1998, the Company entered into an agreement and plan of merger
(the "Agreement and Plan of Merger") to acquire Digital Television Services,
Inc. ("DTS"), for approximately 5.5 million shares of Pegasus' Class A Common
Stock. As of December 31, 1997, DTS' operations consisted of providing DIRECTV
services to approximately 126,000 subscribers in certain rural areas of eleven
states in which DTS holds the exclusive right to provide such services. Upon
completion of the acquisition of DTS (the "DTS Acquisition"), DTS will become a
wholly owned subsidiary of Pegasus.

F-23
<PAGE>

PEGASUS COMMUNICATIONS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

20. Subsequent Events: -- (Continued)

In January 1998, the Company entered into an agreement to sell its
remaining New England cable systems for a purchase price of at least $28
million and not more than $31 million, based on the systems' location cash flow
for the trailing 12 months prior to closing, multiplied by nine. The Company
anticipates this transaction to close in the third quarter of 1998. The Company
expects to report a nonrecurring gain relating to this transaction.

The Company has entered into 14 letters of intent or definitive agreements
to acquire, from various independent DIRECTV providers, the rights to provide
DIRECTV programming in certain rural areas of Idaho, Nebraska, New Mexico,
Oregon, South Dakota and Texas and the related assets in exchange for
approximately $52.9 million in cash, $10.3 million in promissory notes and
$854,000 of the Company's Class A Common Stock.

In February 1998, pursuant to a registered exchange offer, Pegasus
exchanged all $115.0 million of its 9.625% Series A Senior Notes for $115.0
million of its 9.625% Series B Senior Notes due 2005 (the "9.625% Series B
Senior Notes"). The 9.625% Series B Notes have substantially the same terms and
provisions as the 9.625% Series A Senior Notes. No gain or loss was recorded in
connection with the exchange of the notes.

21. Quarterly Information (Unaudited):

<TABLE>
<CAPTION>
Quarter Ended
------------------------------------------------------------
March 31, June 30, September 30, December 31,
1997 1997 1997 1997
----------- ------------ --------------- -------------
(in thousands)
<S> <C> <C> <C> <C>
1997
Net revenues ....................... $ 15,897 $ 19,778 $ 21,927 $ 29,216
Operating income (loss) ............ (366) (113) (1,308) (4,801)
Income (loss) before extraordinary
items ............................ 1,433 (3,083) (9,015) (19,166)
Net income (loss) .................. $ 1,433 $ (3,083) $ (9,015) $ (20,822)
Basic and diluted earnings per share:
Operating income (loss) ............ $ (0.04) $ (0.01) $ (0.13) $ (0.47)
Income (loss) before extraordinary
items ............................ 0.07 ( 0.64) ( 0.91) ( 1.88)
Net income (loss) .................. $ 0.07 $ (0.64) $ (0.91) $ (2.05)

</TABLE>

For the fourth quarter of 1997, the Company had an extraordinary loss of
approximately $1.7 million or $0.16 per share in connection with the
refinancing of certain facilities (see footnote 7 -- Long-Term Debt).

F-24
<PAGE>

PEGASUS COMMUNICATIONS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

21. Quarterly Information (Unaudited): -- (Continued)

<TABLE>
<CAPTION>
Quarter Ended
--------------------------------------------------------------
March 31, June 30, September 30, December 31,
1996 1996 1996 1996
(in thousands) ------------- ------------ --------------- -------------
<S> <C> <C> <C> <C>
1996
Net revenues ....................... $ 8,427 $ 10,756 $ 10,938 $ 17,809
Operating income (loss) ............ (451) 960 (604) 2,644
Income (loss) before extraordinary
items ............................ (3,106) (1,732) (3,980) (905)
Net income (loss) .................. $ (3,106) $ (1,732) $ (4,231) $ (905)
Basic and diluted earnings per share:
Operating income (loss) ............ $ (0.09) $ 0.18 $ (0.12) $ 0.30
Income (loss) before extraordinary
items ............................ ( 0.59) ( 0.33) ( 0.76) ( 0.10)
Net income (loss) .................. $ (0.59) $ (0.33) $ (0.81) $ (0.10)
</TABLE>

For the third quarter of 1996, the Company had an extraordinary loss of
approximately $251,000 or $0.05 per share in connection with the refinancing of
a credit facility (see footnote 7 -- Long-Term Debt).

F-25

<PAGE>

Coopers Coopers & Lybrand LLP
& Lybrand
A professional services firm

REPORT OF INDEPENDENT ACCOUNTANTS

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

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

/s/ Coopers & Lybrand LLP
- --------------------------

2400 Eleven Penn Center
Philadelphia, Pennsylvania
February 26, 1998

S-1

<PAGE>

PEGASUS COMMUNICATIONS CORPORATION SCHEDULE II - VALUATION AND QUALIFYING
ACCOUNTS For the Years Ended December 31, 1997, 1996 and 1995
(Dollars in thousands)

Description Balance at Additions Additions Balance at
Beginning of Charged To Charged To End of
Period Expenses Other Accountants Deductions Period
<S> <C> <C> <C> <C> <C>

Allowance for Unollectible
Accounts Receivable
Year 1995 $ 348 $ 151 $ - $ 261 $ 238
Year 1996 $ 238 $ 336 $ - $ 331 $ 243
Year 1997 $ 243 $ 371 $ - $ 295 $ 319

Valuation Allowance for
Deferred Tax Assets
Year 1995 $ 1,756 $ 8,675 $ - $ 3,477 $ 6,954
Year 1996 $ 6,954 $ 7,032 $ - $ 3,302 $ 10,684
Year 1997 $ 10,684 $ 7,584 $ - $ 4,971 $ 13,297

</TABLE>

(a) Amounts written off, net of recoveries

S-2