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 Pegasus Communications Corporation that are based on the beliefs of our management, as well as assumptions made by and information currently available to our management. These statements may differ materially from actual future events or results. When used in this Report, the words "estimate," "project," "believe," "anticipate," "hope," "intend," "expect," and similar expressions are intended to identify forward looking statements, although not all forward looking statements contain these identifying words. Any statement that is not a historical fact, including estimates, projections, future trends and the outcome of events that have not yet occurred, are forward looking statements. Such statements reflect our current views with respect to future events and are subject to unknown risks, uncertainties, and other factors that may cause actual results to differ from those contained in the forward looking statements. Such factors include the risks described in this section below and elsewhere in this Report and, although it is not possible to create a comprehensive list of all factors that may cause actual results to differ from our forward looking statements, such factors include, but are not limited to, the following: general economic and business conditions, both nationally, internationally, and in the regions in which we operate; catastrophic events, including acts of terrorism; existing government regulations, and changes in, or the failure to comply with, government regulations; competition, the resolution of the Chapter 11 bankruptcy proceedings of Pegasus Satellite and certain of its direct and indirect subsidiaries; changes in business strategy or development plans; the cost of pursuing new business initiatives; an expansion of land based communications systems; technological developments and difficulties; an inability to obtain intellectual property licenses and to avoid committing intellectual property infringement; the ability to attract and retain qualified personnel; the availability and terms of capital to fund the expansion of our businesses; and other factors mentioned in this report and in other reports filed from time to time with the Securities and Exchange Commission, including our Annual Report on Form 10-K, as amended by Form 10-K/A, for the year ended December 31, 2003. Readers are cautioned not to place undue reliance on these forward looking statements, which speak only as of the date hereof. We do not undertake any obligation to publicly release any revisions to these forward looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

The following discussion of our results of operations should be read in conjunction with the consolidated financial statements and related notes herein.

GENERAL

All references to "we," "us," "our," and "Pegasus Communications Corporation" refer to Pegasus Communications Corporation, together with its direct and indirect consolidated subsidiaries. "Pegasus Communications" refers to Pegasus Communications Corporation individually as a separate entity. "Pegasus Development" and "Pegasus Real Estate" refer to Pegasus Development Corporation and Pegasus Real Estate Company, respectively, wholly owned subsidiaries of Pegasus Communications. "Pegasus Satellite" refers to Pegasus Satellite Communications, Inc., a wholly owned, deconsolidated subsidiary of Pegasus Communications. "Pegasus Media" refers to Pegasus Media & Communications, Inc., a wholly owned subsidiary of Pegasus Satellite Communications, Inc. Other terms used are defined as necessary where they first appear.

Pegasus Development holds two Ka band satellite licenses granted by the Federal Communications Commission ("FCC") and intellectual property rights licensed from Personalized Media Communications L.L.C. ("Personalized Media"). Pegasus Guard Band LLC ("Pegasus Guard Band") is

a wholly owned subsidiary of Pegasus Communications and holds FCC licenses to provide terrestrial communications services in the 700 MHZ spectrum. Pegasus Rural Broadband LLC ("Pegasus Rural Broadband") is a wholly owned subsidiary of Pegasus Communications that provides broadband Internet access in rural areas. Pegasus Communications Management Company ("Pegasus Management") is a wholly owned subsidiary of Pegasus Communications and provides management services to Pegasus Communications and its subsidiaries, including Pegasus Satellite Communications, Inc. and its subsidiaries, Pegasus Development, Pegasus Guard Band, and Pegasus Rural Broadband.

The unaudited financial statements herein include the accounts of Pegasus Communications and certain of its subsidiaries on a consolidated basis. As discussed below, on June 2, 2004 ("Filing Date"), Pegasus Satellite, Pegasus Media, and certain of their direct and indirect subsidiaries (collectively referred to herein as the "Debtors") filed a voluntary petition for relief under Chapter 11 of the U.S. Bankruptcy Code ("Bankruptcy Code") in the U.S. Bankruptcy Court, District of Maine ("Bankruptcy Court"). The Chapter 11 filing does not include Pegasus Communications or its direct subsidiaries other than Pegasus Satellite. Under generally accepted accounting principles, the financial results of Pegasus Satellite are included in our consolidated results through the Filing Date. Subsequent to the Filing Date, we no longer consolidate Pegasus Satellite's financial results in our consolidated financial statements and Pegasus Satellite has been deconsolidated from our balance sheet. As of the Filing Date, our negative investment in Pegasus Satellite of $412.7 million is presented using the cost method, and we no longer record earnings or losses from Pegasus Satellite's operations subsequent to the Filing Date. Furthermore, the results of operations of Pegasus Satellite Television, Inc. (a wholly owned subsidiary of Pegasus Media & Communications and one of the Debtor entities) are included in discontinued operations in the accompanying financial statements of Pegasus Communications Corporation and Pegasus Satellite due to the sale of the direct broadcast satellite business to DIRECTV effective August 27, 2004. See Note 2. When Pegasus Satellite, Pegasus Media, and certain of their direct and indirect subsidiaries emerge from the jurisdiction of the Bankruptcy Court, the subsequent accounting and ultimate disposition of our negative investment in Pegasus Satellite will be determined based on the terms of the reorganization plan. See discussion under "Proceedings Under Chapter 11 of the Bankruptcy Code" below.

RESTATEMENT OF FINANCIAL STATEMENTS

We have restated our previously issued interim financial statements filed in our Form 10-Q for the three and nine months ended September 30, 2003 to properly reflect income taxes associated with continuing and discontinued operations. We have also restated in the statement of operations for the three and nine months ended September 30, 2003 the equity in losses of affiliates related to our investment in PCS Partners, to amend incorrect allocations of profits and losses in accordance with the LP agreement. We summarized the effects of these restatements in the table below.

                                               Three months ended           Nine months ended
                                               September 30, 2003          September 30, 2003
                                            ------------------------    ------------------------
                                                As                          As
                                            Originally        As        Originally        As
(in thousands)                               Reported      Restated      Reported      Restated
-----------------------------------------   ----------    ----------    ----------    ----------
Equity in (losses) earnings of affiliates   $     (784)   $        -    $   (3,686)   $      161
Net (expense) benefit for income taxes             (81)            -          (219)            -
Loss before discontinued operations            (11,438)      (10,573)      (38,597)      (34,531)
Income (loss) from discontinued
 operations, net of income tax                 (29,747)      (30,612)      (77,870)      (78,748)
Net loss                                       (41,185)      (41,185)     (116,467)     (113,279)

While the restatements of the unaudited quarterly financial information resulted in changes in the amount of net loss for the nine months ended September 30, 2003, there was no change in the amount of net loss for the 2003 annual period. These restatements also had no impact on cash flows for the three and nine months ended September 30, 2003. The originally reported numbers above are adjusted for Pegasus Satellite Television's operations being classified as discontinued in the statements of operations and comprehensive loss (See Note 2).

On August 5, 2004, we announced that our Board of Directors had declared a two for one stock split of our common stock, which was effected in the form of a stock dividend for holders of record on August 19, 2004 and was distributed on August 26, 2004. All share and per share amounts included herein have been retroactively restated to reflect the impact of the stock split for all periods presented.

PROCEEDINGS UNDER CHAPTER 11 OF THE BANKRUPTCY CODE

On June 2, 2004, Pegasus Satellite Television, Inc. (a wholly owned subsidiary of Pegasus Media & Communications and one of the Debtor entities) and certain of its affiliates involved in the distribution of DIRECTV direct broadcast satellite service received notices from the National Rural Telecommunications Cooperative ("NRTC") purporting to terminate their exclusive distribution agreements with the NRTC, which provided them with the exclusive rights to distribute DIRECTV services in specified rural territories in the United States, and from DIRECTV, Inc., purporting to terminate the Revised Seamless Consumer Program effective as of August 31, 2004. Pegasus Satellite Television, Inc. and its affiliates also received a related cash offer from DIRECTV on June 2, 2004 to purchase the assets of Pegasus Satellite Television.

As a result of actions taken by NRTC and DIRECTV, on June 2, 2004 certain subsidiaries of Pegasus Communications involved in the direct broadcast satellite business and broadcast television business filed voluntary petitions for Chapter 11 bankruptcy protection in the U.S. Bankruptcy Court, District of Maine. A creditors committee representing the unsecured creditors of the Debtors has been appointed by the Bankruptcy Court, and in accordance with the provisions of the Bankruptcy Code, has the right to be heard on all matters that come before the Bankruptcy Court. The appointed committee has played an important role in the bankruptcy proceedings to date and the Debtors expect that the committee will play an important role in the negotiation of the terms of any plan or plans of reorganization. The Debtors are required to bear certain of the committee's costs and expenses, including those of their counsel and advisors. As provided by the Bankruptcy Code and as ordered by the Bankruptcy Court, the Debtors have the exclusive right to propose a plan of reorganization until January 10, 2005, at which time a hearing will be held to determine whether the Debtors' exclusivity period will be further extended.. If the Debtors fail to file a plan of reorganization during such exclusive period or any extension thereof, or if such plan is not accepted by the requisite number of creditors and equity holders entitled to vote on the plan, other parties in interest may be permitted to propose their own plan(s) of reorganization for the Debtors.

On July 30, 2004, Pegasus Satellite Television, Inc. and certain of its affiliates entered into an agreement ("Asset Purchase Agreement") to sell to DIRECTV its direct broadcast satellite business for a purchase price of $937.7 million, consisting of $875.0 million in cash and $62.7 million in debt forgiveness, subject to certain closing adjustments. Pegasus Satellite Television, Inc. and DIRECTV also entered into a cooperation agreement ("Cooperation Agreement") to ensure an efficient transfer of Pegasus Satellite's direct broadcast satellite business to DIRECTV pursuant to the Asset Purchase Agreement. Also on July 30, 2004, Pegasus Satellite, Pegasus Communications,
DIRECTV, the NRTC,

and the creditors committee entered into a certain settlement agreement ("Global Settlement Agreement").

In the Global Settlement Agreement, Pegasus Satellite, DIRECTV, and the NRTC agreed to dismiss all litigation between and among them with prejudice, stay all pending litigation, and agreed not to commence any new litigation in order to facilitate the sale of Pegasus Satellite's direct broadcast satellite business to DIRECTV. In addition, Pegasus Communications agreed to release all claims against DIRECTV (with the exception of claims relating to the Personalized Media patent infringement litigation) and the NRTC related to the Debtors' direct broadcast satellite business. In consideration for Pegasus Communications agreeing to provide the releases described above and agreeing to release its claims against the Debtors for certain amounts owed by the Debtors to Pegasus Communications, the Debtors agreed to release certain claims that the Debtors may have against Pegasus Communications and various related parties, including potential preference and fraudulent transfer avoidance claims.

The Bankruptcy Court approved the sale of the direct broadcast satellite business to DIRECTV on August 26, 2004, and the sale of the direct broadcast satellite business to DIRECTV took place on August 27, 2004. Pursuant to the Cooperation Agreement, Pegasus Satellite Television continued to provide services to DIRECTV until October 31, 2004.

Pursuant to a letter agreement ("Letter Agreement") dated July 30, 2004, entered into by and among Pegasus Communications, the creditors committee and members of the creditors committee, the parties agreed to take all actions necessary to support the Global Settlement Agreement and the transactions contemplated thereby. The Letter Agreement also provided that Pegasus Communications could acquire all of the Debtors' broadcast television assets for $75 million in cash, subject to higher and better offers received from third parties pursuant to certain auction procedures described in the agreement and subject to Bankruptcy Court approval. Pegasus Communications is currently negotiating a subscription agreement with the creditors committee, which would serve as a stalking bid for the broadcast television assets. Pegasus Communications has entered into an agreement with a third party investor whereby the investor has committed to provide financing consisting of $55.0 million of term loans and $5.0 million of revolving credit to a subsidiary to be created to acquire the broadcast television assets. Security interests in substantially all the borrowing subsidiary's assets, including ownership interests in its subsidiaries and all ownership interests in the borrower, would secure the loans. The commitment is subject to definitive documentation and other customary closing conditions, including completion of the acquisition of the Debtors' broadcast television assets. Subject to definitive agreement on the Pegasus Communications Subscription Agreement, it is anticipated that an auction of the broadcast assets will occur in early 2005 with Pegasus Communications making a stalking bid for the broadcast television assets.

The equitable doctrine of substantive consolidation permits a bankruptcy court to disregard the separateness of related entities, and to consolidate and pool the entities' assets and liabilities and treat them as though held and incurred by one entity where the interrelationship between the entities warrants such consolidation. We believe that any effort to substantively consolidate Pegasus Communications with the Debtors would be without merit. However, it is possible that the Debtors' creditors may attempt to advance such claims or other claims under piercing the corporate veil, alter ego, control person, or related theories in the Debtors' bankruptcy proceeding. If the Bankruptcy Court were to allow substantive consolidation of Pegasus Communications and the Debtors, or if another court were to allow other related claims against Pegasus Communications, it could have a material adverse effect on Pegasus Communications. Since the Bankruptcy Court approved the transactions contemplated by the various agreements entered into on July 30, 2004 referenced above and the sale of Pegasus Satellite Television,

Inc. to DIRECTV was completed, we believe the releases entered into by the creditors committee and members of the committee eliminate the risk of substantive consolidation and any potential claims that could be made against Pegasus Communications by the Debtors.

We believe the ultimate resolution of the Debtors' financial difficulties will not affect Pegasus Communications' ability to continue as a going concern. Pegasus Communications is not dependent on cash flows from the Debtors, nor do we believe that Pegasus Communications is contingently liable to creditors or preferred stockholders of the Debtors. We believe that our available resources will be sufficient to fund our operating, investing, and financing requirements.

NASDAQ NOTICE

On August 30, 2004, we announced in a Form 8-K filed with the Securities and Exchange Commission ("SEC") that our independent accountants had not completed their review procedures related to our Form 10-Q for the period ended June 30, 2004, with respect to our investment in limited partnership interests in Pegasus PCS Partners.

On September 3, 2004, we announced that we had received a Nasdaq staff determination on September 1, 2004. According to the Nasdaq staff determination, the filing of our Form 10-Q under the circumstances described above is the equivalent of a delinquent SEC filing, which, in the staff's view, violates Nasdaq Marketplace rule 4310(c)(14) and may subject our Class A common stock to delisting from the Nasdaq National Market. As a result, beginning at the opening of trading on September 3, 2004, Nasdaq appended the character "E" after our trading symbol. We requested a hearing before a Nasdaq Listing Qualifications Panel to review the staff determination. This hearing was held on September 30, 2004 and any potential delisting of our Class A common stock was stayed pending a determination of the Nasdaq Listing Qualification Panel. On October 26, 2004, the Nasdaq Listing Qualifications Panel granted our request for continued listing on the Nasdaq National Market, subject to the condition that we file an amended Form 10-Q for the quarter ended June 30, 2004 and a Form 10-Q for the quarter ended September 30, 2004, as well as file any necessary accounting restatements for prior periods, with the Nasdaq and SEC on or before November 30, 2004.

On November 30, 2004, we filed a request with the Panel to grant a further extension until December 17, 2004 to file our amended Form 10-Q for the quarter ended June 30, 2004 and any necessary restatements for prior periods and until December 24, 2004 to file our Form 10-Q for the quarter ended September 30, 2004. On December 7, 2004, the Panel granted our extension request. We filed our amended Form 10-Q for the quarter ended June 30, 2004, our amended Form 10-Q for the quarter ended March 31, 2004, and our amended Form 10-K for the year ended December 31, 2003 on December 20, 2004. We filed our Form 10-Q for the quarter ended September 30, 2004 on December 29, 2004. Although we believe that our filings have brought us in compliance with the Panel's requirements, there can be no assurance that the Panel would agree with our view in light of the fact that our December 20, 2004 filings were made a day later than their due date.

INVESTMENT IN AFFILIATE

Pegasus Development has a limited partnership interest in Pegasus PCS Partners, L.P. ("Pegasus PCS Partners"). Pegasus Development has no control or voice in Pegasus PCS Partners' matters. The general partner of Pegasus PCS Partners is an entity beneficially controlled by Marshall W. Pagon, our Chairman of the Board and Chief Executive Officer. Pegasus PCS Partners' assets as of September 30, 2004 and December 31, 2003 consisted principally of senior preferred equity interests in Pegasus Capital Holdings, LLC ("PCH LLC"), 71,000 Class A shares of Pegasus Communications, and 14,472 Class B shares of Pegasus Communications. PCH LLC is an entity that is also beneficially controlled by Marshall W. Pagon. As of December 31, 2003, PCH LLC's assets consisted of only direct and indirect investments in 1,805,822 Class B shares of Pegasus Communications. Therefore, Pegasus Development's investment in Pegasus PCS Partners as of December 31, 2003 and Pegasus PCS Partners'

investment in PCH LLC as of September 30, 2004 are classified as equity. The approximate carrying and fair values of Pegasus Development's investment in Pegasus PCS Partners at December 31, 2003 are $12.0 million and $15.8 million, respectively, based on our Class A common share price at such date. The approximate carrying and fair values of Pegasus PCS Partners' investment in PCH LLC at September 30, 2004 are $14.0 million and $10.6 million, respectively, based on our Class A common share price at such date.

RESULTS OF OPERATIONS

Prior to the bankruptcy filing of the Debtors, the direct broadcast satellite business comprised a substantial portion of our revenues, operating results, and financial position. As a result of the deconsolidation of Pegasus Satellite and the subsequent sale of its satellite television business, our results of operations have significantly changed. Under generally accepted accounting principles, the financial results of Pegasus Satellite are included in our consolidated results through the June 2, 2004 filing date. Subsequent to June 2, 2004, we no longer consolidate Pegasus Satellite's financial results in our consolidated financial statements and Pegasus Satellite has been deconsolidated from our balance sheet. Our negative investment in Pegasus Satellite of $412.7 million is presented using the cost method, and we no longer record earnings or losses from Pegasus Satellite's operations subsequent to June 2, 2004.

Furthermore, the results of operations of Pegasus Satellite Television are included in discontinued operations in the accompanying financial statements of Pegasus Communications Corporation and Pegasus Satellite.

In the following discussion and analysis of our accompanying consolidated financial statements, we will discuss the results of operations for Pegasus Communications Corporation shown in our Consolidated Statements of Operations for the three and nine months ended September 30, 2004, including the impact of the inclusion of Pegasus Satellite's financial results for only the five months ended June 2, 2004 compared to the nine months ended September 30, 2003. We will then discuss the results of operations for Pegasus Communications Corporation excluding Pegasus Satellite for the three and nine months ended September 30, 2004 compared to the three and nine months ended September 30, 2003.

PEGASUS COMMUNICATIONS CORPORATION'S RESULTS OF OPERATIONS, INCLUDING PEGASUS SATELLITE

The results of operations of Pegasus Satellite are included in the accompanying Condensed Statements of Operations and Comprehensive Loss through June 2, 2004, and the results of operations of Pegasus Satellite Television are included in such statements as discontinued operations. See Note 1 of the Notes to Consolidated Financial Statements for a discussion of the proceedings under Chapter 11 of the Bankruptcy Code and the transactions contemplated by the Asset Purchase Agreement, the Cooperation Agreement, the Global Settlement Agreement, and the Letter Agreement.

See Note 2 of the Notes to Consolidated Financial Statements for a discussion of discontinued operations. The following discussion focuses on the results of operations of Pegasus Broadcast Television.

Broadcast Television Revenues:

For the nine months ended September 30, 2004, net revenues decreased $9.7 million to $13.2 million compared to $22.9 million for the nine months ended September 30, 2003. These decreases were primarily due to the impact of comparing five months of net revenues in 2004 versus nine months in

2003. Net revenues for the full nine months ended September 30, 2004 versus the same period of 2003 increased $700 thousand. See Pegasus Satellite Communications, Inc.'s Condensed Consolidated Statements of Operations in Note 1 of the Notes to Consolidated Financial Statements for broadcast television net revenues for the nine months ended September 30, 2004 and 2003.

Broadcast Television Expenses:

Broadcast television expenses decreased $10.7 million to $11.5 million compared to $22.2 million for the nine months ended September 30, 2003. These decreases were primarily due to the impact of comparing five months of expenses in 2004 versus nine months in 2003. See Pegasus Satellite Communications, Inc.'s Condensed Consolidated Statements of Operations in Note 1 of the Notes to Consolidated Financial Statements for broadcast television expenses for the nine months ended September 30, 2004 and 2003. Broadcast television expenses decreased for the full nine months ended September 30, 2004 compared to the same period of 2003, primarily as a result of lower programming expense of $578 thousand and lower depreciation and amortization expenses of $593 thousand.

Pegasus Communications Corporation's Other Statement of Operations and Comprehensive Loss Items

Corporate, development, and other operations expense decreased $2.4 million and $1.2 million for the three and nine months ended September 30, 2004 compared to the same periods of 2003 primarily due to the deconsolidation of Pegasus Satellite. The prior year periods include consolidated corporate expenses for the full three and nine month periods ended, whereas the current year periods only include an allocation of corporate expenses attributable to non-Debtors from the Filing Date to September 30, 2004. We continue to provide certain services to the Debtors, including management, accounting, treasury, human resources, legal, and payroll services, among others, and the Debtors compensate us for such services based on a methodology specified in a Support Services Agreement approved by the Bankruptcy Court. As a result of the inclusion since the Filing Date of only an allocation of these expenses, our corporate, development, and other operations expense line item has decreased. Corporate expenses included in this line item for the three and nine months ended September 30, 2004 were $151 thousand and $6.7 million, respectively, compared to $3.3 million and $9.9 million, respectively for the same periods of 2003. See the discussion of Pegasus Communications Corporation's Results of Operations, Excluding Pegasus Satellite, below. These decreases were partially offset by the inclusion of expenses related to the Pegasus Rural Broadband business of $1.1 million and $2.5 million in the three and nine months of 2004, respectively. There were no expenses related to the Pegasus Rural Broadband business in the three and nine months of September 30, 2003. Pegasus Rural Broadband's terrestrial fixed wireless network currently passes approximately 60,000 households.

Other operating expenses increased $2.2 million to $4.1 million for the three months ended September 30, 2004 compared to the same period of 2003, primarily due to $1.5 million of non-Debtor allocated retention and severance . . .