<PAGE>   1
              FORM 10-K.--ANNUAL REPORT PURSUANT TO SECTION 13 OR
                  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
               (As last amended in Rel. No. 34-29354 eff. 7-1-91.)

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

                                    FORM 10-K

[X]      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934 [FEE REQUIRED]
                   For the fiscal year ended DECEMBER 31, 1996

[ ]      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934 [FEE REQUIRED]
                For the transition period from _______to________

                         Commission file number 0-16065

               NORTHLAND CABLE PROPERTIES FIVE LIMITED PARTNERSHIP
             (Exact name of registrant as specified in its charter)

          STATE OF WASHINGTON                             91-1302403
    (State or other jurisdiction of                    (I.R.S. Employer
     incorporation or organization)                   Identification No.)

     3600 WASHINGTON MUTUAL TOWER
1201 THIRD AVENUE, SEATTLE, WASHINGTON                       98101
(Address of principal executive offices)                   (Zip Code)

       Registrant's telephone number, including area code: (206) 621-1351

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

     Title of each class         Name of each exchange on which registered
           (NONE)                                  (NONE)

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

                      UNITS OF LIMITED PARTNERSHIP INTEREST
                                (Title of class)

         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 [ ]

                       DOCUMENTS INCORPORATED BY REFERENCE
                      (Partially Incorporated into Part IV)

         (1)      Form 8-A Registration Statement filed July 24, 1987.

         (2)      Form 10-K Annual Reports for fiscal years ended December 31,
                  1986, December 31, 1988, December 31, 1990, December 31, 1991,
                  and December 31, 1992, respectively.

         (3)      Form 8-K dated September 29, 1994.

         (4)      Form 10-Q Quarterly Report for period ended September 30,
                  1995.

This filing contains ____ pages. Exhibits Index appears on page ____. Financial
Statements/Schedules Index appears on page ____.
<PAGE>   2
Cautionary statement for purposes of the "Safe Harbor" provisions of the
Private Litigation Reform Act of 1995. Statements contained or incorporated by
reference in this document that are not based on historical fact are
"forward-looking statements" within the meaning of the Private Securities
Reform Act of 1995. Forward-looking statements may be identified by use of
forward-looking terminology such as "believe," "intends," "may," "will,"
"expect," "estimate," "anticipate," "continue," or similar terms, variations of
those terms or the negative of those terms.

                                     PART I

ITEM 1.   BUSINESS

         Northland Cable Properties Five Limited Partnership (the "Partnership")
is a Washington limited partnership consisting of two general partners (the
"General Partners") and approximately 995 limited partners as of December 31,
1996. Northland Communications Corporation, a Washington corporation, is the
Managing General Partner of the Partnership (referred to herein as "Northland"
or the "Managing General Partner"). FN Equities Joint Venture, a California
general partnership, is the Administrative General Partner of the Partnership
(the "Administrative General Partner").

         Northland was formed in March 1981 and is principally involved in the
ownership and management of cable television systems. Northland currently
manages the operations and is the General Partner for cable television systems
owned by 5 limited partnerships. Northland is also the parent company of
Northland Cable Properties, Inc. which was formed in the February 1995 and is
principally involved in direct ownership of cable television systems. Northland
is a subsidiary of Northland Telecommunications Corporation ("NTC"). Other
subsidiaries of NTC include:

         NORTHLAND CABLE TELEVISION, INC. - formed in October 1985 and
         principally involved in the direct ownership of cable television
         systems. Owner of Northland Cable News, Inc.

                  NORTHLAND CABLE NEWS, INC. - formed in May 1994 and
                  principally involved in the production and development of
                  local programming.

         NORTHLAND CABLE SERVICES CORPORATION - formed in August 1993 as the
         holding company for the following entities:

                  CABLE TELEVISION BILLING, INC. - formed in June 1987 and
                  principally involved in the development and production of
                  computer software used in connection with the billing and
                  financial recordkeeping for cable systems owned or managed by
                  Northland or Northland Cable Television, Inc.

                  CABLE AD-CONCEPTS, INC. - formed in November 1993 and
                  principally involved in the production and development of
                  video commercial advertisements.

         NORTHLAND MEDIA, INC. - formed in April 1995 as the holding company for
         the following entity:

                  STATESBORO MEDIA, INC. - formed in April 1995 and principally
                  involved in acquiring and operating an AM radio station
                  serving the community of Statesboro, GA and surrounding areas.

         The Partnership was formed on August 19, 1985 and began operations in
1985 with the acquisition of a cable television system serving several
communities and contiguous areas surrounding Cedar Creek, Texas (the "Cedar
Creek System"). In 1986, the Partnership purchased cable television systems
located in Lamesa, Texas and surrounding areas (the "Lamesa System"), and in
western North Carolina (the "Forest City System"). In September 1994 the
Partnership purchased a cable television system in Corsicana, Texas (the
"Corsicana System"). In December 1995, the Partnership acquired cable
<PAGE>   3
television systems serving communities in the Ellenboro, Bostic, Gilkey and
Harris, North Carolina areas (the "Phoenix Systems")(collectively herein
referred to as the "Systems"). As of December 31, 1996, the total number of
basic subscribers served by the Systems was 22,714, and the Partnership's
penetration rate (basic subscribers as a percentage of homes passed) was
approximately 61% as compared to an industry average of approximately 64%, as
reported by PAUL KAGAN ASSOCIATES, INC.

         In August 1994, the Partnership formed Corsicana Media, Inc. (Corsicana
Media), a Washington corporation and wholly owned subsidiary, for the purpose of
acquiring and operating an AM radio station serving the community of Corsicana,
Texas and surrounding areas. On January 16, 1995, Corsicana Media acquired the
operating assets of KAN-D Land, Inc.

         The Partnership has 25 non-exclusive franchises to operate the Systems.
These franchises, which will expire at various dates through 2014, have been
granted by county, city and other local governmental authorities in the areas in
which the Systems operate. Annual franchise fees are paid to the granting
governmental authorities. These fees vary between 2% and 5% of the respective
gross revenues of the Systems in the communities. The franchises may be
terminated for failure to comply with their respective conditions.

         The Partnership serves the communities and surrounding areas of Lamesa,
Cedar Creek and Corsicana, Texas, as well as Forest City, North Carolina. The
following is a description of the areas:

         Lamesa, TX: Lamesa is the county seat of Dawson County, Texas. Its
economy is largely based on agriculture and livestock. Total cultivated acreage
in Dawson County is estimated at over 500,000 acres, with cotton being the
principal crop. Certain information regarding the Lamesa, TX system as of
December 31, 1996 is as follows:

                  Basic Subscribers                           3,302
                  Tier Subscribers                            1,396
                  Premium Subscribers                         1,109
                  Estimated Homes Passed                      4,100

         Cedar Creek, TX: The eight communities served by the Cedar Creek System
are scattered around Cedar Creek Lake, a man-made reservoir created in 1967 to
provide water to Fort Worth, Texas. The 33,750-acre lake is a recreation
attraction and provides residents and weekenders with opportunities for fishing,
camping, boating and other water sports. Although tourism is the primary growth
industry, many residents commute to Dallas on a daily basis. Certain information
regarding the Cedar Creek, TX system as of December 31, 1996 is as follows:

                  Basic Subscribers                           4,013
                  Tier Subscribers                              969
                  Premium Subscribers                         1,139
                  Estimated Homes Passed                      8,300

         Forest City, NC: The communities served by the Forest City System are
all located in Rutherford County, North Carolina, in the industrial Piedmont
section of North Carolina and the Blue Ridge Mountains. In the midst of the
county lies Forest City, atop a hill, with the smaller surrounding communities
served by the Forest City System located within close proximity. Rutherford
County is in an area generally referred to as the "Thermal Belt" region. This
region is known for its year-round moderate climate. Initially, this climate
created ideal conditions for a prosperous agricultural economy, which remains a
strong contributor to the local economy. More recently, the area has been
enjoying growth in industrial development. Certain information regarding the
Forest City, NC system as of December 31, 1996 is as follows:
<PAGE>   4
                  Basic Subscribers                           9,249
                  Tier Subscribers                            6,834
                  Premium Subscribers                         3,540
                  Estimated Homes Passed                     15,000

         Corsicana, TX: The Corsicana system serves the community of and
contiguous areas surrounding Corsicana, Texas located in north central Texas on
I-45 between Dallas (53 miles) and Houston (187 miles). Founded in 1848, the
city flourished with the expansion of railroads, discovery of oil in 1894 and
subsequent oil booms. Corsicana was the site of the first oil refinery in
Texas, built by Magnolia Oil in 1897. From those beginnings came Mobil Oil whose
parent company was Magnolia. Texaco Oil also traces its beginnings to Corsicana.
Today, Corsicana is the host city for Texas' newest and largest recreational
area, Richland Chambers Lake. The city also encompasses the 117-acre main campus
of Navarro College, which contains a population of approximately 3,000 students.
Certain information regarding the Corsicana, TX system as of December 31, 1996
is as follows:

                  Basic Subscribers                            6,150
                  Tier Subscribers                               435
                  Premium Subscribers                          2,921
                  Estimated Homes Passed                      10,100

         The Partnership had 37 employees as of December 31, 1996. Management of
these systems is handled through offices located in the towns of Gun Barrel City
(Cedar Creek), Lamesa and Corsicana, Texas and Forest City, North Carolina.
Pursuant to the Agreement of Limited Partnership, Partnership reimburses the
Managing General Partner for time spent by the Managing General Partner's
accounting staff on Partnership accounting and bookkeeping matters. (See Item
13(a) below.)

         The Partnership's cable television business is not considered seasonal.
The business of the Partnership is not dependent upon a single customer or a few
customers, the loss of any one or more of which would have a material adverse
effect on its business. No customer accounts for 10% or more of revenues. No
material portion of the Partnership's business is subject to renegotiation of
profits or termination of contracts or subcontracts at the election of any
governmental unit, except that franchise agreements may be terminated or
modified by the franchising authorities as noted above. During the last year,
the Partnership did not engage in any research and development activities.

         Partnership revenues are derived primarily from monthly payments
received from cable television subscribers. Subscribers are divided into three
categories: basic subscriberstier subscribers and premium subscribers. "Basic
subscribers" are households that subscribe to the basic level of service, which
generally provides access to the three major television networks (ABC, NBC and
CBS), a few independent local stations, PBS (the Public Broadcasting System) and
certain satellite programming services, such as ESPN, CNN or The Discovery
Channel. "Tier subscribers" are households that subscribe to an additional level
of certain programming services, the content of which varies from system to
system. "Premium subscribers" are households that subscribe to one or more "pay
channels" in addition to the basic service. These pay channels include such
services as Showtime, Home Box Office, Cinemax, Disney or The Movie Channel.

COMPETITION

         Due to factors such as the non-exclusivity of the Partnership's
franchises, recent regulatory changes and Congressional action, the rapid pace
of technological developments, and the adverse publicity received by the cable
industry over recent years regarding the lack of competition, there is a
<PAGE>   5
substantial likelihood that the Partnership's systems will be subject to a
greater degree of competition in the future.

         Other Entertainment Alternatives The Partnership's systems compete with
other communications and entertainment media, including conventional
over-the-air television broadcasting stations. Cable television service was
first offered as a means of improving television reception in markets where
terrain factors or remoteness from major cities limited the availability of
over-the-air television broadcasts. In some of the areas served by the
Partnership's systems, several of the broadcast television channels can be
adequately received off-air. The extent to which cable television service is
competitive with broadcast stations depends in significant part upon the cable
television system's ability to provide an even greater variety of programming
than is available off-air.

         Cable television systems also are susceptible to competition from other
video programming delivery systems (discussed below), from other forms of home
entertainment such as video cassette recorders, and, in varying degrees, from
sources of entertainment in the communities served, including motion picture
theaters, live theater and sporting events.

         Overbuilds Recent federal legislation and court decisions have
increased the likelihood that incumbent cable operators will face instances of
"overbuilding". Overbuilding occurs when a cable operator who is not affiliated
with the incumbent franchise holder applies for and receives a second franchise
from the local franchising authority and constructs a cable system in direct
competition with that of the incumbent. None of the Partnership's franchises
provide for exclusivity. Overbuilding typically occurs where the overbuilder
believes it can attract a profitable share of the incumbent operator's customer
base. Overbuilding also may occur if the local franchising authority authorizes
construction of a governmentally owned and operated cable system. However,
Management believes that given the current regulatory environment related to
cable rates, the attractiveness of overbuilding may have been diminished.

         Wireless Services A variety of services, often generically referred to
as "wireless" cable, distribute video programming via omnidirectional low-power
microwave signals from a stationary transmitter to customers at fixed locations.
For many years such services faced governmental restrictions on the types of
programming they could distribute and were generally prevented, by regulatory
and technological reasons, from distributing the quantity of programming
distributed by cable operators. Wireless operators also faced difficulty in
obtaining access to certain programming produced by vendors affiliated with the
cable industry.

         In recent years, the Federal Communications Commission (the "FCC") has
adopted policies for authorizing new technologies and providing a more favorable
regulatory environment for certain existing wireless technologies. Such policies
have the potential to create additional competition for cable television
systems. The FCC recently amended its regulations to enable multi-channel,
multi-point distribution services ("MMDS"), to compete more effectively with
cable television systems by making available additional channels to the MMDS
industry.

         On December 10, 1992, the FCC commenced a rulemaking in which a new
wireless multichannel video service is proposed to be created. The proposed new
service is called the Local Multichannel Distribution Service ("LMDS") and will
operate in the 27.5 - 29.5 MHz frequency band. LMDS providers, as the FCC
currently proposes, would have no restrictions on the kinds of service that may
be offered. No major technological advances which would adversely affect the
Partnership's business have been made during 1996.
<PAGE>   6
         The Partnership experienced competition from an MMDS operator in the
Lamesa system during 1996. This resulted in the loss of approximately 300
subscribers. These losses were concentrated during the initial start up phase of
the MMDS operator as the area was heavily marketed. During the fourth quarter of
1996 the Lamesa system gained approximately 20 basic subscribers.

         Although the Partnership overall has not experienced material
subscriber losses to MMDS there can be no assurance, that future competition
brought about by MMDS, LMDS and other wireless technologies will not have a
material adverse effect on Partnership operations. As noted below, the recent
Congressional legislation, among other things, is designed to make programming
that is currently available to the cable television industry available to other
technologies to foster the growth of alternative video programming delivery
services.

         Satellite Delivered Services Additional competition exists from private
cable television systems serving condominiums, apartment complexes and other
private residential developments. The operators of these private systems,
generally referred to as Satellite Master Antenna Television ("SMATV")
providers, often enter into exclusive agreements with apartment building owners
or homeowner's associations that preclude operators of franchised cable
television systems from serving residents of such private complexes. Due to the
widespread availability of reasonably priced satellite signal reception dishes
or earth stations, SMATV systems now can offer both improved reception of local
television station and many of the same satellite-delivered programming
services that are offered by franchised cable television systems. Moreover,
SMATV systems generally are free of the regulatory burdens imposed on franchised
cable television systems. Although a number of states and some municipalities
have enacted laws and ordinances to afford operators of franchised cable
television systems access to private complexes, several of such laws and
ordinances have been challenged successfully in the courts, and others are under
attack. Because the Partnership generally has been able to enter into access
agreements with owners of private complexes, in Management's opinion, successful
challenges to access statutes would not have a material adverse effect on the
operations of the Partnership.

         Reasonably priced earth stations designed for private home use now
enable individual households to receive many of the satellite-delivered
programming services formerly available only to cable television subscribers.
Many satellite programmers now encode their signals in order to allow reception
only by means of authorized decoding equipment.

         Direct broadcast satellite ("DBS") service consists of satellite
services that focus on delivering programming services directly to homes using
high-power signals transmitted by satellites to receiving facilities located on
the premises of subscribers. With an antenna as small as 18 inches, a DBS
customer can receive a hundred or more programming signals. Using a national
base of subscribers, it is possible that DBS companies may be able to offer new
and highly specialized services which may not be available to the cable
television industry, but as channel capacity and penetration of cable television
systems increase, the cable industry is expected to have the ability to offer
additional services as well. Because DBS systems deliver their services using
satellite technology, they may not be able to economically provide services that
are of local interest to their subscribers, and may not be able to maintain a
local presence, which is considered a significant advantage in developing and
maintaining subscriber support.

         During 1996, the Partnership did not experience any significant
subscriber loss to DBS. There can be no assurance, however, that future
competition brought about by DBS will not have a material adverse impact on
Partnership operations.
<PAGE>   7
         Telephone Companies Federal law, FCC regulations and the 1982 federal
court consent decree (the "Modified Final Judgment") that settled the 1974
antitrust suit against AT&T all limit in various ways the provision of video
programming and other information services by telephone companies. Federal law
codifies FCC cross-ownership regulations which, among other things, prohibit
local telephone exchange companies including the seven Regional Bell Operating
Companies ("RBOCs"), from providing video programming directly to subscribers
within their local exchange service areas, except in rural areas or by specific
waiver of FCC rules. These statutory provisions and corresponding FCC
regulations are of particular competitive importance because these telephone
companies already own much of the plant necessary for cable television
operations, such as poles, underground conduits, associated rights-of-way and
connections to the home.

         In July 1991, the U.S. District Court responsible for the Modified
Final Judgment lifted the prohibition on the provision of information services
by the RBOCs. As a result, the RBOCs were allowed to acquire or construct cable
television systems outside of their own service areas. Another federal court
held that the cable/telco cross-ownership prohibitions unconstitutionally
abridge the First Amendment rights of the RBOCs and other telephone companies.
Several RBOCs have entered into agreements to purchase cable television systems
outside their service areas. Management believes that such purchases of existing
cable television systems do not represent a significant competitive threat to
the Partnership.

         In July 1992, the FCC voted to authorize additional competition to
cable television by video programmers using broadband common carrier facilities
constructed by telephone companies. The FCC allowed telephone companies to take
ownership interests of up to 5% in such programmers. Several telephone companies
have sought approval from the FCC to build such systems and several experimental
systems have been approved by the FCC. No such systems were proposed in a
community in which the Partnership holds a cable franchise.

         Recent Federal laws have significantly changed the restrictions on
telephone companies with respect to their ability to own and operate video
programming delivery systems within their own service areas. See "Regulation -
The 1996 Act."

         There can be no assurance that future competition brought on by
telephone company participation in the cable television industry will not have a
material adverse effect on the Partnership's operations.

REGULATION

         The Partnership's business is subject to intensive regulation at the
federal and local levels, and to a lesser degree, at the state level. The FCC,
the principal federal regulatory agency with jurisdiction over cable television,
is responsible for implementing federal policies such as rate regulation, cable
system relations with other communications media, cross-ownership, signal
carriage, equal employment opportunity and technical performance. Provisions of
regulatory events that have impacted the Partnership's operations are summarized
below.

         The 1992 Cable Act. On October 5, 1992, Congress enacted the Cable
Television Consumer Protection and Competition Act of 1992 (the "1992 Cable
Act"), which significantly increased regulation of the cable television
industry. The 1992 Cable Act became generally effective on December 4, 1992,
although certain provisions became effective at later dates. The 1992 Cable Act
represented a significant change in the regulatory framework under which cable
television systems operate and has had and likely will continue to have a
significant impact on the cable industry and the Partnership's business.
<PAGE>   8
         Since the Cable Communications Policy Act of 1984 (the "1984 Cable
Act") became effective, and prior to the enactment of the 1992 Cable Act, rates
for cable services were unregulated for substantially all of the Partnership's
systems. Effective September 1, 1993, rate regulation was instituted for certain
cable television services and equipment in communities that are not subject to
"effective competition" as defined in the legislation. Effective competition is
defined by this law to exist only where (i) fewer than 30 percent of the
households in the franchise area subscribe to the cable service of a cable
system; (ii) there are at least two unaffiliated multichannel video programming
distributors serving the franchise area meeting certain penetration criteria; or
(iii) a multichannel video programming distributor is available to 50 percent of
the homes in the franchise area and is operated by the franchising authority.
Virtually all cable television systems in the United States, including all of
the Partnership's systems, are not subject to effective competition under this
definition and therefore are subject to rate regulation for basic service by
local franchising authority officials under the oversight of the FCC and subject
to rate regulation for their remaining programming services (other than those
offered for a per-channel or per-program charge) by the FCC.

         The 1992 Cable Act requires each cable system to establish a basic
service tier consisting, at a minimum, of all local broadcast signals and all
non-satellite delivered distant broadcast signals which the system wishes to
carry, and all public, educational and governmental access programming. On April
1, 1993, the FCC adopted its initial regulations governing rates for the basic
service tier. Under the regulations adopted by the FCC on April 1, 1993, local
franchising authorities, after meeting certain requirements, were authorized to
require cable operators to reduce the rates for the basic service tier by up to
10 percent from the rates in effect on September 30, 1992, if those rates exceed
a per-channel benchmark established by the FCC. Local franchising authorities
also were empowered to regulate the rates charged for installation and lease of
the equipment used by subscribers to receive the basic service tier and the
installation and monthly use of connections for additional television sets.

         A local franchising authority seeking to regulate basic service rates
must certify to the FCC that, among other things, it has adopted regulations
consistent with the FCC's rate regulation guidelines and criteria. If a local
franchising authority's certification is deficient or subsequently is revoked,
then the FCC is required to regulate the cable operator's basic service rates
until the local franchising authority is properly certified or until such time
as effective competition exists within the cable system's franchise area.

         As part of the implementation of the new regulations, the FCC froze all
rates in effect on April 5, 1993 until May 15, 1994, except rates for premium
and pay-per-view programming services and equipment. On February 22, 1994, the
FCC adopted rules that modified, among other things, the FCC's benchmark system
for determining the maximum rates for regulated services on cable systems not
subject to effective competition. In addition to adopting new, lower benchmark
levels, the FCC's regulations (i) allowed local franchising authorities to
require cable operators to reduce the rate for the basic service tier by up to
17 percent from the rates in effect on September 30, 1992 if those rates exceed
the new per-channel benchmarks by that amount, and (ii) allowed the FCC, in
response to a complaint, to require cable operators to reduce the rates for
CPST's by up to 17 percent from the rates in effect on September 30, 1992 if
those rates exceed the new per-channel benchmarks by that amount.

         Under the 1992 Cable Act, cable systems may not require subscribers to
purchase any service tier other than the basic tier as a condition of access to
video programming offered on a per-channel or per-program basis. Cable systems
are allowed a 10-year phase-in period to the extent necessary to
<PAGE>   9
implement the required technology to facilitate such access. The FCC may grant
extensions of the 10-year time period, if deemed necessary.

         The 1992 Cable Act also provides that the consent of most television
stations (except satellite-delivered television stations that were provided to
the cable television industry as of May 1, 1991, and noncommercial stations)
would be required before a cable system could retransmit their signals.
Alternatively, a television station could elect to exercise must-carry rights.
Must-carry rights entitle a local broadcast station to demand carriage on a
cable system, and a system generally is required to devote up to one-third of
its channel capacity for the carriage of local stations. Litigation challenging
the constitutionality of the mandatory broadcast signal carriage requirements of
the 1992 Cable Act is currently pending before the United States Supreme Court.
The must-carry rules will remain in effect during the pendency of the
proceedings before the United States Court. If must-carry requirements withstand
judicial review, the requirements may cause displacement of more attractive
programming. If retransmission consent requirements withstand judicial review
and broadcast stations require significant monetary payments for cable system
carriage of their signals, the cost of such signal carriage may adversely affect
the Partnership's operations.

         In addition, the 1992 Cable Act (i) requires cable programmers under
certain circumstances to offer their programming to present and future
competitors of cable television such as multichannel multipoint distribution
services ("MMDS"), satellite master antenna systems ("SMATV") and direct
broadcast satellite system operators; (ii) prohibits new exclusive contracts
with program suppliers without FCC approval; (iii) bars municipalities from
granting exclusive franchises and from unreasonably refusing to grant additional
competitive franchises; (iv) permits municipal authorities to operate a cable
system without a franchise; (v) regulates the ownership by cable operators of
other media such as MMDS and SMATV; (vi) bars, subject to several stated
exceptions, cable operators from selling or transferring ownership in a cable
system for a three-year period following the acquisition or initial construction
of the system; and (vii) prohibits a cable operator from charging a customer for
any service or equipment that the subscriber has not affirmatively requested.

         In response to the 1992 Cable Act, the FCC has imposed or will impose
new regulations in the areas of customer service, technical standards,
compatibility with other consumer electronic equipment such as "cable ready"
television sets and video cassette recorders, equal employment opportunity,
privacy, rates for leased access channels, obscene or indecent programming,
limits on national cable system ownership concentration, standards for limiting
the number of channels that a cable television system operator could program
with programming services controlled by such operator and disposition of a
customer's home wiring.

         The 1992 Cable Act and subsequent FCC rulings have generally increased
the administrative and operational expenses of cable television systems as a
result of additional regulatory oversight by the FCC and local franchise
authorities. There have been several lawsuits filed by cable operators and
programmers in federal court challenging various aspects of the 1992 Cable Act.
The litigation concerning the must-carry rules is described above. Appeals also
have been filed in connection with litigation resulting from the FCC's rate
regulation rulemaking decisions. The Partnership cannot determine at this time
the outcome of pending FCC rulemakings, the litigation described herein, or the
impact of any adverse judicial or administrative decisions on the Partnership's
systems or business.

         The 1996 Act. On February 8, 1996, the Telecommunications Act of 1996
(the "1996 Act") was enacted which dramatically changed federal
telecommunications laws and the future competitiveness of the industry. Many
<PAGE>   10
of the changes called for by the 1996 Act will not take effect until the FCC
issues new regulations which, in some cases, may not be completed for several
years. Because of this, the full impact of the 1996 Act on the Partnership's
operations cannot be determined at this time. A summary of certain provisions
affecting the cable television industry follows.

         FCC regulation of rates for cable programming service tiers (i.e.,
cable programming carried on a level other than the basic service tier or
offered on a pay-per-channel or pay-per-view basis) ("CPST") has been eliminated
for small cable systems served by small companies. Small cable systems are those
having 50,000 or fewer subscribers served by companies with fewer than one
percent of national cable subscribers (approximately 600,000). All of the
Partnership's cable systems qualify as small cable systems. Basic service tier
rates remain subject to regulation by the local franchising authority under most
circumstances until effective competition exists. The 1996 Act expands the
definition of effective competition to include the offering of video programming
services directly to subscribers in a franchised area by the local exchange
carrier (i.e. local telephone company), its affiliates, or any multichannel
video programming distributor which uses the facilities of the local exchange
carrier. No penetration criteria exists that triggers the presence of effective
competition under these circumstances.

         The 1996 Act allows telephone companies to offer video programming
directly to customers in their service areas immediately upon enactment. They
may provide video programming as a cable operator fully subject to the 1996 Act,
or a radio-based multichannel programming distributor not subject to any
provisions of the 1996 Act, or through non-franchised "open video systems"
offering non-discriminatory capacity to unaffiliated programmers, subject to
selected provisions of the 1996 Act. Although Management's current opinion is
that there is low probability of competition from telcos in rural areas in the
near future, there are no assurances such competition will not materialize.

         The 1996 Act encompasses various other aspects of providing cable
television service including prices for equipment, discounting of rates to
multiple dwelling units, lifting of anti-trafficking restrictions,
cable-telephone cross ownership provisions, pole attachment rate formulas, rate
uniformity, program access, scrambling and censoring of PEG and leased access
channels.

         Other Regulatory Developments In November 1991, the FCC released a
Report and Order in which it concluded, among other things, that the 1984 Cable
Act and the FCC's regulatory cross-ownership restrictions do not prohibit
interexchange carriers (i.e., long distance telephone companies) from acquiring
cable television systems or entering into joint ventures with cable operators in
areas where such interexchange carriers provide their long distance telephone
services. The FCC also concluded that a local exchange carrier (i.e., the local
telephone company) that provides a common carrier-based system to distribute
video programming to subscribers and a third party programmer using such common
carrier services are not required by federal law to obtain a cable television
franchise from the local franchising authority in order to provide such video
programming services to the public. The FCC's decision described in the
preceding sentence has been appealed and these appeals are currently pending.

         In 1989, the FCC issued new syndicated exclusivity and network
non-duplication rules which enable local television broadcasters to compel cable
television operators to delete certain programming on distant broadcast signals.
Those rules took effect January 1, 1990. Under the rules, all television
broadcasters, including independent stations, can compel cable television
operators to delete syndicated programming from distant signals if the local
broadcaster negotiated exclusive rights to such programming. Local network
affiliates may insist that a cable television operator delete a network
broadcast on a distant signal. The rules made certain distant signals
<PAGE>   11
a less attractive source of programming for the Partnership's systems, since
much of such distant signals' programming may have to be deleted.

         The FCC currently regulates the rates and conditions imposed by public
utilities for use of their poles, unless, under the Federal Pole Attachments
Act, state public service commissions are able to demonstrate that they regulate
the cable television pole attachment rates. In the absence of state regulation,
the FCC administers pole attachment rates through the use of a formula which it
has devised. The validity of this FCC function was upheld by the United States
Supreme Court.

         Copyright Cable television systems are subject to federal copyright
licensing, covering carriage of television broadcast signals. In exchange for
paying a percentage of their revenues to a federal copyright royalty pool, cable
television operators obtain a compulsory license to retransmit copyrighted
materials from broadcast signals. Existing Copyright Office regulations require
that compulsory copyright payments be calculated on the basis of revenue derived
from any service tier containing broadcast retransmission. Although the FCC has
no formal jurisdiction over this area, it has recommended to Congress to
eliminate the compulsory copyright scheme altogether. The Copyright Office has
similarly recommended such a repeal. Without the compulsory license, cable
television operators would need to negotiate rights from the copyright owners
for each program carried on each broadcast station in each cable system's
channel lineup. Such negotiated agreements could increase the cost to cable
television operators of carrying broadcast signals. Thus, given the uncertain
but possible adoption of this type of copyright legislation, the nature or
amount of the Partnership's future payments for broadcast signal carriage cannot
be predicted at this time.

         Local Regulation Cable television systems are generally operated
pursuant to franchises, permits or licenses issued by a municipality or other
local government entity. Each franchise generally contains provisions governing
fees to be paid to the franchising authority, 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 television
services provided. Franchises are usually issued for fixed terms and must
periodically be renewed. There can be no assurance that the franchises for the
Partnership's systems will be renewed as they expire, although the Partnership
believes that its cable systems generally have been operated in a manner that
satisfies the standards of the 1984 Cable Act, as amended by the 1992 Cable Act,
for franchise renewal. In the event the franchises are renewed, the Partnership
cannot predict the impact of any new or different conditions that might be
imposed by the franchising authorities in connection with such renewals.

         Summary The foregoing does not purport to be a summary of all present
and proposed federal, state and local regulations and legislation relating to
the cable television industry. Other existing federal legislation and
regulations, copyright licensing and, in many jurisdictions, state and local
franchise requirements are currently 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 television
systems operate. Neither the outcome of these proceedings nor their impact upon
the cable television industry or the Partnership can be predicted at this time.

         The Partnership expects to adapt its business to adjust to the changes
that may be required under any scenario of regulation. At this time, the
Partnership cannot assess the effects, if any, that present regulation may have
on the Partnership's operations and potential appreciation of its Systems. There
can be no assurance, however, that the final form of regulation will not have a
material adverse impact on partnership operations.
<PAGE>   12
ITEM 2.   PROPERTIES

         The Partnership's cable television system offices are located in and
around Gun Barrel City (Cedar Creek), Lamesa and Corsicana, Texas and Forest
City, North Carolina. The principal physical properties of the Systems consist
of system components (including antennas, coaxial cable, electronic
amplification and distribution equipment), motor vehicles, miscellaneous
hardware, spare parts and real property, including land and buildings. The
Partnership's cable plant passed approximately 37,500 homes as of December 31,
1996. Management believes that the Partnership's plant passes all areas which
are currently economically feasible to service. Future line extensions depend
upon the density of homes in the area as well as available capital resources for
the construction of new plant. (See Part II. Item 7. Liquidity and Capital
Resources.)

ITEM 3.   LEGAL PROCEEDINGS

         None.

ITEM 4.   SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS

         None.
<PAGE>   13
                                     PART II

ITEM 5.   MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
          MATTERS

             (a) There is no established public trading market for the
Partnership's units of limited partnership interest.

             (b) The approximate number of equity holders as of December 31,
1996, is as follows:

                                    Limited Partners:      995

                                    General Partners:        2

             (c) During 1996, the Partnership made cash distributions of $73,694
to the limited partners and $744 to the Managing General Partner. The limited
partners have received in the aggregate in the form of cash distributions
$5,650,553 on total initial contributions of $7,500,000 as of December 31, 1996.
As of December 31, 1996, the Partnership had repurchased $130,500 of limited
partnership units ($500 per unit). Future distributions depend upon results of
operations, leverage ratios and compliance with financial covenants required by
the Partnership's lender.

ITEM 6.   SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
                                                 Years ended December 31,
                         -----------------------------------------------------------------------
                             1996           1995           1994           1993           1992
                         -----------    -----------    -----------    -----------    -----------
<S>                      <C>            <C>            <C>            <C>            <C>
SUMMARY OF OPERATIONS:

Revenue                  $ 9,244,966    $ 7,897,009    $ 5,598,494    $ 4,724,194    $ 4,192,847
Operating income           1,170,445        525,779        713,552        876,579        755,807
Loss on disposal of
  plant                     (166,840)       (14,795)             0              0       (188,545)
Net income (loss)           (727,733)      (989,380)       (37,786)       314,706        (69,680)
Net income (loss) per
  limited partner unit
  (weighted average)             (49)           (66)            (3)            21             (5)
Cumulative tax losses
  per limited partner
  unit                          (566)          (494)          (456)          (480)          (540)
</TABLE>


<TABLE>
<CAPTION>
                                                         December 31,
                         ---------------------------------------------------------------------------
                             1996            1995            1994           1993            1992
                         ------------    ------------    ------------    -----------    ------------
<S>                      <C>             <C>             <C>             <C>            <C>
BALANCE SHEET DATA:

Total assets             $ 16,683,277    $ 17,951,250    $ 15,099,388    $ 6,270,667    $  6,930,346
Notes payable              20,819,461      21,660,989      17,745,642      9,083,146       9,898,301
Total liabilities          22,165,350      22,631,152      18,641,032      9,591,252      10,399,329
General partners'
  deficit                    (156,748)       (148,727)       (137,346)      (137,475)       (137,124)
Limited partners'
  deficit                  (5,325,325)     (4,531,175)     (3,404,298)    (3,185,110)     (3,331,859)
Distributions per
  limited partner unit              5              10              10             10              10
Cumulative distribu-
  tions per limited
  partner unit                    378             373             363            353             343
</TABLE>
<PAGE>   14
ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS

RESULTS OF OPERATIONS


         1996 AND 1995

         Total revenue for the year ended December 31, 1996 reached $9,244,966,
representing an increase of approximately 17% over 1995 revenue. This increase
stems from a full year of operations for the Phoenix Systems which were acquired
in December of 1995. Of the 1996 revenue, $6,237,969 (68%) is derived from
subscriptions to basic service, $932,331 (10%) from subscriptions to premium
services, $769,223 (8%) from tier service subscriptions, $371,983 (4%) from
advertising, $171,655 (2%) from installation charges, $174,695 (2%) from service
maintenance revenue and $587,110 (6%) from other sources.

<TABLE>
<CAPTION>
                                   1996      1995      1994      1993      1992
                                   ----      ----      ----      ----      ----
<S>                               <C>       <C>       <C>       <C>       <C>
Basic Rate                        $22.10    $20.85    $20.15    $19.90    $19.20
Tier Rate                           7.05      5.35      3.80      3.25      2.20
HBO Rate                           11.70     11.30     10.75     10.75      9.65
Cinemax Rate                        6.80      7.00      7.15      7.35      7.50
Showtime Rate                      10.85     10.95     10.50     10.50      8.50
Movie Channel Rate                  8.70      9.00      8.50      8.50      8.50
Disney Rate                         8.15      7.75      7.50      7.50      7.50
Additional
  Outlet Rate                       --        --        --        --        3.56
Service Contract
  Rate                              2.75      2.90      3.10      3.15      --
</TABLE>


         Operating expenses totaled $823,200 for 1996, representing an increase
of approximately 9% over 1995. This is primarily due to the addition of
employees from the purchase of the Phoenix Systems as well as increases in
salary and benefit costs for all employees. Salary and benefit costs are the
major components of operating expenses. Employee wages are reviewed annually,
and in most cases increased based on cost of living adjustments and other
factors. Therefore, Management expects the trend of increases in operating
expenses to continue.

         General and administrative expenses totaled $2,437,295 for 1996,
representing an increase of approximately 20% over 1995. This is mainly due to
the acquisition of the Phoenix Systems, increased salary and benefit costs, and
increases in revenue based expenses, such as franchise fees and management fees.
Significant administrative expenses are based on Partnership revenues.
Therefore, as the Partnership's revenues increase, the trend of increased
administrative expenses is expected to continue.

         Programming expenses totaled $2,426,483 for 1996, representing an
increase of 19% over 1995. Approximately 50% of the increase is attributable to
subscriber based expenses associated with the acquisition of the Phoenix
Systems. Approximately 10% of the increase relates to advertising expenses. The
remaining increase is the result of higher costs charged by various program
suppliers, and additional salary and benefit costs related to local programming
support. Programming expenses mainly consist of payments made to the suppliers
of various cable programming services. As these costs are based on the number of
subscribers served, future subscriber increases will cause the trend of
programming expense increases to continue. In addition, rate increases from
program suppliers, as well as fees due to the launch of
<PAGE>   15
additional channels, will contribute to the trend of increased programming
costs.

         Depreciation and amortization expense decreased from $2,544,097 in 1995
to $2,387,543 in 1996 (approximately 7%). This is mainly due to the Phoenix
System being acquired at the end of 1995 offset by several assets becoming fully
depreciated in early 1996.

         Interest expense increased from $1,505,965 in 1995 to $1,740,313 in
1996 (approximately 16%). The Partnership's average debt balance increased from
approximately $19,477,652 in 1995 to $21,275,304 in 1996, mainly due to
increased borrowing to finance the acquisition of the Phoenix Systems in
December 1995. In addition, the Partnership's effective interest rate increased
from approximately 7.73% in 1995 to approximately 8.00% in 1996.

        In 1996, the Partnership generated a net loss of $727,733. The
operating losses incurred by the Partnership historically are a result of
significant non-cash charges to income for depreciation and amortization. Prior
to the deduction for these non-cash items, the Partnership has generated
positive operating income in each of the past three years ending December 31.
Management anticipates that this trend will continue, and that the Partnership
will continue to generate net operating losses after depreciation and
amortization until a majority of the Partnership's assets are fully depreciated.

         1995 AND 1994

         Total revenue for the year ended December 31, 1995 reached $7,897,009,
representing an increase of approximately 41% over 1994 revenue. This increase
stems primarily from a full year of operations for the Corsicana, TX cable
television system which was acquired in September of 1994, the acquisition of
Corsicana Media and significant increases in advertising revenues. Of the 1995
revenue, $5,265,987 (67%) is derived from subscription to basic service,
$866,870 (11%) from subscription to premium services, $609,905 (8%) from tier
service subscriptions, $308,263 (4%) from advertising, $174,263 (2%) from
installation charges, $168,839 (2%) from service maintenance revenue and
$502,882 (6%) from other sources.

         Operating expenses totaled $754,573 for 1995, representing an increase
of approximately 35% over 1994. This is due to the addition of employees from
the purchases of the Corsicana, TX system and Corsicana Media. In addition,
increases in salary and benefit costs for all employees contributed to higher
operating costs.

         General and administrative expenses totaled $2,028,131 for 1995,
representing an increase of approximately 39% over 1994. Approximately 33% of
the increase is attributable to expenses associated with the Corsicana, TX
system and Corsicana Media. The remaining increase is due to increases in
revenue based expenses (e.g. copyright fees, franchise fees and management
fees).

         Programming expenses totaled $2,044,429 for 1995, representing an
increase of 72% over 1994. Approximately 50% of the increase is attributable to
expenses associated with the Corsicana, TX system and Corsicana Media.
Approximately 12% of the increase relates to advertising expenses. The remaining
increase is the result of higher costs charged by various program suppliers, and
additional salary and benefit costs related to local programming support.

         Depreciation and amortization expense increased from $1,675,502 in 1994
to $2,544,097 in 1995 (approximately 52%). This is mainly due to depreciation
and amortization on plant, equipment and intangible assets acquired with the
purchases of the Corsicana and Phoenix systems and Corsicana Media as well as
depreciation on assets placed into service during 1995.

         Interest expense increased from $761,186 in 1994 to $1,505,965 in 1995
(approximately 98%). The Partnership's average debt balance increased from
approximately $13,240,000 in 1994 to $19,477,652 in 1995, mainly due to
increased borrowing to finance the acquisition of the Corsicana and Phoenix
systems. In addition, the Partnership's effective interest rate increased from
approximately 5.75% in 1994 to approximately 7.73% in 1995.
<PAGE>   16
EFFECTS ON REGULATION

         On October 5, 1992, Congress enacted the Cable Television Consumer
Protection and Competition Act of 1992 (the "1992 Act"). The 1992 Act and
subsequent revisions and rulemakings substantially re-regulated the cable
television industry. The regulatory aspects of the 1992 Act included giving the
local franchising authorities and the FCC the ability to regulate rates for
basic services, equipment charges and additional CPST's when certain conditions
were met. All of the Partnership's cable systems were potentially subject to
rate regulation. The most significant impact of rate regulation was the
inability to raise rates for regulated services as costs of operation rose
during an FCC imposed rate freeze from April 5, 1993 to May 15, 1994.

         On February 8, 1996, the Communications Act of 1996 (the "1996 Act")
became law. The 1996 Act will eliminate all rate regulation on CPST's of small
cable systems, defined by the 1996 Act as systems serving fewer than 50,000
subscribers owned by operators serving fewer than 1% of all subscribers in the
United States (approximately 600,000 subscribers). All of the Partnership's
cable systems qualify as small cable systems. Many of the changes called for by
the 1996 Act will not take effect until the FCC issues new regulations, a
process that could take from several months to a few years depending on the
complexity of the required changes and the statutory time limits. Because of
this, the full impact of the 1996 Act on the Partnership's operations cannot be
determined at this time.

         As of the date of this filing, no local franchising authorities have
elected to certify and no formal requests for rate justifications have been
received from franchise authorities. Based on Management's analysis, the basic
service tier rates charged by these systems are within the maximum rates
allowed under FCC rate regulations.

LIQUIDITY AND CAPITAL RESOURCES

         During 1996, the Partnership's primary source of liquidity was cash
flow from operations. The Partnership generates cash on a monthly basis through
the monthly billing of subscribers for cable services. Losses from
uncollectible accounts have not been material. During 1996, cash generated from
monthly billings was sufficient to meet the Partnership's needs for working
capital, capital expenditures (excluding acquisitions) and debt service.
Management's projections for 1997 show that the cash generated from monthly
subscriber billings should be sufficient to meet the Partnership's working
capital needs, as well as meeting the debt service obligations of its bank loan.

         The Partnership's credit facility provides for a maximum outstanding
balance of $23,000,000. The term loan matures March 31, 2001 and includes
graduated quarterly principal payments. As of the date of this filing, the
Partnership's term loan balance was $20,806,544. As of the date of this filing,
interest rates on the credit facility were as follows: $15,875,000 fixed at
7.995% under the terms of a self-amortizing interest rate swap agreement with
the Partnership's lender expiring December 8, 1997 and $4,700,000 at a LIBOR
based rate of 8.285% expiring July 10, 1997. The balance of $231,554 bears
interest at the prime rate plus 1 3/8% (currently 9.625%). The above rates
include a margin paid to the lender based on overall leverage and may increase
or decrease as the Partnership's overall leverage fluctuates.
<PAGE>   17
         At December 31, 1996, the Partnership was required under the terms of
its credit agreement to maintain certain financial ratios including a Maximum
Leverage Ratio of 5.50 to 1 and an Interest Coverage Ratio of 1.75 to 1. At
December 31, 1996, the Partnership was in compliance with all covenants of its
loan agreement.

ECONOMIC CONDITIONS

         Historically, the effects of inflation have been considered in
determining to what extent rates will be increased for various services
provided. It is expected that the future rate of inflation will continue to be a
significant variable in determining rates charged for services provided, subject
to the provisions of the 1996 Act. Because of the deregulatory nature of the
1996 Act, the Partnership does not expect the future rate of inflation to have a
material adverse impact on operations.

CAPITAL EXPENDITURES

         During 1996, the Partnership incurred approximately $1,016,000 on
capital expenditures. These expenditures include fiber interconnection and
system repair from ice storm damage in the Forest City, NC system, a tier launch
in the Corsicana, TX system and vehicle replacements in various systems.

         Management estimates that the Partnership will spend approximately
$1,115,000 on capital expenditures during 1997. These expenditures include
continuation of a system upgrade to 330 MHz and installation of a fiber optic
backbone in the Cedar Creek, TX system, vehicle replacement in the Forest City,
NC system, construction of a new office building in the Corsicana, TX system as
well as line extensions in various systems.

ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         The audited financial statements of the Partnership for the years ended
December 31, 1996, 1995 and 1994 are included as a part of this filing (see Item
14(a)(1) below).

ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
          FINANCIAL DISCLOSURE

         None.
<PAGE>   18
                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         The Partnership has no directors or officers. The Managing General
Partner of the Partnership is Northland Communications Corporation, a Washington
corporation; the Administrative General Partner of the Partnership is FN
Equities Joint Venture, a California general partnership.

         Certain information regarding the officers and directors of Northland
is set forth below.

         JOHN S. WHETZELL (AGE 55). Mr. Whetzell is the founder of Northland
Communications Corporation and has been President since its inception and a
Director since March 1982. Mr. Whetzell became Chairman of the Board of
Directors in December 1984. He also serves as President and Chairman of the
Board of Northland Telecommunications Corporation and each of the subsidiaries.
He has been involved with the cable television industry for over 22 years and
currently serves as a director on the board of the Cable Telecommunications
Association, a national cable television association. Between March 1979 and
February 1982 he was in charge of the Ernst & Whinney national cable television
consulting services. Mr. Whetzell first became involved in the cable television
industry when he served as the Chief Economist of the Cable Television Bureau of
the Federal Communications Commission (FCC) from May 1974 to February 1979. He
provided economic studies to support the deregulation of cable television both
in federal and state arenas. He participated in the formulation of accounting
standards for the industry and assisted 1996 the FCC in negotiating and
developing the pole attachment rate formula for cable television. His
undergraduate degree is in economics from George Washington University, and he
has an MBA degree from New York University.

         JOHN E. IVERSON (AGE 60). Mr. Iverson is the Assistant Secretary of
Northland Communications Corporation and has served on the Board of Directors
since December 1984. He also serves on the Board of Directors of Northland
Telecommunications Corporation and each of its subsidiaries. He is currently a
partner in the law firm of Ryan, Swanson & Cleveland, Northland's general
counsel. He is a member of the Washington State Bar Association and American Bar
Association and has been practicing law for more than 34 years. Mr. Iverson is
the past president and a Trustee of the Pacific Northwest Ballet Association.
Mr. Iverson has a Juris Doctor degree from the University of Washington.

         ARLEN I. PRENTICE (AGE 59). Since July 1985, Mr. Prentice has served on
the Board of Directors of Northland Telecommunications Corporation, and he
served on the Board of Directors of Northland Communications Corporation between
March 1982 and July 1985. Since 1969, Mr. Prentice has been Chairman and Chief
Executive Officer of Kibble & Prentice, a diversified financial services firm.
Kibble & Prentice has four divisions, which include Estate Planning and Business
Insurance, Financial Planning and Investments, Employee Benefit Services, and
Property and Casualty Insurance. Mr. Prentice is a Chartered Life Underwriter,
Chartered Financial Consultant, past President of the Million Dollar Round Table
and a registered representative of Investment Management and Research. Mr.
Prentice has a Bachelor of Arts degree from the University of Washington.

         MILTON A. BARRETT, JR. (AGE 62). Since April 1986, Mr. Barrett has
served on the Board of Directors of Northland Telecommunications Corporation. In
1995, he retired from the Weyerhaeuser Company after thirty-four years of
service with that company. At the time of his retirement he was a Vice
<PAGE>   19
President of Sales and Marketing as well as chairman of Weyerhaeuser's business
ethics committee. Mr. Barrett is a graduate of Princeton University magna cum
laude and of the Harvard University Graduate School of Business Administration.

         RICHARD I. CLARK (AGE 39). Mr. Clark has served as Vice President of
Northland since March 1982. He has served on the Board of Directors of both
Northland Communications Corporation and Northland Telecommunications
Corporation since July 1985. He also serves as Vice President and Director of
all subsidiaries of Northland Telecommunications Corporation. Mr. Clark was
elected Treasurer in April 1987, prior to which he served as Secretary from
March 1982. Mr. Clark was an original incorporator of Northland and is
responsible for the administration and investor relations activities of
Northland, including financial planning and corporate development. From July
1979 to February 1982, Mr. Clark was employed by Ernst & Whinney in the area of
providing cable television consultation services and has been involved with the
cable television industry for nearly 18 years. He has directed cable television
feasibility studies and on-site market surveys. Mr. Clark has assisted in the
design and maintenance of financial and budget computer programs, and he has
prepared documents for major cable television companies in franchising and
budgeting projects through the application of these programs. In 1979, Mr. Clark
graduated cum laude from Pacific Lutheran University with a Bachelor of Arts
degree in accounting.

         ARTHUR H. MAZZOLA (AGE 74). Mr. Mazzola was elected to the Board of
Directors of Northland Telecommunications Corporation in April 1987. From 1985
to 1990, he was Senior Vice President of Benjamin Franklin Leasing Company,
Inc., an equipment lease financing company. Currently, Mr. Mazzola is serving as
Business Development Coordinator for the Bank of California. Prior to his
association with Benjamin Franklin Leasing Company, Mr. Mazzola served as
President of Federal Capital Corporation and Trans Pacific Lease Company. Both
of these companies also engaged exclusively in equipment lease financing. Mr.
Mazzola is a past Board Chairman and current Trustee of the Pacific Northwest
Ballet Association and current Board Member of the Dante Alighieri Society. Mr.
Mazzola attended Boston University School of Business in 1943 where he studied
economics.

         TRAVIS H. KEELER (AGE 56). Mr. Keeler was elected to the Board of
Directors of Northland Telecommunications Corporation in April 1987. Since May
1985, he has served as President of Overall Laundry Services, Inc., an
industrial laundry and garment rental firm. Mr. Keeler received a Bachelor of
Arts degree from the University of Washington in 1962.

         JAMES E. HANLON (AGE 63). Since June 1985, Mr. Hanlon has been a
Divisional Vice President for Northland's Tyler, Texas regional office and is
currently responsible for the management of systems serving approximately 90,400
basic subscribers in Texas, Alabama and Mississippi. Prior to his association
with Northland, he served as Chief Executive of M.C.T. Communications, a cable
television company, from 1981 to June 1985. His responsibilities included
supervision of the franchise, construction and operation of a cable television
system located near Tyler, Texas. From 1979 to 1981, Mr. Hanlon was President of
the CATV Division of Buford Television, Inc., and from 1973 to 1979, he served
as President and General Manager of Suffolk Cablevision in Suffolk County, New
York. Mr. Hanlon has also served as Vice President and Corporate Controller of
Viacom International, Inc. and Division Controller of New York Yankees, Inc. Mr.
Hanlon has a Bachelor of Science degree in Business Administration from St.
Johns University.

         JAMES A. PENNEY (AGE 42). Mr. Penney is Vice President and General
Counsel for Northland Telecommunications Corporation and each of its
subsidiaries and has served in this role since September 1985. He was elected
Secretary in April 1987. Mr. Penney is responsible for advising all Northland
<PAGE>   20
systems with regard to legal and regulatory matters, and also is involved in the
acquisition and financing of new cable systems. From 1983 until 1985 he was
associated with the law firm of Ryan, Swanson & Cleveland, Northland's general
counsel. Mr. Penney holds a Bachelor of Arts Degree from the University of
Florida and a Juris Doctor from The College of William and Mary, where he was a
member of The William and Mary Law Review.

         GARY S. JONES (AGE 39). Mr. Jones is Vice President for Northland. Mr.
Jones joined Northland in March 1986 as Controller and has been Vice President
of Northland Telecommunications Corporation and each of its subsidiaries since
October 1986. Mr. Jones is responsible for cash management, financial reporting
and banking relations for Northland and is involved in the acquisition and
financing of new cable systems. Prior to joining Northland, Mr. Jones was
employed as a Certified Public Accountant with Laventhol & Horwath from 1980 to
1986. Mr. Jones received his Bachelor of Arts degree in Business Administration
with a major in accounting from the University of Washington in 1979.

         RICHARD J. DYSTE (AGE 51). Mr. Dyste has served as Vice
President-Technical Services of Northland Telecommunications Corporation and
each of its subsidiaries since April 1987. Mr. Dyste is responsible for planning
and advising all Northland cable systems with regard to technical performances
as well as system upgrades and rebuilds. He is a past president and current
member of the Mount Rainier Chapter of the Society of Cable Television
Engineers, Inc. Mr. Dyste joined Northland in 1986 as an engineer and served as
Operations Consultant to Northland Communications Corporation from August 1986
until April 1987. From 1977 to 1985, Mr. Dyste owned and operated Bainbridge TV
Cable. He is a graduate of Washington Technology Institute.

         H. LEE JOHNSON (AGE 53). Mr. Johnson has served as Divisional Vice
President for Northland's Statesboro, Georgia regional office since March 1994.
He is responsible for the management of systems serving approximately 62,000
basic subscribers in Georgia, Mississippi, North Carolina and South Carolina.
Prior to his association with Northland he served as Regional Manager for Warner
Communications, managing four cable systems in Georgia from 1968 to 1973. Mr.
Johnson has also served as President of Sunbelt Finance Corporation and was
employed as a System Manager for Statesboro CATV when Northland purchased the
system in 1986. Mr. Johnson has been involved in the cable television industry
for nearly 28 years and is a current member of the Society of Cable Television
Engineers. He is a graduate of Swainsboro Technical Institute and has attended
numerous training seminars, including courses sponsored by Jerrold Electronics,
Scientific Atlanta, The Society of Cable Television Engineers and CATA.

         JOHN T. WAECHTER (AGE 34). Mr. Waechter was promoted to Divisional Vice
President for Western operations on January 1, 1997. He is responsible for the
management of systems serving over 60,400 basic subscribers in California,
Oregon, Idaho and Washington. Mr. Waechter also serves as the Director of
Marketing and manages programming efforts for Northland. Prior to joining
Northland in July 1995, Mr. Waechter was employed with GTE, Northwest from 1987
to 1993 as Marketing and Sales Manager. Prior to his employment with GTE, Mr.
Waechter worked as Marketing Executive for the Xerox Corporation. He received a
Bachelor of Arts degree in Political Science and Economics from Whitman College
in 1984, and also attended the London School of Economics in 1983. Mr. Waechter
received his MBA from the University of Washington in 1995.

                  Certain information regarding the officers and directors of FN
Equities Joint Venture is set forth below:

         MILES Z. GORDON (AGE 49). Mr. Gordon, President and Chief Executive
Officer of Financial Network Investment Corporation (FNIC), has a
<PAGE>   21
comprehensive background in both the securities industry and securities law and
regulation. In 1972, he joined the Los Angeles office of the Securities and
Exchange Commission (SEC), and in 1974 he was appointed Branch Chief of the
Investment Company and Investment Advisors Examination Division. Mr. Gordon left
the SEC in 1978 to practice law. Within one year, he accepted a position as Vice
President of a major national securities broker/dealer firm headquartered in
Long Beach, California. He subsequently accepted the presidency of this firm in
early 1980. In 1983, he helped form and became President and Chief Executive
Officer of FNIC. This leading firm is now one of the largest independent
broker/dealers in the United States. A graduate of Michigan State University
(and current board member of the Visitors for the College of Social Science for
MSU), Mr. Gordon received his Juris Doctorate from the University of California
at Los Angeles School of Law. He presently serves as Chairman of the Securities
Industry Association Independent Contractor Firms Committee. Mr. Gordon was also
Chairman and a member of the NASD District Business Conduct Committee and a
former member of the NASD Board of Governors. He is past president of the
California Syndication Forum and has also served on several committees for the
Securities Industry Association. Mr. Gordon has appeared on television and radio
programs, been featured in numerous magazine and newspaper articles as an
industry spokesperson, and is a frequent speaker at many industry seminars and
conventions.

         JOHN S. SIMMERS (AGE 46). Mr. Simmers, Executive Vice President and
Chief Operating Officer of Financial Network Investment Corporation (FNIC), has
an extensive background in the securities industry. He began his career as a
reporter for Dunn and Bradstreet, then joined the National Association of
Securities Dealers (NASD) in 1974. Knowledgeable in all aspects of broker/dealer
regulations, operations, and products, Mr. Simmers was responsible for reviewing
the activities of member firms in twelve states. Mr. Simmers left the NASD seven
years later to accept a position as Vice President of the securities
broker/dealer, retail, wholesale and investment advisory subsidiaries of a
publicly held investment company headquartered in Long Beach, California. He
left this firm in 1983 to help form and become Executive Vice President and
Chief Operating Officer of FNIC. This full service broker/dealer firm has
offices located across the United States. Mr. Simmers is a graduate of Ohio
State University. He served on the Board of Directors of the California
Association of Independent Broker/Dealers and was a member of the Real Estate
Securities and Syndication Institute, the NASD District Business Conduct
Committee (District 2 South), and the International Association for Financial
Planning Due Diligence Steering Committee, which was organized to work toward
improving the quality and consistency of due diligence in the securities
industry. Mr. Simmers currently serves as a member of the NASD Direct
Participation Programs Committee, and has spoken at numerous seminars and
conventions.

         HARRY M. KITTER (AGE 41). Mr. Kitter has served as Controller for
Financial Network Investment Corporation since 1983. Prior to this association
from 1981 to 1983 he was employed as the Los Angeles Internal Audit Manager at
the Pacific Stock Exchange. From 1978 to 1981, he was Senior Accountant at
Arthur Young & Co., C.P.A. He holds an MBA from the University of Pittsburgh and
a bachelor's degree in economics from Lafayette College, Easton, Pennsylvania.

ITEM 11.  EXECUTIVE COMPENSATION

         The Partnership does not have executive officers. However, compensation
was paid to the Managing General Partner during 1996 as indicated in Note 3 of
the Notes to Financial Statements--December 31, 1996 (see Items 13(a) and
14(a)(1) below). In addition, cash distributions were made to the Managing
General Partner in 1996 (see Item 5(c) above).
<PAGE>   22
ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         (a) CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. Security ownership of
management as of December 31, 1996 is as follows:

<TABLE>
<CAPTION>
                                                      AMOUNT AND NATURE
                            NAME AND ADDRESS            OF BENEFICIAL        PERCENT OF
    TITLE OF CLASS        OF BENEFICIAL OWNER             OWNERSHIP            CLASS
    --------------        -------------------             ---------            -----
<S>                     <C>                             <C>              <C>
  General Partner's     Northland Communications         (See Note A)       (See Note A)
      Interest          Corporation
                        1201 Third Avenue
                        Suite 3600
                        Seattle, Washington  98101

  General Partner's     FN Equities Joint Venture        (See Note B)       (See Note B)
      Interest          2780 Skypark Dr.
                        Suite 300
                        Torrance, California  90505
</TABLE>


         Note A: Northland has a 1% interest in the Partnership, which increases
to 20% interest in the Partnership at such time as the limited partners have
received 100% of their aggregate cash contributions. Northland also owns eight
units of limited partnership interest. The natural person who exercises voting
and/or investment control over these interests is John S. Whetzell.

         Note B: FN Equities Joint Venture has no interest (0%) in the
Partnership until such time as the limited partners have received 100% of their
aggregate cash contributions, at which time FN Equities Joint Venture will have
a 5% interest in the Partnership. The natural person who exercises voting and/or
investment control over these interests is John S. Simmers.

         (b) CHANGES IN CONTROL. Northland has pledged its ownership interest as
Managing General Partner of the Partnership to the Partnership's lender as
collateral pursuant to the terms of the term loan agreement between the
Partnership and its lender.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         (a) TRANSACTIONS WITH MANAGEMENT AND OTHERS. The Managing General
Partner receives a management fee equal to 6% of the gross revenues of the
Partnership, not including revenues from any sale or refinancing of the
Partnership's Systems. The Managing General Partner also receives reimbursement
of normal operating and general and administrative expenses incurred on behalf
of the Partnership.

         The Partnership has an operating management agreement with Northland
Premier Cable Limited Partnership ("Premier"), an affiliated partnership
organized and managed by Northland. Under the terms of this agreement, the
Partnership serves as the exclusive managing agent for one of Premier's cable
systems and is reimbursed for certain operating and administrative costs.

         Cable Television Billing, Inc. ("CTB"), an affiliate of Northland,
provides software installation and billing services to certain of the
Partnership's Systems.

         Northland Cable News, Inc. ("NCN"), an affiliate of Northland, provides
programming to the Partnership's systems.

         Cable Ad-Concepts, Inc. ("CAC"), an affiliate of Northland, provides
the production and development of video commercial advertisements and
advertising sales support.

         See Note 3 of the Notes to Financial Statements--December 31, 1996 for
disclosures regarding transactions with the General Partners or affiliates.
<PAGE>   23
         The following schedule summarizes these transactions:


<TABLE>
<CAPTION>
                                               FOR THE YEARS ENDED DECEMBER 31,
                                              ----------------------------------
                                                1996         1995         1994
                                              --------     --------     --------
<S>                                           <C>          <C>          <C>
Partnership management fees                   $533,011     $453,521     $335,910
Operating expense reimbursements               497,090      406,603      281,914
Software installation and
  billing service fees to CTB                   66,672       50,302       35,593
Programming fees to NCN                        267,021      165,281       53,296
Reimbursements to CAC for
  services                                      37,097       37,602       19,538
Amounts due to General Partner
  and affiliates at year end                   276,161      190,853       96,579
</TABLE>

         Management believes that all of the above transactions are on terms as
favorable to the Partnership as could be obtained from unaffiliated parties for
comparable goods or services.

         As disclosed in the Partnership's Prospectus (which has been
incorporated by reference), certain conflicts of interest may arise between the
Partnership and the General Partners and their affiliates. Certain conflicts may
arise due to the allocation of management time, services and functions between
the Partnership and existing and future partnerships as well as other business
ventures. The General Partners have sought to minimize these conflicts by
allocating costs between systems on a reasonable basis. Each limited partner may
have access to the books and non-confidential records of the Partnership. A
review of the books will allow a limited partner to assess the reasonableness
of      these allocations. The Agreement of Limited Partnership provides that
any limited partner owning 10% or more of the Partnership units may call a
special meeting of the Limited Partners, by giving written notice to the
General Partners specifying in general terms the subjects to be considered. In
the event of a dispute between the General Partners and Limited Partners which
cannot be otherwise resolved, the Agreement of Limited Partnership provides
steps for the removal of a General Partner by the Limited Partners.

                  (b) CERTAIN BUSINESS RELATIONSHIPS. John E. Iverson, a
Director and Assistant Secretary of the Managing General Partner, is a partner
of the law firm of Ryan, Swanson & Cleveland, which has rendered and is expected
to continue to render legal services to the Managing General Partner and the
Partnership.

                  (c)  INDEBTEDNESS OF MANAGEMENT.  None.
<PAGE>   24
                                     PART IV

ITEM 14.   EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
           8-K

         (a)  DOCUMENTS FILED AS A PART OF THIS REPORT:

<TABLE>
<CAPTION>
                                                                        SEQUENTIALLY
                                                                          NUMBERED
                                                                            PAGE
<S>                                                                        <C>
              (1).............................FINANCIAL STATEMENTS:

                      Report of Independent Public Accountants...........  ____

                      Balance Sheets--December 31, 1996 and 1995.........  ____

                      Statements of Operations for the years
                      ended December 31, 1996, 1995 and 1994.............  ____

                      Statements of Changes in Partners'
                      Deficit for the years ended December 31,
                      1996, 1995 and 1994................................  ____

                      Statements of Cash Flows for the years
                      ended December 31, 1996, 1995 and 1994.............  ____

                      Notes to Financial Statements--December 31,
                      1996...............................................  ____
</TABLE>

              (2)     EXHIBITS:

                       4.1     Amended and Restated Certificate and Agreement of
                               Limited Partnership Dated December 30, 1985(1)

                       4.2     Amendment to Certificate and Agreement of Limited
                               Partnership Dated April 11, 1986(2)

                       4.3     Amendment to Agreement of Limited Partnership
                               dated January 8, 1991(4)

                       4.4     Amendment to Agreement of Limited Partnership
                               dated February 19, 1992

                      10.1     Gun Barrel City Franchise(2)

                      10.2     Kerens Franchise(2)

                      10.3     Kemp Franchise(2)

                      10.4     Malakoff Franchise(2)

                      10.5     Mabank Franchise(2)

                      10.6     Seven Points Franchise(2)

                      10.7     Trinidad Franchise(2)

                      10.8     Tool City Franchise(2)
<PAGE>   25
                      10.9     Lamesa Franchise(2)

                      10.10    Alexander Mills Franchise(2)

                      10.11    Forest City Franchise(5)

                      10.12    Rutherfordton Franchise(5)

                      10.13    Spindale Franchise(5)

                      10.14    Rutherford County Franchise(2)

                      10.15    Star Harbor Franchise(2)

                      10.16    Enchanted Oaks Franchise(3)

                      10.17    Caney City Franchise(3)

                      10.18    Log Cabin Franchise(3)

                      10.19    Payne Springs Franchise(3)

                      10.20    Management Agreement dated as of September 30,
                               1985(2)

                      10.21    Management Agreement dated as of March 1, 1986(2)

                      10.22    Revolving Credit and Term Loan Agreement with
                               Provident National Bank dated as of January 8,
                               1991(4)

                      10.23    Modification Agreement dated as of January 24,
                               1992(6)

                      10.24    Purchase agreement with Corsicana Cable
                               Television Company dated July 11, 1994(7)

                      10.25    Amended and Restated Term Loan Agreement with
                               Provident National Bank dated September 29,
                               1994(7)

                      10.26    Franchise Agreement with City of Corsicana, TX -
                               Assignment and Assumption Agreement dated August
                               16, 1994(8)

                      10.27    Asset Purchase Agreement between Northland Cable
                               Properties Five Limited Partnership and PCI One,
                               Incorporated(9)

                      10.28    Asset Purchase Agreement between Northland Cable
                               Properties Five Limited Partnership and Phoenix
                               Cable Income Fund(9)

                      10.29    Credit Agreement with First Union National Bank
                               of North Carolina dated November 17, 1995(10)

                ---------------------
                     (1)  Incorporated by reference from the Partnership's Form
                          8-A Registration Statement filed July 24, 1987.

                     (2)  Incorporated by reference from the Partnership's Form
                          10-K Annual Report for the fiscal year ended December
                          31, 1986.

                     (3)  Incorporated by reference from the Partnership's Form
                          10-K Annual Report for the fiscal year ended December
                          31, 1988.

                     (4)  Incorporated by reference from the Partnership's Form
                          10-K Annual Report for the fiscal year ended December
                          31, 1990.
<PAGE>   26
                     (5)  Incorporated by reference from the Partnership's Form
                          10-K Annual Report for the fiscal year ended December
                          31, 1991.

                     (6)  Incorporated by reference from the Partnership's Form
                          10-K Annual Report for the fiscal year ended December
                          31, 1992.

                     (7)  Incorporated by reference from the Partnership's Form
                          8-K dated September 29, 1994.

                     (8)  Incorporated by reference from the Partnership's Form
                          10-K Annual Report for the fiscal year ended December
                          3,1 994.

                     (9)  Incorporated by reference from the Partnership's Form
                          10-Q Quarterly Report for the period ended September
                          30, 1995.

                     (10) Incorporated by reference from the Partnership's Form
                          10-K Annual Report for the period ended December 31,
                          1995.

         (b) REPORTS ON FORM 8-K. No Partnership reports on Form 8-K have been
filed for the fourth quarter of the fiscal year ended December 31, 1996.
<PAGE>   27
                                   SIGNATURES


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



               NORTHLAND CABLE PROPERTIES FIVE LIMITED PARTNERSHIP

                    By: NORTHLAND COMMUNICATIONS CORPORATION
                           (Managing General Partner)


                          By /s/ John S. Whetzell        Date:
                             ---------------------------
                             John S. Whetzell, President




         Pursuant to the requirements of the Securities Exchange 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>
      SIGNATURES                         CAPACITIES                            DATE
      ----------                         ----------                         -----------
<S>                           <C>                                           <C>
/s/ John S. Whetzell          Chief executive officer, principal
------------------------      financial officer, and principal              -----------
John S. Whetzell              accounting officer of registrant;
                              chief executive officer, principal
                              financial officer and chairman of the
                              board of directors of Northland
                              Communications Corporation


/s/ Richard I. Clark          Director of Northland Communications
------------------------      Corporation                                   -----------
Richard I. Clark

/s/ John E. Iverson           Director of Northland Communications
------------------------      Corporation                                   -----------
John E. Iverson

/s/ Gary S. Jones             Vice President and principal accounting
------------------------      officer of Northland Communications
Gary S. Jones                 Corporation                                   -----------
</TABLE>
<PAGE>   28
                                 EXHIBITS INDEX


<TABLE>
<CAPTION>
                                                                Sequentially
Exhibit                                                           Numbered
Number                        Description                           Page
-------        -----------------------------------------        ------------
<S>            <C>                                              <C>
27.0           Financial Data Schedule
</TABLE>
<PAGE>   29
                     NORTHLAND CABLE PROPERTIES FIVE
                       LIMITED PARTNERSHIP AND SUBSIDIARY

                     CONSOLIDATED FINANCIAL STATEMENTS
                     AS OF DECEMBER 31, 1996 AND 1995
                     TOGETHER WITH AUDITORS' REPORT
<PAGE>   30
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS



To the Partners of
Northland Cable Properties Five Limited Partnership and Subsidiary:

We have audited the accompanying consolidated balance sheets of Northland Cable
Properties Five Limited Partnership and subsidiary (a Washington limited
partnership) as of December 31, 1996 and 1995, and the related consolidated
statements of operations, changes in partners' deficit and cash flows for each
of the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Partnership'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 financial statements referred to above present fairly, in
all material respects, the financial position of Northland Cable Properties Five
Limited Partnership and subsidiary as of December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1996, in conformity with generally accepted
accounting principles.



/s/ Arthur Andersen LLP

Seattle, Washington,
  February 25, 1997
<PAGE>   31
       NORTHLAND CABLE PROPERTIES FIVE LIMITED PARTNERSHIP AND SUBSIDIARY


            CONSOLIDATED BALANCE SHEETS -- DECEMBER 31, 1996 AND 1995

<TABLE>
<CAPTION>
                                          ASSETS

                                                                1996            1995
                                                            ------------    ------------
<S>                                                         <C>             <C>
CASH                                                        $    414,811    $    241,713

ACCOUNTS RECEIVABLE                                              483,208         411,862

INSURANCE RECEIVABLE                                             126,000            --

PREPAID EXPENSES                                                  61,985          81,309

INVESTMENT IN CABLE TELEVISION PROPERTIES:
       Property and equipment, at cost                        22,922,054      22,225,781
       Less- Accumulated depreciation                        (13,074,555)    (11,562,201)
                                                            ------------    ------------
                                                               9,847,499      10,663,580
       Franchise agreements (net of
          accumulated amortization of
          $1,426,830 in 1996 and $818,074
          in 1995)                                             4,711,637       5,326,026
       Organization costs and other
          intangibles (net of accumulated
          amortization of $990,440 in 1996
          and $757,047 in 1995)                                1,038,137       1,226,760
                                                            ------------    ------------
               Total investment in cable
                 television properties                        15,597,273      17,216,366
                                                            ------------    ------------

               Total assets                                 $ 16,683,277    $ 17,951,250
                                                            ============    ============


                            LIABILITIES AND PARTNERS' DEFICIT

LIABILITIES:
    Accounts payable and accrued expenses                   $    816,707    $    574,311
    Due to General Partner and affiliates                        276,161         190,853
    Deposits                                                      21,602          26,761
    Subscriber prepayments                                       231,419         178,238
    Notes payable                                             20,819,461      21,660,989
                                                            ------------    ------------
               Total liabilities                              22,165,350      22,631,152
                                                            ------------    ------------

COMMITMENTS AND CONTINGENCIES (Note 8)

PARTNERS' DEFICIT:
    General partners-
       Contributed capital, net                                  (56,075)        (55,331)
       Accumulated deficit                                      (100,673)        (93,396)
                                                            ------------    ------------
                                                                (156,748)       (148,727)
                                                            ------------    ------------
    Limited partners-
       Contributed capital, net -
          14,739 units in 1996 and 1995                          593,327         667,021
       Accumulated deficit                                    (5,918,652)     (5,198,196)
                                                            ------------    ------------
                                                              (5,325,325)     (4,531,175)
                                                            ------------    ------------
               Total liabilities and partners'
                 deficit                                    $ 16,683,277    $ 17,951,250
                                                            ============    ============
</TABLE>

              The accompanying notes are an integral part of these
                          consolidated balance sheets.
<PAGE>   32
       NORTHLAND CABLE PROPERTIES FIVE LIMITED PARTNERSHIP AND SUBSIDIARY


                      CONSOLIDATED STATEMENTS OF OPERATIONS

              FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994



<TABLE>
<CAPTION>
                                                  1996           1995           1994
                                              -----------    -----------    -----------
<S>                                           <C>            <C>            <C>
REVENUE                                       $ 9,244,966    $ 7,897,009    $ 5,598,494
                                              -----------    -----------    -----------
EXPENSES:
    Operating (including $29,748, $34,057
      and $34,442, net, paid to affiliates
      in 1996, 1995 and 1994, respectively)       823,200        754,573        557,281

    General and administrative (including
      $910,206, $806,840 and $570,349, net,
      paid to affiliates in 1996, 1995 and
      1994, respectively)                       2,437,295      2,028,131      1,464,107

    Programming (including $299,319,
      $203,025 and $80,905 paid to
      affiliates in 1996, 1995 and 1994,
      respectively)                             2,426,483      2,044,429      1,188,052

    Depreciation and amortization               2,387,543      2,544,097      1,675,502
                                              -----------    -----------    -----------
                                                8,074,521      7,371,230      4,884,942
                                              -----------    -----------    -----------
               Operating income                 1,170,445        525,779        713,552

OTHER INCOME (EXPENSE):
    Interest income and other                       8,975          5,601          9,848
    Interest expense                           (1,740,313)    (1,505,965)      (761,186)
    Loss on disposal of assets                   (166,840)       (14,795)          --
                                              -----------    -----------    -----------
               Net loss                       $  (727,733)   $  (989,380)   $   (37,786)
                                              ===========    ===========    ===========
ALLOCATION OF NET LOSS:
    General partners                          $    (7,277)   $    (9,893)   $      (378)
                                              ===========    ===========    ===========
    Limited partners                          $  (720,456)   $  (979,487)   $   (37,408)
                                              ===========    ===========    ===========
NET LOSS PER LIMITED PARTNERSHIP UNIT         $       (49)   $       (66)   $        (3)
                                              ===========    ===========    ===========
</TABLE>

                 The accompanying notes are an integral part of
                         these consolidated statements.
<PAGE>   33
       NORTHLAND CABLE PROPERTIES FIVE LIMITED PARTNERSHIP AND SUBSIDIARY


             CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' DEFICIT

              FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994


<TABLE>
<CAPTION>
                                                  General       Limited
                                                  Partners      Partners         Total
                                                 ---------    -----------    -----------
<S>                                              <C>          <C>            <C>
BALANCE, December 31, 1993                       $(135,475)   $(3,185,110)   $(3,320,585)

    Repurchase of limited partnership units           --          (34,000)       (34,000)

    Cash distributions to partners ($10 per
       limited partnership unit)                    (1,493)      (147,780)      (149,273)

    Net loss                                          (378)       (37,408)       (37,786)
                                                 ---------    -----------    -----------
BALANCE, December 31, 1994                        (137,346)    (3,404,298)    (3,541,644)

    Cash distributions to partners ($10 per
       limited partnership unit)                    (1,488)      (147,390)      (148,878)

    Net loss                                        (9,893)      (979,487)      (989,380)
                                                 ---------    -----------    -----------
BALANCE, December 31, 1995                        (148,727)    (4,531,175)    (4,679,902)

    Cash distributions to partners ($5 per
       limited partnership unit)                      (744)       (73,694)       (74,438)

    Net loss                                        (7,277)      (720,456)      (727,733)
                                                 ---------    -----------    -----------
BALANCE, December 31, 1996                       $(156,748)   $(5,325,325)   $(5,482,073)
                                                 =========    ===========    ===========
</TABLE>

                 The accompanying notes are an integral part of
                         these consolidated statements.
<PAGE>   34
       NORTHLAND CABLE PROPERTIES FIVE LIMITED PARTNERSHIP AND SUBSIDIARY


                      CONSOLIDATED STATEMENTS OF CASH FLOWS

              FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994


<TABLE>
<CAPTION>
                                                                         1996            1995            1994
                                                                     -----------    ------------    ------------
<S>                                                                  <C>            <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
    Net loss                                                         $  (727,733)   $   (989,380)   $    (37,786)
    Adjustments to reconcile loss to net cash provided by
      operating activities-
          Depreciation and amortization expense                        2,387,543       2,544,097       1,675,502
          Loss on disposal of assets                                     166,840          14,795            --
          (Increase) decrease in operating assets:
              Accounts receivable                                        (71,346)       (237,040)        (75,753)
              Prepaid expenses                                            19,324         (13,029)        (10,450)
          Increase (decrease) in operating liabilities:
              Accounts payable and accrued expenses                      242,396         (32,293)        219,383
              Due to General Partner and affiliates                       85,308          94,274          87,750
              Deposits                                                    (5,159)         (4,294)          6,460
              Subscriber prepayments                                      53,181         (35,463)         73,691
                                                                     -----------    ------------    ------------
               Net cash provided by operating activities               2,150,354       1,341,667       1,938,797
                                                                     -----------    ------------    ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
    Acquisition of cable systems and related radio station                  --        (5,278,375)     (8,499,270)
    Purchase of property and equipment, net                           (1,016,520)       (530,340)       (747,056)
    Hold-back note payable                                               (91,528)        104,000            --
                                                                     -----------    ------------    ------------
               Net cash used in investing activities                  (1,108,048)     (5,704,715)     (9,246,326)
                                                                     -----------    ------------    ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
     Proceeds from notes payable                                            --        21,931,554      17,625,000
     Principal payments on notes payable                                (750,000)    (17,773,780)     (9,309,396)
     Distributions to partners                                           (74,438)       (148,878)       (149,273)
     Repurchase of limited partnership units                                --              --           (34,000)
     Loan fees                                                           (44,770)       (556,421)       (133,078)
                                                                     -----------    ------------    ------------
               Net cash (used in) provided by financing activities      (869,208)      3,452,475       7,999,253
                                                                     -----------    ------------    ------------

INCREASE (DECREASE) IN CASH                                              173,098        (910,573)        691,724

CASH, beginning of year                                                  241,713       1,152,286         460,562
                                                                     -----------    ------------    ------------
CASH, end of year                                                    $   414,811    $    241,713    $  1,152,286
                                                                     ===========    ============    ============

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
    Cash paid during the year for interest                           $ 1,663,208    $  1,663,654    $    663,563
                                                                     ===========    ============    ============
</TABLE>

  The accompanying notes are an integral part of these consolidated statements.
<PAGE>   35
       NORTHLAND CABLE PROPERTIES FIVE LIMITED PARTNERSHIP AND SUBSIDIARY


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                DECEMBER 31, 1996




1.  ORGANIZATION AND PARTNERS' INTERESTS:

Formation and Business

Northland Cable Properties Five Limited Partnership and subsidiary (the
Partnership), a Washington limited partnership, were formed on August 19, 1985.
The Partnership was formed to acquire, develop and operate cable television
systems. The Partnership began operations by acquiring a cable television system
serving several communities and contiguous areas surrounding Cedar Creek, Texas.
During 1986, the Partnership acquired three additional cable television systems,
which serve the Forest City, North Carolina and Lamesa and Star Harbor, Texas
areas. In September 1994, the Partnership acquired a cable television system
serving the Corsicana, Texas area. In December 1995, the Partnership acquired
cable television systems serving several communities in the Ellenboro, Bostic,
Gilkey and Harris, North Carolina areas. The Partnership has 25 nonexclusive
franchises to operate the cable television systems for periods which will expire
at various dates through the year 2014.

In August 1994, the Partnership formed Corsicana Media, Inc. (Corsicana Media),
a Washington corporation and a wholly owned subsidiary, for the purpose of
acquiring and operating an AM radio station serving the community of Corsicana,
Texas and surrounding areas. On January 16, 1995, Corsicana Media acquired the
operating assets of KAN-D Land, Inc. for a total price of $500,000. For purposes
of the Partnership's financial statement presentation, the activities of
Corsicana Media have been consolidated and all intercompany transactions have
been eliminated.

Northland Communications Corporation is the Managing General Partner (the
General Partner) of the Partnership. Certain affiliates of the Partnership also
own and operate other cable television systems. In addition, the General Partner
manages cable television systems for other limited partnerships for which it is
General Partner.

FN Equities Joint Venture, a California joint venture, is the Administrative
General Partner of the Partnership.

Contributed Capital, Commissions and Offering Costs

The capitalization of the Partnership is set forth in the accompanying
statements of changes in partners' deficit. No limited partner is obligated to
make any additional contribution to partnership capital.

The general partners purchased their 1% interest in the Partnership by
contributing $1,000 to partnership capital.
<PAGE>   36
                                      -2-


Pursuant to the Partnership Agreement, brokerage fees paid to an affiliate of
the Administrative General Partner and other offering costs paid to the General
Partner of $787,500 and $139,651, respectively, were recorded as a reduction of
limited partners' capital.

Organization Costs

Organization costs include reimbursements of $25,823 to the General Partner for
costs incurred on the Partnership's behalf and fees of $487,500 as compensation
for selecting and arranging for the purchase of the cable television systems.

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Depreciation

Depreciation of property and equipment is provided using the straight-line
method over the following estimated service lives:

        Buildings                                                   20 years
        Distribution plant                                          10 years
        Other equipment and leasehold improvements                5-20 years

Allocation of Cost of Purchased Cable Television Systems

The Partnership allocated the total contract purchase price of cable television
systems acquired as follows: first, to the estimated fair value of net tangible
assets acquired; then, to the franchise and other determinable intangible costs;
and then any excess would have been allocated to goodwill.

Intangible Assets

Costs assigned to franchise agreements, organization costs and other intangibles
are being amortized using the straight-line method over the following estimated
useful lives:

        Franchise agreements                                        10 years
        Organization costs and other intangibles                   1-8 years

Revenue Recognition

The Partnership recognizes revenue in the month service is provided to customers
and accounts for advance payments on services to be rendered as subscriber
prepayments.

Estimates Used in Financial Statement Presentation

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amount of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
<PAGE>   37
                                      -3-


3.  TRANSACTIONS WITH THE GENERAL PARTNER AND AFFILIATES:

Management Fees

The General Partner receives a fee for managing the Partnership equal to 6% of
the gross revenues of the Partnership, excluding revenues from the sale of cable
television systems or franchises. The amount of management fees charged by the
General Partner was $533,011, $453,521 and $335,910 for 1996, 1995 and 1994,
respectively.

Income Allocation

As defined in the limited partnership agreement, the general partners are
allocated 1% and the limited partners are allocated 99% of partnership net
income, net losses, deductions and credits from operations until such time as
the limited partners receive aggregate cash distributions equal to their
aggregate capital contributions. Thereafter, the general partners will be
allocated 25% and the limited partners will be allocated 75% of partnership net
income, net losses, deductions and credits from operations. Cash distributions
from operations will be allocated in accordance with the net income and net loss
percentages then in effect. Prior to the general partners receiving cash
distributions from operations for any year, the limited partners must receive
cash distributions in an amount equal to 50% of the limited partners' allocable
share of taxable net income for such year. Any distributions other than from
cash flow, such as from the sale or refinancing of a system or upon dissolution
of the Partnership, will be determined according to the Partnership Agreement.

The limited partners' total initial contributions to capital were $7,500,000
($500 per limited partnership unit). As of December 31, 1996, $5,650,553 ($377
per limited partnership unit) has been distributed to the limited partners and
the Partnership has repurchased $130,500 of limited partnership units ($500 per
unit).

Reimbursements

The General Partner provides certain centralized services to the Partnership and
other affiliated entities. As set forth in the Partnership Agreement, the
Partnership reimburses the General Partner for the cost of those services
provided by the General Partner to the Partnership. These services include
engineering, marketing, management services, accounting, bookkeeping, legal,
copying, office rent and computer services.

The amounts billed to the Partnership for these services are based on the
General Partner's cost. The cost of certain services is charged directly to the
Partnership, based upon actual time spent by employees of the General Partner.
The cost of other services is allocated to the Partnership, and other affiliated
entities, based upon their relative size, revenue and other factors. Amounts
charged to the Partnership by the General Partner for these services were
$497,090, $406,603 and $281,914 for the years ended December 31, 1996, 1995 and
1994, respectively.

In 1996, 1995 and 1994, the Partnership was charged for billing services
provided by an affiliate, amounting to $66,672, $50,302 and $35,593,
respectively.
<PAGE>   38
                                      -4-


In July 1994, the Partnership began paying monthly program license fees to
Northland Cable News, Inc. (NCN), an affiliate of the General Partner, for the
rights to distribute programming developed and produced by NCN. Total license
fees billed by NCN during 1996, 1995 and 1994 were $267,021, $165,281 and
$53,296, respectively.

Cable Ad Concepts, Inc. (CAC), an affiliate of the General Partner, was formed
in 1993 and began operations in 1994. CAC was organized to assist in the
development of local advertising markets and management and training of local
sales staff. CAC billed the Partnership $37,097, $37,602 and $19,538 in 1996,
1995 and 1994, respectively, for these services.

In 1996, the Partnership entered into operating management agreements with
affiliates managed by the General Partner. Under the terms of these agreements,
the Partnership serves as the executive managing agent for certain cable
television systems and is reimbursed for certain operating, programming and
administrative expenses. The Partnership received $51,170, under the terms of
these agreements during 1996.

Due to General Partner and Affiliates

The liability to the General Partner and affiliates consists of the following:

<TABLE>
<CAPTION>
                                                              December 31,
                                                       -------------------------
                                                         1996             1995
                                                       --------         --------
<S>                                                    <C>              <C>
Management fees                                        $137,394         $  1,569
Reimbursable operating costs                            123,975           42,431
Due to affiliates, net                                   14,792          146,853
                                                       --------         --------
                                                       $276,161         $190,853
                                                       ========         ========
</TABLE>

4.  PROPERTY AND EQUIPMENT:

Property and equipment consists of the following:

<TABLE>
<CAPTION>
                                                            December 31,
                                                   -----------------------------
                                                       1996              1995
                                                   -----------       -----------
<S>                                                <C>               <C>
Land and buildings                                 $   562,498       $   561,199
Distribution plant                                  20,885,763        20,351,459
Other equipment                                      1,402,152         1,297,110
Leasehold improvements                                  16,013            16,013
Construction in progress                                55,628              --
                                                   -----------       -----------
                                                    22,922,054        22,225,781
Less- Accumulated depreciation                      13,074,555        11,562,201
                                                   -----------       -----------
                                                   $ 9,847,499       $10,663,580
                                                   ===========       ===========
</TABLE>

Replacements, renewals and improvements are capitalized. Maintenance and repairs
are charged to expense as incurred.
<PAGE>   39
                                      -5-


5.  ACCOUNTS PAYABLE AND ACCRUED EXPENSES:

Accounts payable and accrued expenses consists of the following:

<TABLE>
<CAPTION>
                                                             December 31,
                                                      --------------------------
                                                        1996              1995
                                                      --------          --------
<S>                                                   <C>               <C>
Programmer license fees                               $226,009          $158,704
Accrued franchise fees                                 205,072           140,316
Other                                                  385,626           275,291
                                                      --------          --------
                                                      $816,707          $574,311
                                                      ========          ========
</TABLE>

6.  NOTES PAYABLE:

Notes payable consist of the following:

<TABLE>
<CAPTION>
                                                                December 31,
                                                       ------------------------------
                                                           1996               1995
                                                       -----------        -----------
<S>                                                    <C>                <C>
Revolving credit and term loan agreement,
    collateralized by a first lien position on all
    present and future assets of the Partnership.
    Interest rates vary based on certain financial
    covenants; currently 8.00% (weighted average).
    Graduated principal payments plus interest are
    due quarterly until maturity on March 31,
    2001. The Partnership has a revolving credit
    facility with its creditor allowing for
    borrowings not to exceed $2,500,000 until
    maturity of the term loan agreement. At
    December 31, 1996, the Partnership had
    $1,431,553 outstanding on its revolving credit
    facility.                                          $20,806,554        $21,556,554

Unsecured, subordinated, noninterest-bearing
    hold-back notes due to seller, payable in full
    the first quarter of 1997, net of seller
    receivable.                                             12,907             95,337

Other                                                        --                 9,098
                                                       -----------        -----------
                                                       $20,819,461        $21,660,989
                                                       ===========        ===========
</TABLE>

Annual maturities of notes payable after December 31, 1996, are as follows:

<TABLE>
<S>                                                          <C>
               1997                                          $ 1,133,391
               1998                                            1,500,000
               1999                                            2,000,000
               2000                                            2,650,000
               2001                                           13,536,070
                                                             -----------
                                                             $20,819,461
                                                             ===========
</TABLE>
<PAGE>   40
                                       -6-


Under the revolving credit and term loan agreement, the Partnership has agreed
to restrictive covenants which require the maintenance of certain ratios,
including a Fixed Charge Ratio of 1.15 to 1, an Interest Coverage Ratio of 1.75
to 1 and a Maximum Leverage Ratio of 5.50 to 1, among other restrictions. The
General Partner submits quarterly debt compliance reports to the Partnership's
creditor under this agreement.

The Partnership has entered into interest rate swap agreements to reduce the
impact of changes in interest rates. Interest rate swap transactions generally
involve the exchange of fixed and floating interest payment obligations without
the exchange of underlying principal amounts. At December 31, 1996, the
Partnership had outstanding two interest rate swap agreements with its bank,
having a notional principal amount of $20,575,000. These agreements effectively
change the Partnership's interest rate exposure to a fixed rate of 5.36%
(weighted average), plus an applicable margin based on certain financial
covenants (the margin at December 31, 1996 was 2.625%). The maturity date, the
fixed interest rate and the notional amount of each swap are as follows:

<TABLE>
<CAPTION>
  Maturity Date                               Fixed Rate              Amount
  -------------                               ----------              ------
<S>                                           <C>                  <C>
January 13, 1997                                 5.32%             $ 4,700,000
December 8, 1997                                 5.37%             $15,875,000
</TABLE>

At December 31, 1996, the counterparty to the Partnership's interest rate swap
agreement would have been required to pay the Partnership approximately $51,000
to settle these agreements based on fair value estimates received from financial
institutions.

7.  INCOME TAXES:

Income taxes have not been recorded in the accompanying financial statements
because they are obligations of the partners. The federal and state income tax
returns of the Partnership are prepared and filed by the General Partner.

The tax returns, the qualification of the Partnership as such for tax purposes
and the amount of distributable partnership income or loss are subject to
examination by federal and state taxing authorities. If such examinations result
in changes with respect to the Partnership's qualification or in changes with
respect to the income or loss, the tax liability of the partners would likely be
changed accordingly.

Taxable (loss) income to the limited partners was approximately $(1,064,000),
$(566,000) and $349,000 for each of the three years in the period ended December
31, 1996, and is different from that reported in the consolidated statements of
operations due to the difference in depreciation expense allowed for tax
purposes and that amount recognized under generally accepted accounting
principles. There were no other significant differences between taxable (loss)
income and the net loss reported in the consolidated statements of operations.

In general, under current federal income tax laws, a limited partner's allocated
share of tax losses from a partnership is allowed as a deduction on his
individual income tax returns only to the extent of the partner's adjusted basis
in his partnership interest at the end of the tax year. Any excess losses over
adjusted basis may be carried forward to future tax years and are allowed as a
deduction to the extent the partner has an increase in his adjusted basis in the
partnership through either an allocation of partnership income or additional
capital contributions to the partnership.
<PAGE>   41
                                      -7-


In addition, the current tax law does not allow a taxpayer to use losses from a
business activity in which he does not materially participate (a "passive
activity," e.g., a limited partner in a limited partnership) to offset income
such as salary, active business income, dividends, interest, royalties and
capital gains. However, such losses can be used to offset income from other
passive activities. In addition, disallowed losses can be carried forward
indefinitely to offset future income from passive activities. Disallowed losses
can be used in full when the taxpayer recognizes gain or loss upon the
disposition of his entire interest in the passive activity.

8.  COMMITMENTS AND CONTINGENCIES:

Lease Arrangements

The Partnership leases certain tower sites, office facilities and pole
attachments under leases accounted for as operating leases. Rental expense
included in operations amounted to $173,451, $165,872 and $116,151 in 1996, 1995
and 1994, respectively. Minimum lease payments through the end of the lease
terms are as follows:

<TABLE>
<S>                                                           <C>
               1997                                           $ 36,181
               1998                                             36,120
               1999                                             33,420
               2000                                              8,520
               2001                                              8,520
               Thereafter                                       52,675
                                                              --------
                                                              $175,436
                                                              ========
</TABLE>

Effects of Regulation

On February 8, 1996, the Telecommunications Act of 1996 (the 1996 Act) was
enacted which dramatically changed federal telecommunications laws and the
future competitiveness of the industry. Many of the changes called for by the
1996 Act will not take effect until the Federal Communications Commission (FCC)
issues new regulations which, in some cases, may not be completed for a few
years. Because of this, the full impact of the 1996 Act on the Partnership's
operations cannot be determined at this time. A summary of the provisions
affecting the cable television industry, more specifically those affecting the
Partnership's operations, follows.
<PAGE>   42
                                      -8-


Cable Programming Service Tier Regulation. FCC regulation of rates for cable
programming service tiers has been eliminated for small cable systems owned by
small companies. Small cable systems are those having 50,000 or fewer
subscribers which are owned by companies with fewer than 1% of national cable
subscribers (approximately 600,000). The Partnership qualifies as a small cable
company and all of the Partnership's cable systems qualify as small cable
systems. Basic tier rates remain subject to regulations by the local franchising
authority under most circumstances until effective competition exists. The 1996
Act expands the definition of effective competition to include the offering of
video programming services directly to subscribers in a franchised area served
by a local telephone exchange carrier, its affiliates or any multichannel video
programming distributor which uses the facilities of the local exchange carrier.
The FCC has not yet determined the penetration criteria that will trigger the
presence of effective competition under these circumstances.

Telephone Companies. The 1996 Act allows telephone companies to offer video
programming services directly to customers in their service areas immediately
upon enactment. They may provide video programming as a cable operator fully
subject to any provision of the 1996 Act, or a radio-based multichannel
programming distributor not subject to any provisions of the 1996 Act, or
through nonfranchised "open video systems" offering nondiscriminatory capacity
to unaffiliated programmers, subject to select provisions of the 1996 Act.
Although management's opinion is that the probability of competition from
telephone companies in rural areas is unlikely in the near future, there are no
assurances that such competition will not materialize.

The 1996 Act encompasses many other aspects of providing cable television
service including prices for equipment, discounting rates to multiple dwelling
units, lifting of anti-trafficking restrictions, cable-telephone cross ownership
provisions, pole attachment rate formulas, rate uniformity, program access,
scrambling and censoring of Public, Educational and Governmental and leased
access channels.

9.  CABLE TELEVISION SYSTEM ACQUISITION:

In September 1994, the Partnership completed its purchase of certain operating
assets and franchises of cable television systems owned by Corsicana Cable
Television (CCT). These systems currently serve the community of Corsicana,
Texas and surrounding areas. The total purchase price was $8,800,000. At the
time of closing, the Partnership paid $8,370,000 to CCT. The remaining purchase
price was in the form of an unsecured, subordinated, noninterest-bearing
hold-back note payable due June 30, 1995. During 1995, the Partnership paid
approximately $319,000 to CCT to satisfy the unsecured, subordinated,
noninterest-bearing hold-back note payable. The amount paid was net of certain
purchase price adjustments.

On December 20, 1995, the Partnership acquired substantially all operating
assets and franchise rights of the cable television systems in or around the
communities of Ellenboro, Bostic, Gilkey and Harris, in the state of North
Carolina (the Phoenix system) for a total purchase price of $4,233,000. At the
time of closing, the Partnership paid $4,129,000. The cable television systems
represent approximately 2,400 basic subscribers and were owned by Phoenix Cable
Income Fund and PCI One Incorporated. In 1996, the Partnership paid to the
seller $96,000, net of purchase price adjustments. The remainder will be settled
in 1997.
<PAGE>   43
                                      -9-


Pro forma operating results of the Partnership for December 31, 1995, assuming
the acquisition of the Phoenix system had been made at the beginning of the
year, follow:

<TABLE>
<CAPTION>
                                                         For the year ended
                                                          December 31, 1995
                                                         ------------------
                                                             (unaudited)
<S>                                                      <C>
Revenue                                                      $ 8,681,000
                                                             ===========

Net loss                                                     $(1,841,617)
                                                             ===========

Net loss per limited partnership unit                        $      (124)
                                                             ===========
</TABLE>