<PAGE>   1
   
                               AMENDMENT NO. 1 TO
              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
                                AMENDMENT NO. 1
                                       TO
                                    FORM 10-K


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

[ ]  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,
               December 31, 1992, December 31, 1994, and December 31, 1995,
               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
   
    
                                     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,
1997. 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. Sole shareholder of Northland Cable News, Inc.

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

        NORTHLAND CABLE SERVICES CORPORATION - formed in August 1993 and
        principally involved in the development and production of computer
        software used in billing and financial record keeping for
        Northland-affiliated cable systems. Sole shareholder of Cable
        Ad-Concepts.

                CABLE AD-CONCEPTS, INC. - formed in November 1993 and
                principally involved in the sale, development and production of
                video commercial advertisements that are cablecast on Northland-
                affiliated cable systems.

        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 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

<PAGE>   3

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 television
systems serving communities in the Ellenboro, Bostic, Gilkey and Harris, North
Carolina areas (the "Phoenix Systems")(collectively the cable systems are
referred to herein as the "Systems"). As of December 31, 1997, the total number
of basic subscribers served by the Systems was 22,847, and the Partnership's
penetration rate (basic subscribers as a percentage of homes passed) was
approximately 60% as compared to an industry average of approximately 68%, as
reported by PAUL KAGAN AND 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 the
Lamesa, Cedar Creek and Corsicana, Texas Systems, as well as Forest City, North
Carolina (including the former Phoenix Systems). 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, 1997 is as follows:

<TABLE>
<S>                                                       <C>  
               Basic Subscribers                          3,332
               Tier Subscribers                           1,447
               Premium Subscribers                          937
               Estimated Homes Passed                     4,085
</TABLE>

        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, 1997 is as follows:

<TABLE>
<S>                                                       <C>  
               Basic Subscribers                          4,049
               Tier Subscribers                           1,083
               Premium Subscribers                        1,093
               Estimated Homes Passed                     8,445
</TABLE>

        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

<PAGE>   4

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, 1997 is as follows:

               Basic Subscribers                          9,268
               Tier Subscribers                           6,987
               Premium Subscribers                        3,675
               Estimated Homes Passed                    15,240

        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, 1997
is as follows:

<TABLE>
<S>                                                        <C>  
               Basic Subscribers                           6,198
               Tier Subscribers                            1,161
               Premium Subscribers                         3,100
               Estimated Homes Passed                     10,250
</TABLE>

        The Partnership had 36 employees as of December 31, 1997. 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, the 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 subscribers, tier 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 

<PAGE>   5
"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.

        In addition to the cable television assets described above,the 
Partnership owns all of the stock of Corsicana Media, Inc., a Washington 
corporation, which the Partnership formed 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 radio 
station operating assets of KAN-D Land, Inc. for a total price of $500,000. 
This purchase price was determined by the seller from whom the Partnership 
purchased the Corsicana System with the purchase of the Corsicana System being
conditioned upon the purchase of Corsicana Media. KAN-D Land, Inc.'s operating
assets consist of a low-power (i.e., 1,000 watt), unrated (i.e., broadcasts in 
a non-existent radio market) AM radio station. Since August 1994, the 
Partnership has invested approximately $45,000 on capital projects related to 
Corsicana Media, including the replacement of the station's tower, ground 
plane and radio transmitter.

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
substantial likelihood that the Partnership's systems will be subject to a
greater degree of competition in the future.

        Cable television systems face competition from alternative methods of
receiving and distributing television signals and from other sources of news,
information and entertainment such as off-air television broadcast programming,
satellite master antenna television services, DBS services, wireless cable
services, newspapers, movie theaters, live sporting events, online computer
services and home video products, including videotape cassette recorders. The
extent to which a cable communications system is competitive depends, in part,
upon the cable system's ability to provide, at a reasonable price to customers,
a greater variety of programming and other communications services than those
which are available off-air or through other alternative delivery sources and
upon superior technical performance and customer service.

        Cable television systems generally operate pursuant to franchises
granted on a non-exclusive basis. The 1992 Cable Act prohibits franchising
authorities from unreasonably denying requests for additional franchises and
permits franchising authorities to operate cable television systems without a
franchise. It is possible that a franchising authority might grant a second
franchise to another company containing terms and conditions more favorable than
those afforded the Partnership.


<PAGE>   6

        Well-financed businesses from outside the cable industry (such as the
public utilities and other companies that own the poles to which cable is
attached) may become competitors for franchises or providers of competing
services. Congress has repealed the prohibition against national television
networks owning cable systems, and telephone companies may now enter the cable
industry, as described below. Such new entrants may become competitors for
franchises or providers of competitive services. In general, a cable system's
financial performance will be adversely affected when a competing cable service
exists (referred to in the cable industry as an "overbuild").

        In recent years, the FCC and the Congress have adopted policies
providing a more favorable operating environment for new and existing
technologies that provide, or have the potential to provide, substantial
competition to cable television systems. These technologies include, among
others, DBS, whereby signals are transmitted by satellite to small receiving
dishes located on subscribers' homes. Programming is currently available to DBS
subscribers through conventional, medium- and high-powered satellites. Existing
DBS systems offer in excess of 120 channels of programming and pay-per-view
services and are expected to increase channel capacity to 150 or more channels,
enabling them to provide program service comparable to and in some instances,
superior to those of cable television systems. At least four well-financed
companies currently offer DBS services and have undertaken extensive marketing
efforts to promote their products. The FCC has implemented regulations under the
1992 Cable Act to enhance the ability of DBS systems to make available to home
satellite dish owners certain satellite delivered cable programming at
competitive costs. Programming offered by DBS systems has certain advantages
over cable systems with respect to number of channels offered, programming
capacity and digital quality, as well as disadvantages that include high upfront
and monthly costs and a lack of local programming, service and equipment
distribution. DBS systems will provide increasing competition to cable systems
as the cost of DBS reception equipment continues to decline. At least one DBS
provider is undertaking the technical and legislative steps necessary to enhance
its service by adding local broadcast signals which could further increase
competitive pressures from DBS systems.

        Cable television systems also compete with wireless program distribution
services such as MMDS which uses low power microwave to transmit video
programming over the air to customers. Additionally, the FCC recently adopted
new regulations allocating frequencies in the 28 GHz band for a new multichannel
wireless video service similar to MMDS, known as Local Multipoint Distribution
Service ("LMDS"). LMDS is also suited for providing wireless data services,
including the possibility of Internet access. Wireless distribution services
generally provide many of the programming services provided by cable systems,
although current technology limits the number of channels which may be offered.
Moreover, because MMDS service generally requires unobstructed "line of sight"
transmission paths, the ability of MMDS systems to compete may be hampered in
some areas by physical terrain and foliage.

        The 1996 Telecommunications Act eliminated the previous prohibition on
the provision of video programming by local exchange telephone companies
("LECs") in their telephone service areas. Various LECs currently are providing
and seeking to provide video programming services within their telephone service
areas through a variety of distribution methods, primarily through the
deployment of broadband wire facilities, wireless transmission and installation
of traditional cable systems alongside existing telephone equipment. Cable
television systems could be placed at a competitive disadvantage if the delivery
of video programming services by LECs becomes widespread, since LECs may not be
required, under certain circumstances, to obtain local franchises to deliver
such video services or to comply with the variety of obligations imposed upon
cable television systems under such franchises. Issues of cross subsidization by
LECs of video and telephony services also pose strategic disadvantages for cable
operators seeking to compete with LECs that provide video services. The Company
believes, however, that the small to medium markets in which it provides or
expects to provide cable services are unlikely to support competition in the
provision of video and telecommunications broadband services given the lower
population densities and higher costs per subscriber of installing plant. The
1996 Telecommunications Act's provisions promoting facilities-based broadband
competition are primarily targeted at larger systems and markets. The 1996
Telecommunications Act includes certain limited exceptions to the general
prohibition on buy outs and joint ventures between incumbent cable operators and
LECs for smaller non-urban cable systems and carriers meeting certain criteria.

        Other new technologies may become competitive with non-entertainment
services that cable television systems can offer. The FCC has authorized
television broadcast stations to transmit textual and graphic information useful
both to consumers and businesses. The FCC also permits commercial and
noncommercial FM stations to use their subcarrier frequencies to provide non-
broadcast services including data transmissions. The FCC has established an
over-the-air Interactive Video and Data Service that will permit two-way
interaction with commercial and educational programming along with informational
and data services. The expansion of fiber optic systems by LECs and other common
carriers, and electric utilities is providing facilities for the transmission
and distribution to homes and businesses of video services, including
interactive computer-based services like the Internet, data and other nonvideo
services.

        The business of delivering and producing televised news, information and
entertainment are characterized by new market entrants, increasingly rapid
technological change and evolving industry standards. There can be no assurance
that the Partnership will be able to fund the capital expenditures necessary to
keep pace with technological developments or that the Partnership will
successfully predict the technical demand of its subscribers. The Partnership's
inability to provide enhanced services in a timely manner or to predict the
demands of the marketplace could have a material adverse effect on the
Partnership, its financial condition, prospects and debt service ability.

        Advances in communications technology as well as changes in the
marketplace and the regulatory and legislative environments are constantly
occurring. Thus, it is not possible to predict the effect that ongoing or future
developments might have on the cable industry or on the operations of the
Partnership.


<PAGE>   7
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 cable television system
operations, which are the principal business of the Partnership, are summarized
below.

        INTRODUCTION

        The operation of cable television systems is extensively regulated by
the FCC, some state governments and most local governments. The
Telecommunications Act of 1996 alters the regulatory structure governing the
nation's telecommunications providers. The Telecommunications Act of 1996 is
intended to remove barriers to competition in both the cable television market
and the local telephone market. It also reduces the scope of cable rate
regulation.

        The 1996 Telecommunications Act requires the FCC to undertake a host of
implementing rulemakings, the final outcome of which cannot yet be determined.
Moreover, Congress and the FCC have frequently revisited the subject of cable
regulation. Future legislative and regulatory changes could adversely affect the
Partnership's operations. This section briefly summarizes key laws and
regulations affecting the operation of the Partnership's systems and does not
purport to describe all present, proposed, or possible laws and regulations
affecting the Company or its systems.

        CABLE RATE REGULATION

        The 1992 Cable Act imposed an extensive rate regulation regime on the
cable television industry. Under that regime, all cable systems are subject to
rate regulation, unless they face "effective competition" in their local
franchise area. Federal law now defines "effective competition" on a
community-specific basis as requiring either low penetration (less than 30%) by
the incumbent cable 


<PAGE>   8

operator, appreciable penetration (more than 15%) by competing multichannel
video providers ("MVPs"), or the presence of a competing MVP affiliated with a
local telephone company.

        Although the FCC rules control, local government units (commonly
referred to as "local franchising authorities" or "LFAs") are primarily
responsible for administering the regulation of the lowest level of cable, the
basic service tier ("BST"), which typically contains local broadcast stations
and public, educational, and government access channels. Before an LFA begins
BST rate regulation, it must certify to the FCC that it will follow applicable
federal rules, and many LFAs have voluntarily declined to exercise this
authority. LFAs also have primary responsibility for regulating cable equipment
rates. Under federal law, charges for various types of cable equipment must be
unbundled from each other and from monthly charges for programming services. The
1996 Telecommunications Act allows operators to aggregate costs for broad
categories of equipment across geographic and functional lines.

        The FCC itself directly administers rate regulation of an operator's
cable programming service tiers ("CPST"), which typically contain
satellite-delivered programming. Under the 1996 Telecommunications Act, the FCC
can regulate CPST rates only if an LFA first receives at least two rate
complaints from local subscribers and then files a formal complaint with the
FCC. When new CPST rate complaints are filed, the FCC now considers only whether
the incremental increase is justified and will not reduce the previously
established CPST rate.

        Under the FCC's rate regulations, most cable systems were required to
reduce their BST and CPST rates in 1993 and 1994, and have since had their rate
increases governed by a complicated price cap scheme that allows for the
recovery of inflation and certain increased costs, as well as providing some
incentive for expanding channel carnage. The FCC has modified its rate
adjustment regulations to allow for annual rate increases and to minimize
previous problems associated with regulatory lag. Operators also have the
opportunity of bypassing this "benchmark" regulatory scheme in favor of
traditional "cost-of-service," regulation in cases where the latter methodology
appears favorable. Premium cable services offered on a per-channel or
per-program basis remain unregulated, as do affirmatively marketed packages
consisting entirely of new programming product. Federal law requires that the
BST be offered to all cable subscribers, but limits the ability of operators to
require purchase of any CPST before purchasing premium services offered on a
per-channel or per-program basis.

        In an effort to ease the regulatory burden on small cable systems, the
FCC has created special rate rules applicable for systems with fewer than 15,000
subscribers owned by an operator with fewer than 400,000 subscribers. The
special rate rules allow for a simplified cost-of-service showing. All of the
Partnership's systems are eligible for these simplified cost-of-service rules,
and have calculated rates generally in accordance with those rules.

        The 1996 Telecommunications Act provides additional relief for small
cable operators. For franchising units with less than 50,000 subscribers and
owned by an operator with less than one percent of the nation's cable
subscribers (i.e., approximately 600,000 subscribers) that is not affiliated
with any entities with aggregate annual gross revenue exceeding $250 million,
CPST rate regulation is automatically eliminated. The Partnership and all of its
systems qualify for this CPST deregulation.

        The 1996 Cable Act sunsets FCC regulation of CPST rates for all systems
(regardless of size) on March 31, 1999. It also relaxes existing uniform rate
requirements by specifying that uniform rate requirements do not apply where the
operator faces "effective competition," and by exempting bulk discounts to
multiple dwelling units, although complaints about predatory pricing still may
be made to the FCC.

        CABLE ENTRY INTO TELECOMMUNICATIONS

        The 1996 Cable Act provides that no state or local laws or regulations
may prohibit or have the effect of prohibiting any entity from providing any
interstate or intrastate telecommunications service. States are authorized,
however, to impose "competitively neutral" requirements regarding universal
service, public safety and welfare, service quality, and consumer protection.
State and local governments also retain their authority to manage the public
rights-of-way and may require reasonable, competitively neutral compensation for
management of the public rights-of-way when cable operators provide
telecommunications service. The extent to which state and local governments may
impose requirements in such situations recently has been, and will continue to
be, the subject of litigation. The outcome of that litigation, and its effect on
the Partnership, cannot be predicted. The favorable pole attachment rates
afforded cable operators under federal law can be gradually increased by utility
companies owning the poles (beginning on February 8, 2001) if the operator
provides telecommunications service, as well as cable service, over its plant.

        Cable entry into telecommunications will be affected by the regulatory
landscape now being fashioned by the FCC and state regulators. One critical
component of the 1996 Cable Act to facilitate the entry of new
telecommunications providers (including cable operators) is the interconnection
obligation imposed on all telecommunications carriers. Certain aspects of the
FCC's initial interconnection order were rejected by the Eighth Circuit Court of
Appeals on July 18, 1997, on the ground that the states, not the FCC, have
statutory authority to set the prices that incumbent local exchange carriers may
charge for interconnection. The United States Supreme Court has granted
certiorari to hear an appeal of the Eighth Circuit Court of Appeals ruling.

        TELEPHONE COMPANY ENTRY INTO CABLE TELEVISION

        The 1996 Cable Act allows telephone companies to compete directly with
cable operators by repealing the historic telephone company/cable
cross-ownership ban. Local exchange carriers ("LECs"), including the Bell
Operating Companies, can now compete with cable operators both inside and
outside their telephone service areas. Because of their resources, LECs could be
formidable competitors to traditional cable operators, and certain LECs have
begun offering cable service.

        Under the 1996 Cable Act, a LEC providing video programming to
subscribers generally will be regulated as a traditional cable operator (subject
to local franchising and federal regulatory requirements), unless the LEC elects
to provide its programming via an "open video system" ("OVS"). To qualify for
OVS status, the LEC must reserve two-thirds of the system's activated channels
for unaffiliated entities.

        Although LECs and cable operators can now expand their offerings across
traditional service boundaries, the general prohibition remains on LEC buyouts
(i.e., any ownership interest exceeding 10 percent) of co-located cable systems,
cable operator 


<PAGE>   9

buyouts of co-located LEC systems, and joint ventures between cable operators
and LECs in the same market. The 1996 Telecommunications Act provides a few
limited exceptions to this buyout prohibition, including a carefully
circumscribed "rural exemption." The 1996 Telecommunications Act also provides
the FCC with the limited authority to grant waivers of the buyout prohibition
(subject to LFA approval).

        ELECTRIC UTILITY ENTRY INTO TELECOMMUNICATIONS/CABLE TELEVISION

        The 1996 Cable Act provides that registered utility holding companies
and subsidiaries may provide telecommunications services (including cable
television) notwithstanding the Public Utilities Holding Company Act. Electric
utilities must establish separate subsidiaries, known as "exempt
telecommunications companies" and must apply to the FCC for operating authority.
Because of their resources, electric utilities could be formidable competitors
to traditional cable systems, and a few electric utilities have announced plans
to offer video programming. Recent technological advances have increased the
likelihood that electric utilities may become competitive with the Partnership.

        ADDITIONAL OWNERSHIP RESTRICTIONS

        The 1996 Cable Act eliminates statutory restrictions on broadcast/cable
cross-ownership (including broadcast network/cable restrictions), but leaves in
place existing FCC regulations prohibiting local cross-ownership between
co-located television stations and cable systems. The 1996 Cable Act also
eliminates the three year holding period required under the 1992 Cable Act's
"anti-trafficking" provision. The 1996 Cable Act leaves in place existing
restrictions on cable cross-ownership with satellite master antenna television
("SMATV") and MMDS facilities, but lifts those restrictions where the cable
operator is subject to effective competition. FCC regulations permit cable
operators to own and operate SMATV systems within their franchise area, provided
that such operation is consistent with local cable franchise requirements.

        Pursuant to the 1992 Cable Act, the FCC adopted rules precluding a cable
system from devoting more than 40% of its activated channel capacity to the
carriage of affiliated national program services. A companion rule establishing
a nationwide ownership cap on any cable operator equal to 30% of all domestic
cable subscribers has been stayed pending further judicial review.

        There are no federal restrictions on non-U.S. entities having an
ownership interest in cable television systems or the FCC licenses commonly
employed by such systems.

        MUST CARRY/RETRANSMISSION CONSENT

        The 1992 Cable Act conveyed to a commercial broadcaster the right
generally to elect every three years either to require: (i) that the local cable
operator carry its signals ("must carry"); or (ii) that such operator obtain the
broadcaster's retransmission consent before doing so. The Company has been able
to reach agreements with all of the broadcasters who elected retransmission
consent and has not been required by broadcasters to remove any broadcast
stations from the cable television channel line-ups. To date, compliance with
the "retransmission consent" and "must carry" provisions of the 1992 Cable Act
has not had a material effect on the Partnership, although this result may
change in the future depending on such factors as market conditions, the
introduction of digital broadcasts, channel capacity and similar matters when
such arrangements are renegotiated.

        CHANNEL SET-ASIDES

        LFAs can include franchise provisions, requiring cable operators to set
aside certain channels for public, educational and governmental access
programming. Federal law also requires cable systems to designate a portion of
their channel capacity (up to 15% in some cases) for commercial leased access by
unaffiliated third parties. The FCC has adopted rules regulating the terms,
conditions and maximum rates a cable operator may charge for use of this
designated channel capacity, but use of commercial leased access channels has
been relatively limited. The FCC recently modified its leased access rules,
making leased access somewhat more favorable to potential users. The changes,
however, were not as dramatic as leased access users had hoped, and should not
significantly infringe on the Partnership's control over the channel line-up of
its various cable television operating systems. The revised maximum rate formula
has been challenged by one leased access applicant in an appeal to the D.C.
Circuit Court.

        ACCESS TO PROGRAMMING

        To spur the development of independent cable programmers and competition
to incumbent cable operators, the 1992 Cable Act imposed restrictions on
dealings between cable operators and cable programmers. The 1992 Cable Act
precludes video programmers affiliated with cable companies from favoring cable
operators over competitors and requires such programmers to sell their
programming to other multichannel video distributors. This provision limits the
ability of vertically integrated cable programmers to offer exclusive
programming arrangements to cable companies.

        OTHER FCC REGULATIONS

        In addition to the FCC regulations noted above, there are other FCC
regulations covering such areas as equal employment opportunity, subscriber
privacy, programming practices (including, among other things, syndicated
program exclusivity, network program non-duplication, local sports blackouts,
indecent programming, lottery programming, political programming, sponsorship
identification, and children's programming advertisements), registration of
cable systems and facilities licensing, maintenance of various records and
public inspection files, frequency usage, lockbox availability, antenna
structure notification, tower marking and lighting, consumer protection and
customer service standards, technical standards, and consumer electronics
equipment compatibility. The FCC recently adopted rules relating to the
ownership of cable wiring located inside multiple dwelling unit complexes. The
FCC has concluded that such wiring can, in certain cases, be unilaterally
acquired by the complex owner, making it easier for complex owners to terminate
service from the incumbent cable operator in favor of a new entrant. The FCC
recently imposed new Emergency Alert System requirements on cable operators
which will be phased in over several years. The FCC recently adopted "closed
captioning" rules that the Partnership does not expect to have an adverse effect
on its operations. The FCC has the authority to enforce its regulations through
the imposition of substantial fines, the issuance of cease and desist orders
and/or the imposition of other 



<PAGE>   10
administrative sanctions, such as the revocation of FCC licenses needed to
operate certain transmission facilities used in connection with cable
operations.

        PENDING PROCEEDING

        The FCC has initiated a rulemaking proceeding involving whether cable
customers must be allowed to purchase cable converters from third party vendors.
If the FCC concludes that such distribution is required, and does not make
appropriate allowances for signal piracy concerns, it may become more difficult
for cable operators to combat theft of service.

        COPYRIGHT

        Cable television systems are subject to federal copyright licensing
covering carriage of television and radio broadcast signals. In exchange for
filing certain reports and contributing a percentage of their revenue to a
federal copyright royalty pool (which varies depending on the size of the system
and the number of distant broadcast television signals carried), cable operators
can obtain blanket permission to retransmit copyrighted material on broadcast
signals. The possible modification or elimination of this compulsory copyright
license is the subject of continuing legislative review and could adversely
affect the Partnership's ability to obtain desired broadcast programming. In
addition, the cable industry pays music licensing fees to BMI and is negotiating
a similar arrangement with ASCAP. Copyright clearances for non-broadcast
programming services are arranged through private negotiations.

        STATE AND LOCAL REGULATION

        Cable television systems generally are operated pursuant to nonexclusive
franchises granted by a municipality or other state or local government entity
in exchange for the use of public rights-of-way. Federal law now prohibits
franchise authorities from granting exclusive franchises or from unreasonably
refusing to award additional franchises. Cable franchises generally are granted
for fixed terms and in many cases include monetary penalties for non-compliance
and may be terminable if the franchisee fails to comply with material
provisions.

        The terms and conditions of franchises vary materially from jurisdiction
to jurisdiction. Each franchise generally contains provisions governing cable
operations, service rates, franchise fees, system construction and maintenance
obligations, system channel capacity, design and technical performance, customer
service standards, and indemnification protections. Although LFAs have
considerable discretion in establishing franchise terms, there are certain
federal limitations. For example, LFAs cannot require the payment of franchise
fees exceeding 5% of the system's gross revenue, cannot dictate the particular
technology used by the system, and cannot specify video programming, other than
identifying broad categories of programming, that must be carried on the
systems.

        Federal law contains renewal procedures designed to protect incumbent
franchisees against arbitrary denials of renewal. Even if a franchise is
renewed, the franchise authority may seek to impose new and more onerous
requirements such as significant upgrades in facilities and services or
increased franchise fees as a condition of renewal. Similarly, if a franchise
authority's consent is required for the purchase or sale of a cable system or
franchise, such authority may attempt to impose more burdensome or onerous
franchise requirements in connection with a request for consent. Historically,
franchises have been renewed for cable operators that have provided satisfactory
services and have complied with the terms of their franchises. However, there
can be no assurance that renewal will be granted or that renewals will be made
on similar terms and conditions.

        Various proposals have been introduced at the state and local levels
with regard to the regulation of cable television systems, and a number of
states have adopted legislation subjecting cable television systems to the
jurisdiction of state governmental agencies.

        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.

   
        SUBSEQUENT EVENT

        Subsequent to year end, the Partnership filed a Preliminary Proxy
Statement (the "Proxy Statement") with the Securities and Exchange Commission
relating to a meeting of limited partners of the Partnership (the "Special 
Meeting") to consider the proposed sale of the cable television systems and 
other assets owned by the Partnership (the "Assets"), and the dissolution, 
winding up and liquidation of the Partnership. It is expected that the Proxy 
Statement will be mailed to the Limited Partners in May, 1998. The following 
discussion is not intended to be a complete description of the proposal 
contained in the Proxy Statement but rather a summary thereof.

        The Proxy Statement describes a proposal whereby the Partnership would
sell the undivided portion of the Assets that is attributable to the Limited
Partners' collective interest in the Partnership (the "LPs' Interest") at a
price which equals the independently appraised fair market value of the Assets
of $35,463,000. If approved, the sale transaction and resulting liquidation is
anticipated to yield a cumulative total of approximately $2,371 per $1,000
investment to Limited Partners during the life of the Partnership (or
approximately $1,185.50 per $500 unit of limited partnership interest). These
estimates include prior cash distributions to date of $775 per $1,000
investment (or $377.50 per $500 unit of limited partnership interest), but do
not include aggregate interest payments of $56 per $1,000 investment projected
for certain post-closing distributions. Because the transaction described in the
Proxy Statement involves the acquisition of the Assets by the Managing General
Partner of the Partnership or an affiliate of the Managing General Partner, the
General Partners have a conflict of interest in making the proposal.

        If the proposal is approved, the Partnership will be authorized to
enter into an agreement (the "Agreement") with the Managing General Partner of
the Partnership or its assigns ("Northland"), to (i) sell to Northland both the
LPs' Interest and the undivided portion of the Assets that is attributable to
the Administrative General Partner's interest in the Partnership (the "AGP's
Interest"), and (ii) distribute in-kind to Northland the undivided portion of
the Assets that is attributable to the Managing General Partner's interest in
the Partnership (the "MGP's Interest"). Net proceeds from the sale of the LP's
Interest and the AGP's Interest will be distributed solely to the Limited
Partners and the Administrative General Partner. Closing of the sale
("Closing") will be subject to certain terms and conditions, including the
availability of sufficient debt financing to Northland. If Closing does not
occur within 180 days of the date of the Special Meeting called pursuant to the
Notice of Special Meeting included with the Proxy Statement, the Agreement will
be terminated without penalty. Following Closing, which is expected to occur in
early July 1998, the Partnership will be dissolved.

        The aggregate amount to be distributed to the Limited Partners, as a
group, in connection with the acquisition of the Assets by Northland is
anticipated to be equal to the amount of cash that would be distributable to
the Limited Partners collectively assuming the liquidation of the Partnership
following the sale of the Assets to a third party, as of the date of Closing,
for a gross cash purchase price equal to $35,463,000 (the "Gross Valuation").
Such amount will be determined in accordance with the Partnership's partnership
agreement. In determining the amount distributable to the Limited Partners
collectively, the Gross Valuation generally will be (i) reduced by Partnership
liabilities attributable to the Limited Partners' collective interest in the
Assets and by the net value of the portion of the Assets attributable to the
collective interests of the General Partners and (ii) increased by the Limited
Partners' collective interest in any net Partnership assets other than the
Assets.

        As described in the Proxy Statement, at Closing Northland will purchase
the LP's Interest and the AGP's Interest by (i) making an initial payment to
the Partnership equal to that amount which, after retiring Partnership
liabilities attributable to the LPs' Interest and the AGP's Interest, will
enable the Partnership to distribute to the Limited Partners $945 for every
$1,000 invested, and (ii) delivering to the Partnership a promissory note (the
"Note") in principal amount equal to the remaining balance of the aggregate
purchase price for the LP's Interest and the AGP's Interest. A total aggregate
of approximately $6.9 million cash is anticipated to be distributed to Limited
Partners within 30 days of Closing. The Managing General Partner will be the
maker and sole obligor of the Note, which is expected to be in the principal
amount of approximately $4.5 million.

        Distributions to Limited Partners will be made in three installments.
The initial distribution of $945 per $1,000 investment will be made within 30
days after the date of Closing. The General Partners believe that the initial
distribution will occur in late July 1998. The balance of distributions to be
made to the Limited Partners, anticipated to approximate a total of $620 per
$1,000 investment (plus interest on the Note of $56 per $1,000 investment),
will be made as and when payments are made by Northland pursuant to the Note.
The Note will have a two-year term, with two equal payments of principal, plus
accrued interest, due annually commencing on the first anniversary of the
Closing. The Note will bear interest at a per annum rate of six percent (6%),
and will be subordinated to Northland's senior debt, which is expected to
consist solely of commercial bank debt, including that anticipated to be
incurred by Northland in connection with financing the transaction described in
the Proxy Statement. The Note will not be the obligation of, or guaranteed by,
Northland's wholly-owned subsidiary, Northland Cable Properties, Inc. Assuming
that the Closing occurs in July 1998, distributions to the Limited Partners are
expected to approximate $310 per $1,000 investment (plus interest on the Note
of $37 per $1,000 investment) in July 1999, and $310 per $1,000 investment
(plus interest on the Note of $19 per $1,000 investment) in July 2000.

        The estimates contained in the Proxy Statement take into account the
payment of all known or anticipated Partnership liabilities attributable to the
Limited Partners' collective interest in the Partnership, including any
liquidation expenses and any claims against the Partnership of which the
General Partners are aware. If the Partnership incurs any unanticipated
liabilities or expenses which arise from operations of the Partnership prior to
or on the date of Closing and which exceed amounts set aside for the payment of
known and anticipated current liabilities, such liabilities or expenses could
reduce the amount of cash available for distribution to the Limited Partners.
However, if at any time prior to the Closing the Managing General Partner
believes that the aggregate amount of cash available for distribution to the
Limited Partners will be reduced by more than $300,000 from these estimates,
the Proxy Statement states that the transaction will not proceed and Closing
will not occur without again obtaining approval of the Limited Partners.
Accordingly, as described in the Proxy Statement, the minimum amount of cash
which will be distributed to the Limited Partners without re-solicitation of
approval of the Limited Partners is anticipated to be at least $925 or a
cumulative total of $2,351 per $1,000 investment to Limited Partners during the
life of the Partnership (or approximately $1,175.50 per $500 unit of limited
partnership interest).

        As described in the Proxy Statement, approval of the proposed
transaction is subject to the affirmative vote of the holders of a majority of
the outstanding units of limited partnership interest, not including those held
by the Managing General Partner, the Administrative General partner or their
affiliates. Each non-affiliated Limited Partner will be entitled to one vote
for each unit held. Because Northland is not yet assured of financing for
purchase of the LP's Interest and the AGP's Interest, Northland will be under
no obligation to consummate the purchase. No bids from independent third
parties have been solicited by the General Partners to date. Although the
Partnership has obtained an independent appraisal of the value of the Assets in
connection with the transaction described in the Proxy Statement, the
Partnership has not sought or obtained a fairness opinion with respect to the
terms of the proposed transaction. If the requisite approval of Limited
Partners is not obtained, or if Limited Partners approve the proposed
transaction but Closing does not occur for any reason, the Partnership will
continue to conduct its operations as usual. If the requisite approval of
Limited Partners is obtained and the Closing does not occur within the
requisite period, the Assets will not be sold to any affiliate of the General
Partners without again obtaining approval of the Limited Partners.
        
        As further described in the Proxy Statement, to accomplish the proposed
transaction, Limited Partners must approve an amendment to the Partnership's
Amended and Restated Certificate and Agreement of Limited Partnership (the
"Partnership Agreement"). The amendment, if approved, would authorize the
General Partners to sell the undivided portion of the Assets that is
attributable to the LPs' Interest to Northland. Although the existing
provisions of the Partnership Agreement permit the sale of assets of the
Partnership, the sale of such assets to the Managing General Partner, the
Administrative General Partner or their affiliates is prohibited.

        The Proxy Statement will contain a more detailed and comprehensive
discussion of the foregoing, including, among other things, the appraisal
process, certain consequences of the transaction, and special factors to be
considered by the Limited Partners, together with instructions as to the time
and place of the Special Meeting and voting of proxies.

    

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
comprising the assets 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 38,020 homes as of
December 31, 1997. 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 "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources".)

        In August 1994, the Partnership formed 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 radio
station operating assets of KAN-D Land, Inc. for a total price of $500,000.

        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 (now part of the Forest City System and formerly described as the
Phoenix Systems) for a total purchase price of $4,233,000. The cable television
systems represent approximately 2,400 basic subscribers and were owned by
Phoenix Cable Income Fund and PCI One Incorporated.


ITEM 3.   LEGAL PROCEEDINGS

        None.

ITEM 4.   SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS

        None.
<PAGE>   11
                                            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,
1997, is as follows:

<TABLE>
<S>                                                      <C>
                             Limited Partners:           995

                             General Partners:              2
</TABLE>

               (c) The Partnership made no cash distributions in 1997 and made
cash distributions of $73,694 to the limited partners and $744 to the Managing
General Partner during 1996. 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, 1997. As of December 31, 1997, the Partnership had
repurchased $132,500 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,
                          ---------------------------------------------------------------------------
                              1997            1996            1995           1994             1993
                          -----------     -----------     -----------     -----------     -----------
SUMMARY OF OPERATIONS:

<S>                       <C>             <C>             <C>             <C>             <C>        
Revenue                   $ 9,549,197     $ 9,244,966     $ 7,897,009     $ 5,598,494     $ 4,724,194
Operating income            1,375,597       1,170,445         525,779         713,552         876,579
Loss on disposal of
  plant                       (18,365)       (166,840)        (14,795)              0               0
Net income (loss)            (333,683)       (727,733)       (989,380)        (37,786)        314,706
Net income (loss) per
  limited partner unit
  (weighted average)              (22)            (49)            (66)             (3)             21
Cumulative tax losses
  per limited partner
  unit                           (592)           (566)           (494)           (456)           (480)
</TABLE>

<TABLE>
<CAPTION>
                                                          December 31,
                          ---------------------------------------------------------------------------
                              1997            1996           1995            1994            1993
                          -----------     -----------     -----------     -----------     -----------
BALANCE SHEET DATA:

<S>                       <C>             <C>             <C>             <C>             <C>        
Total assets              $15,378,739     $16,683,277     $17,951,250     $15,099,388     $ 6,270,667
Notes payable              20,154,766      20,819,461      21,660,989      17,745,642       9,083,146
Total liabilities          21,196,495      22,165,350      22,631,152      18,641,032       9,591,252
General partners'
  deficit                    (160,085)       (156,748)       (148,727)       (137,346)       (135,475)
 Limited
partners'
  deficit                  (5,657,671)     (5,325,325)     (4,531,175)     (3,404,298)     (3,185,110)
Distributions per
  limited partner unit              0               5              10              10              10
                                                                                                   
Cumulative distribu-
  tions per limited
  partner unit                    378             378             373             363             353
</TABLE>



<PAGE>   12
ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
          AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS


        1997 AND 1996

        Total revenues reached 9,549,197 for the year ended December 31, 1997,
representing an increase of approximately 3% over the same period in 1996. Of
these revenues $6,471,315 (68%) is derived from subscriptions to basic service,
$883,261 (9%) is derived from subscriptions to premium services, $951,913 (10%)
from tier service subscriptions and $1,242,708 (13%) from other sources such as
installation charges and advertising. The overall revenue increase is
attributable to a full period inclusion of basic rate increases effective August
1, 1996 which approximated 5% on a weighted average basis. Additionally, tier
revenues increased 24% due to the launch of a tier service in the Corsicana
System and the continued increase in penetration of tiers launched in 1996.

   As of December 31, 1997 the Systems served approximately 22,840 basic
subscribers, 8,805 premium subscribers and 10,680 tier subscribers.



<TABLE>
<CAPTION>
                          1997      1996      1995      1994      1993
                         ------    ------    ------    ------    ------
<S>                      <C>       <C>       <C>       <C>       <C>   
Basic Rate               $23.25    $22.10    $20.85    $20.15    $19.90
Tier Rate                  7.75      7.05      5.35      3.80      3.25
HBO Rate                  11.50     11.70     11.30     10.75     10.75
Cinemax Rate               7.30      6.80      7.00      7.15      7.35
Showtime Rate              7.50     10.85     10.95     10.50     10.50
Movie Channel Rate         8.50      8.70      9.00      8.50      8.50
Disney Rate                8.00      8.15      7.75      7.50      7.50
Additional
  Outlet Rate                --        --        --        --        --
Service Contract
  Rate                     2.75      2.75      2.90      3.10      3.15
</TABLE>

   Operating expenses totaled $866,958 for the year ended December 31, 1997,
representing an increase of approximately 5% over the same period in 1996. The
increase was attributable to wage and benefit cost increases of approximately 7%
over 1996. Salary and benefit costs are the major components of operating
expenses accounting for approximately 75% of the total. Wages are reviewed
annually, and generally 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 $2,495,544 for the year ended
December 31, 1997, representing an increase of 2% over the same period in 1996.
The increase was attributable to a 27% rise in wage and benefit costs resulting
from annual wage adjustments and the addition of personnel in the Corsicana and
Forest City systems.

   Programming expenses totaled $2,591,577 for the year ended December 31, 1997,
representing a 7% increase over the same period in 1996. Programming expenses
mainly consist of payments made to suppliers of various cable programming
services and are generally based on the number of subscribers served. The 1997
increase is attributable to a rise in the average number of tier subscribers
from 9,092 in 1996 to 10,213 in 1997.

   Depreciation and amortization expenses totaled $2,219,521 for the year ended
December 31, 1997, representing a decline of $168,022 from the same period in
1996. This decrease is a result of certain Partnership assets being fully
depreciated.

   Interest expense totaled $1,718,610 for the year ended December 31, 1997,
representing a decrease of $21,703 from the same period in 1996. The
Partnership's average outstanding bank debt under its revolving credit and term
loan with First Union National Bank decreased to $20,444,945 for the 1997 period
from $21,275,304 for the 1996 period as a result of quarterly principal
payments.

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. Approximately
70% of this increase stems from a full year of operations for those cable
television systems which were acquired in December of 1995 (formerly owned by
affiliates of Phoenix Cable and collectively identified herein as the "Phoenix
Systems") and are now a part of the Partnership's Forest City System, originally
purchased in 1986. The remaining increase is primarily attributable to rate
increases for basic service which averaged 6%. 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, and $933,460 (14%) from other sources such as installation
charges and advertising.

        Operating expenses totaled $823,200 for 1996, representing an increase
of approximately 9% over 1995. Approximately 50% of this increase is due to the
addition of employees from the purchase in 1995 of the Phoenix Systems. The
remaining increase is due to increases in salary and benefit costs for all
employees which averaged 5% in 1996. Salary and benefit costs are the major
<PAGE>   13
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. Approximately 65% of
this increase is due to the acquisition of the Phoenix Systems. The remaining
increase is due to 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 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 various assets
becoming fully depreciated in early 1996, partially offset by expense associated
with the acquisition of the Phoenix Systems.

        Interest expense increased from $1,505,965 in 1995 to $1,740,313 in 1996
(approximately 16%). The Partnership's average outstanding bank debt under its
revolving credit and term loan with First Union National Bank increased from
approximately $19,477,652 in 1995 to $21,181,554 in 1996, mainly due to a
borrowing of $4,126,000 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.

LIQUIDITY AND CAPITAL RESOURCES

        The Partnership's cable television systems are located in and around
four operating groups, including Corsicana, Lamesa and Cedar Creek, Texas and
Forest City, North Carolina. The principal physical properties of the Assets
consist of system components (including antennas, coaxial cable, electronic
amplification and distribution equipment), motor vehicles, miscellaneous
hardware, spare parts and real property, including office buildings and land on
which towers and antennas are located. The General Partners believe that the
Partnership's cable 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.

        Currently, the Partnership's primary source of liquidity is cash
provided from operations and borrowing capacity under its revolving credit
facility. Short-term liabilities are paid primarily through cash flow generated
by long-term assets and, to some extent, credit available under existing lines
of credit, particularly in periods of significant capital expenditures. "Current
assets," as that term is defined under generally accepted accounting principles,
is not the primary source of liquidity used by the Partnership to satisfy its
short-term obligations. Net cash provided by operating activities was
$1,545,983, $2,150,354 and $1,341,667 for the years ended December 31, 1997,
1996 and 1995, respectively. The general and limited partners have no future
obligation to make additional capital contributions to the Partnership.

        Should the Partnership's future working capital needs exceed cash
provided from operating activities and its borrowing capacity, several
alternative sources of additional funding exist, including renegotiation of the
Partnership's current loan agreement to provide additional borrowing capacity,
deferral of management fees and certain operating costs payable to the Managing
General Partner, and the seeking of a loan from the Managing General Partner.
The General Partners are not obligated to defer payments due to them or to make
loans to the Partnership.

   The Partnership currently has a revolving credit and term loan facility with
First Union National Bank. The indebtedness is secured by a first lien position
on all present and future assets of the Partnership. As of December 31, 1997,
this loan facility had an outstanding balance of $20,154,766. Graduated
principal plus interest payments are due quarterly until maturity on March 31,
2001. Pursuant to an amendment to its loan agreement effective December 31,
1997, the Partnership is subject to certain restrictive covenants, consisting
primarily of the maintenance of certain financial ratios, including a maximum
ratio of debt to annualized operating cash flow of 5.50 to 1 and a minimum ratio
of annualized operating cash flow to fixed charges of 1.00 to 1 at December 31,
1997. Breach of these financial covenants constitutes an event of default, upon
the happening of which the lender is entitled to accelerate the loan and enforce
legal remedies, including foreclosure upon the Partnership's assets. The
Partnership was in compliance with its financial covenants at December 31, 1997.
As of September 30, 1997, the Partnership was not in compliance with the
required ratio of debt to annualized operating cash flow. The Partnership has
received a waiver from its lender for this covenant violation. The waiver
granted by the lender applies specifically to this event of default and shall
remain in effect with respect to this specific item throughout the remaining
term of the loan agreement.

        The amendment to the loan agreement and issuance of the waiver were
conditioned upon the Managing General Partner deferring management fees for the
first quarter of 1998, which would approximate $150,000, and limiting the
Partnership's borrowings under its revolving credit facility to $200,000
subsequent to December 31, 1997. These conditions would provide the Partnership
with $350,000 of working capital in addition to that provided by operations
which management estimates will be adequate to cover all operating expenses,
debt service and capital expenditures for 1998.


<PAGE>   14

        Should the Partnership continue operations beyond 1998, the Managing
Partner believes certain modifications to the existing loan agreement would be
necessary. These modifications would include a revision to the required ratio of
debt to annualized operating cash flow as well as an extension of maturity and
rescheduling of principal amortization. Based on discussion with the
Partnership's lender, the Managing General Partner believes these modifications
could be achieved, if necessary, with no material adverse effect on the
Partnership.

        The Partnership manages its exposure to changes in interest rates by
entering into certain fixed rate agreements with its lender. As of the date of
this filing, interest rates on amounts outstanding under the credit facility are
as follows: $14,823,212 fixed at a LIBOR rate of 8.53% expiring March 31, 1998;
$5,131,554 fixed at a LIBOR rate of 8.34375% expiring June 30, 1998; and
$200,000 bearing interest at a floating rate, currently 9.875%. These rates
include a margin paid to the lender, currently 2.625% for fixed rates and 1.375%
for floating rates, which may increase or decrease depending on the
Partnership's ratio of debt to annualized operating cash flow.


CAPITAL EXPENDITURES

        During the year ended December 31, 1997, the Partnership incurred
approximately $1,188,000 in capital expenditures including a vehicle upgrade
and new office construction in the Corsicana System; a vehicle replacement in
the Cedar Creek System; the first phase of a plant upgrade to the Ellenboro
portion of the Forest City System; and the construction of a fiber optic
backbone in the Cedar Creek System.

        Management estimates that the Partnership will spend approximately
$650,000 on capital expenditures during 1998. These expenditures include
continuation of a system upgrade to 330 MHz and deployement of a fiber optic
backbone in the Cedar Creek, TX system, vehicle replacements in the Forest City,
NC system and Corsicana, TX system as well as channel additions and line
extensions in various systems.

YEAR 2000 ISSUES

        The efficient operation of the Partnership's business is dependent in
part on its computer software programs and operating systems (collectively,
Programs and Systems). These Program and Systems are used in several key areas
of the Partnership's business, including subscriber billing and collections and
financial reporting. The Managing General Partner has evaluated the Programs and
Systems utilized in the conduct of the Partnership's business for the purpose of
identifying year 2000 compliance problems. Failure to remedy these issues could
impact the ability of the Partnership to timely bill its subscribers for service
provided and properly report its financial condition 

<PAGE>   15
and results of operations which could have a material impact on its liquidity
and capital resources.

        The Programs and Systems utilized in subscriber billing and collections
has been modified to address year 2000 compliance issues. These modifications
are currently in the process of being installed in the Partnership's various
billing sites. The Partnership expects this implementation to be completed by
the end of 1998. The Managing General Partner is currently in the process of
replacing Programs and Systems related to financial reporting which will resolve
year 2000 compliance issues and is expected to be completed by the end of 1998.
The aggregate cost to the Partnership to address year 2000 compliance issues is
not expected to be material to its results of operations, liquidity and capital
resources.

ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

        The audited financial statements of the Partnership for the years ended
December 31, 1997, 1996 and 1995 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>   16
                                    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 56). 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 its subsidiaries.
He has been involved with the cable television industry for over 23 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 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 61). 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 35 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.


<PAGE>   17
company. At the time of his retirement he was a Vice 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 40). 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 19 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.

        JAMES E. HANLON (AGE 64). 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 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 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.


<PAGE>   18

        JAMES A. PENNEY (AGE 43). 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
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 40). 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 52). 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 performance 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 54). 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 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 over 29 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.

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

        MILES Z. GORDON (AGE 50). Mr. Gordon is President of FNE and President
and Chief Executive Officer of Financial Network Investment Corporation (FNIC),
and has held those positions since 1983. From 1979 through April 1983 he was
President of University Securities Corporation. In 1978, Mr. Gordon was engaged
in the private practice of law, and from 1973 through 1978 he was employed by
the Securities and Exchange commission. 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. 

<PAGE>   19
He is past president of the California Syndication Forum and has also served on
several committees for the Securities Industry Association.

        JOHN S. SIMMERS (AGE 47). Mr. Simmers is Vice President and Secretary of
FNE and Executive Vice President and Chief Operating Officer of FNIC and has
held those positions since 1983. From June 1980 through April 1983 he was
Executive Vice President of University Securities Corporation, Vice President of
University Capital Corporation, and Vice President of University Asset
Management Group. From 1974 through May 1980 he was employed by the National
Association of Securities Dealers.

        HARRY M. KITTER (AGE 42). Mr. Kitter is Treasurer of FNE and Controller
for FNIC and has held those positions 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 1997 as indicated in Note 3 of
the Notes to Financial Statements--December 31, 1997 (see Items 13(a) and
14(a)(1) below).



<PAGE>   20
ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

        (a)    CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.  Security ownership of 
management as of December 31, 1997 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.

        Northland Cable Services Corporation ("NCSC"), an affiliate of
Northland, provides software installation and billing services to certain of the
Partnership's Systems.


<PAGE>   21

        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, 1997 for
disclosures regarding transactions with the General Partners or affiliates.

        The following schedule summarizes these transactions:


<TABLE>
<CAPTION>
                                             FOR THE YEARS ENDED DECEMBER 31,
                                            ------------------------------------
                                               1997          1996          1995
                                            ----------    ----------    --------
<S>                                         <C>            <C>           <C>     
Partnership management fees                 $555,039       $533,011      $453,521
Operating expense reimbursements             538,669        497,090       406,603
Software installation and
  billing service fees to NCSC                65,276        66,672        50,302
Programming fees to NCN                      289,303       267,021       165,281
Reimbursements to CAC for
  services                                    54,816        37,097        37,602
Reimbursements (to)/from affiliates           76,635            --            --
Amounts due to General Partner
  and affiliates at year end                  48,484        276,161       190,853
</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.

   

SUBSEQUENT EVENT

        Subsequent to year-end, the Partnership filed a Proxy statement with
the Securities and Exchange Commission related to a proposed sale of the cable
television and other assets of the Partnership to the Managing General Partner
or an affiliate of the Managing General Partner at a price equal to the 
independently appraised fair market value of such assets of $35,463,000,
subject to certain adjustments described therein. If approved by a majority of
the outstanding limited partner units, the sale would result in the
liquidation, wind-up and dissolution of the Partnership. If approved, the
closing is expected to occur in the summer of 1998. A more detail discussion of
the proposed transaction is set forth "Item 1 - Business - Subsequent Events."

    
               (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>   22
                                     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, 1997 and 1996.......................____

                   Statements of Operations for the years
                   ended December 31, 1997, 1996 and 1995...........................____

                   Statements of Changes in Partners'
                   Deficit for the years ended December 31,
                   1997, 1996 and 1995..............................................____

                   Statements of Cash Flows for the years
                   ended December 31, 1997, 1996 and 1995...........................____

                   Notes to Financial Statements--December 31,
                   1997.............................................................____

            (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)
</TABLE>

<PAGE>   23

<TABLE>
<S>                                                                                  <C>
                   10.8   Tool City Franchise(2)

                   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)

                   10.30  Amendment to the Credit Agreement with First Union National
                          Bank dated January 15, 1998
</TABLE>

----------

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

(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.

(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 31, 1994.
         
(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, 1997.



<PAGE>   25
                                   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: April 23, 1998
                         -----------------------------       --------------
                             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            April 23, 1998  
-----------------------------      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          April 23, 1998
-----------------------------      Corporation
Richard I. Clark                   


/s/ John E. Iverson                Director of Northland Communications          April 23, 1998
-----------------------------      Corporation
John E. Iverson                    


/s/ Gary S. Jones                  Vice President and principal accounting       April 23, 1998
-----------------------------      officer of Northland Communications 
Gary S. Jones                      Corporation                         
</TABLE>
                                       
<PAGE>   26

                                 EXHIBITS INDEX


<TABLE>
<CAPTION>
                                                       Sequentially
  Exhibit                                                Numbered
  Number                 Description                       Page
  ------                 -----------                   ------------
<S>              <C>                                   <C>
   27.0          Financial Data Schedule
</TABLE>

<PAGE>   27
                          NORTHLAND CABLE PROPERTIES FIVE
                            LIMITED PARTNERSHIP AND SUBSIDIARY

                          CONSOLIDATED FINANCIAL STATEMENTS
                          AS OF DECEMBER 31, 1997 AND 1996
                          TOGETHER WITH AUDITORS' REPORT



<PAGE>   28
                    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 (a Washington limited partnership)and
subsidiary as of December 31, 1997 and 1996, 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, 1997. 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, 1997 and 1996, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles.




                                                             ARTHUR ANDERSEN LLP




Seattle, Washington,
  February 6, 1998



<PAGE>   29
       NORTHLAND CABLE PROPERTIES FIVE LIMITED PARTNERSHIP AND SUBSIDIARY


                           CONSOLIDATED BALANCE SHEETS

                           DECEMBER 31, 1997 AND 1996

                                     ASSETS
                                     ------
<TABLE>
<CAPTION>
                                                  1997             1996
                                              ------------     ------------
<S>                                           <C>              <C>         
CASH                                          $    236,449     $    414,811

ACCOUNTS RECEIVABLE                                427,836          483,208

INSURANCE RECEIVABLE                                  --            126,000

PREPAID EXPENSES                                   129,716           61,985

INVESTMENT IN CABLE TELEVISION PROPERTIES:
      Property and equipment, at cost           15,510,616       22,922,054
      Less- Accumulated depreciation            (5,868,755)     (13,074,555)
                                              ------------     ------------
                                                 9,641,861        9,847,499

      Franchise agreements (net of
         accumulated amortization of
         $1,992,979 in 1997 and $1,426,830
         in 1996)                                4,106,121        4,711,637
      Organization costs and other
         intangibles (net of accumulated
         amortization of $1,193,560 in
         1997 and $990,440 in 1996)
                                                   836,756        1,038,137
                                              ------------     ------------
            Total investment in cable
               television properties
                                                14,584,738       15,597,273
                                              ------------     ------------

            Total assets                      $ 15,378,739     $ 16,683,277
                                              ============     ============


                       LIABILITIES AND PARTNERS' DEFICIT
                       ---------------------------------
LIABILITIES:
   
   Accounts payable and accrues expenses      $    721,740     $    816,707
   Due to General Partner and affiliates            48,484          276,161
   Deposits                                         17,578           21,602
   Subscriber prepayments                          253,927          231,419
   Notes payable                                20,154,766       20,819,461
                                              ------------     ------------
            Total liabilities                   21,196,495       22,165,350
                                              ------------     ------------

COMMITMENTS AND CONTINGENCIES 
   (Note 8)

PARTNERS' DEFICIT:
   General partners-
      Contributed capital, net                     (56,075)         (56,075)
      Accumulated deficit                         (104,010)        (100,673)
                                              ------------     ------------
                                                  (160,085)        (156,748)
                                              ------------     ------------
   Limited partners-
      Contributed capital, net -
         14,735 units in 1997 and 14,739
           in 1996                                 591,327          593,327
      Accumulated deficit                       (6,248,998)      (5,918,652)
                                              ------------     ------------
                                                (5,657,671)      (5,325,325)
                                              ------------     ------------
            Total liabilities and
               partners' deficit              $ 15,378,739     $ 16,683,277
                                              ============     ============
</TABLE>



                 The accompanying notes are an integral part of
                       these consolidated balance sheets.



<PAGE>   30
       NORTHLAND CABLE PROPERTIES FIVE LIMITED PARTNERSHIP AND SUBSIDIARY


                      CONSOLIDATED STATEMENTS OF OPERATIONS

              FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995



<TABLE>
<CAPTION>
                                                         1997            1996             1995
                                                      -----------     -----------     -----------
<S>                                                   <C>             <C>             <C>        
REVENUE                                               $ 9,549,197     $ 9,244,966     $ 7,897,009
                                                      -----------     -----------     -----------
EXPENSES:
   Operating (including $42,140, $29,748 and
      $34,057, net, paid to affiliates in 1997,
      1996 and 1995, respectively)                        866,958         823,200         754,573
   General and administrative (including $931,067,
      $910,206 and $806,840, net, paid to
      affiliates in 1997, 1996 and 1995,
      respectively)                                     2,495,544       2,437,295       2,028,131
   Programming (including $339,368, $299,319 and
      $203,025, net,  paid to affiliates in 1997,
      1996 and 1995, respectively)                      2,591,577       2,426,483       2,044,429
   Depreciation and amortization                        2,219,521       2,387,543       2,544,097
                                                      -----------     -----------     -----------
                                                        8,173,600       8,074,521       7,371,230
                                                      -----------     -----------     -----------
            Operating income                            1,375,597       1,170,445         525,779

OTHER INCOME (EXPENSE):
   Interest income                                         27,695           8,975           5,601
   Interest expense                                    (1,718,610)     (1,740,313)     (1,505,965)
   Other                                                  (18,365)       (166,840)        (14,795)
                                                      -----------     -----------     -----------
            Net loss                                  $  (333,683)    $  (727,733)    $  (989,380)
                                                      ===========     ===========     ===========
ALLOCATION OF NET LOSS:
   General partners                                   $    (3,337)    $    (7,277)    $    (9,893)
                                                      ===========     ===========     ===========
   Limited partners                                   $  (330,346)    $  (720,456)    $  (979,487)
                                                      ===========     ===========     ===========
NET LOSS PER LIMITED PARTNERSHIP UNIT                 $       (22)    $       (49)    $       (66)
                                                      ===========     ===========     ===========
</TABLE>




                 The accompanying notes are an integral part of
                         these consolidated statements.

<PAGE>   31
       NORTHLAND CABLE PROPERTIES FIVE LIMITED PARTNERSHIP AND SUBSIDIARY


             CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' DEFICIT

              FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995



<TABLE>
<CAPTION>
                                                          General         Limited
                                                         Partners        Partners           Total
                                                      -----------     -----------     -----------
<S>                                                   <C>             <C>             <C>         
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)

   Repurchase of limited partnership units                   --            (2,000)         (2,000)

   Net loss                                                (3,337)       (330,346)       (333,683)
                                                      -----------     -----------     -----------
BALANCE, December 31, 1997                            $  (160,085)    $(5,657,671)    $(5,817,756)
                                                      ===========     ===========     ===========
</TABLE>




                 The accompanying notes are an integral part of
                         these consolidated statements.


<PAGE>   32
       NORTHLAND CABLE PROPERTIES FIVE LIMITED PARTNERSHIP AND SUBSIDIARY


                      CONSOLIDATED STATEMENTS OF CASH FLOWS

              FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995


<TABLE>
<CAPTION>
                                                                       1997             1996             1995
                                                                   ------------     ------------     ------------
<S>                                                                <C>              <C>              <C>          
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net loss                                                        $   (333,683)    $   (727,733)    $   (989,380)
   Adjustments to reconcile loss to net cash provided by
     operating activities-
         Depreciation and amortization expense                        2,219,521        2,387,543        2,544,097
         (Gain) loss on disposal of assets                              (23,336)         166,840           14,795
         (Increase) decrease in operating assets:
           Accounts receivable                                           55,372          (71,346)        (237,040)
           Prepaid expenses                                             (67,731)          19,324          (13,029)
         Increase (decrease) in operating liabilities:
           Accounts payable and accrued expenses                        (94,967)         242,396          (32,293)
           Due to General Partner and affiliates                       (227,677)          85,308           94,274
           Deposits                                                      (4,024)          (5,159)          (4,294)
           Subscriber prepayments                                        22,508           53,181          (35,463)
                                                                   ------------     ------------     ------------
            Net cash provided by operating activities                 1,545,983        2,150,354        1,341,667
                                                                   ------------     ------------     ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
   Acquisition of cable systems and radio station                          --               --         (5,278,375)
   Purchase of property and equipment, net                           (1,188,492)      (1,016,520)        (530,340)
   Hold-back note payable                                               (12,907)         (91,528)         104,000
   Proceeds from sale of assets                                           9,957             --               --
   Insurance recovery                                                   151,661             --               --
   Increase in intangibles                                              (30,776)            --               --
                                                                   ------------     ------------     ------------
            Net cash used in investing activities                    (1,070,557)      (1,108,048)      (5,704,715)
                                                                   ------------     ------------     ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
    Proceeds from notes payable                                         400,000             --         21,931,554
    Principal payments on notes payable                              (1,051,788)        (750,000)     (17,773,780)
    Distributions to partners                                              --            (74,438)        (148,878)
    Repurchase of limited partnership units                              (2,000)            --               --
    Loan fees                                                              --            (44,770)        (556,421)
                                                                   ------------     ------------     ------------
            Net cash (used in) provided by financing activities        (653,788)        (869,208)       3,452,475
                                                                   ------------     ------------     ------------

(DECREASE) INCREASE IN CASH                                            (178,362)         173,098         (910,573)

CASH, beginning of year                                                 414,811          241,713        1,152,286
                                                                   ------------     ------------     ------------
CASH, end of year                                                  $    236,449     $    414,811     $    241,713
                                                                   ============     ============     ============

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
   Cash paid during the year for interest                          $  1,775,712     $  1,663,208     $  1,663,654
                                                                   ============     ============     ============
</TABLE>


                 The accompanying notes are an integral part of
                         these consolidated statements.


<PAGE>   33
       NORTHLAND CABLE PROPERTIES FIVE LIMITED PARTNERSHIP AND SUBSIDIARY


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                DECEMBER 31, 1997


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>   34
                                      -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:

Property and Equipment

Property and equipment are stated at cost. Replacements, renewals and
improvements are capitalized. Maintenance and repairs are charged to expense as
incurred.

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

<TABLE>
<S>                                                                   <C>     
     Buildings                                                        20 years
     Distribution plant                                               10 years
     Other equipment and leasehold improvements                     5-20 years
</TABLE>

The Partnership periodically reviews the carrying value of its long-lived
assets, including property, equipment and intangible assets, whenever events or
changes in circumstances indicate that the carrying value may not be
recoverable. To the extent the estimated future cash inflows attributable to the
asset, less estimated future cash outflows, is less than the carrying amount, an
impairment loss is recognized.

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:

<TABLE>
<S>                                                                    <C>     
      Franchise agreements                                             10 years
      Organization costs and other intangibles                        1-8 years
</TABLE>

Revenue Recognition

Cable television service revenue is recognized in the month service is provided
to customers. Advance payments on cable services to be rendered are recorded as
subscriber prepayments. Revenues resulting from the sale of local spot
advertising are recognized when the related advertisements or commercials appear
before the public. Local spot advertising revenues earned were $369,493,
$371,983 and $308,253 in 1997, 1996 and 1995, respectively.


<PAGE>   35
                                       -3-



Derivatives

The Partnership has only limited involvement with derivative financial
instruments and does not use them for trading purposes. They are used to manage
well-defined interest rate risks. The Partnership periodically enters into
interest rate swap agreements with major banks or financial institutions
(typically its bank) in which the Partnership pays a fixed rate and receives a
floating rate with the interest payments being calculated on a notional amount.
Gains or losses associated with changes in fair values of these swaps and the
underlying notional principal amounts are deferred and recognized as interest
expense over the term of the agreements in the Partnership's statements of
operations.

The Partnership is exposed to credit-related losses in the event of
nonperformance by counterparties to financial instruments but does not expect
any counterparties to fail to meet their obligations. The Partnership deals only
with highly rated counterparties, and usually only its bank. Notional amounts do
not represent amounts exchanged by the parties and, thus, are not a measure of
exposure to the Partnership through its use of derivatives. The exposure in a
derivative contract is the net difference between what each party is required to
pay based on the contractual terms against the notional amount of the contract,
which in the Partnership's case are interest rates. The use of derivatives does
not have a significant effect on the Partnership's result of operations or its
financial position.

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.

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 $555,039, $533,011 and $453,521 for 1997, 1996 and 1995,
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 

<PAGE>   36
                                      -4-



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, 1997, $5,650,553 ($377
per limited partnership unit) has been distributed to the limited partners and
the Partnership has repurchased $132,500 of limited partnership units ($500 per
unit).

Reimbursements

The General Partner provides or causes to be provided certain centralized
services to the Partnership and other affiliated entities. The General Partner
is entitled to reimbursement from the Partnership for various expenses incurred
by it or its affiliates on behalf of the Partnership allocable to its management
of the Partnership, including travel expenses, pole and site rental, lease
payments, legal expenses, billing expenses, insurance, governmental fees and
licenses, headquarters supplies and expenses, pay television expenses, equipment
and vehicle charges, operating salaries and expenses, administrative salaries
and expenses, postage and office maintenance.

The amounts billed to the Partnership are based on costs incurred by affiliates
in rendering the services. The costs of certain services are charged directly to
the Partnership, based upon the personnel time spent by the employees rendering
the service. The cost of other services is allocated to the Partnership and
affiliates based upon relative size and revenue. Management believes that the
methods used to allocate services to the Partnership are reasonable. Amounts
charged to the Partnership by the General Partner for these services were
$538,669, $497,090 and $406,603 for the years ended December 31, 1997, 1996 and
1995, respectively.

In 1997, 1996 and 1995, the Partnership was charged a maintenance fee for
billing system support provided by an affiliate, amounting to $65,276, $66,672
and $50,302, respectively.

The Partnership pays 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 1997, 1996 and 1995 were $289,303, $267,021 and $165,281, 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 $54,816, $37,097 and $37,602 in 1997,
1996 and 1995, 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 $76,635, under the terms of
these agreements during 1997.



<PAGE>   37
                                      -5-



Due to General Partner and Affiliates

<TABLE>
<CAPTION>
                                                              December 31,
                                                    ----------------------------
                                                       1997              1996
                                                    ---------          ---------
<S>                                                 <C>                <C>      
Management fees                                     $ 102,425          $ 137,394
Reimbursable operating costs                          (37,686)           123,975
Due to affiliates, net                                (16,255)            14,792
                                                    ---------          ---------
                                                    $  48,484          $ 276,161
                                                    =========          =========
</TABLE>

4.  PROPERTY AND EQUIPMENT:

<TABLE>
<CAPTION>
                                                           December 31,
                                                 -------------------------------
                                                     1997                1996
                                                 -----------         -----------
<S>                                              <C>                 <C>        
Land and buildings                               $   618,251         $   562,498
Distribution plant                                13,310,636          20,885,763
Other equipment                                      969,465           1,402,152
Leasehold improvements                                16,013              16,013
Construction in progress                             596,251              55,628
                                                 -----------         -----------
                                                 $15,510,616         $22,922,054
                                                 ===========         ===========
</TABLE>

5.  ACCOUNTS PAYABLE AND ACCRUED EXPENSES:

<TABLE>
<CAPTION>
                                                             December 31,
                                                     ---------------------------
                                                       1997               1996
                                                     --------           --------
<S>                                                  <C>                <C>     
Programmer license fees                              $282,745           $226,009
Accrued franchise fees                                163,349            205,072
Other                                                 275,646            385,626
                                                     --------           --------
                                                     $721,740           $816,707
                                                     ========           ========
</TABLE>



<PAGE>   38
                                      -6-



6.  NOTES PAYABLE:

Notes payable consist of the following:

<TABLE>
<CAPTION>
                                                                                          December 31,
                                                                                   ---------------------------
                                                                                       1997           1996
                                                                                   -----------     -----------
<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 8.46% (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, 1997, the Partnership
   had $1,831,554 outstanding on its revolving credit facility.                    $20,154,766     $20,806,554

Hold-back notes due to seller settled in 1997                                               --          12,907
                                                                                   -----------     -----------
                                                                                   $20,154,766     $20,819,461
                                                                                   ===========     ===========
</TABLE>

Annual maturities of notes payable after December 31, 1997, are as follows:

<TABLE>
<S>                                                                  <C>        
                  1998                                               $ 1,500,000
                  1999                                                 2,000,000
                  2000                                                 2,650,000
                  2001                                                14,004,766
                                                                     -----------
                                                                     $20,154,766
                                                                     ===========
</TABLE>

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 1.00 to 1, an Interest Coverage Ratio of 1.85
to 1 and a Maximum Leverage Ratio of 5.5 to 1, among other restrictions. The
General Partner submits quarterly debt compliance reports to the Partnership's
creditor under this agreement.

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.



<PAGE>   39
                                      -7-



Taxable loss to the limited partners was approximately $377,819, $1,064,000 and
$566,000 for each of the three years in the period ended December 31, 1997, and
is different from that reported in the consolidated statements of operations
principally 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 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.

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 $170,881, $173,451 and $165,872 in 1997, 1996
and 1995, respectively. Minimum lease payments through the end of the lease
terms are as follows:

<TABLE>
<S>                                                   <C>    
            1998                                      $ 9,920
            1999                                        8,520
            2000                                        8,520
            2001                                        8,520
            2002                                        8,520
            Thereafter                                 41,595
                                                      -------
                                                      $85,595
                                                      =======
</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 



<PAGE>   40
                                      -8-



determined at this time. A summary of the provisions affecting the cable
television industry, more specifically those affecting the Partnership's
operations, follows.

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; as 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.

Self-Insurance

The Partnership began self-insuring for aerial and underground plant in 1996.
Beginning in 1997, the Partnership began making quarterly contributions into an
insurance fund maintained by an affiliate which covers all Northland entities
and would defray a portion of any loss should the Partnership be faced with a
significant uninsured loss. To the extent the Partnership's losses exceed the
fund's balance, the Partnership would absorb any such loss. If the Partnership
were to sustain a material uninsured loss, such reserves could be insufficient
to fully fund such a loss. The resulting reduction in cash flow caused by
interrupted service, together with the capital cost of replacing such equipment
and physical plant, could have a material adverse effect on the Partnership, its
financial condition, prospects and debt service ability.

Amounts paid to affiliate, which maintains the fund for the Partnership and its
affiliates, are expensed as incurred and are included in the consolidated
statements of operations. To the extent a loss has been incurred related to
risks that are self-insured, the Partnership records an expense and an
associated liability for the amount of the loss, net of any amounts to be drawn
from the fund. For the year ended December 31, 1997, the Partnership made
payments of $13,604 to the fund. As of December 31, 1997, the fund had a balance
of $129,700.

<PAGE>   41
                                      -9-



9.  SUBSEQUENT EVENT:

Subsequent to year-end, the Partnership filed a Proxy statement with the
Securities and Exchange Commission related to a proposed sale of the cable
television and other assets of the Partnership to the Managing General Partner
or an affiliate of the Managing General Partner. If approved by a majority of
the outstanding limited partner units, the sale would result in the liquidation,
wind-up and dissolution of the Partnership. If approved, the closing is expected
to occur in the summer of 1998.

<PAGE>   42
                                                          January 15, 1998


Via Facsimile (206) 623-9015
and Federal Express

Northland Communications Corporation
1201 Third Avenue, Suite 3600
Seattle, Washington 98101
Attention: Mr. Gary Jones
           Chief Financial Officer

        Re:     Credit Agreement dated as of November 17, 1995 (as amended,
                restated, supplemented or otherwise modified, the "Credit
                Agreement") by and among NORTHLAND CABLE PROPERTIES FIVE LIMITED
                PARTNERSHIP, a limited partnership organized under the laws of
                the State of Washington (the "Borrower"), and FIRST UNION
                NATIONAL BANK (F.K.A. First Union National Bank of North
                Carolina), a national banking association, in its capacity as
                agent for the lenders (the "Agent").

Gentlemen:

Reference is made to the above referenced Credit Agreement. Capitalized but
undefined terms set forth herein shall have the meanings ascribed thereto in the
Credit Agreement.

The Borrower notified the Agent in a letter dated January 14, 1998 to Mark
Misenheimer from Gary Jones of Defaults or Events of Default (as defined in the
Credit Agreement) as of September 30, 1997 and December 31, 1997 arising in
connection with non-compliance with the requirements set forth in Section 9.1
(Maximum Leverage Ratio) of the Credit Agreement. The Borrower has requested
that the Agent waive the above referenced Defaults or Events of Default (as
defined in the Credit Agreement).

The Agent hereby agrees to waive the Defaults or Events of Default (as defined
in the Credit Agreement) referenced above for the period ending September 30,
1997, subject to the terms and provisions set forth herein. The Agent also
hereby agrees to waive the Defaults or Events of Default (as defined in the
Credit Agreement) referenced above for the period ending December 31, 1997, up
to a Leverage Ratio not to exceed 5.50 to 1.00, subject to the terms and
provisions set forth herein.

<PAGE>   43
To induce to the Agent to agree to the terms of this letter agreement, the
Borrower hereby agrees that:

        i.      The waiver specifically described herein shall not constitute
                and shall not be deemed a waiver of any other Default or Event
                of Default, whether arising as a result of the further violation
                of any Section of the Credit Agreement noted herein, under the
                terms of this letter agreement or otherwise, or a waiver of any
                rights or remedies arising as a result of such other Defaults or
                Events of Default

        ii.     Except as specifically set forth herein, all terms and
                provisions of the Credit Agreement and all other documents
                executed in connection therewith and all rights of the Agent
                thereunder and all obligations of the Borrower shall remain in
                full force and effect and are ratified and confirmed in all
                respects.

        iii.    The Borrower agrees to forego all payment of Management Fees in
                cash until such time as the Borrower delivers to the Agent a
                compliance package containing audited financial statements
                demonstrating full compliance as of December 31, 1997 with all
                Covenants as waived.

        iv.     The Borrower agrees to limit future draws under the Loan to
                $200,000.00 until such time as the Borrower delivers a
                compliance package demonstrating compliance as of March 31, 1998
                with all Covenants of the Credit Agreement.

This letter agreement embodies the final, entire agreement among the parties
hereto and supersedes any and all prior commitments, representations and
understandings whether written or oral relating to the subject matter hereof and
may not be contracted or varied by evidence of prior, contemporaneous or
subsequent oral agreements or discussions of the parties hereto. This letter
agreement may be executed in one or more counterparts and on fax counterparts
each of which shall be deemed an original, but all of which shall constitute one
and the same agreement.

                                            Very truly yours,

                                            FIRST UNION NATIONAL BANK

                                            By: /s/ Bruce W. Lofton
                                                -------------------------------
                                            Name: Bruce W. Lofton
                                                  -----------------------------
                                            Title: Senior Vice President
                                                   ----------------------------

                                  ACCEPTED AND AGREED TO AS OF JANUARY 15, 1997.

                                                   BORROWER:

                                             By: /s/ Gary S. Jones
                                                 ------------------------------
                                            Name: Gary S. Jones
                                                  -----------------------------
                                            Title: Vice President of Northland
                                                   Communications Corporation