<PAGE>   1
================================================================================

                                SECURITIES AND EXCHANGE COMMISSION
                                      WASHINGTON, D.C. 20549
                                            FORM 10-K

[x]    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES 
       EXCHANGE ACT OF 1934

                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
                                                OR
[ ]    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES 
       EXCHANGE ACT OF 1934

                 For the transition period from ______ to ______
                         Commission File Number: 0-18266

                  FALCON CLASSIC CABLE INCOME PROPERTIES, L.P.
             ------------------------------------------------------
             (Exact name of Registrant as specified in its charter)

                CALIFORNIA                                      95-4200409
-----------------------------------                   --------------------------
     (State or other jurisdiction of                         (I.R.S. Employer
     incorporation or organization)                       Identification Number)

10900 WILSHIRE BOULEVARD - 15TH FLOOR
        LOS ANGELES, CALIFORNIA                                    90024
---------------------------------------               --------------------------
(Address of principal executive offices)                        (Zip Code)

Registrant's telephone number, including area code:          (310) 824-9990
                                                          ----------------------

Securities registered pursuant to Section 12 (b) of the Act:          NONE

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

                                                        Name of each exchange
         Title of each Class                             on which registered
         -------------------                             -------------------
UNITS OF LIMITED PARTNERSHIP INTEREST                           NONE

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

Yes  X   No
   ----    ----

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

         State the aggregate market value of the voting equity securities held
by non-affiliates of the registrant: all of the registrant's 71,879 Units of
limited partnership interests, its only class of equity securities, are held by
non-affiliates. There is no public trading market for the Units and transfers of
Units are subject to certain restrictions; accordingly, the registrant is unable
to state the market value of the Units held by non-affiliates.

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                    The Exhibit Index is located at Page E-1


<PAGE>   2
                                     PART I

ITEM 1.        BUSINESS

INTRODUCTION

         Falcon Classic Cable Income Properties, L.P. (the "Partnership") is a
California limited partnership. Prior to March 1998, the Partnership was engaged
in the ownership and operation of non-urban cable television systems in five
regions in Oregon, North Carolina, Kentucky, California and Maryland. On March 6
and 9, 1998, the Partnership consummated the sale of substantially all of the
Partnership's assets ("the Sold Systems"), except the cable system serving the
City of Somerset Kentucky (the "Somerset System"), to Falcon Holding Group, L.P.
("FHGLP"), the general partner of the Partnership's general partner, Falcon
Classic Cable Investors, L.P. (the "General Partner"). The sale of the Somerset
System to FHGLP will be completed as soon as the necessary regulatory approvals
can be obtained, of which there can be no assurance. If the sale of the Somerset
System is successfully completed, the General Partner intends to dissolve the
Partnership as soon as practicable thereafter. See " -- Recent Developments." As
of December 31, 1997, the Partnership's cable television systems served
approximately 49,000 basic subscribers, including approximately 4,000 basic
subscribers in the Somerset System.

         The Partnership was formed on February 17, 1989, began offering Units
of limited partnership interests ("Units") for sale on May 15, 1989, and
continued the offering through May 8, 1990. The Partnership sold a total of
71,879 Units. Prior to March 1993, the general partner of the General Partner
was Falcon Holding Group, Inc., a California corporation ("FHGI"). In March
1993, FHGLP was organized to effect the consolidation of the ownership of
various cable television businesses previously operated by FHGI. In such
consolidation, FHGLP became the general partner of the Partnership's sole
general partner, succeeding FHGI in that role. The management of FHGLP is
substantially the same as that of FHGI. See Item 13., "Certain Relationships and
Related Transactions."

         The General Partner receives a management fee from the Partnership for
managing the Partnership's cable television operations. See Item 11., "Executive
Compensation." For more detailed information, see the Amended and Restated
Agreement of Limited Partnership of the Partnership dated as of May 15, 1989, as
amended by the first amendment thereto (hereinafter collectively referred to as
the "Partnership Agreement"), which are exhibits to this Annual Report on Form
10-K.

         Led by Chairman of the Board and Chief Executive Officer, Marc B.
Nathanson, and President and Chief Operating Officer, Frank J. Intiso, the
Partnership's senior management has on average over nineteen years of experience
in the industry and has worked together for over a decade. Mr. Nathanson, a
29-year veteran of the cable business, is a member of the Board of Directors of
the National Cable Television Association and a past winner of the prestigious
Vanguard Award from the National Cable Television Association for outstanding
contributions to the growth and development of the cable television industry.
Mr. Intiso is a 19-year veteran of the cable industry. He is also Chairman of
the California Cable Television Association and is active in various industry
boards including the Board of the Community Antenna Television Association
("CATA"). The principal executive offices of the Partnership, and its general
partner, FHGLP, are located at 10900 Wilshire Boulevard, 15th Floor, Los
Angeles, California 90024, and their telephone number is (310) 824-9990.

RECENT DEVELOPMENTS

         Pursuant to the terms of the "Appraisal Process" provided for in the
Partnership Agreement, the Partnership may, in the sole discretion of the
General Partner, sell individual cable systems and may also sell all or
substantially all of the Partnership's assets to the General Partner or its
affiliates. The Partnership Agreement provides that any such sale must be made
in cash at the median of appraisals undertaken by three nationally recognized
experts in the cable television field. As previously reported, the Partnership
commenced the 



                                      -2-
<PAGE>   3

"Appraisal Process" in August 1996 and received the results of the related
appraisals in February 1997. The full text of these appraisals has previously
been filed with the Securities and Exchange Commission. By letter dated June 24,
1997, the General Partner advised the Partnership that it intended to exercise
its purchase right to acquire all of the Partnership's cable systems (the
"Proposed Sale") pursuant to the Appraisal Process for cash consideration equal
to the median appraised value of $82 million (the "Appraised Value"). The
General Partner further advised the Partnership that, as permitted by the
Partnership Agreement, it intended that the cable systems be acquired by certain
affiliates of the General Partner (the "Purchasers"). On June 27, 1997, the
General Partner caused the Partnership to enter into an Asset Purchase Agreement
with the Purchasers, and the parties began to seek the necessary regulatory and
other consents. The Asset Purchase Agreement is filed as an exhibit to the
Partnership's Report on Form 8-K dated June 24, 1997.

         On or about September 2, 1997, the Partnership was named in a putative
class action suit (the "Lawsuit") filed against the Partnership, the General
Partner and certain of its directors and officers with respect to the Proposed
Sale. Effective as of December 31, 1997, the Partnership and certain other
parties reached an agreement (the "Settlement Agreement") resolving and settling
the Lawsuit. In exchange for a complete dismissal of the Lawsuit with prejudice
and releases, and without admitting or conceding any fault, liability or
wrongdoing whatsoever, the Partnership and the other defendants agreed to
establish a settlement fund payable to holders of Units as of June 30, 1997,
which amounted to $1.3 million plus interest at 10% from January 1, 1998 through
closing of the sale as defined in the Settlement Agreement. On March 6 and 9,
1998, the Partnership consummated the sale of substantially all of its assets
except for the Somerset System. The assets sold represented approximately 92.4%
of the total amount of the Proposed Sale. In connection with such sale, and in
accordance with the Settlement Agreement and the Asset Purchase Agreement, the
Partnership received approximately $76.8 million, representing the purchase
price, accrued interest on the net purchase price attributable to the systems
sold, less an appropriate portion of the settlement notice costs. In addition,
the defendants to the Lawsuit separately transferred approximately $1.2 million
to the settlement fund.

         In connection with the Partnership's receipt of the proceeds from the
sale of the Sold Systems, on March 6, 1998, the Partnership retired its
outstanding bank debt and, on March 27, 1998, the Partnership distributed
approximately $58.2 million (approximately $809.92 per unit) to its unitholders.
In addition, the Partnership understands that counsel for the plaintiffs in the
Lawsuit intend to distribute the settlement fund in late May or early June 1998.
As of March 9, 1998, the Partnership's sole remaining cable system asset is the
Somerset System, which represents approximately 7.6% of the Proposed Sale. The
regulatory approvals required to consummate the sale of the Somerset System to
FHGLP have not been obtained from the City of Somerset. The Partnership will
continue to negotiate with the City of Somerset to obtain such approvals. There
can be no assurance, however, that the Partnership will be successful in
obtaining such approvals. If such approvals are not received on or before
September 30, 1998, the Partnership intends to explore alternative options,
including the sale of the Somerset System to a third party. If the Partnership
obtains the requisite approvals from the City of Somerset on or prior to
September 30, 1998, the Partnership intends to complete the sale of the Somerset
System to FHGLP and to distribute to unitholders at the time of such sale
approximately $6.3 million, representing the proceeds from the sale of the
Somerset System (less certain deductions) and the remainder of the interest
required by the Settlement Agreement. The approximately $6.3 million to be
distributed upon the sale of the Somerset System is only an estimate and may
vary depending on transaction costs and expenses and liabilities incurred prior
to distribution. In addition, if the sale of the Somerset System occurs on or
before September 30, 1998, the Settlement Agreement requires that additional
funds be transferred to the settlement fund for distribution to unitholders as
of June 30, 1997.

         The Partnership Agreement provides that the Partnership shall be
dissolved upon the occurrence of the sale or distribution of all or
substantially all of the assets of the Partnership. The Partnership Agreement
also provides that upon the dissolution of the Partnership, the General Partner
shall take such actions as are necessary for the winding up of the affairs of
the Partnership and the distribution of its assets to the partners pursuant to
the provisions of the Partnership Agreement. Accordingly, following the
consummation of the sale of the Somerset System, the General Partner intends to
wind-up the affairs of the Partnership in accordance with the terms of the
Partnership Agreement, including the liquidation of the assets of the
Partnership, the discharge of 



                                      -3-
<PAGE>   4

all of the liabilities of the Partnership, and the distribution of the remaining
assets of the Partnership to its partners as appropriate.

BUSINESS STRATEGY

         The Partnership's strategy is to attempt to obtain the regulatory
approvals necessary to consummate the sale of the Somerset System, to consummate
such sale and to dissolve the Partnership as discussed above. Prior to March
1998, the Partnership was engaged primarily in the business of owning, operating
and developing cable television systems. The Partnership did not participate in
any other activities in 1995, 1996 or 1997 and, based on the planned
liquidation, will not undertake any such activities in the future. See
"Legislation and Regulation" and Item 7., "Management's Discussion and Analysis
of Financial Condition and Results of Operations."

         Adoption of rules implementing certain provisions of the Cable
Television Consumer Protection and Competition Act of 1992 (the "1992 Cable
Act") by the Federal Communications Commission (the "FCC") has had a negative
impact on the Partnership's revenues and cash flow. These rules are subject to
further amendment to give effect to the Telecommunications Act of 1996 (the
"1996 Telecom Act"). Among other changes, the 1996 Telecom Act provides that the
regulation of certain cable programming service tier ("CPST") rates will be
phased out altogether in 1999. Because cable service rate increases have
continued to outpace inflation under the FCC's existing regulations, the
Partnership expects Congress and the FCC to explore additional methods of
regulating cable service rate increases, including deferral or repeal of the
March 31, 1999 sunset of CPST regulation. There can be no assurance as to what,
if any, further action may be taken by the FCC, Congress or any other regulatory
authority or court, or the effect thereof on the Partnership's business. See
"Legislation and Regulation" and Item 7., "Management's Discussion and Analysis
of Financial Condition and Results of Operations."



                                      -4-
<PAGE>   5



DESCRIPTION OF THE PARTNERSHIP'S SYSTEMS

               The Partnership's remaining cable television system is located in
Somerset, Kentucky. The assets sold to FHGLP included cable television systems
in the following locations: Redmond, Oregon; Burke County, North Carolina;
Centreville, Maryland; California City, California; and the adjacent communities
of Somerset, Kentucky. The table below sets forth certain operating statistics
for the Somerset System and the Sold Systems as of December 31, 1997:



<TABLE>
<CAPTION>
                                                                                                   Average
                                                                                                   Monthly
                                                                     Premium                       Revenue
                          Homes         Basic           Basic        Service       Premium        Per Basic
Region                  Passed(1)   Subscribers(2)  Penetration(3)   Units(4)    Penetration(5)  Subscriber(6)
------                  --------    -------------   -------------    -------      ------------   ------------
<S>                      <C>         <C>             <C>             <C>          <C>             <C>
Redmond, OR               7,502          3,626           48.3%          494           13.6%       $   33.73
Burke County, NC         19,200         10,582           55.1%        3,823           36.1%       $   36.53
Somerset, KY(7)          22,060         19,784           89.7%        3,577           18.1%       $   32.18
Centreville, MD          24,187         13,083           54.1%        7,045           53.8%       $   37.84
California City, CA       2,858          1,908           66.8%          670           35.1%       $   30.98
                         ------         ------                       ------
Total                    75,807         48,983           64.6%       15,609           31.9%       $   34.69
                         ======         ======                       ======
</TABLE>


----------

        (1) Homes passed refers to estimates by the Partnership of the
approximate number of dwelling units in a particular community that can be
connected to the distribution system without any further extension of principal
transmission lines. Such estimates are based upon a variety of sources,
including billing records, house counts, city directories and other local
sources.


        (2) A home with one or more television sets connected to a cable system
is counted as one basic subscriber. Bulk accounts are included on a "basic
customer equivalent" basis in which the total monthly bill for the account is
divided by the basic monthly charge for a single outlet in the area.


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


        (4) Premium service units include only single channel services offered
for a monthly fee per channel and do not include tiers of channels offered as a
package for a single monthly fee. Prior to July 1, 1996, The Disney Channel was
offered as a premium service. Effective July 1, 1996, it was offered as part of
an unregulated tier of services. As a result, the number of reported premium
service units was artificially reduced by this service offering change. The
number of Disney Channel premium service units at June 30, 1996 was 1,688.


        (5) Premium service units as a percentage of basic subscribers. A
customer may purchase more than one premium service, each of which is counted as
a separate premium service unit. This ratio may be greater than 100% if the
average customer subscribes for more than one premium service.


        (6) Average monthly revenue per home subscribing to cable service has
been computed based on revenue for the year ended December 31, 1997.


        (7) The statistics for Somerset, KY include the Somerset System and
cable television systems in adjacent communities of Somerset, KY which were
included in the Sold Systems. The Somerset System statistics included are: 5,119
Homes Passed; 4,091 Basic Subscribers; 79.9% Basic Penetration; 757 Premium
Service Units; 18.5% Premium Penetration; and $30.43 Average Monthly Revenue Per
Basic Subscriber.


         The Somerset System, the Partnership's remaining cable television
system, and its adjacent communities, are considered to be the hub of commerce,
industry, transportation and recreation in the region. In addition to the local
recreation and resort industry, many other industries located in the area
provide for a well diversified economic base. They include pressed glassware,
wood working, food processing, clothing manufacturing, compressor/air
conditioning, charcoal briquettes manufacturing and boat manufacturing. Somerset
is also home to the newly-opened Rural Development Center complex, associated
with the University of Kentucky, which coordinates numerous activities, promotes
linkages for local businesses to world-wide markets and provides a community
cultural gathering place.



                                      -5-
<PAGE>   6
         At March 9, 1998, the Somerset system had approximately 4,000 basic
subscribers and addressable technology is available to all customers. The system
offers 39 channels of programming which are 100% utilized. Fiber overlay
projects have been completed in the Somerset System. The Somerset System has
been tied together with fiber to the Burnside system, which was sold to FHGLP on
March 9, 1998, thereby eliminating the Somerset head-end.

CUSTOMER RATES AND SERVICES

         The Partnership offers customers packages of services that include the
local area network, independent and educational television stations, a limited
number of television signals from distant cities, numerous satellite-delivered,
non-broadcast channels (such as CNN, MTV, USA, ESPN, TNT and The Disney Channel)
and certain information and public access channels. For an extra monthly charge,
the Partnership provides certain premium television services, such as HBO and
Showtime. The Partnership also offers other cable television services to its
customers, including pay-per-view programming.

         Pursuant to the 1992 Cable Act, most cable television systems are
subject to rate regulation of the basic service tier, the non-basic service
tiers other than premium (per channel or program) services, the charges for
installation of cable service, and the rental rates for customer premises
equipment such as converter boxes and remote control devices. These rate
regulation provisions affect all of the Partnership's systems not deemed to be
subject to effective competition under the FCC's definition. See "Legislation
and Regulation."

         At March 9, 1998, the Somerset System's monthly rates for basic cable
service for residential customers, excluding special senior citizen discount
rates, ranged from $19.08 to $19.65 and premium service rates were $11.95,
excluding special promotions offered periodically in conjunction with the
Partnership's marketing programs. A one-time installation fee, which the
Partnership may wholly or partially waive during a promotional period, is
usually charged to new customers. Commercial customers, such as hotels, motels
and hospitals, are charged a negotiated, non-recurring fee for installation of
service and monthly fees based upon a standard discounting procedure. Most
multi-unit dwellings are offered a negotiated bulk rate in exchange for
single-point billing and basic service to all units. These rates are also
subject to regulation.

EMPLOYEES

         At March 9, 1998, the Partnership had no employees.

PROGRAMMING

         The Partnership has various contracts to obtain basic and premium
programming from program suppliers whose compensation is generally based on a
fixed fee per customer or a percentage of the gross receipts for the particular
service. Some program suppliers provide volume discount pricing structures or
offer marketing support to the Partnership. Certain other new channels have also
recently offered fees in return for carrying their service. Due to a lack of
channel capacity available for adding new channels, the Partnership's management
cannot predict the impact of such potential payments on its business. In
addition, the FCC may require that certain such payments from programmers be
offset against the programming fee increases which can be passed through to
subscribers under the FCC's rate regulations. The Partnership's programming
contracts are generally for a fixed period of time and are subject to negotiated
renewal. The Partnership does not have long-term programming contracts for the
supply of a substantial amount of its programming. Accordingly, no assurance can
be given that the Partnership's programming costs will not continue to increase
substantially, or that other materially adverse terms will not be added to the
Partnership's programming contracts. Management believes, however, that the
Partnership's relations with its programming suppliers generally are good.

         The Partnership's cable programming costs have increased in recent
years and are expected to continue to increase due to additional programming
being provided to basic customers, the requirements to carry channels under
retransmission carriage agreements entered into with certain programming
sources, increased 



                                      -6-
<PAGE>   7

costs to produce or purchase cable programming generally (including sports
programming), inflationary increases and other factors. The 1996 retransmission
carriage agreement negotiations resulted in the Partnership agreeing to carry
one new service in certain of its systems for which it will receive
reimbursement of certain costs related to launching the service. All other
negotiations were completed with essentially no change to the previous
agreements. Under the FCC's rate regulations, increases in programming costs for
regulated cable services occurring after the earlier of March 1, 1994, or the
date a system's basic cable service became regulated, may be passed through to
customers. See "Legislation and Regulation - Federal Regulation - Carriage of
Broadcast Television Signals."

FRANCHISES

         Cable television systems are generally constructed and operated under
non-exclusive franchises granted by local governmental authorities. These
franchises typically contain many conditions, such as time limitations on
commencement and completion of construction; conditions of service, including
number of channels, types of programming and the provision of free service to
schools and certain other public institutions; and the maintenance of insurance
and indemnity bonds. The provisions of local franchises are subject to federal
regulation under the Cable Communications Policy Act of 1984 (the "1984 Cable
Act"), the 1992 Cable Act and the 1996 Telecom Act. See "Legislation and
Regulation."

         As of December 31, 1997, the Partnership held 36 franchises. As of
March 9, 1998, the Partnership had one franchise due to the sale of
substantially all the Partnership's assets to FHGLP. This franchise, which is
non-exclusive, provides for the payment of fees to the City of Somerset. The
franchise fees imposed on the Partnership are 3% of the gross revenues generated
by the system. The 1984 Cable Act prohibits franchising authorities from
imposing franchise fees in excess of 5% of gross revenues and also permits the
cable system operator to seek renegotiation and modification of franchise
requirements if warranted by changed circumstances. The City of Somerset's
franchise is currently under renewal negotiation, there can be no assurance
however, that it will be renewed. The franchise serves approximately 4,000 basic
subscribers.

         The 1984 Cable Act provides, among other things, for an orderly
franchise renewal process in which franchise renewal will not be unreasonably
withheld or, if renewal is denied and the franchising authority acquires
ownership of the system or effects a transfer of the system to another person,
the operator generally is entitled to the "fair market value" for the system
covered by such franchise, but no value attributable to the franchise itself. In
addition, the 1984 Cable Act, as amended by the 1992 Cable Act, establishes
comprehensive renewal procedures which require that an incumbent franchisee's
renewal application be assessed on its own merit and not as part of a
comparative process with competing applications. See "Legislation and
Regulation".

COMPETITION

         Cable television systems compete with other communications and
entertainment media, including over-the-air television broadcast signals which a
viewer is able to receive directly using the viewer's own television set and
antenna. The extent to which a cable system competes with over-the-air
broadcasting depends upon the quality and quantity of the broadcast signals
available by direct antenna reception compared to the quality and quantity of
such signals and alternative services offered by a cable system. Cable systems
also face competition from alternative methods of distributing and receiving
television signals and from other sources of entertainment such as live sporting
events, movie theaters and home video products, including videotape recorders
and videodisc players. In recent years, the FCC has adopted policies providing
for authorization of new technologies and a more favorable operating environment
for certain existing technologies that provide, or may provide, substantial
additional competition for cable television systems. The extent to which cable
television service is competitive depends in significant part upon the cable
television system's ability to provide an even greater variety of programming
than that available over the air or through competitive alternative delivery
sources.



                                      -7-
<PAGE>   8

         Individuals presently have the option to purchase home satellite
dishes, which allow the direct reception of satellite-delivered broadcast and
nonbroadcast program services formerly available only to cable television
subscribers. Most satellite-distributed program signals are being electronically
scrambled to permit reception only with authorized decoding equipment for which
the consumer must pay a fee. The 1992 Cable Act enhances the right of cable
competitors to purchase nonbroadcast satellite-delivered programming. See
"Legislation and Regulation - Federal Regulation."

         Television programming is now also being delivered to individuals by
high-powered direct broadcast satellites ("DBS") utilizing video compression
technology. This technology has the capability of providing more than 100
channels of programming over a single high-powered DBS satellite with
significantly higher capacity available if, as in the case with DIRECTV,
multiple satellites are placed in the same orbital position. Unlike cable
television systems, however, DBS satellites are limited by law in their ability
to deliver local broadcast signals. One DBS provider, EchoStar, has announced
plans to deliver a limited number of local broadcast signals in a limited number
of markets. DBS service can be received virtually anywhere in the continental
United States through the installation of a small rooftop or side-mounted
antenna, and it is more accessible than cable television service where cable
plant has not been constructed or where it is not cost effective to construct
cable television facilities. DBS service is being heavily marketed on a
nationwide basis by several service providers. In addition, medium-power
fixed-service satellites can be used to deliver direct-to-home satellite
services over small home satellite dishes, and one provider, PrimeStar,
currently provides service to subscribers using such a satellite.

         Multichannel multipoint distribution systems ("Wireless Cable") deliver
programming services over microwave channels licensed by the FCC received by
subscribers with special antennas. Wireless Cable systems are less capital
intensive, are not required to obtain local franchises or to pay franchise fees,
and are subject to fewer regulatory requirements than cable television systems.
To date, the ability of Wireless Cable services to compete with cable television
systems has been limited by channel capacity (35-channel maximum) and the need
for unobstructed line-of-sight over-the-air transmission. Although relatively
few Wireless Cable systems in the United States are currently in operation or
under construction, virtually all markets have been licensed or tentatively
licensed. The use of digital compression technology may enable Wireless Cable
systems to deliver more channels.

         Private cable television systems compete for service to condominiums,
apartment complexes and certain other multiple unit residential developments.
The operators of these private systems, known as satellite master antenna
television ("SMATV") systems, often enter into exclusive agreements with
apartment building owners or homeowners' associations which preclude franchised
cable television operators from serving residents of such private complexes.
However, the 1984 Cable Act gives franchised cable operators the right to use
existing compatible easements within their franchise areas upon
nondiscriminatory terms and conditions. Accordingly, where there are preexisting
compatible easements, cable operators may not be unfairly denied access or
discriminated against with respect to the terms and conditions of access to
those easements. There have been conflicting judicial decisions interpreting the
scope of the access right granted by the 1984 Cable Act, particularly with
respect to easements located entirely on private property. Under the 1996
Telecom Act, SMATV systems can interconnect non-commonly owned buildings without
having to comply with local, state and federal regulatory requirements that are
imposed upon cable systems providing similar services, as long as they do not
use public rights-of-way.

         The FCC has initiated a new interactive television service which will
permit non-video transmission of information between an individual's home and
entertainment and information service providers. This service will provide an
alternative means for DBS systems and other video programming distributors,
including television stations, to initiate the new interactive television
services. This service may also be used by the cable television industry.

         The FCC has allocated spectrum in the 28 GHz range for a new
multichannel wireless service that can be used to provide video and
telecommunication services. The FCC is in the process of awarding 



                                      -8-
<PAGE>   9

licenses to use this spectrum via a market-by-market auction. It cannot be
predicted at this time whether such a service will have a material impact on the
operations of cable television systems.

         The 1996 Telecom Act eliminates the restriction against ownership and
operation of cable systems by local telephone companies within their local
exchange service areas. Telephone companies are now free to enter the retail
video distribution business through any means, such as DBS, Wireless Cable,
SMATV or as traditional franchised cable system operators. Alternatively, the
1996 Telecom Act authorizes local telephone companies to operate "open video
systems" without obtaining a local cable franchise, although telephone companies
operating such systems can be required to make payments to local governmental
bodies in lieu of cable franchise fees. Up to two-thirds of the channel capacity
on an "open video system" must be available to programmers unaffiliated with the
local telephone company. The open video system concept replaces the FCC's video
dialtone rules. The 1996 Telecom Act also includes numerous provisions designed
to make it easier for cable operators and others to compete directly with local
exchange telephone carriers.

         The cable television industry competes with radio, television and print
media and internet for advertising revenues. As the cable television industry
continues to develop programming designed specifically for distribution by
cable, advertising revenues may increase. Premium programming provided by cable
systems is subject to the same competitive factors which exist for other
programming discussed above. The continued profitability of premium services may
depend largely upon the continued availability of attractive programming at
competitive prices.

         Advances in communications technology, as well as changes in the
marketplace and the regulatory and legislative environment, are constantly
occurring. Thus, it is not possible to predict the competitive effect that
ongoing or future developments might have on the cable industry. See
"Legislation and Regulation."



                                      -9-
<PAGE>   10
                           LEGISLATION AND REGULATION

         The cable television industry is regulated by the FCC, some state
governments and substantially all local governments. In addition, various
legislative and regulatory proposals under consideration from time to time by
Congress and various federal agencies have in the past materially affected, and
may in the future materially affect, the Partnership and the cable television
industry. The following is a summary of federal laws and regulations affecting
the growth and operation of the cable television industry and a description of
certain state and local laws. The Partnership believes that the regulation of
its industry remains a matter of interest to Congress, the FCC and other
regulatory authorities. There can be no assurance as to what, if any, future
actions such legislative and regulatory authorities may take or the effect
thereof on the Partnership.

FEDERAL REGULATION

         The primary federal statute dealing with the regulation of the cable
television industry is the Communications Act of 1934 (the "Communications
Act"), as amended. The three principal amendments to the Communications Act that
shaped the existing regulatory framework for the cable television industry were
the 1984 Cable Act, the 1992 Cable Act and the 1996 Telecom Act.

         The FCC, the principal federal regulatory agency with jurisdiction over
cable television, has promulgated regulations to implement the provisions
contained in the Communications Act. The FCC has the authority to enforce these
regulations through the imposition of substantial fines, the issuance of cease
and desist orders and/or the imposition of other administrative sanctions, such
as the revocation of FCC licenses needed to operate certain transmission
facilities often used in connection with cable operations. A brief summary of
certain of these federal regulations as adopted to date follows.

         RATE REGULATION

         The 1992 Cable Act replaced the FCC's previous standard for determining
effective competition, under which most cable systems were not subject to local
rate regulation, with a statutory provision that resulted in nearly all cable
television systems becoming subject to local rate regulation of basic service.
The 1996 Telecom Act expanded the definition of effective competition to include
situations where a local telephone company or its affiliate, or any multichannel
video provider using telephone company facilities, offers comparable video
service by any means except DBS. A finding of effective competition exempts both
basic and nonbasic tiers from regulation. Additionally, the 1992 Cable Act
required the FCC to adopt a formula, enforceable by franchising authorities, to
assure that basic cable rates are reasonable; allowed the FCC to review rates
for nonbasic service tiers (other than per-channel or per-program services) in
response to complaints filed by franchising authorities and/or cable customers;
prohibited cable television systems from requiring subscribers to purchase
service tiers above basic service in order to purchase premium services if the
system is technically capable of doing so; required the FCC to adopt regulations
to establish, on the basis of actual costs, the price for installation of cable
service, remote controls, converter boxes and additional outlets; and allowed
the FCC to impose restrictions on the retiering and rearrangement of cable
services under certain limited circumstances. The 1996 Telecom Act limits the
class of complainants regarding nonbasic tier rates to franchising authorities
only and terminates FCC regulation of nonbasic tier rates on March 31, 1999.
Because cable service rate increases have continued to outpace inflation under
the FCC's existing regulation, the Partnership expects Congress and the FCC to
explore additional methods of addressing this issue, including deferral or
repeal of the March 31, 1999 termination of CPST rate regulation, and
legislation recently was introduced in Congress to repeal the termination
provision.

         The FCC's regulations contain standards for the regulation of basic and
nonbasic cable service rates (other than per-channel or per-program services).
Local franchising authorities and/or the FCC are empowered to order a reduction
of existing rates which exceed the maximum permitted level for either basic
and/or nonbasic cable services and associated equipment, and refunds can be
required. The rate regulations adopt a benchmark price cap system for measuring
the reasonableness of existing basic and nonbasic service rates. 



                                      -10-
<PAGE>   11

Alternatively, cable operators have the opportunity to make cost-of-service
showings which, in some cases, may justify rates above the applicable
benchmarks. The rules also require that charges for cable-related equipment
(e.g., converter boxes and remote control devices) and installation services be
unbundled from the provision of cable service and based upon actual costs plus a
reasonable profit. The regulations also provide that future rate increases may
not exceed an inflation-indexed amount, plus increases in certain costs beyond
the cable operator's control, such as taxes, franchise fees and increased
programming costs. Cost-based adjustments to these capped rates can also be made
in the event a cable operator adds or deletes channels. In addition, new product
tiers consisting of services new to the cable system can be created free of rate
regulation as long as certain conditions are met, such as not moving services
from existing tiers to the new tier. These provisions currently provide limited
benefit to the Partnership due to the lack of channel capacity previously
discussed. There is also a streamlined cost-of-service methodology available to
justify a rate increase on basic and regulated nonbasic tiers for "significant"
system rebuilds or upgrades.

         Franchising authorities have become certified by the FCC to regulate
the rates charged by the Partnership for basic cable service and for associated
basic cable service equipment. In addition, a number of the Partnership's
customers and/or franchising authorities have filed complaints with the FCC
regarding the rates charged for nonbasic cable service.

         The Partnership has adjusted its regulated programming service rates
and related equipment and installation charges so as to bring these rates and
charges into compliance with the applicable benchmark or equipment and
installation cost levels.

         FCC regulations adopted pursuant to the 1992 Cable Act which require
cable systems to permit customers to purchase video programming on a per channel
or a per program basis without the necessity of subscribing to any tier of
service, other than the basic service tier, unless the cable system is
technically incapable of doing so. Generally, this exemption from compliance
with the statute for cable systems that do not have such technical capability is
available until a cable system obtains the capability, but not later than
December 2002.

         CARRIAGE OF BROADCAST TELEVISION SIGNALS

         The 1992 Cable Act adopted new television station carriage
requirements. These rules allow commercial television broadcast stations which
are "local" to a cable system, i.e., the system is located in the station's Area
of Dominant Influence, to elect every three years whether to require the cable
system to carry the station, subject to certain exceptions, or whether the cable
system will have to negotiate for "retransmission consent" to carry the station.
Local non-commercial television stations are also given mandatory carriage
rights, subject to certain exceptions, within the larger of: (i) a 50 mile
radius from the station's city of license; or (ii) the station's Grade B contour
(a measure of signal strength). Unlike commercial stations, noncommercial
stations are not given the option to negotiate retransmission consent for the
carriage of their signal. In addition, cable systems will have to obtain
retransmission consent for the carriage of all "distant" commercial broadcast
stations, except for certain "superstations," i.e., commercial
satellite-delivered independent stations such as WGN. The Partnership has thus
far not been required to pay cash compensation to broadcasters for
retransmission consent or been required by broadcasters to remove broadcast
stations from the cable television channel line-ups. The Partnership has,
however, agreed to carry some services in specified markets pursuant to
retransmission consent arrangements which it believes are comparable to those
entered into by most other large cable operators, and for which it pays monthly
fees to the service providers, as it does with other satellite providers. The
second election between must-carry and retransmission consent for local
commercial television broadcast stations was October 1, 1996, and the
Partnership has agreed to carry one new service in specified markets pursuant to
these retransmission consent arrangements. The next election between must-carry
and retransmission consent for local commercial television broadcast stations
will be October 1, 1999.



                                      -11-
<PAGE>   12
         NONDUPLICATION OF NETWORK PROGRAMMING

         Cable television systems that have 1,000 or more customers must, upon
the appropriate request of a local television station, delete the simultaneous
or nonsimultaneous network programming of certain lower priority distant
stations affiliated with the same network as the local station.

         DELETION OF SYNDICATED PROGRAMMING

         FCC regulations enable television broadcast stations that have obtained
exclusive distribution rights for syndicated programming in their market to
require a cable system to delete or "black out" such programming from other
television stations which are carried by the cable system. The extent of such
deletions will vary from market to market and cannot be predicted with
certainty. However, it is possible that such deletions could be substantial and
could lead the cable operator to drop a distant signal in its entirety.

         PROGRAM ACCESS

         The 1992 Cable Act contains provisions that are intended to foster the
development of competition to traditional cable systems by regulating the access
of competing video providers to vertically integrated, satellite-distributed
cable programming services. The FCC has commenced a rulemaking proceeding to
seek comment on proposed modifications to its existing rules implementing the
statute, including: (1) establishing specific deadlines for resolving program
access complaints; (2) improving the discovery process, such as requiring the
disclosure of the rates that vertically integrated programmers charge cable
operators; (3) imposing monetary damages for program access violations; (4)
possibly applying the program access rules to certain situations in which
programming is moved from satellite delivery to terrestrial delivery; and (5)
revising the manner in which the rules apply to program buying cooperatives. It
is not clear to what extent, if any, the provisions of the 1992 Cable Act cover
programming distributed by means other than satellite or by programmers
unaffiliated with Multiple System Operators ("MSOs"). Legislation also is
expected to be introduced shortly in Congress to strengthen the program access
provisions of the 1992 Cable Act.

         FRANCHISE FEES

         Franchising authorities may impose franchise fees, but such payments
cannot exceed 5% of a cable system's annual gross revenues. Under the 1996
Telecom Act, franchising authorities may not exact franchise fees from revenues
derived from telecommunications services.

         RENEWAL OF FRANCHISES

         The 1984 Cable Act established renewal procedures and criteria designed
to protect incumbent franchisees against arbitrary denials of renewal. While
these formal procedures are not mandatory unless timely invoked by either the
cable operator or the franchising authority, they can provide substantial
protection to incumbent franchisees. Even after the formal renewal procedures
are invoked, franchising authorities and cable operators remain free to
negotiate a renewal outside the formal process. Nevertheless, renewal is by no
means assured, as the franchisee must meet certain statutory standards. Even if
a franchise is renewed, a franchising authority may impose new and more onerous
requirements such as upgrading facilities and equipment, although the
municipality must take into account the cost of meeting such requirements.

         The 1992 Cable Act makes several changes to the process under which a
cable operator seeks to enforce his renewal rights which could make it easier in
some cases for a franchising authority to deny renewal. While a cable operator
must still submit its request to commence renewal proceedings within thirty to
thirty-six months prior to franchise expiration to invoke the formal renewal
process, the request must be in writing and the franchising authority must
commence renewal proceedings not later than six months after receipt of such
notice. The four-month period for the franchising authority to grant or deny the
renewal now runs from the submission of the renewal proposal, not the completion
of the public proceeding. Franchising authorities may consider the 



                                      -12-
<PAGE>   13

"level" of programming service provided by a cable operator in deciding whether
to renew. For alleged franchise violations occurring after December 29, 1984,
franchising authorities are no longer precluded from denying renewal based on
failure to substantially comply with the material terms of the franchise where
the franchising authority has "effectively acquiesced" to such past violations.
Rather, the franchising authority is estopped if, after giving the cable
operator notice and opportunity to cure, it fails to respond to a written notice
from the cable operator of its failure or inability to cure. Courts may not
reverse a denial of renewal based on procedural violations found to be "harmless
error."

         CHANNEL SET-ASIDES

         The 1984 Cable Act permits local franchising authorities to require
cable operators to set aside certain channels for public, educational and
governmental access programming. The 1984 Cable Act further requires cable
television systems with thirty-six or more activated channels to designate a
portion of their channel capacity for commercial leased access by unaffiliated
third parties. While the 1984 Cable Act allowed cable operators substantial
latitude in setting leased access rates, the 1992 Cable Act requires leased
access rates to be set according to a formula determined by the FCC. The FCC has
recently changed the formula in order to produce lower rates and thereby
encourage the use of leased access.

         COMPETING FRANCHISES

         The 1992 Cable Act prohibits franchising authorities from unreasonably
refusing to grant franchises to competing cable television systems and permits
franchising authorities to operate their own cable television systems without
franchises.

         OWNERSHIP

         The 1996 Telecom Act repealed the 1984 Cable Act's prohibition against
local exchange telephone companies ("LECs") providing video programming directly
to customers within their local telephone exchange service areas. However, with
certain limited exceptions, a LEC may not acquire more than a 10% equity
interest in an existing cable system operating within the LEC's service area.
The 1996 Telecom Act also authorized LECs and others to operate "open video
systems" without obtaining a local cable franchise. See "Competition."

         The 1984 Cable Act and the FCC's rules prohibit the common ownership,
operation, control or interest in a cable system and a local television
broadcast station whose predicted grade B contour (a measure of a television
station's signal strength as defined by the FCC's rules) covers any portion of
the community served by the cable system. The 1996 Telecom Act eliminates the
statutory ban and directs the FCC to review its rule within two years. Finally,
in order to encourage competition in the provision of video programming, the FCC
adopted a rule prohibiting the common ownership, affiliation, control or
interest in cable television systems and Wireless Cable facilities having
overlapping service areas, except in very limited circumstances. The 1992 Cable
Act codified this restriction and extended it to co-located SMATV systems.
Permitted arrangements in effect as of October 5, 1992 are grandfathered. The
1996 Telecom Act exempts cable systems facing effective competition from the
Wireless Cable and SMATV restriction. In addition, a cable operator can purchase
a SMATV system serving the same area and technically integrate it into the cable
system. The 1992 Cable Act permits states or local franchising authorities to
adopt certain additional restrictions on the ownership of cable television
systems.

         The FCC has also adopted rules which limit the number of channels on a
cable system which can be occupied by programming in which the entity which owns
the cable system has an attributable interest. The limit is 40% of the first 75
activated channels.

         The FCC also recently commenced a rulemaking proceeding to examine,
among other issues, whether any limitations on cable-DBS cross-ownership are
warranted in order to prevent anticompetitive conduct in the video services
market.



                                      -13-
<PAGE>   14

         FRANCHISE TRANSFERS

         The 1992 Cable Act requires franchising authorities to act on any
franchise transfer request submitted after December 4, 1992 within 120 days
after receipt of all information required by FCC regulations and by the
franchising authority. Approval is deemed to be granted if the franchising
authority fails to act within such period.

         TECHNICAL REQUIREMENTS

         The FCC has imposed technical standards applicable to the cable
channels on which broadcast stations are carried, and has prohibited franchising
authorities from adopting standards which are in conflict with or more
restrictive than those established by the FCC. Those standards are applicable to
all classes of channels which carry downstream National Television System
Committee (NTSC) video programming. The FCC also has adopted additional
standards applicable to cable television systems using frequencies in the
108-137 MHz and 225-400 MHz bands in order to prevent harmful interference with
aeronautical navigation and safety radio services and has also established
limits on cable system signal leakage. Periodic testing by cable operators for
compliance with the technical standards and signal leakage limits is required
and an annual filing of the results of these measurements is required. The 1992
Cable Act requires the FCC to periodically update its technical standards to
take into account changes in technology. Under the 1996 Telecom Act, local
franchising authorities may not prohibit, condition or restrict a cable system's
use of any type of subscriber equipment or transmission technology.

         The FCC has adopted regulations to implement the requirements of the
1992 Cable Act designed to improve the compatibility of cable systems and
consumer electronics equipment. Among other things, these regulations, inter
alia, generally prohibit cable operators from scrambling their basic service
tier. The 1996 Telecom Act directs the FCC to set only minimal standards to
assure compatibility between television sets, VCRs and cable systems, and to
rely on the marketplace. The FCC must adopt rules to assure the competitive
availability to consumers of customer premises equipment, such as converters,
used to access the services offered by cable systems and other multichannel
video programming distributors.

         POLE ATTACHMENTS

         The FCC currently regulates the rates and conditions imposed by certain
public utilities for use of their poles unless state public service commissions
are able to demonstrate that they regulate the rates, terms and conditions of
cable television pole attachments. The state of Kentucky, where the Partnership
operates its remaining cable system, has certified to the FCC that it regulates
the rates, terms and conditions for pole attachments. In the absence of state
regulation, the FCC administers such pole attachment rates through use of a
formula which it has devised. As directed by the 1996 Telecom Act, the FCC has
adopted a new rate formula for any attaching party, including cable systems,
which offer telecommunications services. This new formula will result in
significantly higher attachment rates for cable systems which choose to offer
such services, but does not begin to take effect until 2001.

         OTHER MATTERS

         Other matters subject to FCC regulation include certain restrictions on
a cable system's carriage of local sports programming; rules governing political
broadcasts; customer service standards; obscenity and indecency; home wiring;
EEO; privacy; closed captioning; sponsorship identification; system
registration; and limitations on advertising contained in nonbroadcast
children's programming.



                                      -14-
<PAGE>   15
         COPYRIGHT

         Cable television systems are subject to federal copyright licensing
covering carriage of broadcast signals. In exchange for making semi-annual
payments to a federal copyright royalty pool and meeting certain other
obligations, cable operators obtain a statutory license to retransmit broadcast
signals. The amount of this royalty payment varies, depending on the amount of
system revenues from certain sources, the number of distant signals carried, and
the location of the cable system with respect to over-the-air television
stations. Any future adjustment to the copyright royalty rates will be done
through an arbitration process supervised by the U.S. Copyright Office.

         Cable operators are liable for interest on underpaid and unpaid royalty
fees, but are not entitled to collect interest on refunds received for
overpayment of copyright fees.

         Copyrighted music performed in programming supplied to cable television
systems by pay cable networks (such as HBO) and basic cable networks (such as
USA Network) is licensed by the networks through private agreements with the
American Society of Composers and Publishers ("ASCAP") and BMI, Inc. ("BMI"),
the two major performing rights organizations in the United States. As a result
of extensive litigation, both ASCAP and BMI now offer "through to the viewer"
licenses to the cable networks which cover the retransmission of the cable
networks' programming by cable systems to their customers.

         Copyrighted music performed by cable systems themselves, e.g., on local
origination channels or in advertisements inserted locally on cable networks,
must also be licensed. Cable industry negotiations with ASCAP, BMI and SESAC,
Inc. (a third and smaller performing rights organization) are in progress.

LOCAL REGULATION

         Because a cable television system uses local streets and rights-of-way,
cable television systems generally are operated pursuant to nonexclusive
franchises, permits or licenses granted by a municipality or other state or
local government entity. Franchises generally are granted for fixed terms and in
many cases are terminable if the franchise operator fails to comply with
material provisions. Although the 1984 Cable Act provides for certain procedural
protections, there can be no assurance that renewals will be granted or that
renewals will be made on similar terms and conditions. Upon receipt of a
franchise, the cable system owner usually is subject to a broad range of
obligations to the issuing authority directly affecting the business of the
system. The terms and conditions of franchises vary materially from jurisdiction
to jurisdiction, and even from city to city within the same state, historically
ranging from reasonable to highly restrictive or burdensome. The specific terms
and conditions of a franchise and the laws and regulations under which it was
granted directly affect the profitability of the cable television system. Cable
franchises generally contain provisions governing charges for basic cable
television services, fees to be paid to the franchising authority, length of the
franchise term, renewal, sale or transfer of the franchise, territory of the
franchise, design and technical performance of the system, use and occupancy of
public streets and number and types of cable services provided. The 1996 Telecom
Act prohibits a franchising authority from either requiring or limiting a cable
operator's provision of telecommunications services.

         The 1984 Cable Act places certain limitations on a franchising
authority's ability to control the operation of a cable system operator and the
courts have from time to time reviewed the constitutionality of several general
franchise requirements, including franchise fees and access channel
requirements, often with inconsistent results. On the other hand, the 1992 Cable
Act prohibits exclusive franchises, and allows franchising authorities to
exercise greater control over the operation of franchised cable television
systems, especially in the area of customer service and rate regulation.
Moreover, franchising authorities are immunized from monetary damage awards
arising from regulation of cable television systems or decisions made on
franchise grants, renewals, transfers and amendments.



                                      -15-
<PAGE>   16
         The foregoing does not purport to describe all present and proposed
federal, state and local regulations and legislation relating to the cable
television industry. Other existing federal regulations, copyright licensing
and, in many jurisdictions, state and local franchise requirements, currently
are the subject of a variety of judicial proceedings, legislative hearings and
administrative and legislative proposals which could change, in varying degrees,
the manner in which cable television systems operate. Neither the outcome of
these proceedings nor their impact upon the cable television industry can be
predicted at this time.

ITEM 2.  PROPERTIES

         As of March 9, 1998, the Partnership had sold substantially all of its
assets (except for the Somerset System) to FHGLP, including all its program
production equipment, headend equipment (towers, antennae, electronic equipment,
and satellite earth stations), test equipment, tools and maintenance equipment
and vehicles. The Partnership's remaining assets related to its Somerset System
are its cable plant (distribution equipment, amplifiers, customer drops and
hardware) and converters.

         Prior to the sale of the Sold Systems to FHGLP, the Partnership
generally leased the real estate on which its business offices, microwave
receiving antennae, microwave towers, warehouses, headend facilities and other
related equipment were located. The Partnership paid approximately $86,000
pursuant to all such leases for the year ended December 31, 1997. All such
leases were transferred to FHGLP in connection with the sale of the Sold
Systems. As of March 9, 1998, the Partnership entered into an agreement with
FHGLP to rent the usage of the headend site, the office and related equipment
with respect to the Somerset System. Such arrangement will terminate upon the
sale of the Somerset System to FHGLP.

ITEM 3.  LEGAL PROCEEDINGS

         The Partnership is a party to various legal proceedings. Such legal
proceedings are ordinary and routine litigation proceedings that are incidental
to the Partnership's business and management believes that the outcome of all
pending legal proceedings will not, in the aggregate, have a material adverse
effect on the financial condition of the Partnership.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         Not Applicable.



                                      -16-
<PAGE>   17
                                     PART II

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

         The following summarizes certain provisions of the Partnership
Agreement. All statements made below and elsewhere in this Report on Form 10-K
with respect to the Partnership Agreement are qualified in their entirety by
reference to the Partnership Agreement, a copy of which is filed as an exhibit
hereto. Capitalized terms that are not otherwise defined are used as defined in
the Partnership Agreement.

LIQUIDITY

         While the Partnership's equity securities, which consist of Units of
limited partnership interests, are publicly held, there is no established
trading market for the Units and it is not expected that such a market will
develop. The approximate number of equity security holders of record was 5,990
as of March 1, 1998. In addition to restrictions on the transferability of Units
contained in the Partnership Agreement, the transferability of Units is affected
by restrictions on resales imposed by federal or state law.

DISTRIBUTIONS

         The Partnership Agreement provides that the limited partners will
receive 99% and the General Partner will receive 1% of distributions of
Available Sale Proceeds until the limited partners have received Payback. After
the limited partners have received Payback, the limited partners will receive
75% and the General Partner will receive 25% of Available Sale Proceeds. The
term "Available Sales Proceeds" means all cash receipts of the Partnership, net
of any repayments of outstanding indebtedness, from any sale or refinancing of
Partnership assets less such amounts deemed necessary by the General Partner for
payments of or reserves for any expenses, contingencies, obligations or capital
expenditures of the Partnership and less any proceeds reinvested pursuant to the
terms of the Partnership Agreement. "Payback" means, with respect to any limited
partner, aggregate cash distributions to the limited partner equal to such
limited partner's capital contributions plus the 11% Preferred Return per year
computed on such limited partner's Adjusted Capital Contribution. The term "11%
Preferred Return" means an 11% per annum (cumulative but not compounded) cash
return based on each limited partner's Adjusted Capital Contribution and
calculated with respect to any Units from the date of the closing in which such
Units were first issued by the Partnership.

         The "Adjusted Capital Contribution" of a limited partner on which the
Payback and the 11% Preferred Return are calculated is the limited partner's
capital contribution reduced by the aggregate of cash distributions distributed
to the limited partners which is in excess of the amount required to satisfy any
11% Preferred Return. The Partnership does not presently expect to generate cash
in excess of the 11% Preferred Return. With respect to any limited partner, the
11% Preferred Return will be calculated from the date of the closing of the sale
of Units in which such limited partner's Units were first issued by the
Partnership.

         In connection with the Partnership's receipt of the proceeds from the
sale of the Sold Systems, on March 6, 1998, the Partnership retired its
outstanding bank debt and, on March 27, 1998, the Partnership distributed
approximately $58.2 million (approximately $809.92 per unit) to its unitholders.
If the Partnership obtains the requisite approvals from the City of Somerset on
or prior to September 30, 1998, the Partnership intends to complete the sale of
the Somerset System to FHGLP and to distribute to unitholders at the time of
such sale approximately $6.3 million, representing the proceeds from the sale of
the Somerset System (less certain deductions) and the remainder of the interest
required by the Settlement Agreement. The approximately $6.3 million to be
distributed upon the sale of the Somerset System is only an estimate and may
vary depending on transaction costs and expenses and liabilities incurred prior
to distribution. The Partnership's management does not anticipate that any
limited partner will receive payback prior to the dissolution of the
Partnership.




                                      -17-
<PAGE>   18

         The Partnership Agreement provides that the Partnership shall
distribute all Cash Available for Distributions, if any, within 45 days after
the end of each calendar month. The limited partners will receive 99% and the
General Partner will receive 1% of all Cash Available for Distributions. "Cash
Available for Distributions" means for any month (i) the sum of Gross Revenues
for such month, (ii) less the sum of all expenses for such month (prior to the
deduction of interest and depreciation and amortization expenses but including
management fees and general partner expenses) calculated in accordance with
generally accepted accounting principles, (iii) less any reasonable increase in
amounts reserved (or plus any decrease in amounts reserved) for payment by the
General Partner for capital expenditures of the Partnership, (iv) less amounts
accrued by the General Partner for such month for interest on borrowings of the
Partnership and (v) less increases in reserves (or plus decreases in reserves)
established by the General Partner in such month for principal payments on
borrowings of for obligations or other contingent liabilities of the
Partnership. No such distributions have been made since April 15, 1994 and the
Partnership does not expect that any such distributions will be made during the
duration of the Partnership. See Item 7., "Management's Discussion and Analysis
of Financial Condition and Results of Operations."

         The Partnership Agreement provides that distributions of Other
Distributable Funds, if any, will be made 45 days after the end of each calendar
month for which there are Other Distributable Funds. Distributions of Other
Distributable Funds will be made 99% to limited partners who own Units which
have been issued and outstanding for at least one year and 1% to the General
Partner. Such distributions to limited partners will be made pro rata based on
the number of such Units held by each limited partner. "Other Distributable
Funds" for any month means any borrowings designated by the General Partner to
fund cash distributions to Partners for such month. The Partnership does not
expect that any such distributions will be made during the duration of the
Partnership.

         The average distributions to Unitholders amounted to $99.09 per Unit in
1991, $100.28 per Unit in 1992, $84.86 per Unit in 1993 and $11.31 per Unit in
1994. The distributions made during 1993 consisted of approximately $5.7 million
of Cash Available for Distributions (described above) and $476,000 from
borrowings. There were no borrowings required to fund any portion of the
distributions paid in 1994. Cash Available for Distributions differs from cash
provided by operating activities due to increases and decreases, over the prior
year, of receivables, payables, and other assets and liabilities.

         The Partnership Agreement limits borrowings incurred to make
distributions to partners to not more than 10% of Gross Proceeds (as defined)
from the public offering of the Units (approximately $7.2 million). As of
December 31, 1997, the Partnership had incurred an aggregate of approximately
$5.4 million in borrowings to make distributions to partners. As noted above,
the Partnership suspended distributions subsequent to the April 15, 1994
payment.



                                      -18-
<PAGE>   19
ITEM 6.  SELECTED FINANCIAL DATA

         Set forth below is selected financial data of the Partnership for the
five years ended December 31, 1997. This data should be read in conjunction with
the Partnership's financial statements included in Item 8 hereof and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included in Item 7.


<TABLE>
<CAPTION>
                                                                               Year ended December 31,
                                                ----------------------------------------------------------------------------
                                                  1993             1994             1995             1996             1997
                                                --------         --------         --------         --------         --------
                                                                             (In thousands of dollars)
<S>                                             <C>              <C>              <C>              <C>              <C>     
OPERATIONS STATEMENT DATA
  Revenues                                      $ 16,785         $ 17,382         $ 18,363         $ 19,826         $ 20,299
  Costs and expenses                              (9,578)          (9,497)         (10,100)         (10,316)         (11,248)
  Depreciation and amortization                   (8,404)          (8,924)          (8,526)          (7,712)          (8,080)
                                                --------         --------         --------         --------         --------
  Operating income (loss)                         (1,197)          (1,039)            (263)           1,798              971
  Interest expense, net                           (1,519)          (1,776)          (2,010)          (1,813)          (1,490)
  Other expense                                       --                4               --               --              (61)
                                                --------         --------         --------         --------         --------
  Net loss                                      $ (2,716)        $ (2,811)        $ (2,273)        $    (15)        $   (580)
                                                ========         ========         ========         ========         ========

  Distributions to partners                     $  6,163         $    821         $     --         $     --         $     --
                                                ========         ========         ========         ========         ========

PER UNIT OF LIMITED PARTNERSHIP INTEREST:
     Net loss                                   $ (37.41)        $ (38.71)        $ (31.30)        $  (0.21)        $  (7.99)
                                                ========         ========         ========         ========         ========
     Distributions                              $  84.86         $  11.31         $     --         $     --         $     --
                                                ========         ========         ========         ========         ========

OTHER OPERATING DATA
  Net cash provided by operating
  activities                                    $  6,169         $  6,090         $  6,486         $  6,747         $  8,064
  EBITDA(1)                                        7,207            7,885            8,263            9,510            9,051
  EBITDA to revenues                                42.9%            45.4%            45.0%            48.0%            44.6%
  Total debt to EBITDA                              3.1x             2.9x             3.3x             2.6x             1.6x
  Capital expenditures                          $  3,889         $  3,982         $  5,713         $  3,033         $  4,832
</TABLE>

<TABLE>
<CAPTION>

                                                                                 As of December 31,
                                                ----------------------------------------------------------------------------
BALANCE SHEET DATA                                1993             1994             1995             1996             1997
                                                --------         --------         --------         --------         --------
<S>                                             <C>              <C>              <C>              <C>              <C>     
Total assets                                    $ 63,807         $ 60,060         $ 62,959         $ 59,334         $ 49,434
Total long-term debt                              22,300           22,500           27,000           24,300           14,750
Total liabilities                                 27,062           26,939           32,111           28,501           19,181
Partners' equity                                  36,745           33,121           30,848           30,833           30,253
</TABLE>



--------
        (1) EBITDA is calculated as operating income before income taxes,
depreciation and amortization. Based on its experience in the cable television
industry, the Partnership believes that EBITDA and related measures of cash flow
serve as important financial analysis tools for measuring and comparing cable
television companies in several areas, such as liquidity, operating performance
and leverage. In addition, the covenants in the primary debt instruments of the
Partnership use EBITDA-derived calculations as a measure of financial
performance. EBITDA should not be considered by the reader as an alternative to
net income as an indicator of the Partnership's financial performance or as an
alternative to cash flows as a measure of liquidity.



                                      -19-
<PAGE>   20
ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 
         RESULTS OF OPERATIONS

INTRODUCTION

         The 1992 Cable Act required the FCC to, among other things, implement
extensive regulation of the rates charged by cable television systems for basic
and programming service tiers, installation, and customer premises equipment
leasing. Compliance with those rate regulations has had a negative impact on the
Partnership's revenues and cash flow. The 1996 Telecom Act substantially changed
the competitive and regulatory environment for cable television and
telecommunications service providers. Among other changes, the 1996 Telecom Act
provides that the regulation of CPST rates will be terminated on March 31, 1999.
Because cable service rate increases have continued to outpace inflation under
the FCC's existing regulations, the Partnership expects Congress and the FCC to
explore additional methods of regulating cable service rate increases, including
deferral or repeal of the March 31, 1999 termination of CPST rate regulation and
legislation recently was introduced in Congress to repeal the termination
provision. There can be no assurance as to what, if any, further action may be
taken by the FCC, Congress or any other regulatory authority or court, or the
effect thereof on the Partnership's business. Accordingly, the Partnership's
historical financial results as described below are not necessarily indicative
of future performance. See "Legislation and Regulation."

         This Report includes certain forward looking statements regarding,
among other things, future results of operations, regulatory requirements,
competition, capital needs, the possible sale of assets by the Partnership and
general business conditions applicable to the Partnership. Such forward looking
statements involve risks and uncertainties including, without limitation, the
uncertainty of legislative and regulatory changes and the rapid developments in
the competitive environment facing cable television operators such as the
Partnership, as discussed more fully elsewhere in this Report.

RECENT DEVELOPMENTS

         As previously reported, on March 6 and 9, 1998, the Partnership
consummated the sale of substantially all of the Partnership's assets, except
the Somerset System, to FHGLP, the general partner of the Partnership's general
partner. The sale of the Somerset System to FHGLP will be completed as soon as
the necessary regulatory approvals can be obtained, of which there can be no
assurance. If the sale of the Somerset System is successfully completed, the
General Partner intends to dissolve the Partnership as soon as practicable
thereafter. See "Recent Developments." These matters are discussed more fully
under the caption Item 13., "Certain Relationships and Related Transactions -
Appraisal Process" and in the Partnership's Current Reports on Form 8-K dated
December 31, 1997, March 3, 1998 and March 27, 1998. Unitholders are urged to
review the referenced materials carefully.

RESULTS OF OPERATIONS

         1997 COMPARED TO 1996

         The Partnership's revenues increased from $19.8 million to $20.3
million, or by 2.4%, during 1997 compared to 1996. Of the $472,000 increase,
approximately $708,000 was due to increases in regulated service rates, $184,000
was due to the restructuring of The Disney Channel from a premium channel to a
tier channel on July 1, 1996 and $111,000 was due to increases in advertising
sales. These increases were partially offset by $368,000 due to reductions in
the number of subscriptions for premium cable services and by $163,000 due to
decreases in programming incentives. As of December 31, 1997, the Partnership
had approximately 49,000 basic subscribers and 15,600 premium service units,
approximately 4,000 and 800 of which were in the Somerset System.

         Service costs increased from $6.0 million to $6.7 million, or by 11.3%,
during 1997 compared to 1996. Service costs represent costs directly
attributable to providing cable service to customers. The 



                                      -20-
<PAGE>   21

$678,000 increase was primarily related to an increase of $504,000 in
programming fees charged by program suppliers (including primary satellite
fees), which included an $82,000 increase related to the restructuring of The
Disney Channel discussed above and to increases of $216,000 in franchise fees
and $30,000 in other expenses. These increases were partially offset by a
$72,000 increase in capitalized labor, primarily related to upgrading the
Centreville, Maryland cable television system.

         General and administrative expenses increased from $2.7 million to $2.9
million, or by 7.9%, during 1997 compared with 1996. Of the $216,000 increase,
$164,000 was due to bad debt expense, $76,000 was due to costs associated with
advertising sales, $17,000 was due to costs associated with marketing activities
and $21,000 was due to other expenses. These increases were partially offset by
a decrease of $62,000 related primarily to reduced insurance premiums as a
result of self-insuring the Partnership's cable distribution plant and
subscriber connections during 1997.

         General Partner management fees and reimbursed expenses remained
constant as a percent of revenue at 8.0% and remained at $1.6 million during
1997 compared with 1996.

         Operating income before income taxes, depreciation and amortization
(EBITDA) is a commonly used financial analysis tool for measuring and comparing
cable television companies in several areas, such as liquidity, operating
performance and leverage. EBITDA as a percentage of revenues decreased from
48.0% in 1996 to 44.6% in 1997. The decrease was primarily caused by increased
programming fees, franchise fees and bad debt expense, as described above.
EBITDA decreased from $9.5 million to $9.1 million, or by 4.8%, during 1997
compared with 1996. EBITDA should be considered in addition to and not as a
substitute for net income and cash flows determined in accordance with generally
accepted accounting principles as an indicator of financial performance and
liquidity.

         Depreciation and amortization expense increased from $7.7 million to
$8.1 million, or by 4.8%, during 1997 compared with 1996. The $368,000 increase
was due to asset additions related to various projects in the Centreville,
Maryland cable systems.

         Operating income decreased from $1.8 million to $971,000 during 1997
compared with 1996. The $827,000 decrease was primarily due to increased
programming fees, franchise fees and bad debt expense as discussed above.

         Net interest expense, including the effects of interest rate hedging
agreements, decreased from $1.8 million to $1.5 million, or by 17.8%, during
1997 compared to 1996. The $323,000 decrease was due primarily to lower average
debt balances and lower interest rates. The hedging agreements resulted in
higher interest expense of $117,000 and $72,000 for the years ended December 31,
1996 and 1997, respectively.

         Other expense increased $61,000 for the year ended December 31, 1997 as
compared to 1996. The increase was due primarily to $103,000 in legal costs
related to the sale of the Partnership's assets as discussed above in "Recent
Developments." This increase was partially offset by other income of $42,000 due
primarily to the sale of an easement in Somerset, Kentucky to the Commonwealth
of Kentucky for the purpose of improving U.S. Highway 27.

         Due to the factors described above, the Partnership's net loss
increased from $15,000 to $580,000 during 1997 compared to 1996.

         1996 COMPARED TO 1995

         The Partnership's revenues increased from $18.4 million to $19.8
million, or by 8.0%, during 1996 compared to 1995. Of the $1.4 million increase,
approximately $1.2 million was due to increases in regulated service rates
implemented in the second quarter of 1995 and throughout 1996, $215,000 was due
to the restructuring of The Disney Channel from a premium channel to a tier
channel on July 1, 1996, $219,000 



                                      -21-
<PAGE>   22

was due to programmer incentives and $93,000 was due to increases in advertising
sales. These increases were partially offset by revenue decreases of $264,000,
primarily due to reductions in the number of subscriptions for premium cable
services. As of December 31, 1996, the Partnership had approximately 48,600
basic subscribers and 17,500 premium service units. The decrease of 5,400
premium units from December 31, 1995 was due in part to approximately 1,700
Disney premium units that became tier subscriptions under the restructuring
discussed above.

         Service costs remained relatively unchanged at approximately $6 million
during 1996 compared to 1995. Service costs represent costs directly
attributable to providing cable services to customers.

         General and administrative expenses increased from $2.6 million to $2.7
million, or by 4.9%, during 1996 compared with 1995. Of the $128,000 increase,
$51,000 was due to increases in insurance cost, $30,000 was due to increases in
compliance costs associated with reregulation by the FCC and $47,000 was due to
increases in other expenses.

         General Partner management fees and reimbursed expenses remained
constant as a percent of revenue at 8.0%, and increased from $1.5 million to
$1.6 million during 1996 compared with 1995.

         Depreciation and amortization expense decreased from $8.5 million to
$7.7 million, or by 9.5%, during 1996 compared with 1995. The $814,000 decrease
was due primarily to certain assets becoming fully amortized in 1996.

         An operating loss of $263,000 for 1995 became operating income of $1.8
million for 1996. The $2.1 million increase in operating income during 1996
compared with 1995 was due primarily to increased revenues and decreases in
depreciation and amortization expense.

         Net interest expense, including the effects of interest rate hedging
agreements, decreased from $2 million to $1.8 million, or by 9.8%, during 1996
compared to 1995. The $197,000 decrease was due primarily to interest income
earned on higher cash balances offset by an increase in interest expense due to
higher average debt balances (because the $5.6 million borrowed on December 29,
1995 was not outstanding during 1995). The hedging agreements resulted in higher
interest expense of $19,000 and $117,000 for the years ended December 31, 1995
and 1996, respectively.

         Due to the factors described above, the Partnership's net loss
decreased from $2.3 million to $15,000 during 1996 compared to 1995.

LIQUIDITY AND CAPITAL RESOURCES

         The Partnership's primary objective, having invested its net offering
proceeds in cable systems, has been to distribute to its partners all available
cash flow generated from operations and proceeds from the sale of cable systems,
if any, after providing for expenses, debt service and capital requirements
relating to possible improvement and upgrade of its Systems. As discussed above
in "Recent Developments", the Partnership sold substantially all its assets to
FHGLP in March 1998, and in connection with such sale distributed approximately
$58.2 million to its unitholders on March 27, 1998. If the Partnership obtains
the requisite approvals from the City of Somerset on or prior to September 30,
1998, the Partnership intends to complete the sale of the Somerset System and to
distribute the proceeds from such sale (less certain deductions) to unitholders
at the time of such sale. If such approvals are not received on or before
September 30, 1998, the Partnership intends to explore alternative options,
including the sale of the Somerset System to a third party. See "Business-Recent
Developments."

         The Partnership has relied upon the availability of cash generated from
operations and borrowings to fund its ongoing capital requirements. In general,
these requirements have involved expansion, improvement and upgrade of the
Partnership's cable systems. The Partnership encountered liquidity difficulties



                                      -22-
<PAGE>   23

due in part to the adverse effects of the 1992 Cable Act and new competitive
pressures resulting from both technological advances as well as from the 1996
Telecom Act which required that material amounts of capital be invested in the
Partnership's cable systems. As previously reported, in response to the FCC's
amended rate regulation rules, distributions to Unitholders were discontinued
subsequent to the April 15, 1994 payment in order to preserve cash resources.
The Partnership also delayed the majority of its rebuild and upgrade capital
expenditure programs that had been scheduled for 1994, 1995, 1996 and 1997 in
order to preserve liquidity. See "Legislation and Regulation."

         The Partnership's access to capital has been severely constrained
primarily due to the limitations imposed by the Partnership Agreement. This
limitation on indebtedness, which is discussed below, has been at odds with the
need to increase leverage and to spend approximately $35 million to rebuild and
upgrade the Partnership's cable systems (of which approximately $650,000 was
mandated by franchise agreements). The Partnership spent an aggregate of
approximately $4.8 million in 1997 for all capital expenditures, including
approximately $156,000 to begin the upgrade of a portion of one system, which
represented the minimum level of expenditures that management believes were
necessary in 1997 to comply with franchise authority and FCC technical
requirements.

         The Partnership Agreement provides that without the approval of a
majority of interests of limited partners, the Partnership may not incur any
borrowings unless the amount of such borrowings together with all outstanding
borrowings does not exceed 30% of the greater of the aggregate cost or current
fair market value of the Partnership's assets as determined by the General
Partner. As discussed above, in order to spend the appropriate amount of capital
to rebuild and upgrade the Partnership's systems, this provision of the
Partnership Agreement would need to have been amended in order to have
significantly increased the Partnership's leverage because the Partnership's
management did not believe that it would be able to fund rebuild requirements
entirely from cash resources and operating cash flow.

         The Partnership Agreement also limits borrowings incurred to make
distributions to partners to not more than 10% of Gross Proceeds from the public
offering of the Units (approximately $7.2 million). As of December 31, 1997, the
Partnership had incurred an aggregate of approximately $5.4 million in
borrowings to make distributions to partners. The Partnership discontinued
distributions subsequent to the April 15, 1994 payments.

         As of December 31, 1997, the amount outstanding under the Partnership's
amended Bank Credit Agreement was $14.8 million. At December 31, 1997, such
borrowings bore interest at an average rate of 8.4% (including the effect of
interest rate swap transactions). In connection with the sale of the Sold
Systems, the Partnership fully repaid the $14.8 million outstanding debt on
March 6, 1998. The Partnership's management believes that the Partnership's
anticipated cash resources and cash flow from operations will be sufficient to
fund its working capital requirements until the Partnership is dissolved. See
"Business - Recent Developments."

         The Partnership's management agreement with the General Partner
requires deferral of the payment of up to 50% of the management fees for any
month, without interest, unless Adjusted Operating Cash (as defined) for such
month exceeds a 10% annualized return calculated with respect to outstanding
Partnership Units. To the extent that Adjusted Operating Cash exceeds such
amount, the General Partner may recover previously deferred fees, without
interest. In compliance with these provisions, the General Partner received its
standard management fee for 1997 and recovered $276,000 in previously deferred
management fees.

         Beginning in August 1997, the General Partner elected to self-insure
the Partnership's cable distribution plant and subscriber connections against
property damage as well as possible business interruptions caused by such
damage. The decision to self-insure was made due to the geographical
diversification of the Partnership's asset base and due to significant increases
in the cost of insurance coverage and decreases in the amount of insurance
coverage available. The Partnership continues to purchase insurance coverage in
amounts its management views as appropriate for all other property, liability,
automobile, workers' compensation and other types of insurable risks. In January
1998, the Partnership suffered storm damage to its Somerset, Kentucky cable



                                      -23-
<PAGE>   24

television system. Management estimates that the cost to repair this damage will
be $1.0 million and will be funded through cash from the sale of the Sold
Systems.

         1997 VS. 1996

         Cash provided by operating activities increased from $6.7 million to
$8.1 million, or by $1.3 million, for the year ended December 31, 1997 compared
to 1996. The increase resulted from an increase in the net loss of $565,000,
$368,000 of which resulted from an increase in non-cash depreciation and
amortization; and from an increase of $1.5 million in other operating items
(receivables, prepaid expenses and other assets, cable materials, equipment and
supplies, payables, accrued expenses and customer deposits and prepayments).

         Cash used in investing activities increased by $2.0 million during 1997
compared to 1996, primarily due to an increase in capital expenditures. Cash
used by financing activities increased $6.9 million because of increased net
repayment of debt of $9.6 million during 1997 compared to $2.7 million during
1996.

         1996 VS. 1995

         Cash provided by operating activities increased from $6.5 million to
$6.7 million, or by $261,000, for the year ended December 31, 1996 compared to
1995. The increase resulted from a decrease in the net loss of $2.3 million,
$814,000 of which resulted from a decrease in non-cash depreciation and
amortization; and from a decrease of $1.2 million in other operating items
(receivables, prepaid expenses and other assets, cable materials, equipment and
supplies, payables, accrued expenses and customer deposits and prepayments),
which includes the $900,000 decrease in deferred management fees discussed
above.

         Cash used in investing activities decreased by $2.8 million during 1996
compared to 1995, primarily due to a decrease in capital expenditures. Cash used
by financing activities increased $7.2 million because of increased net
repayment of debt of $2.7 million during 1996 compared to net borrowings of $4.5
million during 1995.

         Operating income before depreciation and amortization (EBITDA) as a
percentage of revenues increased from 45.0% to 48.0% during 1996 compared to
1995. The increase was primarily caused by increased revenues, as described
above. EBITDA increased from $8.3 million to $9.5 million, or by 15.1%, during
1996 compared to 1995.

INFLATION

         Certain of the Partnership's expenses, such as those for wages and
benefits, equipment repair and replacement, and billing and marketing generally
increase with inflation. However, the Partnership does not believe that its
financial results have been, or will be, adversely affected by inflation in a
material way, provided that it is able to increase its service rates
periodically, of which there can be no assurance, due to the reregulation of
rates charged for certain cable services. See "Legislation and Regulation."

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA

         The financial statements and related financial information required to
be filed hereunder are indexed on Page F-1.

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

         Not applicable.



                                      -24-
<PAGE>   25
                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         The Partnership Agreement provides that the General Partner shall
manage the business and affairs of the Partnership. The business and affairs of
the General Partner are managed by its general partner, FHGLP. FHGI serves as
the sole general partner of FHGLP. As such, FGHI is responsible for the
management of the business and operations of the Partnership. The officers and
directors are subject to certain conflicts of interest relating to time and
services devoted to the Partnership. See Item 13., "Certain Relationships and
Related Transactions - Conflicts of Interest."

EXECUTIVE OFFICERS AND DIRECTORS

               The directors and executive officers of FHGI are as follows:

<TABLE>
<CAPTION>
Name                         Age     Position
----                         ---     --------
<S>                          <C>     <C>
Marc B. Nathanson            52      Chairman of the Board, Chief Executive 
                                     Officer and Director of FHGI

Frank J. Intiso              51      President and Chief Operating Officer

Stanley S. Itskowitch        59      Executive Vice President, General Counsel 
                                     and Director of FHGI

Michael K. Menerey           46      Executive Vice President, Chief Financial 
                                     Officer and Secretary

Joe A. Johnson               53      Executive Vice President - Operations

Thomas J. Hatchell           48      Executive Vice President - Operations

Jon W. Lunsford              38      Executive Vice President - Finance
</TABLE>


         The following sets forth certain biographical information with respect
to the directors and executive officers of FHGI:

MARC B. NATHANSON, 52, has been Chairman of the Board and Chief Executive
Officer of FHGI and its predecessors since 1975, and prior to September 19, 1995
also served as President. Prior to 1975, Mr. Nathanson was Vice President of
Marketing for Teleprompter Corporation, then the largest MSO in the United
States. He also held executive positions with Warner Cable and Cypress
Communications Corporation. He is a former President of the California Cable
Television Association and a member of Cable Pioneers. He is currently a
Director of the National Cable Television Association ("NCTA"). At the 1986 NCTA
convention, Mr. Nathanson was honored by being named the recipient of the
Vanguard Award for outstanding contributions to the growth and development of
the cable television industry. Mr. Nathanson is a 28-year veteran of the cable
television industry. He is a founder of the Cable Television Administration and
Marketing Society ("CTAM") and the Southern California Cable Television
Association. Mr. Nathanson has served as Chairman of the Board, Chief Executive
Officer and President of Enstar since October 1988. Mr. Nathanson is a Director
of T.V. Por Cable Nacional, S.A. de C.V., an Advisory Board member of TVA,
(Brazil) and a Director of GRB Entertainment. Mr. Nathanson is also Chairman of
the Board and Chief Executive Officer of FIC. Mr. Nathanson was appointed by
President Clinton and confirmed by the U.S. Senate on August 14, 1995 for a
three year term on the Board of Governors of International Broadcasting of the
United States Information Agency. He also serves on the Board of Radio Free
Asia, Radio Free Europe and Radio Liberty. Mr. Nathanson is a trustee of the
Annenburg School of Communications at the University of Southern California and
a member of the Board of Visitors of the Anderson School of Management at the
University of California, Los Angeles ("UCLA"). In addition, he serves on the
Board of the UCLA Foundation and the UCLA Center for Communications Policy and
is on the Board of Governors of AIDS Project Los Angeles. Mr. Nathanson received
the "Entrepreneur of the Year Award" from Inc. Magazine in 1994.



                                      -25-
<PAGE>   26
FRANK J. INTISO, 51, was appointed President and Chief Operating Officer of FHGI
in September 1995, and between 1982 and that date held the positions of
Executive Vice President and Chief Operating Officer, with responsibility for
the day-to-day operations of all cable television systems under FHGLP's
management. Mr. Intiso has also served as Executive Vice President and as a
Director of Enstar since October 1988. Mr. Intiso has a Masters Degree in
Business Administration from UCLA and is a Certified Public Accountant. He
serves as Chair of the California Cable Television Association and is on the
boards of the Cable Advertising Bureau, Cable in the Classroom, Community
Antenna Television Association and California Cable Television Association. He
is a member of the American Institute of Certified Public Accountants, the
American Marketing Association, the American Management Association and the
Southern California Cable Television Association.

STANLEY S. ITSKOWITCH, 59, has been a Director of FHGI and its predecessors
since 1975, and Senior Vice President and General Counsel from 1987 to 1990 and
has been Executive Vice President and General Counsel since February 1990. He
has been President and Chief Executive Officer of F.C. Funding, Inc. (formerly
Fallek Chemical Company), which is a marketer of chemical products, since 1980.
He is a Certified Public Accountant and a former tax partner in the New York
office of Touche Ross & Co. (now Deloitte & Touche LLP). He has a J.D. Degree
and an L.L.M. Degree in Tax from New York University School of Law. Mr.
Itskowitch has also served as Senior Vice President or Executive Vice President
and as a Director of Enstar since October 1988. Mr. Itskowitch is also Executive
Vice President and General Counsel of FIC.

MICHAEL K. MENEREY, 46, has been Executive Vice President, Chief Financial
Officer and Secretary of FHGI since February 1998 and was Chief Financial
Officer and Secretary of FHGI and its predecessors between 1984 and 1998. Mr.
Menerey is a Certified Public Accountant and is a member of the American
Institute of Certified Public Accountants and the California Society of
Certified Public Accountants, and he was formerly associated with BDO Seidman.
Mr. Menerey has also served as Chief Financial Officer, Secretary and as a
Director of Enstar since October 1988.

JOE A. JOHNSON, 53, has been Executive Vice President of Operations of FHGI
since September 1995, and was a Divisional Vice President of FHGI between 1989
and 1992. From 1982 to 1989, he held the positions of Vice President and
Director of Operations for Sacramento Cable Television, Group W Cable of Chicago
and Warner Amex. From 1975 to 1982, Mr. Johnson held Cable System and Regional
Manager positions with Warner Amex and Teleprompter.

THOMAS J. HATCHELL, 48, has been Executive Vice President of Operations of FHGI
since February 1998. From October 1995 to February 1998, he was Senior Vice
President of Operations of Falcon International Communications, L.P. and its
predecessor company and was a Senior Vice President of FHGI from January 1992 to
September 1995. Mr. Hatchell was a Divisional Vice President of FHGI between
1989 and 1992. From 1981 to 1989 he served as Vice President and Regional
Manager for Falcon's San Luis Obispo, California region. He was Vice President -
Construction of an affiliate of Falcon from June 1980 to June 1981. In addition,
he served as a General Manager of the cable system in Tulare County, California,
from 1977 to 1980. Prior to that time, Mr. Hatchell served as a cable executive
with the Continental Telephone Company.

JON W. LUNSFORD, 38, has been Executive Vice President - Finance of FHGI since
February 1998 and was Vice President - Finance and Corporate Development of FHGI
between September 1994 and 1998. From 1991 to 1994, he served as Director of
Corporate Finance at Continental Cablevision, Inc. Prior to 1991, Mr. Lunsford
was a Vice President with Crestar Bank.

OTHER OFFICERS OF FALCON

         The following sets forth, as of December 31, 1997, certain biographical
information with respect to additional members of the management of FHGI:


                                      -26-
<PAGE>   27
LYNNE A. BUENING, 44, has been Vice President of Programming of FHGI since
November 1993. From 1989 to 1993, she served as Director of Programming for
Viacom Cable, a division of Viacom International Inc. Prior to that, Ms. Buening
held programming and marketing positions in the cable, broadcast and newspaper
industries.

OVANDO COWLES, 44, has been Vice President of Advertising Sales and Production
of FHGI since January 1992. From 1988 to 1991, he served as a Director of
Advertising Sales and Production at Cencom Cable Television in Pasadena,
California. He was an Advertising Sales Account Executive at Choice TV, an
affiliate of Falcon, from 1985 to 1988. From 1983 to 1985, Mr. Cowles served in
various sales and advertising positions.

ABEL C. CRESPO, 38, has been Controller of FHGI since January 1997. Mr. Crespo
joined Falcon in December 1984, and has held various accounting positions during
that time, most recently Senior Assistant Controller. Mr. Crespo holds a
Bachelor of Science degree in Business Administration from California State
University, Los Angeles.

HOWARD J. GAN, 51, has been Vice President of Regulatory Affairs of FHGI and its
predecessors since 1988. He was General Counsel at Malarkey-Taylor Associates, a
Washington, D.C.-based telecommunications consulting firm, from 1986 to 1988.
Mr. Gan was Vice President and General Counsel at the Cable Television
Information Center from 1978 to 1983. In addition, he was an attorney and an
acting Branch Chief of the Federal Communications Commission's Cable Television
Bureau from 1975 to 1978.

R.W. ("SKIP") HARRIS, 50, has been Vice President of Marketing of FHGI since
June 1991. He is a member of the CTAM Premium Television Committee. Mr. Harris
was National Director of Affiliate Marketing for the Disney Channel from 1985 to
1991. He was also a sales manager, regional marketing manager and director of
marketing for Cox Cable Communications from 1978 to 1985.

JOAN SCULLY, 62, has been Vice President of Human Resources of FHGI and its
predecessors since May 1988. From 1987 to May 1988, she was self-employed as a
Management Consultant to cable and transportation companies. She served as
Director of Human Resources of a Los Angeles based cable company from 1985
through 1987. Prior to that time, she served as a human resource executive in
the entertainment and aerospace industries. Ms. Scully holds a Masters Degree in
Human Resources Management from Pepperdine University.

RAYMOND J. TYNDALL, 50, has been Vice President of Engineering of FHGI since
October 1989. From 1975 to September 1989, he held various technical positions
with Choice TV and its predecessors. From 1967 to 1975, he held various
technical positions with Sammons Communications. He is a certified National
Association of Radio and Television Engineering ("NARTE") engineer in lightwave,
microwave, satellite and broadband and is a member of the Cable Pioneers.

         In addition, FHGI has six Divisional Vice Presidents who are based in
the field. They are Donald L. Amick, Daniel H. DeLaney, Ron L. Hall, Michael E.
Kemph, Michael D. Singpiel and Robert S. Smith.

ADVISORY COMMITTEE AND CONFLICTS COMMITTEE

         The General Partner has formed an eight member Advisory Committee,
members of which are non-employees. Members of the Advisory Committee are
appointed by the General Partner and can be removed only by a vote of a majority
of the Advisory Committee. Members meet periodically to review the operations of
the Partnership and to advise management. The unaffiliated members of the
Advisory Committee constitute the Conflicts Committee and may be called upon
from time to time to review activities, policies and practices of the
Partnership dealing with all matters about which conflicts of interest may
arise.



                                      -27-
<PAGE>   28
         The following individuals have been appointed to the Advisory
Committee:

         Marc B. Nathanson. Mr. Nathanson has been Chairman of the Board and
Chief Executive Officer of FHGI or its predecessors since 1975, and prior to
September 19, 1995 also served as President.

         Frank J. Intiso. Mr. Intiso was appointed President and Chief Operating
Officer of FHGI in 1995 and between 1982 and that date he held the positions of
Executive Vice President and Chief Operating Officer of FHGI or its
predecessors.

         Burt I. Harris. Mr. Harris is President and Chief Executive Officer of
Harriscope Corporation, which controls the ownership and operations of KWHY-TV,
Los Angeles, California. He is a former President and Chairman of Harris Cable
Corporation and a former Vice-Chairman of Warner Cable. He has been a member of
the National Cable Television Association (NCTA) for over 25 years and was
Chairman of the NCTA from 1976 to 1977. In 1979, he was presented with "The
Vanguard Award," the highest recognition of an individual in the cable
television industry. He is also a director of various corporations and, prior to
its dissolution in August 1996, was also a member of the Advisory Committee for
Falcon Cable Systems Company.

         Henry Winkler. Mr. Winkler is a principal of Fair Dinkum Productions,
as well as an actor and a director. Mr. Winkler earned popular and critical
acclaim for his portrayal of "The Fonz" on ABC-TV's "Happy Days" for ten seasons
(1974-84). Since 1979, he has been involved with several different entities,
including Fair Dinkum, which produces feature films and television programming,
including the hit series "Sightings." Mr. Winkler was co-executive producer of
MacGyver. He is also co-executive producer of Dead Man's Gun, currently on
Showtime. Additionally, Mr. Winkler has been honorary chairman of United Friends
of the Children and national chairman of the annual Toys for Tots campaign. He
holds a Bachelor of Arts degree from Emerson College and a Master of Fine Arts
degree from the Yale School of Drama.

         Peter L. S. Currie. Mr. Currie is Senior Vice President and Chief
Financial Officer of Netscape Communications Corporation. Prior to joining
Netscape, Mr. Currie served as Executive Vice President and Chief Financial
Officer of McCaw Cellular Communications, a leading provider of wireless
communications services. Before that, he was a principal in the Investment
Banking Division of Morgan Stanley & Co., Incorporated.

         Mark E. Buchman. Mr. Buchman, a business consultant, was President and
Chief Executive Officer of Liberty Bank, Honolulu, Hawaii, until July 1994.
Previously he was President and Chief Executive Officer of the Bank of Los
Angeles. Mr. Buchman was appointed President and Chief Executive Officer of the
Government National Mortgage Association by President Reagan and served in this
capacity from 1988 to 1989. Mr. Buchman served as Executive Vice
President/Division Manager, Corporate Banking for Union Bank from 1982 to 1988.
Mr. Buchman was associated with Manufacturers Hanover Bank for twenty years, the
majority of which he spent in the International Division in the Asian/Pacific
area. While at Manufacturers Hanover, Mr. Buchman's positions included serving
as the bank's Far Eastern Representative in Tokyo and the Asian Banking Group's
Senior Vice President and Division Manager. Mr. Buchman is a graduate of the
University of Pennsylvania and completed the Advanced Management Program at the
Harvard Graduate School of Business Administration.

         John K. Van de Kamp. Mr. Van de Kamp is of counsel in the Los Angeles
office of the Law Firm of Dewey Ballantine and is a member of the California
Bar. He is also President of the Thoroughbred Owners of California. From 1983 to
1991, Mr. Van de Kamp served as the California Attorney General. From 1975 to
1983, Mr. Van de Kamp served as Los Angeles County District Attorney. From 1971
to 1975, Mr. Van de Kamp served as first Federal Public Defender, Central
District of California, Los Angeles. In 1970, Mr. Van de Kamp served as Special
Assistant to the President's Commission on Campus Unrest (the Scranton
Commission). From 1966 to 1967, Mr. Van de Kamp served as United States
Attorney, Central District of California, Los Angeles. From 1960 to 1966, Mr.
Van de Kamp served as Assistant United States Attorney, Chief of the Criminal
Division, Chief Assistant U.S. Attorney, Los Angeles. Mr. Van de Kamp is a
graduate of Dartmouth College. Mr. Van de Kamp received a J. D. degree from the
Stanford University School of Law.



                                      -28-
<PAGE>   29
         Ned S. Robertson. Mr. Robertson has been an attorney since 1971 and is
currently a partner in the law firm of Aronberg Goldgehn Davis & Garmisa in
Chicago, Illinois. Mr. Robertson received a bachelor of arts degree from Hobart
College in 1967, majoring in political science, and his Juris doctorate from IIT
Chicago-Kent College of Law in 1971. He has published several articles on estate
planning and family business issues and has lectured on these subjects. He is a
past chairman of the Medical Research Institute Council, an organization that
raised substantial funds for research at Michael Reese Hospital and Medical
Center, Chicago, Illinois. Mr. Robertson is a member of the Illinois State Bar
Association, the Chicago Bar Association and the Chicago Estate Planning
Council. He is also Chairman of Division 1 of the Trust Law Committee of the
Chicago Bar Association and a member of the Franchise Advisory Board to the
Illinois Attorney General. Mr. Robertson's law firm has provided legal counsel
to affiliates of Falcon.

         The Partnership Agreement provides that members of the Advisory
Committee will not be liable to the Partnership or the Limited Partners for
certain acts or omissions. See Item 13., "Certain Relationships and Related
Transactions-Fiduciary Responsibility and Indemnification of the General
Partner." Non-employee members of the Advisory Committee are paid $5,000 per
annum, plus reimbursement of expenses.

ITEM 11. EXECUTIVE COMPENSATION

         The following summarizes compensation, fees and distributions that may
or will be paid by the Partnership to the General Partner and FHGLP. For more
detailed information, see the Partnership Agreement.

MANAGEMENT FEE

         FHGLP, pursuant to the Partnership Agreement, manages all aspects of
daily operations of the Partnership's systems, including engineering,
maintenance, programming, advertising, marketing and sales programs, preparation
of financial reports, budgets and reports to governmental and regulatory
agencies and liaison with federal, state and local government officials. FHGLP
is entitled to receive a management fee (the "Management Fee") equal to 5% of
the Partnership's Gross Operating Revenues. "Gross Operating Revenues" means the
total revenues derived by the Partnership but does not include interest income
or Available Sale Proceeds. However, during any month commencing after 18 months
from the initial closing of the sale of Units, up to 50% of the Management Fee
will not be paid currently unless Adjusted Operating Cash for the month exceeds
the Subordination Amount for that month. "Adjusted Operating Cash" means for any
month (i) the sum of gross revenues for such month, (ii) less the sum of all
expenses of the Partnership for such month (other than depreciation and
amortization expenses, the Management Fee and interest expense) calculated in
accordance with generally accepted accounting principles, (iii) less, for any
month beginning with the first full calendar month commencing 42 months after
the initial closing of the sale of Units, interest accrued by the General
Partner for such month for all interest on borrowings of the Partnership and
(iv) less 50% of the Management Fee attributable to such month.

         "Subordination Amount" means for any month, a 10% annualized return,
calculated with respect to Units in each month by determining 0.833% of the
Adjusted Capital Contribution attributable to each Unit on the last day of such
month, but calculated only with respect to Units issued and outstanding for more
than 12 months. To the extent Adjusted Operating Cash for any month exceeds the
Subordination Amount for that month, FHGLP will be entitled to recover deferred
Management Fees, if any. In addition, if Payback is achieved (which is not
presently expected), then the Partnership may pay the unpaid balance of
Management Fees for all prior periods. If Payback is not achieved, the
Partnership will not be required to pay the unpaid Management Fees. For the year
ended December 31, 1997, the management fees and reimbursed expenses totaled
$1.6 million, all of which was paid currently in cash in accordance with the
Partnership Agreement. In addition, in accordance with the Partnership Agreement
the Partnership also paid $276,000 of fees to the General Partner that had been
deferred in prior years to give effect to the amount of Adjusted Operating Cash
realized. As a result of the sale of the Sold Systems, the Partnership's
management anticipates deferring 50% of the management fee payments in 1998.



                                      -29-
<PAGE>   30
PARTICIPATION IN DISTRIBUTIONS

         The General Partner is entitled to share in distributions from, and
profits and losses in, the Partnership. See Item 5, "Market for Registrant's
Common Equity and Related Stockholder Matters."

DISPOSITION FEES AND EXPENSES

         A disposition fee equal to 1% of the sale price received by the
Partnership for the sale of cable systems to unaffiliated third parties is
payable to FHGLP provided that no such fee shall be paid unless and until the
Limited Partners have received a return of their total capital contributions and
a cumulative (but not compounded) six percent annual return on their Adjusted
Capital Contributions. The Partnership will reimburse the General Partner and
FHGLP for certain disposition expenses whether or not a cable system is, in
fact, disposed of and regardless of the limit on General Partner Expenses,
except that certain expenses of the General Partner itself may be subject to
limitations on reimbursement. In case of cable systems disposed of by the
Partnership in exchange for other cable systems and cash, the disposition fee
will be paid only with respect to the cash (or cash equivalents such as
promissory notes) portion of the sale price. No disposition fee will be paid on
sales of cable systems to the General Partner or any of its affiliates.
Accordingly, no disposition fee was paid in connection with the sale of the Sold
Systems and, if the Somerset System is sold to FHGLP as currently anticipated,
no disposition fee will be paid in connection with such sale.

ACQUISITION FEES AND EXPENSES

         An acquisition fee equal to 1% of the purchase price paid to sellers of
cable systems acquired by the Partnership from unaffiliated third parties is
payable to FHGLP. The Partnership will reimburse the General Partner and FHGLP
for acquisition expenses incurred in connection with the investigation and
analysis of acquisitions whether or not a cable system is, in fact, acquired and
regardless of any limit on General Partner Expenses. No acquisition fee will be
paid with respect to acquisitions made with reinvested Available Sale Proceeds.
"Available Sales Proceeds" means all cash receipts of the Partnership, net of
any repayments of outstanding indebtedness, from any sale or refinancing of
partnership assets less such amounts deemed necessary by the General Partner for
payments of or reserves for any expenses, contingencies, obligations or capital
expenditures of the Partnership and less any proceeds reinvested pursuant to the
terms of the Partnership Agreement. In the case of cable systems acquired by the
Partnership in exchange for other cable systems and cash, the acquisition fee
will be paid only with respect to the cash (or cash equivalents such as
Partnership promissory notes) portion of the purchase price.

GENERAL PARTNER EXPENSES AND MANAGEMENT EXPENSES

         The Partnership will reimburse the General Partner and FHGLP for
certain direct and indirect expenses incurred on behalf of the Partnership in
connection with the administration of the Partnership and management of the
Partnership's cable systems in an amount up to 3% of Gross Operating Revenues.
The foregoing cumulative limitation on General Partner Expenses and Management
Expenses does not apply to Acquisition Expenses or Disposition Expenses. The
expenses subject to reimbursement include all direct and indirect expenses
(including legal and accounting fees, overhead and travel and communication
expenses) incurred by FHGLP in connection with the management of the cable
systems of the Partnership, or any successor manager of such systems.
"Acquisition Expenses" means expenses, including any brokerage fees or
commissions, legal fees or expenses, the cost of any credit reports, appraisals,
consulting fees or miscellaneous expenses (including travel and communications
expenses) incurred by the General Partner or FHGLP in connection with services
rendered in acquiring cable systems, whether or not acquired, pursuant to the
Partnership Agreement or the Management Agreement. "Disposition Expenses" means
any brokerage fees or commissions, legal fees or expenses, the cost of any
credit reports, appraisals, consulting fees or miscellaneous expenses (including
travel and communications expenses) incurred by the General Partner or FHGLP in
connection with services rendered in disposing of or refinancing cable systems
pursuant to the Partnership Agreement. General Partner Expenses and Management
Expenses reimbursed by the Partnership will be usual and customary expenses for
services provided.



                                      -30-
<PAGE>   31

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         As of March 3, 1998, the common stock of FHGI was owned as follows:
78.5 % by Falcon Cable Trust, a grantor trust of which Marc B. Nathanson is
trustee and he and members of his family are beneficiaries; 20% by Greg A.
Nathanson; and 1.5% by Stanley S. Itskowitch. In 1989, FHGI issued to Hellman &
Friedman Capital Partners, A California Limited Partnership ("H&F"), a
$1,293,357 convertible debenture due 1999 convertible under certain
circumstances into ten percent of the common stock of FHGI and entitling H&F to
elect one director to the board of directors of FHGI. H&F elected Marc B.
Nathanson pursuant to such right. In 1991, FHGI issued to Hellman & Friedman
Capital Partners II, A California Limited Partnership ("H&FII"), additional
convertible debentures due 1999 in the aggregate amount of $2,006,198
convertible under certain circumstances into approximately 6.3% of the common
stock of FHGI and entitling H&FII to elect one director to the board of
directors of FHGI. As of March 3, 1998, H&FII had not exercised this right.
FHGLP also held 12.1% of the interests in the General Partner, and Falcon Cable
Trust, Frank Intiso and H&FII held 58.9%, 12.1% and 16.3% of the General
Partner, respectively. Such interests entitle the holders thereof to an
allocable share of cash distributions and profits and losses of the General
Partner in proportion to their ownership. Greg A. Nathanson is Marc B.
Nathanson's brother.

         As of March 3, 1998, Marc B. Nathanson and members of his family owned,
directly or indirectly, outstanding partnership interests (comprising both
general partner interests and limited partner interests) aggregating
approximately 0.46% of Falcon Classic Cable Income Properties, L.P. ("Falcon
Classic") and 2.58% of Falcon Video Communications ("Falcon Video"). In
accordance with the respective partnership agreements of these two partnerships,
after the return of capital to and the receipt of certain preferred returns by
the limited partners of such partnerships, FHGLP and certain of its officers and
directors had rights to future profits greater than their ownership interests of
capital in such partnerships. See Item 13., "Certain Relationships and Related
Transactions."

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

CERTAIN TRANSACTIONS

         FHGLP and its affiliates, including Marc B. Nathanson and other members
of the senior management team, currently own varying interests in and operate
additional cable television systems, currently manage additional cable
television systems for the accounts of others, and, subject to the terms of the
Partnership Agreement, may form, jointly or separately, other limited
partnerships or entities to acquire, develop and operate other cable television
systems. The current management activities of FHGLP's senior management are
primarily on behalf of certain affiliated cable television partnerships, for
which FHGLP receives management fees. As a result of such relationships,
however, conflicts of interest may arise at various stages with respect to the
allocation of time, personnel and other resources of FHGLP and such other
affiliates and members of senior management.

         FHGLP has leased certain office space for its corporate financial
center (located in Pasadena, California) from a partnership owned by Marc B.
Nathanson and his wife. The lease commenced on October 1, 1990 and has been
extended through September 30, 2005. The rent is currently approximately $33,000
per month and is indexed for inflation. The terms of the current lease have been
negotiated on an arm's length basis. It is expected that any future
modifications to the leasing agreement will be approved by the members of the
Board of Representatives of FHGLP other than Marc B. Nathanson.



                                      -31-
<PAGE>   32
SALE OF THE PARTNERSHIP'S SYSTEMS

         The Partnership Agreement provides that, pursuant to the terms of the
"Appraisal Process" (as defined below), the Partnership may, in the sole
discretion of the General Partner, sell individual cable systems and may also
sell all or substantially all of the Partnership's assets to the General Partner
or its affiliates. The Partnership Agreement provides that any such sale must be
made in cash at the median of appraisals undertaken by three nationally
recognized experts in the cable television field.

         The Partnership Agreement provides that any sale of Partnership assets
to the General Partner or any of its affiliates must be made in cash pursuant to
the "Appraisal Process." "Appraisal Process" is defined in the Partnership
Agreement as an appraisal undertaken by three independent nationally recognized
experts in the cable television field to determine the fair market value of the
cable systems to be appraised. One such appraiser must be appointed by the
General Partner, one by the Partnership's Conflicts Committee and the third by
the first two appraisers acting jointly. The Partnership Agreement specifies
that the Conflicts Committee be comprised of the independent members of the
Advisory Committee (i.e., the members of the Advisory Committee that are not
affiliates of, or otherwise have certain material business or professional
relationships with, the General Partner or its affiliates). The Partnership
Agreement provides that the appraised value pursuant to the Appraisal Process is
to be deemed to be the median of the three appraised values and, if any
appraised value is expressed as a range, then in calculating the median, the
mean amount of the range of such appraised value shall be used. The Partnership
Agreement provides that no appraisals arising in affiliated transactions may be
conducted at the Partnership's expense. Appraisers selected pursuant to the
Appraisal Process may not have any interest in, nor any material business or
professional relationship with, the Partnership, the General Partner or any of
its affiliates. For the purposes of determining whether or not the business or
professional relationship or joint investment is material, the gross revenue
derived by the appraiser from the Partnership, the General Partner or any
affiliate shall not exceed 5% of the annual gross revenue derived by the
appraiser from all sources.

         As previously disclosed, in a meeting held in Los Angeles on August 27,
1996, the General Partner formally advised the Partnership's Advisory Committee
and Conflicts Committee that it desired to explore on a preliminary basis the
possibility of exercising the purchase rights contained in the Partnership
Agreement and summarized above. Accordingly, the General Partner requested that
the Appraisal Process be commenced and that, in compliance therewith, the
Conflicts Committee select an independent nationally recognized expert in the
cable television field to determine the fair market value of each of the
Partnership's cable systems. Pursuant to the Partnership Agreement, the sole
obligation of the Conflicts Committee in connection with the Appraisal Process
is to select one of the three appraisers. The Conflicts Committee selected
Arthur Andersen, LLP; the General Partner selected Kane Reece Associates, Inc.;
and those two appraisers selected Communications Equity Associates (the
"Appraisers"). Each of the Appraisers is a nationally recognized cable system
appraisal firm and is continually engaged in the valuation of cable systems.
Each of the Appraisers, other than Arthur Andersen LLP, has from time to time
provided valuation services to the Partnership and its affiliates for which they
have received customary compensation.

         On February 6, 1997, each of the Appraisers delivered summaries of the
results of their appraisals (the "Appraisals"), and subsequently delivered their
reports to the Partnership. The full text of the Appraisal reports has
previously been filed with the Securities and Exchange Commission. These
Appraisals addressed the value of the appraised Partnership assets and did not
give effect to any debt or other liabilities of the Partnership. Based solely
upon the Appraisals, as of December 31, 1997, the Partnership understood the
appraised values of the five cable Systems owned by the Partnership to be as
follows (dollars in thousands):



                                      -32-
<PAGE>   33
<TABLE>
<CAPTION>
                                                                     Communications
                                      Kane Reece         Arthur           Equity
                                   Associates, Inc.   Andersen LLP    Associates, Inc.
                                   ----------------   ------------    ----------------
                                                                         (MEDIAN)
<S>                                    <C>              <C>              <C>    
Redmond, OR                            $ 7,680          $ 5,882          $ 6,200
Burke County, NC                        20,570           17,685           19,000
Somerset, KY                            33,590           30,277           31,000
Centreville, MD                         23,980           20,445           23,000
California City, CA                      3,500            2,791            2,800
                                                                         -------
      Total                                                              $82,000
                                                                         =======
</TABLE>

         As noted above, the Appraisal Process dictates that the appraised value
of an asset to be appraised shall be the median Appraisal for such asset.

         The reports related to each Appraisal set forth certain matters
considered by the respective Appraisers. In connection with rendering their
Appraisals, the Appraisers performed a variety of financial analyses which are
summarized in the respective Appraisals. No limitations were imposed by the
Partnership with respect to the investigations made or the procedures followed
by the Appraisers in rendering their Appraisals. Actual sales in the marketplace
could have been at valuations materially above or below those reflected by the
Appraisals.

         The Appraisals, by their respective terms, were based upon numerous
sources of information including data supplied by the General Partner, which
included certain projections regarding 1997 operating results for the
Partnership prepared in the ordinary course of its business. The Partnership
does not as a matter of course make public any forecasts as to its future
financial performance. The 1997 projections were prepared solely for internal
use and not with a view to public disclosure or compliance with the published
guidelines of the Commission or the American Institute of Certified Public
Accountants regarding projections and were not prepared with the assistance of,
or reviewed by, independent accountants. Such 1997 projections were provided to
the Appraisers solely for the purposes of their Appraisals. NONE OF THE GENERAL
PARTNER, THE PARTNERSHIP, ANY AFFILIATE OR ANY PARTY TO WHOM THE PROJECTIONS
WERE PROVIDED ASSUMES ANY RESPONSIBILITY FOR THE VALIDITY, REASONABLENESS,
ACCURACY OR COMPLETENESS OF THE 1997 PROJECTIONS. While presented with numerical
specificity, the 1997 projections were based on a variety of assumptions
relating to the businesses of the Partnership, industry performance, general
business and economic conditions and other matters which are subject to
significant uncertainties and contingencies, many of which are beyond the
Partnership's control, and, therefore, such 1997 projections are inherently
imprecise. Also, actual future results may vary materially from those shown in
the 1997 projections. The Partnership is not under any obligation to update the
projections at any future time.

         By letter dated June 24, 1997, the General Partner advised the
Partnership that it intended to exercise its purchase right to acquire all of
the Partnership's cable systems pursuant to the Appraisal Process for cash
consideration equal to the median appraised value of $82.0 million (the
"Appraised Value"). The General Partner further advised the Partnership that, as
permitted by the Partnership Agreement, it intended that the cable systems be
acquired (the "Proposed Sale") by certain affiliates of the General Partner (the
"Purchasers"). On June 27, 1997, the General Partner caused the Partnership to
enter into an Asset Purchase Agreement with the Purchasers, and the parties
began to seek the necessary regulatory and other consents. The Asset Purchase
Agreement is filed as an exhibit to the Partnership's Report on Form 8-K dated
June 24, 1997.

         On or about September 2, 1997, the Partnership was named in a putative
class action suit (the "Lawsuit") filed against the Partnership, its general
partner and certain of its directors and officers with respect to the Proposed
Sale. Effective as of December 31, 1997, the Partnership and certain other
parties reached the 



                                      -33-
<PAGE>   34
Settlement Agreement resolving and settling the Lawsuit. In exchange for a
complete dismissal of the Lawsuit with prejudice and releases, and without
admitting or conceding any fault, liability or wrongdoing whatsoever, the
Partnership and the other defendants agreed to establish a settlement fund,
payable to holders of Units as of June 30, 1997, which amounted to $1.3 million
plus interest at 10% from January 1, 1998 through closing of the sale as defined
in the Settlement Agreement. On March 6 and 9, 1998, the Partnership consummated
the sale of substantially all of its assets except for the Somerset System. The
assets sold represented approximately 92.4% of the total amount of the Proposed
Sale. In connection with such Sale, and in accordance with the Settlement
Agreement and the Asset Purchase Agreement, the Partnership received
approximately $76.8 million, representing purchase price, accrued interest on
the net purchase price attributable to the systems sold, less an appropriate
portion of the settlement notice costs. In addition, the defendants to the
Lawsuit separately transferred approximately $1.2 million to the settlement
fund.

         In connection with the Partnership's receipt of the proceeds from the
sale of the Sold Systems, on March 6, 1998, the Partnership retired its
outstanding bank debt and, on March 27, 1998, the Partnership distributed
approximately $58.2 million (approximately $809.92 per unit) to its unitholders.
In addition, the Partnership understands that counsel for the plaintiffs in the
Lawsuit intend to distribute the settlement fund in late May or early June 1998.
As of March 9, 1998, the Partnership's sole remaining cable system asset is the
Somerset System, which represents approximately 7.6% of the Proposed Sale. The
regulatory approvals required to consummate the sale of the Somerset System to
FHGLP have not been obtained from the City of Somerset. The Partnership will
continue to negotiate with the City of Somerset to obtain such approvals. There
can be no assurance that the Partnership will be successful in obtaining such
approvals. If such approvals are not received on or before September 30, 1998,
the Partnership intends to explore alternative options, including the sale of
the Somerset System to a third party. If the Partnership obtains the requisite
approvals from the City of Somerset on or prior to September 30, 1998, the
Partnership intends to complete the sale of the Somerset System and to
distribute to unitholders at the time of such sale approximately $6.3 million,
representing the proceeds from the sale of the Somerset System (less certain
deductions) and the remainder of the interest required by the Settlement
Agreement. The approximately $6.3 million to be distributed upon the sale of the
Somerset System is only an estimate and may vary depending on transaction costs
and expenses and liabilities incurred prior to distribution. In addition, if the
sale of the Somerset System occurs on or before September 30, 1998, the
Settlement Agreement requires that additional funds be transferred to the
settlement fund for distribution to holders of units as of June 30, 1997.

         The Partnership Agreement provides that the Partnership shall be
dissolved upon the occurrence of the sale or distribution of all or
substantially all of the assets of the Partnership. The Partnership Agreement
also provides that upon the dissolution of the Partnership, the General Partner
shall take such actions as are necessary for the winding up of the affairs of
the Partnership and the distribution of its assets to the partners pursuant to
the provisions of the Partnership Agreement. Accordingly, following the
consummation of the sale of the Somerset System, the General Partner intends to
wind-up the affairs of the Partnership in accordance with the terms of the
Partnership Agreement, including the liquidation of the assets of the
Partnership, the discharge of all of the liabilities of the Partnership, and the
distribution of the remaining assets of the Partnership to its partners as
appropriate.

         Forward-looking statements in this Report including, in particular, the
statements made above under the caption "Appraisal Process," are made pursuant
to the safe harbor provisions of Section 21E of the Securities Exchange Act of
1934, as amended. Investors are cautioned that such forward-looking statements
involve risks and uncertainties including, without limitation, the effects of
legislative and regulatory changes; the potential of increased levels of
competition for the Partnership; technological changes; the Partnership's
dependence upon third-party programming; the potential exercise of the purchase
right as described above; the absence of Unitholder participation in the
governance and management of the Partnership; limitations on borrowings by the
Partnership contained in the Partnership Agreement; the management fees payable
to the General Partner; the exoneration and indemnification provisions contained
in the Partnership Agreement relating to the General Partner and other;
potential conflicts of interest involving that General Partner and its
affiliates; the potential liability of Unitholders to creditors of the
partnership to the extent of any distribution 



                                      -34-
<PAGE>   35

made to such Unitholder if, immediately after such distribution (whether or not
the Partnership continues to exist), the remaining assets of the Partnership are
not sufficient to pay its then outstanding liabilities of the Partnership; and
other risks detailed from time to time in the Partnership's periodic reports
filed with the Commission.

CONFLICTS OF INTEREST

         In March 1993, FHGLP, a new entity, assumed the management services
operations of FHGI. Effective March 29, 1993, FHGLP began receiving management
fees and reimbursed expenses which had previously been paid by the Partnership,
as well as certain other affiliated entities, to FHGI. The management of FHGLP
is substantially the same as that of FHGI.

         FHGLP also manages domestic and international cable operations owned by
it as well as the operations of the Partnership, Falcon Video Communications
and, through its management of the operation of Falcon Cablevision (a subsidiary
of FHGLP), the partnerships of which Enstar Communications Corporation is the
corporate general partner. On September 30, 1988, Falcon Cablevision acquired
all of the outstanding stock of Enstar Communications Corporation. Certain
members of management of the General Partner have also been involved in the
management of other cable ventures, including recent international cable
ventures that FHGLP has entered into or been associated with. FHGLP contemplates
entering into other cable ventures, including ventures similar to the
Partnership.

         These affiliations subject FHGI, FHGLP and the General Partner and
their management and affiliates to certain conflicts of interest. Such conflicts
of interest relate to the time and services management will devote to the
Partnership's affairs and to the acquisition and disposition of cable television
systems. Management or its affiliates may establish and manage other entities
which could impose additional conflicts of interest. Conflicts of interest
involving acquisitions and dispositions of cable television systems could
adversely affect Unitholders. For instance, the economic interests of management
in other affiliated partnerships are different from those in the Partnership and
this may create conflicts relating to which acquisition or disposition
opportunities are preserved for which partnerships.

         The Partnership has entered into a management agreement with FHGLP and
may enter into future agreements, including joint ventures and agreements
relating to programming services with the General Partner, FHGLP or their
respective affiliates. Thus, a conflict of interest could arise among the
General Partner, FHGLP or their respective affiliates and the Partnership.
Although any such agreements will not be negotiated at arm's length, the General
Partner will cause the terms of all such transactions among the Partnership and
the General Partner, FHGLP and their respective affiliates to be no less
favorable to the Partnership than those which could be obtained by the
Partnership from independent third parties.

         Substantial fees are payable to the General Partner and FHGLP in
connection with the Partnership. See Item 11., "Executive Compensation."

         The Partnership may also enter into joint ventures with FHGLP or its
affiliates, provided that (i) such joint venturer has substantially identical
investment objectives as the Partnership, (ii) there are no duplicate fees,
(iii) the compensation to the sponsor of such joint venturer is substantially
identical, (iv) each joint venturer has a right of first refusal as to the
other's interest in the joint venture and (v) the investment of each joint
venturer is on substantially the same terms and conditions.



                                      -35-
<PAGE>   36
FIDUCIARY RESPONSIBILITY AND INDEMNIFICATION OF THE GENERAL PARTNER

         A general partner is accountable to a limited partnership as a
fiduciary and consequently must exercise good faith and integrity in handling
partnership affairs. Where the question has arisen, some courts have held that a
limited partner may institute legal action on his own behalf and on behalf of
all other similarly situated limited partners (a class action) to recover
damages for a breach of fiduciary duty by a general partner, or on behalf of the
partnership (a partnership derivative action) to recover damages from third
parties. Section 15701 of the California Corporations Code provides that any
limited partner may bring a class action on behalf of all or a class of limited
partners to enforce any claim common to those limited partners against a limited
partnership or any or all of its general partners, without regard to the number
of those limited partners, and such action shall be governed by the law
governing class actions generally.

         Section 15702 of the California Corporations Code also allows a partner
to maintain a partnership derivative action if certain conditions are met.
Certain cases decided by federal courts have recognized the right of a limited
partner to bring such actions under the Securities and Exchange Commission's
Rule 10b-5 for recovery of damages resulting from a breach of fiduciary duty by
a general partner involving fraud, deception or manipulation in connection with
the limited partner's purchase or sale of partnership Units.

         The Partnership Agreement provides that the General Partner and its
affiliates will not be liable to the Partnership or its limited partners for,
and shall be indemnified by the Partnership for any act or omission of the
General Partner or its officers, directors or affiliates in good faith on behalf
of the Partnership and in a manner reasonably believed by such Person to be
within the scope of the authority granted to the General Partner by the
Partnership Agreement and in the best interests of the Partnership, except for
acts or omissions constituting negligence, misconduct or breach of fiduciary
duty. Therefore, limited partners will have a more limited right of action than
they would have absent the limitations in the Partnership Agreement. In
addition, the Partnership Agreement provides that the members of the Advisory
Committee who are not affiliated with the General Partner will not be liable to
the Partnership or its limited partners, and shall be indemnified by the
Partnership for any liability they incur on account of, any act performed or
omitted by such indemnitee in good faith and if the indemnitee's conduct did not
amount to gross negligence or fraud. Affiliated members will be subject to the
same liability and indemnification standards as other affiliates of the General
Partner. In addition, the Partnership maintains insurance on behalf of the
General Partner, members of the Advisory Committee and such other persons as the
General Partner shall determine against any liability that may be asserted
against or expense that may be incurred by such person and against which the
Partnership would be entitled to indemnify such person pursuant to the
Partnership Agreement. To the extent that the exculpatory provisions purport to
include indemnification for liabilities arising under the Securities Act of
1933, it is the opinion of the Securities and Exchange Commission that such
indemnification is contrary to public policy and therefore unenforceable.

         The foregoing summary describes in general terms the remedies available
under state and federal law to limited partners for breach of fiduciary duty by
a general partner and is based on statutes, rules and decisions as of the date
of this Report on Form 10-K. As this is a rapidly developing and changing area
of the law, limited partners who believe that a breach of fiduciary duty by the
General Partner has occurred should consult their own counsel as to the
evaluation of the status of the law at such time.



                                      -36-
<PAGE>   37
                                     PART IV

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


  (a)1.        Financial Statements

               Reference is made to the Index to Financial Statements and
               Schedules on page F-1.



  (a)2.        Financial Statement Schedules

               Reference is made to the Index to Financial Statements and
               Schedules on page F-1.



  (a)3.        Exhibits

               Reference is made to the Index to Exhibits on Page E-1.


  (b)          Reports on Form 8-K

               1.  October 2, 1997 (Putative Class Action Suit)



                                      -37-
<PAGE>   38
                                   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 this 15th
day of May 1998.

                                    FALCON CLASSIC CABLE INCOME PROPERTIES, L.P.

                                    By    Falcon Classic Cable Investors, L.P.
                                          Managing General Partner

                                    By    Falcon Holding Group, L.P.
                                          General Partner

                                    By    Falcon Holding Group, Inc.
                                          General Partner

                                    By    /s/ Michael K. Menerey
                                          --------------------------------------
                                          Michael K. Menerey
                                          Executive Vice President and
                                            Chief Financial Officer

         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 indicated on the 15th day of May 1998.

<TABLE>
<CAPTION>
          Signatures                                               Title(*)
    -------------------------               -------------------------------------------------
<S>                                         <C>
    /s/ Marc B. Nathanson                   Director of Falcon Holding Group, Inc.
    -------------------------               and Chief Executive Officer of the Registrant   
    Marc B. Nathanson                       (Principal Executive Officer)                   
                                            

    /s/ Michael K. Menerey                  Executive Vice President, Chief Financial Officer
    -------------------------               and Secretary of the Registrant
    Michael K. Menerey                      (Principal Financial and Accounting Officer)
                                            

    /s/ Stanley S. Itskowitch               Director of Falcon Holding Group, Inc.
    -------------------------               and Executive Vice President          
    Stanley S. Itskowitch                   and General Counsel of the Registrant 
</TABLE>




                                      -38-
<PAGE>   39
                   INDEX TO FINANCIAL STATEMENTS AND SCHEDULES



                                                                       Page
                                                                       ----

Report of Independent Auditors                                         F-2

Balance Sheets - December 31, 1996 and 1997                            F-3

Financial Statements for each of 
   the three years in the period 
   ended December 31, 1997:

      Statements of Operations                                         F-4

      Statements of Partners' Equity                                   F-5

      Statements of Cash Flows                                         F-6

Notes to Financial Statements                                          F-7

Schedule II  -  Valuation and Qualifying Accounts                      F-16


All other schedules have been omitted because they are either not required, not
applicable or the information has otherwise been supplied.



                                      F-1
<PAGE>   40
                         REPORT OF INDEPENDENT AUDITORS



Partners
Falcon Classic Cable Income Properties, L.P.


         We have audited the accompanying balance sheets of Falcon Classic Cable
Income Properties, L.P. (a California limited partnership) as of December 31,
1996 and 1997, and the related statements of operations, partners' equity, and
cash flows for each of the three years in the period ended December 31, 1997.
Our audits also included the financial statement schedule listed in the index at
Item 14(a)2. These financial statements and schedule are the responsibility of
the Partnership's management. Our responsibility is to express an opinion on
these financial statements and schedule 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 Falcon Classic Cable
Income Properties, L.P. at December 31, 1996 and 1997, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, present fairly
in all material respects the information set forth therein.



                                                   /s/ ERNST & YOUNG LLP



Los Angeles, California
April 22, 1998



                                      F-2
<PAGE>   41
                  FALCON CLASSIC CABLE INCOME PROPERTIES, L.P.

                                 BALANCE SHEETS

                  ============================================



<TABLE>
<CAPTION>
                                                                            December 31,
                                                                     -------------------------
                                                                       1996             1997
                                                                     --------         --------
                                                                       (Dollars in Thousands)
<S>                                                                  <C>              <C>     
ASSETS:
    Cash and cash equivalents                                        $  7,126         $    620
    Receivables, less allowance of $31,000
        and $42,000 for possible losses                                   660              773
    Prepaid expenses and other assets                                   1,516            1,065
    Property, plant and equipment, less accumulated
        depreciation and amortization                                  30,655           30,563
    Franchise cost and goodwill, less accumulated
        amortization of $15,029,000 and $17,712,000                    17,409           14,783
    Customer lists and other intangible costs, less
        accumulated amortization of $2,684,000 and $2,018,000           1,968            1,630
                                                                     --------         --------
                                                                     $ 59,334         $ 49,434
                                                                     ========         ========

                               LIABILITIES AND PARTNERS' EQUITY
LIABILITIES:
    Notes payable                                                    $ 24,300         $ 14,750
    Accounts payable                                                      542              592
    Accrued expenses                                                    2,509            3,422
    Payable to general partner                                          1,006              274
    Customer deposits and prepayments                                     144              143
                                                                     --------         --------
           TOTAL LIABILITIES                                           28,501           19,181
                                                                     --------         --------

COMMITMENTS AND CONTINGENCIES

PARTNERS' EQUITY:
    General partner                                                       401              395
    Limited partners                                                   30,654           30,080
    Notes receivable from general partner                                (222)            (222)
                                                                     --------         --------
           TOTAL PARTNERS' EQUITY                                      30,833           30,253
                                                                     --------         --------
                                                                     $ 59,334         $ 49,434
                                                                     ========         ========
</TABLE>



                See accompanying notes to financial statements.



                                      F-3
<PAGE>   42
                  FALCON CLASSIC CABLE INCOME PROPERTIES, L.P.

                            STATEMENTS OF OPERATIONS

                  ============================================



<TABLE>
<CAPTION>
                                                                    Year ended December 31,
                                                         ------------------------------------------
                                                           1995             1996              1997
                                                         --------         --------         --------
                                                               (Dollars in thousands, except net
                                                               loss per limited partnership unit)
<S>                                                      <C>              <C>              <C>     
REVENUES                                                 $ 18,363         $ 19,826         $ 20,299
                                                         --------         --------         --------

EXPENSES:
  Service costs                                             6,042            6,013            6,691
  General and administrative expenses                       2,589            2,717            2,933
  Management fees and reimbursed expenses                   1,469            1,586            1,624
  Depreciation and amortization                             8,526            7,712            8,080
                                                         --------         --------         --------

           Total expenses                                  18,626           18,028           19,328
                                                         --------         --------         --------

           Operating income (loss)                           (263)           1,798              971

OTHER INCOME (EXPENSE)
  Interest income                                              41              314              280
  Interest expense                                         (2,051)          (2,127)          (1,770)
  Other income (expense)                                        -                -              (61)
                                                         --------         --------         --------

NET LOSS                                                 $ (2,273)        $    (15)        $   (580)
                                                         ========         ========         ========

  Net income (loss) allocated to General Partner         $    (23)        $    -           $     (6)
                                                         ========         ========         ========

  Net income (loss) allocated to Limited Partners        $ (2,250)        $    (15)        $   (574)
                                                         ========         ========         ========

NET LOSS PER LIMITED
  PARTNERSHIP UNIT                                       $ (31.30)        $  (0.21)        $  (7.99)
                                                         ========         ========         ========

WEIGHTED AVERAGE LIMITED
  PARTNERSHIP UNITS OUTSTANDING
  DURING PERIOD                                            71,879           71,879           71,879
                                                         ========         ========         ========
</TABLE>



                See accompanying notes to financial statements.



                                      F-4
<PAGE>   43
                  FALCON CLASSIC CABLE INCOME PROPERTIES, L.P.

                         STATEMENTS OF PARTNERS' EQUITY

                  ============================================



<TABLE>
<CAPTION>
                                                                                     Notes
                                                                                   Receivable
                                                                                     from
                                                   General         Limited          General
                                                   Partner         Partners         Partner           Total
                                                  --------         --------         --------         --------
                                                                       (Dollars In Thousands)
<S>                                               <C>              <C>              <C>              <C>     
PARTNERS' EQUITY,                          
    January 1, 1995,                              $    424         $ 32,919         $   (222)        $ 33,121
    Net loss for year                                  (23)          (2,250)             -             (2,273)
                                                  --------         --------         --------         --------
                                           
PARTNERS' EQUITY,                          
  December 31, 1995                                    401           30,669             (222)          30,848
    Net loss for year                                  -                (15)             -                (15)
                                                  --------         --------         --------         --------
                                           
PARTNERS' EQUITY,                          
  December 31, 1996                                    401           30,654             (222)          30,833
    Net loss for year                                   (6)            (574)             -               (580)
                                                  --------         --------         --------         --------
                                           
PARTNERS' EQUITY,                          
  December 31, 1997                               $    395           30,080         $   (222)        $ 30,253
                                                  ========         ========         ========         ========
</TABLE>
                      



                See accompanying notes to financial statements.



                                      F-5
<PAGE>   44
                  FALCON CLASSIC CABLE INCOME PROPERTIES, L.P.

                            STATEMENTS OF CASH FLOWS

                  ============================================



<TABLE>
<CAPTION>
                                                                       Year ended in December 31,
                                                             ------------------------------------------
                                                               1995             1996             1997
                                                             --------         --------         --------
                                                                        (Dollars in Thousands)
<S>                                                          <C>              <C>              <C>
 Cash flows from operating activities:
  Net loss                                                   $ (2,273)        $    (15)        $   (580)
  Adjustments to reconcile net loss to net
    cash provided by operating activities:
      Depreciation and amortization                             8,526            7,712            8,080
      Gain on sale of assets                                      -                -                 (4)
      Provision for losses on receivables                         234              171              345
      Amortization of deferred loan costs                           4               27              -
  Increase (decrease) from changes in:
      Receivables                                                 (98)            (175)            (458)
      Prepaid expenses and other assets                          (578)             (63)             451
      Accounts payable and other liabilities                      671             (910)             230
                                                             --------         --------         --------

  Net cash provided by operating activities                  $  6,486         $  6,747         $  8,064
                                                             --------         --------         --------

Cash flows from investing activities:
  Capital expenditures                                         (5,713)          (3,033)          (4,832)
  Increase in intangible assets                                  (167)             (25)            (192)
  Proceeds on sale of property, plant and equipment               -                -                  4
                                                             --------         --------         --------

  Net cash used in investing activities                      $ (5,880)        $ (3,058)        $ (5,020)
                                                             --------         --------         --------

Cash flows from financing activities:
  Repayments of notes payable                                $(18,000)        $ (2,700)        $ (9,550)
  Borrowings under notes payable                               22,500              -                -
                                                             --------         --------         --------

  Net cash provided by (used in) financing activities           4,500           (2,700)          (9,550)
                                                             --------         --------         --------

Net increase (decrease) in cash and cash equivalents            5,106              989           (6,506)

Cash and cash equivalents, at beginning of year                 1,031            6,137            7,126
                                                             --------         --------         --------

Cash and cash equivalents, at end of year                    $  6,137         $  7,126         $    620
                                                             ========         ========         ========
</TABLE>



                See accompanying notes to financial statements.



                                      F-6
<PAGE>   45
                  FALCON CLASSIC CABLE INCOME PROPERTIES, L.P.

                          NOTES TO FINANCIAL STATEMENTS

                  ============================================


NOTE 1 - SUMMARY OF ACCOUNTING POLICIES

BASIS OF PRESENTATION

         Falcon Classic Cable Income Properties, L.P. (the "Partnership") was
formed in 1989 to acquire, own, operate and otherwise invest principally in
existing cable television systems in suburban and rural areas located in
California, Kentucky, Maryland, North Carolina and Oregon. The General Partner
of the Partnership is Falcon Classic Cable Investors, L.P., a California limited
partnership ("General Partner"). The general partner of the General Partner is
Falcon Holding Group, L.P., a Delaware limited partnership ("FHGLP"). The
general partner of FHGLP is Falcon Holding Group, Inc., a California corporation
("FHGI").

         The financial statements do not give effect to any assets that the
partners may have outside their interest in the Partnership, nor to any
obligations, including income taxes, of the partners.

         These financial statements are presented on the basis that the
Partnership continues as a going concern. As more fully described in Note 2 to
the financial statements, the Partnership completed the sale of substantially
all of its assets to FHGLP in March 1998 and distributed the net cash proceeds
to its unitholders. The sale of the Partnership's remaining assets (City of
Somerset, Kentucky; the "Somerset System") to FHGLP is pending regulatory
approval, of which there can be no assurance. The carrying value of the net
assets presented herein bear no relation to the fair value of the assets sold or
expected to be sold, and the resulting distributable value per unit.

CASH EQUIVALENTS

         For purposes of the statements of cash flows, the Partnership considers
all highly liquid debt instruments purchased with an initial maturity of three
months or less to be cash equivalents. Cash equivalents at December 31, 1996
included $6,000,000 of short-term investments in commercial paper.

PROPERTY, PLANT, EQUIPMENT AND DEPRECIATION AND AMORTIZATION

         Property, plant and equipment are stated at cost. Direct costs
associated with installations in homes not previously served by cable are
capitalized as part of the distribution system, and reconnects are expensed as
incurred. For financial reporting, depreciation and amortization is computed
using the straight-line method over the following estimated useful lives:

            CABLE TELEVISION SYSTEMS:

            Headend buildings and equipment             7-16 years
            Trunk and distribution                      5-15 years
            Microwave equipment                         7-15 years

            OTHER:

            Furniture and office equipment              5-7  years
            Vehicles and construction equipment         3-10  years
            Leasehold improvements                      Life of lease
            Buildings                                   15 years



                                      F-7
<PAGE>   46
                  FALCON CLASSIC CABLE INCOME PROPERTIES, L.P.

                          NOTES TO FINANCIAL STATEMENTS

                  ============================================


NOTE 1 - SUMMARY OF ACCOUNTING POLICIES (CONTINUED)

FRANCHISE COST AND GOODWILL

         The excess of cost over the fair value of tangible assets and customer
lists of cable television systems acquired represents the cost of franchises and
goodwill. In addition, franchise cost includes capitalized costs incurred in
obtaining new franchises. These costs (primarily legal fees) are direct and
incremental to the acquisition of the franchise and are amortized using the
straight-line method over the lives of the franchises, ranging up to 12 years.
Costs relating to unsuccessful franchise applications are charged to expense
when it is determined that the efforts to obtain the franchise will not be
successful.

CUSTOMER LISTS AND OTHER INTANGIBLE COSTS

         Customer lists and other intangible costs include customer lists and
organization costs which are amortized using the straight-line method over five
years and covenants not to compete which are amortized over the life of the
covenant.

DEFERRED LOAN COSTS

         Costs related to borrowings are capitalized and amortized to interest
expense over the life of the related loan.

RECOVERABILITY OF ASSETS

         The Partnership assesses on an on-going basis the recoverability of
intangible assets, including goodwill, and capitalized plant assets based on
estimates of future undiscounted cash flows compared to net book value. If the
future undiscounted cash flow estimate were less than net book value, net book
value would then be reduced to estimated fair value, which generally
approximates discounted cash flows. The Partnership also evaluates the
amortization periods of assets, including goodwill and other intangible assets,
to determine whether events or circumstances warrant revised estimates of useful
lives.

REVENUE RECOGNITION

         Revenues from cable services are recognized as the services are
provided.

DERIVATIVE FINANCIAL INSTRUMENTS

         As part of the Partnership's management of financial market risk, the
Partnership enters into various transactions that involve contracts and
financial instruments with off-balance-sheet risk, including interest rate swap
and interest rate cap agreements. The Partnership enters into these agreements
in order to manage the interest-rate sensitivity associated with its
variable-rate indebtedness. The differential to be paid or received in
connection with interest rate swap and interest rate cap agreements is
recognized as interest rates change and is charged or credited to interest
expense over the life of the agreements. Gains or losses for early termination
of those contracts are recognized as an adjustment to interest expense over the
remaining portion of the original life of the terminated contract.



                                      F-8
<PAGE>   47
                  FALCON CLASSIC CABLE INCOME PROPERTIES, L.P.

                          NOTES TO FINANCIAL STATEMENTS

                  ============================================


NOTE 1 - SUMMARY OF ACCOUNTING POLICIES (CONTINUED)

INCOME TAXES

         The Partnership pays no income taxes as an entity. All of the income,
gains, losses, deductions and credits of the Partnership are passed through to
the partners. The basis in the Partnership's assets and liabilities differs for
financial and tax reporting purposes. At December 31, 1997, the book basis of
the Partnership's net assets exceeds its tax basis by $11.9 million.

EARNINGS AND LOSSES PER LIMITED PARTNERSHIP UNIT

         Earnings and losses are allocated 99% to the limited partners and one
percent to the General Partner. Earnings and losses per limited partnership Unit
is based on the weighted average limited partnership Units outstanding during
the period.

USE OF ESTIMATES

         The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

NOTE 2 - PARTNERSHIP MATTERS AND SALE OF PARTNERSHIP ASSETS

         Income and losses of the Partnership are allocated 99% to the limited
partners and one percent to the General Partner. Cash Available for
Distributions, as defined in the Partnership agreement, are allocated 99% to the
limited partners and one percent to the General Partner. Distributions of Other
Distributable Funds (as defined) are allocated 99% to limited partners who own
Units which have been issued and outstanding for at least one year and one
percent to the General Partner. Such distributions to limited partners will be
made pro-rata based on the number of such Units held by each limited partner.
The limited partners will receive 99% and the General Partner will receive one
percent of distributions of Available Sale Proceeds (as defined) until the
limited partners have received Payback.

         APPRAISAL PROCESS

         The Partnership Agreement provides that any sale of Partnership assets
to the General Partner or any of its affiliates must be made in cash pursuant to
the "Appraisal Process." "Appraisal Process" is defined in the Partnership
Agreement as an appraisal undertaken by three independent nationally recognized
experts in the cable television field to determine the fair market value of the
cable systems to be appraised. One such appraiser must be appointed by the
General Partner, one by the Partnership's Conflicts Committee and the third by
the first two appraisers acting jointly. The appraised value pursuant to the
Appraisal Process will be deemed to be the median of the three appraised values.
No appraisals arising in affiliated transactions may be conducted at the
Partnership's expense. Accordingly, on August 27, 1996, the General Partner
requested that the Appraisal Process be commenced and that, in compliance
therewith, the Conflicts Committee of the Advisory Committee select an
independent nationally recognized expert in the cable television field to
determine the fair market value of each of the Partnership's cable systems. The
Conflicts Committee selected Arthur Andersen, LLP; the General Partner selected
Kane Reece Associates, Inc.; and those two appraisers selected Communications
Equity Associates (the "Appraisers").



                                      F-9
<PAGE>   48
                  FALCON CLASSIC CABLE INCOME PROPERTIES, L.P.

                          NOTES TO FINANCIAL STATEMENTS

                  ============================================


NOTE 2 - PARTNERSHIP MATTERS AND SALE OF PARTNERSHIP ASSETS (CONTINUED)

         On February 6, 1997, each of the Appraisers delivered summaries of the
results of their appraisals (the "Appraisals"), and subsequently delivered their
reports to the Partnership. These Appraisals address the value of the appraised
Partnership assets and do not give effect to any debt or other liabilities of
the Partnership. Based solely upon the Appraisals, as of December 31, 1996, the
Partnership understands the appraised values of the five cable systems owned by
the Partnership, including the Somerset System, to be as follows (dollars in
thousands):

<TABLE>
<CAPTION>
                                                                           Communications
                                       Kane Reece           Arthur             Equity
                                    Associates, Inc.    Andersen LLP      Associates, Inc.
                                    ----------------    ------------      ----------------
                                                                              (MEDIAN)
<S>                                     <C>                <C>                <C>    
         Redmond, OR                    $ 7,680            $ 5,882            $ 6,200
         Burke County, NC                20,570             17,685             19,000
         Somerset, KY                    33,590             30,277             31,000
         Centreville, MD                 23,980             20,445             23,000
         California City, CA              3,500              2,791              2,800
                                                                              -------
               Total                                                          $82,000
                                                                              =======
</TABLE>

         As noted above, the Appraisal Process dictates that the appraised value
of an asset to be appraised shall be the median Appraisal for such asset.

         In March 1998 the Partnership received from FHGLP $76.8 million in
connection with the acquisition by FHGLP of substantially all of the assets of
the Partnership (the "Sold Systems"), other than the Somerset System. In
addition, the defendant to certain litigation arising from such sale transferred
$1.2 million to a settlement fund for the benefit of unitholders of record as of
June 30, 1997. The sale of the Somerset System will be completed as soon as
regulatory approvals can be obtained, of which there can be no assurance. For
the year ended December 31, 1997, the Somerset System had revenues of
approximately $1.5 million. In connection with the Partnership's receipt of the
proceeds from the sale of the Sold Systems, on March 6, 1998, the Partnership
retired its outstanding bank debt and, on March 27, 1998, the Partnership
distributed approximately $58.2 million (approximately $809.92 per unit) to its
unitholders. In addition, the Partnership understands that counsel for the
plaintiffs in the litigation arising from the sale intend to distribute the
settlement fund in late May or early June 1998. If the Partnership obtains the
requisite approvals from the City of Somerset on or prior to September 30, 1998,
the Partnership intends to complete the sale of the Somerset System to FHGLP and
to distribute to unitholders at the time of such sale approximately $6.3
million, representing the proceeds from the sale of the Somerset System (less
certain deductions) and the remainder of the interest required by the settlement
agreement. The approximately $6.3 million to be distributed upon the sale of the
Somerset System is only an estimate and may vary depending on transaction costs
and expenses and liabilities incurred prior to distribution. In addition, if the
sale of the Somerset System occurs on or before September 30, 1998, additional
funds will be transferred to the settlement fund for distribution to unitholders
as of June 30, 1997.



                                      F-10
<PAGE>   49
                  FALCON CLASSIC CABLE INCOME PROPERTIES, L.P.

                          NOTES TO FINANCIAL STATEMENTS

                  ============================================


NOTE 3 - PROPERTY, PLANT AND EQUIPMENT

                  Property, plant and equipment consist of:

<TABLE>
<CAPTION>
                                                December 31,
                                        -------------------------
                                          1996              1997
                                        --------         --------
                                         (Dollars in Thousands)
<S>                                     <C>              <C>     
Cable television systems                $ 47,158         $ 50,031
Furniture and equipment                    1,033            1,125
Vehicles                                     746              972
Land, buildings and improvements             846              854
                                        --------         --------

                                          49,783           52,982
Less accumulated depreciation
  and amortization                       (19,128)         (22,419)
                                        --------         --------

                                        $ 30,655         $ 30,563
                                        ========         ========
</TABLE>

NOTE 4 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

         The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is practicable to
estimate that value:

Cash and Cash Equivalents

         The carrying amount approximates fair value due to the short maturity
of those instruments.

Notes Payable

         The carrying amount approximates fair value due to the variable rate
nature of the notes payable.

Interest Rate Hedging Agreements

         The fair value of interest rate hedging agreements is estimated by
obtaining quotes from brokers as to the amount either party would be required to
pay or receive in order to terminate the agreement.



                                      F-11
<PAGE>   50
                  FALCON CLASSIC CABLE INCOME PROPERTIES, L.P.

                          NOTES TO FINANCIAL STATEMENTS

                  ============================================


NOTE 4 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)

         The following table depicts the fair value of each class of financial
instruments for which it is practicable to estimate that value as of December
31:

<TABLE>
<CAPTION>
                                           1996                          1997
                                 ----------------------       -------------------------
                                 Carrying         Fair         Carrying        Fair
                                 Value (1)       Value         Value (1)       Value
                                 --------       -------        --------       --------
                                                (Dollars in Thousands)
<S>                              <C>            <C>            <C>            <C>    
Cash and cash equivalents        $ 7,126        $ 7,126        $   620        $   620

Note Payable (Note 5) (2)        $24,300        $24,300        $14,750        $14,750
</TABLE>



<TABLE>
<CAPTION>
                                         Notional           Fair           Notional          Fair
                                        Amount(3)         Value(4)        Amount(3)        Value(4)
                                        ---------         --------        ---------        --------
<S>                                     <C>               <C>             <C>              <C>     
Interest Rate Hedging Agreements
  (Note 5):
  Interest rate swaps                    $20,000          $   (36)         $15,000          $   (14)
</TABLE>


----------------

(1)      Carrying amounts represent cost basis.

(2)      Due to the variable rate nature of the indebtedness, the fair value is
         assumed to approximate the carrying value.

(3)      The amount on which the interest was computed in 1996 was $20 million
         for swaps. The amount in 1997 was $15 million for swaps.

(4)      The amount that the Partnership estimates it would pay to terminate the
         hedging agreements, such amount has not been reflected in the financial
         statements. The fair value of the excess of interest swaps over
         outstanding notes payable is immaterial.

NOTE 5 - NOTES PAYABLE

         In September 1992, the Partnership entered into a $34 million credit
agreement with four banks (the "Bank Credit Agreement"). The Bank Credit
Agreement provided for annual interest rates ranging from prime plus 0.5% to
prime plus 2.5% or LIBOR plus 2.25% to LIBOR plus 4.25%. At December 31, 1997,
the weighted average interest on the outstanding balance (including the effects
of interest rate swap transactions) was 8.4% per annum.

         On April 10, 1995, the Partnership executed an amendment to the Bank
Credit Agreement (the "Amendment") which, among other things, reduced the total
facility from $34 million to $29 million. On December 31, 1995, the outstanding
principal balance of $27 million converted to a term loan with required
quarterly payments commencing March 31, 1996 through June 30, 2000, the maturity
date of the term loan.

         The term loan was repaid on March 6, 1998 in connection with the sale
of substantially all the Partnership's assets. (See Note 2).

         The Bank Credit Agreement also contained restrictions relating to,
among other things, additional borrowings, guarantees, mergers and distributions
to partners. The debt was collateralized by a security interest in substantially
all of the assets of the Partnership. Management believes that the Partnership
was in compliance with such covenants at December 31, 1997.



                                      F-12
<PAGE>   51
                  FALCON CLASSIC CABLE INCOME PROPERTIES, L.P.

                          NOTES TO FINANCIAL STATEMENTS

                  ============================================


NOTE 5 - NOTES PAYABLE (CONTINUED)

         The Partnership Agreement provides that without the approval of a
majority of interests of limited partners, the Partnership may not incur any
borrowings unless the amount of such borrowings together with all outstanding
borrowings does not exceed 30% of the greater of the aggregate cost or current
fair market value of the Partnership's assets as determined by the General
Partner. The Partnership Agreement also limits borrowings incurred to fund
distributions to partners to not more than 10% of Gross Proceeds from the public
offering of the Units (approximately $7.2 million). As of December 31, 1997, the
Partnership had incurred an aggregate of approximately $5.4 million in
borrowings to make distributions to partners.

         The Partnership utilizes interest rate hedging agreements to establish
long-term fixed interest rates on a portion of its variable rate debt in order
to manage the interest rate sensitivity on its borrowings. At December 31, 1997,
the Partnership participated in interest rate swap contracts with aggregate
notional principal of $15 million under which the Partnership pays interest at
fixed rates ranging from 5.75% to 6.51% (weighted average rate of 6.07%), and
receives interest at variable LIBOR-based rates. These contracts expire in 1998
and 1999, and were sold to FHGLP on March 6, 1998 when the outstanding notes
payable under the Bank Credit Agreement were retired.

         The hedging agreements resulted in additional interest expense of
$19,000, $117,000 and $72,000 for the years ended December 31, 1995, 1996 and
1997, respectively. The Partnership does not believe that it has any significant
risk of exposure to non-performance by any of its counterparties.

NOTE 6 - NOTES RECEIVABLE FROM GENERAL PARTNER

         In accordance with the Partnership's Limited Partnership Agreement,
capital contributions of the General Partner were contributed one-half in cash
and one-half in non-interest bearing notes payable on demand. Additionally,
according to the Limited Partnership Agreement, a minimum of 50% of all
distributions received by the General Partner are to be returned to the
Partnership to reduce the notes receivable balance. The notes receivable balance
was repaid to the Partnership on March 30, 1998 in connection with the sale of
substantially all the Partnership's assets (other than the Somerset System). See
Note 2.

NOTE 7 - MANAGEMENT COMPENSATION

         The Partnership is obligated to pay FHGLP a 5% management fee based on
the gross operating revenues of the Partnership. In addition, FHGLP is entitled
to reimbursement from the Partnership for certain expenses relating to the
performance of management functions as described in the management agreement.
Such reimbursable expenses are limited to 3% of gross operating revenues.
Management fees and reimbursed expenses amounted to approximately $1.5 million,
$1.6 million and $1.6 million for the years ended December 31, 1995, 1996 and
1997, respectively.

         Beginning in 1991, up to 50% of management fees have not been paid
currently unless adjusted operating cash, as defined, for a particular month
exceeded a 10% annualized return, calculated with respect to outstanding
partnership Units. To the extent that adjusted operating cash for any month
exceeds the 10% annualized return, FHGLP may recover previously deferred fees,
without interest. In compliance with these provisions, FHGLP received its
standard management fee for 1997 and recovered $276,000 in previously deferred
management fees. As a result, at December 31, 1995 and 1996, deferred management
fees amounted to $1.2 million and $276,000, respectively. As a result of the
sale of substantially all the Partnership's assets (other than the Somerset
System), the Partnership's management anticipates that adjusted operating cash
in 1998 will not exceed the 10% requirement, and 50% of the management fees in
1998 will be deferred.



                                      F-13
<PAGE>   52
                  FALCON CLASSIC CABLE INCOME PROPERTIES, L.P.

                          NOTES TO FINANCIAL STATEMENTS

                  ============================================


NOTE 8 - COMMITMENTS AND CONTINGENCIES

         The Partnership leased office space and equipment under operating
leases expiring at various dates through the year 2008. These lease commitments
were assumed by FHGLP with the purchase of substantially all the Partnership's
assets. Rent expense for the years ended December 31, 1995, 1996 and 1997 for
all facilities amounted to $86,000, $91,000 and $86,000, respectively. The
Somerset System has no long term lease commitment.

         In addition, the Partnership rents line space on utility poles in some
of the franchise areas it serves. These rentals amounted to $290,000, $341,000
and $360,000 for the years ended December 31, 1995, 1996 and 1997, respectively.
Generally such pole rental agreements, which were substantially assumed by
FHGLP, are short-term, but the Partnership expects such rentals to continue in
the future. The pole rental agreements related to the Somerset System amounted
to approximately $33,000 for the year ended December 31, 1997.

         Beginning in August 1997, the General Partner elected to self-insure
the Partnership's cable distribution plant and subscriber connections against
property damage as well as possible business interruptions caused by such
damage. The decision to self-insure was made due to significant increases in the
cost of insurance coverage and decreases in the amount of insurance coverage
available. Management believes that the relatively small size of the
Partnership's markets in any one geographic area coupled with their geographic
separation will mitigate the risk that the Partnership could sustain losses due
to seasonal weather conditions or other events that, in the aggregate, could
have a material adverse effect on the Partnership's liquidity and cash flows.
There can be no assurance that future self-insured losses will not exceed prior
costs of maintaining insurance for these risks. In January 1998, the Partnership
suffered storm damage to its Somerset, Kentucky cable television system.
Management estimates that the cost to repair this damage will be $1.0 million
and will be funded through cash from the sale of the Sold Systems. The
Partnership continues to purchase insurance coverage in amounts management views
as appropriate for all other property, liability, automobile, workers'
compensation and other types of insurable risks.

         The Somerset System has been tied together with fiber to the Burnside
system, thereby eliminating the Somerset headend. The Burnside system was sold
to FHGLP on March 9, 1998. In the event that the Partnership is unable to obtain
regulatory approvals to complete the sale of the Somerset System to FHGLP, the
Partnership intends to seek other buyers for the Somerset System. The value of
the Somerset System could be adversely affected by the lack of a headend. As of
March 1998, the Partnership entered into an agreement with FHGLP to rent the
usage of the headend site, the office and related equipment.

         The Partnership is subject to regulation by various federal, state and
local government entities. The Cable Television Consumer Protection and
Competition Act of 1992 (the "1992 Cable Act"), provides for, among other
things, federal and local regulation of rates charged for basic cable service,
cable programming services and equipment and installation services. Regulations
issued in 1993 and significantly amended in 1994 by the Federal Communications
Commission (the "FCC") have resulted in changes in the rates charged for the
Partnership's cable services. The Partnership believes that compliance with the
1992 Cable Act has had a negative impact on its operations and cash flow. It
also presently believes than any potential future liabilities for refund claims
or other related actions would not be material. The Telecommunications Act of
1996 (the "1996 Telecom Act") was signed into law on February 8, 1996. This
statute contains a significant overhaul of the federal regulatory structure. As
it pertains to cable television, the 1996 Telecom Act, among other things, (i)
ends the regulation of certain nonbasic programming services in 1999; (ii)
expands the definition of effective competition, the existence of which
displaces rate regulation; (iii) eliminates the restriction against the
ownership and operation of cable systems by telephone companies within their
local exchange service areas; and (iv) liberalizes certain of the FCC's
cross-ownership restrictions. The FCC is in the process of



                                      F-14
<PAGE>   53
                  FALCON CLASSIC CABLE INCOME PROPERTIES, L.P.

                          NOTES TO FINANCIAL STATEMENTS

                  ============================================


NOTE 8 - COMMITMENTS AND CONTINGENCIES (CONTINUED)

conducting a number of additional rulemaking proceedings in order to implement
many of the provisions of the 1996 Telecom Act.

         The Partnership has various contracts to obtain basic and premium
programming from program suppliers whose compensation is generally based on a
fixed fee per customer or a percentage of the gross receipts for the particular
service. Some program suppliers provide volume discount pricing structures or
offer marketing support to the Partnership. The Partnership's programming
contracts are generally for a fixed period of time and are subject to negotiated
renewal. The Partnership does not have long-term programming contracts for the
supply of a substantial amount of its programming. Accordingly, no assurance can
be given that the Partnership's programming costs will not increase
substantially or that other materially adverse terms will not be added to the
Partnership's programming contracts. Management believes, however, that the
Partnership's relations with its programming suppliers generally are good.

NOTE 9 - EMPLOYEE BENEFIT PLANS

         At December 31, 1997, the Partnership had a cash or deferred profit
sharing plan (the "Profit Sharing Plan") covering substantially all of its
employees. The Profit Sharing Plan provided that each participant may elect to
make a contribution in an amount up to 15% of the participant's annual
compensation which otherwise would have been payable to the participant as
salary. The Partnership's contribution to the Profit Sharing Plan, as determined
by management, is discretionary but may not exceed 15% of the annual aggregate
compensation (as defined) paid to all participating employees. There were no
contributions charged against operations of the Partnership for the Profit
Sharing Plan in 1995, 1996 or 1997. As of March 1998, in connection with the
sale of substantially all the Partnership's assets, the Partnership no longer
has employees.

NOTE 10 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

         During the years ended December 31, 1995, 1996 and 1997, the
Partnership paid cash interest amounting to $2.1 million, $2.2 million and $1.8
million, respectively.



                                      F-15
<PAGE>   54
                  FALCON CLASSIC CABLE INCOME PROPERTIES, L.P.

                 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

                  ============================================

<TABLE>
<CAPTION>
         Column A              Column B       Column C         Column D         Column E
         --------              --------       --------         --------         --------
                                             
                                             Additions
                             Balance at      charged to                        Balance at
                              beginning       costs and                          end of
       Description            of period       expenses       Deductions(a)       period
       -----------            ---------       --------       -------------       ------
                                          (Dollars in Thousands)
<S>                            <C>             <C>              <C>               <C> 
Allowance for possible
  losses on receivables

Year ended December 31,

           1995                $  27           $ 234            $ (221)           $ 40

           1996                $  40           $ 171            $ (180)           $ 31

           1997                $  31           $ 345            $ (334)           $ 42
</TABLE>


(a)  Write-off uncollectible accounts



                                      F-16
<PAGE>   55
                                  EXHIBIT INDEX

<TABLE>
<CAPTION>
<S>     <C>
3.1     Certificate of Limited Partnership of the Registrant filed with the
        California Secretary of State on February 17, 1989.(1)

3.2     Agreement of Limited Partnership of the Registrant dated as of February
        21, 1989.(1)

3.3     Certificate of Limited Partnership of Falcon Classic Cable Investors,
        L.P. filed with the California Secretary of State on February 21,
        1989.(1)

3.4     Agreement of Limited Partnership of Falcon Classic Cable Investors, L.P.
        dated as of February 17, 1989 among Falcon Holding Group, Inc., Marc B.
        Nathanson, Stanley S. Itskowitch, Frank J. Intiso, and Michael K.
        Menerey.(1)

3.5     Articles of Incorporation of Falcon Holding Group, Inc.(1)

3.6     Bylaws of Falcon Holding Group, Inc.(1)

3.7     Amended and Restated Agreement of Limited Partnership of the Registrant
        dated as of April 14, 1989.(1)

3.8     Amended and Restated Agreement of Limited Partnership of Falcon Classic
        Cable Investors, L.P. dated as of April 1989 among Falcon Holding Group,
        Inc., Marc B. Nathanson, Stanley S. Itskowitch, Frank J. Intiso, and
        Michael K. Menerey.(1)

3.9     Amended and Restated Agreement of Limited Partnership of the Registrant
        dated as of May 11, 1989.(1)

3.10    Amended and Restated Agreement of Limited Partnership of Falcon Classic
        Cable Investors, L.P. dated as of May 10, 1989 among Falcon Holding
        Group, Inc., Marc B. Nathanson, Stanley S. Itskowitch, Frank J. Intiso,
        and Michael K. Menerey.(1)

3.11    Amended and Restated Agreement of Limited Partnership of the Registrant
        dated as of May 15, 1989.(1)

3.12    First Amendment to Amended and Restated Agreement of Limited Partnership
        of the Registrant dated as of July 24, 1989(3)

4.1     Subscription Documents(1)

5.1     Stipulation of Settlement (17)

10.1    Management Agreement between the Registrant and Falcon Holding Group,
        Inc. dated as of May 15, 1989.(1)

10.2    Asset Purchase and Sale Agreement dated as of July 14, 1989 by and among
        Jack Kent Cooke Incorporated, Cooke Media Group Inc., Cooke Cablevision
        of Cottage Grove, Inc., Cooke Cablevision, Inc., and Pacific
        Telatronics, Inc., on one part, and Falcon Holding Group, Inc., on
        another part.(1)

10.3    Assignment and Assumption of Purchase Agreement dated October 12, 1989
        by and between Falcon Holding Group, Inc. and the Registrant.(1)

10.4    Assignment and Assumption of Purchase Agreement dated October 12, 1989
        by and between Falcon Holding Group, Inc. and the Registrant.(1)
</TABLE>


                                      E-1

<PAGE>   56
                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
<S>     <C>
10.5    Ordinance No. 568 of the City of Redmond, Oregon, granting a
        non-exclusive franchise to McCaw Communications of Redmond to operate
        and maintain a cable communications system within the City limits of
        Redmond, Oregon passed and adopted by the City Council on November 21,
        1989.(3)

10.6    Ordinance No. 600 of the City of Redmond, Oregon dated November 8, 1984,
        approving the transfer and assignment of the rights to construct,
        operate and maintain a community antenna television system in the City
        of Redmond, Oregon.(3)

10.7    Ordinance No. 87-05 of the City of Redmond, Oregon dated February 24,
        1987, approving the transfer and assignment of the rights to construct,
        operate and maintain a community antenna television system in the City
        of Redmond, Oregon.(3)

10.8    Ordinance No. 89-15 of the City of Redmond, Oregon dated November 21,
        1989, approving the transfer and assignment to operate a cable
        television system in the City of Redmond, Oregon.(3)

10.9    Franchise Ordinance and related documents thereto granting a
        non-exclusive community antenna television franchise for Burke County,
        North Carolina.(7)

10.10   Assignment of Cable Television Franchise for Laurel County, Kentucky.(7)

10.11   Franchise Ordinance and related documents thereto granting a
        non-exclusive community antenna television franchise for Pulaski County,
        Kentucky, dated June 6, 1979.(7)

10.12   Franchise Ordinance and related documents thereto granting a
        non-exclusive community antenna television franchise for Pulaski County,
        Kentucky, dated October 26, 1988.(7)

10.13   Franchise Ordinance and related documents thereto granting a
        non-exclusive community antenna television franchise for the City of
        Somerset, Kentucky.(7)

10.14   Franchise Ordinance and related documents thereto granting a
        non-exclusive community antenna television franchise for Queen Anne's
        County, Maryland.(7)

10.15   Franchise Ordinance and related documents thereto granting a
        non-exclusive community antenna television franchise for Talbot County,
        Maryland.(7) 

10.16   Asset Purchase Agreement dated as of July 20, 1991 by and between Burke
        Cable Company Ltd. and the Registrant.(4)

10.17   Asset Purchase Agreement dated as of April 24, 1991 by and between
        Cumberland Valley Cable TV Company and the Registrant.(5)

10.18   Asset Purchase Agreement dated as of May 1, 1991 by and between Simmons
        Communications Company, LP and the Registrant.(6)

10.19   Asset Purchase Agreement dated as of September 20, 1991 by and between
        CABLE TV FUND XII-BCB VENTURE and the Registrant.(8)

10.20   Ordinance No. 7-70-71 of the City of California City granting to Desert
        Video, Inc. a franchise to construct, operate and maintain a cable
        television system. Passed and adopted January 31, 1974.(8)

10.21   Resolution No. 4-86-1208 of the Council of the City of California City
        approving the transfer of a CATV Franchise from Antelope Valley
        Cablevision to Jones Intercable, Inc. Passed, approved and adopted April
        1, 1986.(8)

10.22   Ordinance No. 86-373 of the City of California City approved of the
        transfer of the above cable television franchise from Desert Video, Inc.
        to Jones Intercable, Inc. a Colorado Corporation. Passed and adopted May
        6, 1986.(8)
</TABLE>



                                  E-2
<PAGE>   57
                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
<S>     <C>

10.23   Resolution No. 3-88-1301 of the City of California City approved of the
        transfer of the above cable television franchise from Jones Intercable,
        Inc., a Colorado Corporation, to Cable TV Fund 12-BCD Venture. Passed
        and adopted March 15, 1988.(8)

10.24   Resolution No. 3-92-1463 of the City of California City granting the
        transfer of the above cable company franchise from Cable TV Fund 12-BCD
        Venture to Falcon Classic Cable Income Properties, L.P. Passed and
        approved March 3, 1992.(8)

10.25   Credit Agreement by and among Falcon Classic Cable Income Properties,
        L.P., The Bank of California, N.A., as Agent, Societe Generale,
        NationsBank of Texas, N.A., The Connecticut National Bank, N.A. and The
        Bank of California, N.A., as banks dated as of September 10, 1992.(10)

10.26   Bill of Sale and Assignment whereby Falcon Holding Group, Inc. assigned
        its interest in the Classic Management Agreement to Falcon Holding
        Group, L.P. (10)

10.27   First amendment to the Credit Agreement by and among Falcon Classic
        Cable Income Properties, L.P., The Bank of California, N.A., as Agent,
        Societe Generale, NationsBank of Texas, N.A., The Connecticut National
        Bank, N.A. and The Bank of California, N.A., as banks, dated as of April
        10, 1995.(12)

10.28   Franchise Ordinance No. 450.2 and related documents granting
        non-exclusive franchises to erect, construct, maintain and operate
        community antenna television service facilities in Laurel County,
        Kentucky. (12)

10.29   Franchise Agreement between the Town of Valdese, North Carolina, and
        Falcon Classic Cable Income Properties, L.P., dated June 5, 1995.(14)

10.30   Asset Purchase Agreement, dated as of June 27, 1997, by and among Falcon
        Community Cable, L.P., Falcon Cable Media, Falcon Cable Systems Company
        II, L.P. and Falcon Classic Cable Income Properties, L.P. (17)

21.1    Subsidiaries: None

28.1    Prospectus Supplement dated November 6, 1989 to the Registrant's
        Prospectus dated May 15, 1989.(2)

28.2    Prospectus Supplement dated April 17, 1990 to the Registrant's
        Prospectus dated May 15, 1989 and the Prospectus Supplement dated
        November 6, 1989.(3)

99.1    Memorandum to Unitholders dated August 13, 1993 relating to distribution
        policy of the Partnership.(9)

99.2    Memorandum to Unitholders dated April 29, 1994 relating to distribution
        policy of the Partnership.(11)

99.3    Memorandum to Unitholders dated October 24, 1996 relating to JJJ tender
        offer.(15)

99.4    Fair Market Valuation Report for Falcon Classic Cable Income Properties,
        L.P., as of December 31, 1996, dated February 20, 1997, prepared by
        Arthur Andersen LLP.(16)

99.5    Valuation Analysis for Falcon Classic Cable Income Properties, L.P., as
        of December 31, 1996, dated March 3, 1997, prepared by Communications
        Equity Associates. (16)

99.6    Fair Market Valuation Report for Falcon Classic Cable Income Properties,
        L.P., as of December 31, 1996, dated March 10, 1997, prepared by Kane
        Reece Assocates, Inc. (16)

99.7    Letter to unitholders dated June 24, 1997 relating to sale of the
        Partnership. (17)
</TABLE>



                                      E-3
<PAGE>   58
                               FOOTNOTE REFERENCES

(1)     Incorporated by reference to the exhibits to the Registrant's
        Registration Statement on Form S-1, Registration No. 33-27215.

(2)     Incorporated by reference to the exhibits to the Registrant's Annual
        Report on Form 10-K, File No. 0-18266 for the fiscal year ended December
        31, 1989.

(3)     Incorporated by reference to the exhibits to the Registrant's Annual
        Report on Form 10-K, File No. 0-18266 for the fiscal year ended December
        31, 1990.

(4)     Incorporated by reference to the exhibits to the Registrant's Current
        Report on Form 8-K, File No. 0-18266 dated March 21, 1991.

(5)     Incorporated by reference to the exhibits to the Registrant's Current
        Report on Form 8-K, File No. 0-18266 dated May 2, 1991.

(6)     Incorporated by reference to the exhibits to the Registrant's Current
        Report on Form 8-K, File No. 0-18266 dated October 3, 1991.

(7)     Incorporated by reference to the exhibits to the Registrant's Annual
        Report on Form 10-K, File No. 0-18266 for the fiscal year ended December
        31, 1991.

(8)     Incorporated by reference to the exhibits to the Registrant's Annual
        Report on Form 10-K, File No. 0-18266 for the fiscal year ended December
        31, 1992.

(9)     Incorporated by reference to the exhibits to the Registrant's Quarterly
        Report on Form 10-Q, File No. 0-18266 for the quarter ended June 30,
        1993. 

(10)    Incorporated by reference to the exhibits to the Registrant's Annual
        Report on Form 10-K, File No. 0-18266 for the fiscal year ended December
        31, 1993.

(11)    Incorporated by reference to the exhibits to the Registrant's Current
        Report on Form 8-K, File No. 0-18266 dated April 29, 1994.

(12)    Incorporated by reference to the exhibits to the Registrant's Annual
        Report on Form 10-K, File No. 0-18266 for the fiscal year ended December
        31, 1994.

(13)    Incorporated by reference to the exhibits to the Registrant's Quarterly
        Report on Form 10-Q, File No. 0-18266 for the quarter ended June 30,
        1995.

(14)    Incorporated by reference to the exhibits to the Registrant's Annual
        Report on Form 10-K, File No. 0-18266 for the fiscal year ended December
        31, 1995.

(15)    Incorporated by reference to the exhibits to the Registrant's Current
        Report on Form 8-K, File No. 0-18266 dated October 24, 1996.

(16)    Incorporated by reference to the exhibits to the Registrant's Annual
        Report on Form 10-K, File No. 0-18266 dated December 31, 1996.

(17)    Incorporated by reference to the exhibits to the Registrant's Current
        Report on Form 8-K, File No. 0-18266 dated June 24, 1997.

(18)    Incorporated by reference to the exhibits to the Registrant's Current
        Report on Form 8-K, File No. 0-18266 dated December 31, 1997.



                                      E-4