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                       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 (No Fee Required) 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 (No Fee Required) For the
         transition period from       to

                    Commission file numbers: 333-03741
                                          333-03741-01

                           MUZAK LIMITED PARTNERSHIP
                           MUZAK CAPITAL CORPORATION
           (Exact Name of Registrants as Specified in their charters)

<TABLE>
<S>                                            <C>
                  DELAWARE                                      13-3647593
                  DELAWARE                                      91-1722302
       (State or Other Jurisdiction of             (I.R.S. Employer Identification Nos.)
       Incorporation or Organization)
</TABLE>

                          2901 Third Avenue, Suite 400
                               Seattle, WA 98121
                                 (206) 633-3000
              (Address, Including Zip Code, and Telephone Number,
       Including Area Code, of Registrants' Principal Executive Offices)

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

       Securities registered pursuant to Section 12(g) of the Act: None.

    Indicate by check mark whether the registrants: (1) have 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
registrants were required to file such reports), and (2) have 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 registrants' knowledge, in definitive proxy or information statement
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K /X/.

    On March 30, 1998 there were 19,218,933 units of partnership interests of
Muzak Limited Partnership outstanding.

    None of the voting securities of Muzak Capital Corporation are held by
non-affiliates.

    Muzak Capital Corporation meets the conditions set forth in General
Instruction (I)(1)(a) and (b) of Form 10-K and is therefore filing this form
with the reduced disclosure format.
                         APPLICABLE ONLY TO REGISTRANTS
                       INVOLVED IN BANKRUPTCY PROCEEDINGS
                        DURING THE PRECEDING FIVE YEARS:

    Indicate by check mark whether the registrants have filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes / /  No / /

    APPLICABLE ONLY TO CORPORATE REGISTRANTS: On March 30, 1998, Muzak Capital
Corporation had outstanding 100 shares of Common Stock, par value $0.01 per
share, which is the registrant's only class of common stock.

                   DOCUMENTS INCORPORATED BY REFERENCE: None.

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<PAGE>
                           MUZAK LIMITED PARTNERSHIP
                           MUZAK CAPITAL CORPORATION

                                     INDEX
<TABLE>
<CAPTION>
                                                                                                                            Page
                                                                                                                            ----
<S>           <C>                                                                                                           <C>
Part I
     Item 1.  Business....................................................................................................    3
     Item 2.  Properties..................................................................................................   11
     Item 3.  Legal Proceedings...........................................................................................   11
     Item 4.  Submission of Matters to a Vote of Security Holders.........................................................   11

Part II
     Item 5.  Market for Registrants' Common Equity and Related Stockholder Matters.......................................   12
     Item 6.  Selected Financial Data.....................................................................................   12
     Item 7.  Management's Discussion and Analysis of Financial Condition and Results of Operations.......................   14
     Item 8.  Financial Statements and Supplementary Data.................................................................   22
     Item 9.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........................   48

Part III
    Item 10.  Directors and Executive Officers of the Registrants.........................................................   49
    Item 11.  Executive Compensation......................................................................................   53
    Item 12.  Security Ownership of Certain Beneficial Owners and Management..............................................   56
    Item 13.  Certain Relationships and Related Transactions..............................................................   57

Part IV
    Item 14.  Exhibits, Financial Statement Schedules and Reports on Form 8-K.............................................   58
Signatures................................................................................................................   61
</TABLE>

    The Registrants will furnish a copy of any exhibit to this Form 10-K upon
the payment of a fee equal to the Registrant's reasonable expense in furnishing
such exhibits.

                                       2

<PAGE>

Forward-Looking Statements

    When used in this Annual Report on Form 10-K or future filings by the
Company, as defined below, and Capital Corp., as defined below, with the
Securities and Exchange Commission, in the Company's and Capital Corp.'s press
releases or other public communications, or in oral statements made with the
approval of an authorized executive officer, the words or phrases "will likely
result," "are expected to," "will continue," "is anticipated," "estimate,"
"project" or similar expressions are intended to identify "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. The Company and Capital Corp. wish to caution readers not to place
undue reliance on any such forward-looking statements, which speak only as of
the date made, and to advise readers that various factors, including rapid
technological change, competitive pricing, concentrations in and dependence on
satellite delivery capabilities, and development of new services could affect
the Company's and Capital Corp.'s financial performance and could cause the
Company's and Capital Corp.'s actual results for future periods to differ
materially from those anticipated or projected.

    The Company and Capital Corp. do not undertake and specifically disclaim any
obligation to update any forward-looking statements to reflect the occurrence of
anticipated or unanticipated events or circumstances after the date of such
statements.

                                     PART I

ITEM 1. BUSINESS.

General

    Muzak Limited Partnership (the "Company") is the leading provider of
business music in the United States, based on the number of customer locations
served. As of December 31, 1997, the Company and its franchisees served
approximately 200,000 business customer locations in the United States,
representing a market share of approximately 50% of the estimated number of
domestic business customer locations currently served by business music
providers and approximately twice the estimated number of business customer
locations served by its nearest competitor. In addition to providing business
music, the Company also provides in-home CD quality music to EchoStar Satellite
Corporation ("EchoStar") subscribers. As of December 31, 1997, the number of
EchoStar subscribers receiving this service totaled over 600,000. Revenues from
the in-home music service accounted for approximately 1.0% of revenues in 1997.
Through a network of distributors, the Company also provides business music to
subscribers outside the United States. In addition, the Company offers its
business customers a range of non-music services, including broadcast data
delivery, video, audio marketing and in-store advertising services, and sells,
installs and services related equipment.

    The Company markets business music in a variety of formats, including (i)
its well-known proprietary Environmental Music-Registered Trademark- (or
"background" music) and (ii) over 100 "foreground" music formats ranging from
top-of-the-charts hits to contemporary jazz, country music and classical music.
Environmental Music-Registered Trademark-, which is principally comprised of

                                       3

<PAGE>

instrumental versions of popular songs that have been adapted and re-recorded
by the Company, is generally used in business offices and manufacturing
facilities to improve employee concentration and reduce stress. Foreground
music, consisting principally of original artist recordings, is most commonly
used in public areas, such as restaurants and retail establishments,
primarily as a sales enhancement tool. The Company distributes 60 of its
music formats by broadcast media (principally direct broadcast satellite
("DBS") transmission) and supplies the balance to subscribers principally in
the form of long-playing audio tapes.

    Since 1993, the total number of domestic business customer locations
served by the Company and its franchisees has grown from 158,000 to 200,000.
Over the same period, the Company's total revenues and EBITDA have grown from
$58.5 million and $11.6 million in 1993, respectively, to $91.2 million and
$17.0 million in 1997, respectively.

    Muzak Capital Corporation ("Capital Corp."), a wholly-owned subsidiary of
the Company, has nominal assets and does not conduct any operations.

Business Music Services

    Music Formats

    The Company conducts on-going research into the effects of music on human
behavior to create proprietary music formats designed to have a favorable impact
on listeners. These music formats cover a wide range of musical tastes.

    The Company's best-selling format, Environmental Music-Registered
Trademark-, is a unique blend of completely instrumental music and is
principally comprised of versions of popular songs that have been adapted and
re-recorded by the Company ("covers"), music that has been composed and
recorded exclusively for inclusion in the Environmental Music-Registered
Trademark- program ("originals"), and some commercially available recordings.
The Environmental Music-Registered Trademark-format is generally used in
business offices and manufacturing facilities to improve employee
concentration and reduce stress. The Environmental Music-Registered
Trademark- library consists of approximately 32,000 recordings owned by the
Company, of which approximately 5,000 are actively used at any given time.
The Company updates the library periodically, adding approximately 1,000 new
selections each year.

    Foreground music, consisting principally of original artist recordings, is
most commonly used in public areas, such as restaurants and retail
establishments, primarily as a sales enhancement tool. The Company's most
popular foreground music product, FM-1-Registered Trademark-, features moderate
tempo, original artist recordings of familiar adult contemporary favorites. With
its broad appeal, FM-1-Registered Trademark- is second to the Environmental
Music-Registered Trademark- channel in the total number of business subscriber
locations served and is the Company's most widely-used format in the restaurant
and retail markets. FM-1-Registered Trademark- features a broad range of popular
artists from the last 30 years, with an emphasis on current popular music.

    Including Environmental Music-Registered Trademark- and FM-1-Registered
Trademark-, the Company has developed over 60 other foreground music formats for
broadcast transmission and over 100 different tape-based formats

                                       4
<PAGE>

of music targeted to the specialized business needs of subscribers with more
focused customer demographics.

    Distribution Systems

    Satellite transmission is the Company's primary delivery medium for its
business and residential programs. The Company's business music programs are
distributed to business subscribers through its medium-powered DBS system, the
EchoStar high-powered DBS system, local broadcast technology and tape-based
formats. The Company also uses its medium-powered DBS system to distribute these
programs to its franchisees for local broadcasting to the franchisees'
subscribers.

    The Company leases transponder capacity from Microspace Communication
Corporation ("Microspace"), which also provides facilities for the uplink of the
Company's signals to Microspace's transponder. Microspace, in turn, leases its
transponder capacity on satellites operated by third parties, including the
Galaxy IV satellite operated by Hughes Communications Galaxy Inc. ("Hughes"), on
which a majority of the Company's DBS signals are transmitted. The term of the
Company's principal transponder lease with Microspace for the Galaxy IV
satellite runs through the life of that satellite (which is expected to continue
through 2004). Microspace may terminate its agreements with the Company if the
Company materially breaches its obligations thereunder or if any governmental
restriction results in a sustained interruption of the Company's performance
thereunder. Microspace also is entitled to terminate its agreements with the
Company immediately upon termination of its underlying agreement with Hughes.

    In April 1996, the Company began offering high-powered DBS transmission
service to business and EchoStar residential customers through the EchoStar
satellite system. High-powered DBS systems utilize satellite dishes as small as
18 inches in diameter. The Company expanded its music services offered on the
EchoStar satellite system in mid-February 1997, when an additional 2.4 megahertz
of transponder capacity on EchoStar's second satellite became available for use
by the Company. Pursuant to its agreement with EchoStar, the Company pays
EchoStar a fee for uplink transmission and use of the uplink facility, and
EchoStar pays the Company a programming fee for each residential music customer.

Other Services

    Non-Music Broadcast Services

    The Company offers a variety of non-music services to its medium-powered DBS
business music subscribers that complement its music services. These services
are generally "bundled" and marketed in conjunction with the Company's business
music services. These services include AdParting-Registered Trademark-
(customized audio messages interspersed in business music), broadcast data
delivery (one-way data broadcasting on customer specific networks) and custom
business television services (custom video programs broadcasted to subscriber
locations).

                                       5
<PAGE>
    On-Premise Music Video-ZTV-Registered Trademark-

    The Company programs, duplicates on videotape and sells its proprietary
ZTV-Registered Trademark- on-premise music video service to subscribers,
allowing subscribers to create an "MTV-Registered Trademark--type"
environment for their customers through specially programmed, long-playing
videotapes. The ZTV-Registered Trademark- taped music videos are produced and
shipped directly from the Company's production facilities to subscriber
locations. Subscribers currently using the ZTV-Registered Trademark- service
include Macy's, Radio Shack, Oshman's Sporting Goods and Rent-A-Center.

    Audio Marketing

    The Company creates, produces and records spoken messages for use with
"on-hold" business telephone systems, AdParting-Registered Trademark- broadcasts
and other forms of in-store messaging and advertising.

    In-Store Advertising

    The Company has established an industry-specific network
(SuperLink-Registered Trademark-) of grocery wholesalers and wholesaler-supplied
retailers and sells time on the network to advertisers seeking to deliver a
message simultaneously to multiple locations in the network.

Internet Services

    The Company has developed and operates its Internet
MusicServer-SM- service through its wholly-owned subsidiary, EAIC, Inc.
("EAIC"). The MusicServer-SM- service permits music retailers
and others to offer visitors to their websites access to digitized 30-second
samples from the EAIC's library of recorded music. This service, which
permits, among other things, a consumer to preview recordings offered for
sale by a retailer, currently is being provided to, among others, CDnow!, an
on-line retailer of compact discs and audio cassettes, Tower Records and
Microsoft.

Equipment Sales and Related Services

    The Company sells and leases various audio system-related products,
principally intercoms and sound systems to its business music subscribers and
other customers. The Company also sells electronic equipment, principally DBS
receivers and dishes as well as proprietary tape playback equipment, to its
franchisees to support their business music services business. All the
equipment is manufactured by third parties, although some items bear the
Muzak-Registered Trademark- brand name. Revenues from equipment sales and
related services accounted for 37% of the Company's revenues in 1996 and 35%
of such revenues in 1997.

    The Company and its franchisees also sell, install and maintain non-music
related equipment, such as intercoms and paging systems, for use by their
business music subscribers and other customers. Although the maintenance of
program-receiving equipment provided to business music subscribers is typically
included as part of the overall music subscription fee, installation and
maintenance of audio or other equipment not directly related to reception of the
Company's business music service is provided on a contractual or
time-and-materials basis.

                                       6
<PAGE>

Labor rates and charges for installation and service vary by location and are
determined by the Company or its franchisee.

Marketing

    Company Sales Offices

    The Company has 35 local sales offices in the United States, including sales
offices in seven of the top ten U.S. markets (the greater metropolitan areas of
New York, Los Angeles, Chicago, San Francisco, Boston, Dallas and Detroit).
These 35 sales offices accounted for approximately 72% of the Company's revenues
in each of 1996 and 1997. In addition, the Company has a national sales
office in Chicago.

    Franchisees

    The Company has 80 franchisees serving 137 separate territories in the
United States. Each franchisee has exclusive responsibility for sales in its
territory, except for sales to national accounts, sales of in-store advertising
services and on-premise music video services. The Company designs and produces
literature, customer and training videos and sales materials for use by its
franchisees. The Company also conducts sales training for its franchisees' sales
personnel.

    Under the standard form of franchise agreement, franchisees pay the
Company (i) a monthly fee based on the number of business locations within the
specified territory, (ii) a monthly royalty equal to 10% of billings for
broadcast business music services (subject to certain deductions and
adjustments) and (iii) additional amounts for non-music broadcast services and
on-premise tape services. In addition, franchisees pay a variable surcharge of
billings to customers for medium-powered DBS service and high-powered DBS
services in the franchisee's territory. Franchisees are also responsible for
paying performing rights fees in connection with the provision of services in
their territories.

    Revenues from the sale of other broadcast business services are shared
between the Company and its franchisees, and the Company receives, determined by
service type, 50% or 60% of these revenues in lieu of royalty payments.
Franchisees also pay a monthly fee for use of various additional non-music and
other music broadcast services offered by the Company.

    National Sales Program

    The Company has established a national sales program to market its services
more effectively to subscribers with numerous locations in various territories,
including those served by franchisees, and to address the needs of these
subscribers for uniform service and centralized billing for all of their
locations. Subscribers with 50 or more locations operating in four or more
territories are deemed to be "national accounts." The national sales program
includes a committee of representatives of the Company and its franchisees that
oversees the pricing and other material terms for national account subscriber
contracts. The Company, through its Seattle

                                       7
<PAGE>

headquarters, coordinates the servicing of national accounts by its franchisees
and allocates revenues from national accounts among the participating
franchisees. The national sales office is comprised of seven salespeople and is
supported by additional customer service personnel. At December 31, 1997, the
Company and its franchisees had national accounts representing approximately
80,000 business subscriber locations (of which approximately 48,000 were
franchisee subscriber locations), including those of Taco Bell, McDonald's,
Burger King, Bob Evans, Boston Markets, Crate & Barrel, Kroger, Staples,
Hallmark and Wal-Mart. None of the Company's national accounts represents more
than 3% of the Company's consolidated revenues, and the Company's top five
national accounts represent in the aggregate less than 10% of consolidated
revenues.

    International Sales

    The Company has agreements with 15 international distributors and
franchisees in 10 countries outside the United States, including Canada, Mexico,
Japan, Argentina and Australia. These distributors and franchisees either pay
royalties to the Company based on their sales of business music services or a
flat fee based on the number of subscribers they serve. Royalties and other fees
from international sales accounted for approximately 2% of the Company's
revenues in 1997.

    The Company, through a joint venture ("Muzak Europe"), has been offering
business music and non-music services via satellite transmission since 1995
and is seeking to establish relationships with key distributors throughout
Europe. In addition, Muzak Europe acquired German and Belgian distributors in
1996. On March 2, 1998 the Company entered into a letter of intent with its
joint venture partner that will effectively liquidate the Company's interest
in the joint venture in exchange for a promissory note and the right of the
Company to participate in the future revenues of the European venture in
its new role as franchisor.

Competition

    The Company's principal direct competitors in providing business music
services are AEI Music Network, Inc. ("AEI") of Seattle, Washington, and 3M
Sound and Communications, an affiliate of Minnesota Mining and Manufacturing
Corporation. The Company competes with a number of local independent providers
of business music. In addition, certain companies, such as DMX, Inc. and Cable
Radio Associates L.P., market and sell commercial-free music programming over
cable to residential cable television subscribers and have launched DBS services
aimed at business users. No assurance can be given that such competition will
not attract customers to whom the Company markets its services, including its
existing customers. In broadcast data delivery, video, audio marketing and
in-store advertising services, the Company faces competition from numerous
companies using broadcast as well as other delivery systems to provide similar
business services.

    There are numerous methods by which programming, such as the Company's
business music services, broadcast data delivery, video, audio marketing and
in-store advertising services, can be delivered by existing and future
competitors, including various forms of DBS services, wireless cable and fiber
optic cable and digital compression over existing telephone lines. Many
competitors or potential competitors with access to these delivery technologies
have substantially greater financial, technical, personnel and other resources
than the Company. In addition, the larger communications industry of which the
Company is a part is undergoing significant and

                                       8
<PAGE>

rapid change, including the development of new services, delivery systems and
interactive technologies. In addition, the recently enacted Telecommunications
Act of 1996 (the "Telecommunication Act") may increase competition in the
markets in which the Company operates. The Telecommunications Act resulted in
comprehensive changes to the regulatory environment for the telecommunications
industry as a whole. The legislation permits telephone companies to enter
certain broadcast services businesses. The entry of telephone companies into
such businesses, with greater access to capital and other resources, could
provide significant competition to the Company. In addition, the legislation
affords relief to DBS transmission providers by exempting them from local
restrictions on small-size reception antennae and preempting the authority of
local governments to impose certain taxes. The Company cannot reasonably predict
how the Federal Communications Commission ("FCC") will enforce the rules and
policies promulgated under the Telecommunications Act, or the effect of such
rules and policies on competition in the market for the Company's services.

    Internationally, the Company competes with AEI and a number of regional
business music providers, some of which may have substantially greater
financial, technical, personnel and other resources than the Company.

    The Company competes on the basis of service and system quality, versatility
and flexibility, the variety of its music formats, the availability of its
broadcast data and other non-music services and price. Even
though it is seldom the lowest-priced provider of business music in any
territory, the Company believes that it can compete effectively on all these
bases due to the widespread recognition of the Muzak-Registered Trademark- name,
its nationwide sales and service infrastructure, the quality and variety of its
music programming and its multiple delivery systems. However, no assurance can
be given that the Company will be able to compete successfully with its existing
or potential new competitors or maintain or increase its current market share,
that it will be able to use, or compete effectively with competitors that adopt,
new delivery methods and technologies, or that discoveries or improvements in
the communications, media and entertainment industries will not render obsolete
some or all of the technologies or delivery systems currently relied upon by the
Company.

Music Licenses

    Most music is copyrighted and the Company is required to enter into
license agreements to rerecord and play music in public spaces. The Company
has various types of licensing agreements and arrangements with major rights
owners and organizations to permit the production and distribution of its
business music, including (i) master performance licensing agreements with
the American Society of Composers, Authors and Publishers ("ASCAP") and
Broadcast Music, Inc. ("BMI") that permit public performance of copyrighted
music in a customer's location, (ii) mechanical licensing agreements under
which the Company receives rights to rerecord and make copies of copyrighted
music and (iii) licensing agreements with record companies that allow the
Company to produce, advertise and distribute to its on-premise tape
subscribers audio tapes containing original artist recordings.

    The Company's agreement with ASCAP expires on May 31, 1999. During 1997, the
Company paid ASCAP fees aggregating approximately $3.5 million. The Company's
agreement

                                       9
<PAGE>

with BMI expired on December 31, 1993. The Company has entered into an
interim fee structure with BMI and is in negotiations with BMI with respect
to new agreements. The interim fee structure with BMI has been in place on an
ongoing month-to-month basis since the expiration of the underlying
agreement, and provides for continued payments at 1993 levels. The BMI
license extension stipulates that any settlement relating to ongoing fees may
be retroactive to January 1, 1994. Negotiations on a new contract with BMI
began in early 1994 and at this time it is not known when negotiations will
be completed. During 1997, the Company paid BMI fees aggregating
approximately $1.3 million. The Company's total fees in the aggregate for
mechanical licenses, original artist recording licenses and licensing
agreements with record companies were approximately $432,000 for 1997.

Government Regulation

    The Company is subject to the regulatory authority of the United States
government and the governments of other countries in which it provides services
to subscribers. The business prospects of the Company could be adversely
affected by the adoption of new laws, policies or regulations that modify the
present regulatory environment. The Company currently provides music services in
a few areas in the United States through 928 to 960 megahertz radio broadcast
frequencies, which are licensed by the FCC. Additionally, the satellites on
which the Company transmits its DBS services in the United States are licensed
by the FCC. If the FCC authorizations for any of these satellites are revoked or
are not extended, the Company would be required to seek alternative satellite
facilities. Laws, regulations and policy, or changes therein, in other countries
could adversely affect the Company's existing services or restrict the growth of
the Company's business in these countries.

    The Digital Recordings Act of 1995 (the "Digital Recordings Act") was
enacted into law on November 1, 1995. The Digital Recordings Act amends U.S.
copyright law to provide sound recording owners with an exclusive performance
right in sound recordings that are performed through digital transmissions. The
Digital Recordings Act provides a compulsory license for non-interactive
subscription services, but does not provide a compulsory license for interactive
services (where the listener selects a musical piece based upon a menu or
schedule). As music services to or within a business are specifically exempted
from the provisions of the Digital Recordings Act, the digital performance right
does not apply to the Company's traditional business music services (whether
analog or digital). However, to the extent the Company provides digital music
services to residential customers, via satellite or other broadcast delivery or
via the Internet or other digital means, the Digital Recordings Act would
require the payment of additional royalties.

                                       10
<PAGE>
Employees

    At December 31, 1997, the Company had 667 full-time and part-time employees,
of whom 146 held sales and marketing positions, 157 held administrative
positions and 364 held technical and service positions. A total of 74 of the
Company's technical and service personnel are covered by nine union contracts
with the International Brotherhood of Electrical Workers ("IBEW"). The IBEW
contracts have currently effective terms that expire on dates ranging from
March 31, 1998 to May 31, 2000. All of the IBEW contracts provide for
successive automatic one-year renewals, unless a notice of renegotiation or
termination is given prior to the end of the then-effective term. The Company
anticipates that some of the contracts may be renegotiated as their current
terms expire. The Company believes its relationships with its employees and the
IBEW are good.

ITEM 2. PROPERTIES.

    The Company's headquarters, located in Seattle, Washington, occupies
approximately 43,300 square feet. Muzak's national sales office and 32 of its
35 local sales offices occupy an aggregate of approximately 150,000 square
feet. Muzak's headquarters, 32 of its 35 local and its national sales
offices, as well as office and satellite uplink facilities at Raleigh, North
Carolina and Cheyenne, Wyoming and two warehouses in Seattle, are leased. The
Company's total lease payments related to these premises during 1997 were
approximately $2.7 million. In addition, the Company owns office and
warehouse facilities, aggregating approximately 21,000 square feet, in
Buffalo, New York, Irving, Texas and Peoria, Illinois. The Company considers
its facilities to be adequate to meet its current and reasonably foreseeable
needs.

ITEM 3. LEGAL PROCEEDINGS.

    The Company is subject to various proceedings arising in the ordinary course
of business, none of which, individually or in the aggregate, is expected to
have a material adverse effect on the Company's financial condition, results of
operations or liquidity.

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

    None.

                                       11
<PAGE>
                                    PART II

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

    The Company is a privately-held limited partnership. There is no
established public trading market for its securities.

ITEM 6. SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
                                                                                         Year Ended December 31,
                                                                            -------------------------------------------------------

                                                                              1993       1994(1)      1995      1996(2)      1997
                                                                            ---------  -----------  ---------  ---------  ---------
<S>                                                                         <C>        <C>          <C>        <C>        <C>
Statements of Operation Data:
Revenues:
  Music and other business services.......................................  $  36,800   $  50,410   $  52,489  $  54,585  $  59,351
  Equipment sales and related services....................................     21,741      33,006      34,392     32,226     31,853
                                                                            ---------  -----------  ---------  ---------  ---------
    Total revenues........................................................     58,541      83,416      86,881     86,811     91,204
                                                                            ---------  -----------  ---------  ---------  ---------
Cost of Revenues:
  Music and other business services.......................................     10,611      13,685      14,465     15,263     18,502
  Equipment sales and related services....................................     16,756      23,413      23,895     21,763     22,207
                                                                            ---------  -----------  ---------  ---------  ---------
    Total cost of revenues................................................     27,367      37,098      38,360     37,026     40,709
                                                                            ---------  -----------  ---------  ---------  ---------
Gross profit..............................................................     31,174      46,318      48,521     49,785     50,495
Selling general and administrative expenses...............................     19,603      28,699      28,496     31,659     33,464
Depreciation..............................................................      4,349       8,211       9,382     10,625     10,652
Amortization..............................................................      6,942       9,622       8,909      9,594     10,016
                                                                            ---------  -----------  ---------  ---------  ---------
    Operating income (loss)...............................................        280        (214)      1,734     (2,093)    (3,637)
Interest expense..........................................................     (3,785)     (6,990)     (7,483)    (8,112)   (10,775)
Interest income...........................................................      --            103         129        438      1,017
Other, net................................................................         30         (82)        (94)      (434)       (40)
                                                                            ---------  -----------  ---------  ---------  ---------
Net loss before extraordinary items.......................................     (3,475)     (7,183)     (5,714)   (10,201)   (13,435)
  Extraordinary loss on write-off of deferred financing fees and debt
    discount..............................................................     --          --          --         (3,713)    --
  Extraordinary gain on retirement of redeemable preferred partnership
  interests...............................................................     --          --          --          3,091     --
                                                                            ---------  -----------  ---------  ---------  ---------
  Net loss................................................................     (3,475)     (7,183)     (5,714)   (10,823)   (13,435)
  Redeemable preferred return.............................................       (572)       (933)     (1,029)      (916)      (400)
                                                                            ---------  -----------  ---------  ---------  ---------
  Net loss attributable to general and limited partners                     ($  4,047)  ($  8,116)  ($  6,743) ($ 11,739) ($ 13,835)
                                                                            ---------  -----------  ---------  ---------  ---------
                                                                            ---------  -----------  ---------  ---------  ---------
Other Information:
Gross profit margin(3)....................................................       53.3%       55.5%       55.8%      57.3%      55.4%
EBITDA(4).................................................................  $  11,571   $  17,619   $  20,025  $  18,126  $  17,031
Capital expenditures(5)...................................................      8,235      13,804      12,757     16,337     18,678
Ratio of earnings to fixed charges(6).....................................     --          --          --         --         --
Balance Sheet Data:
Cash and cash equivalents.................................................  $   1,436   $   1,445   $   1,115  $  25,686  $   8,524
Total assets..............................................................     66,294     103,092      96,439    119,042    104,395
Total long-term obligations, including current portion....................     35,002      56,833      53,005    101,102    101,044
Redeemable preferred partnership interests................................      8,760      14,693      15,722      6,090      6,490
Partners' capital (deficit)...............................................      8,047       7,943       1,373    (10,078)   (26,095)
</TABLE>

(footnotes to table on following page)

                                       12
<PAGE>
(footnotes to table on preceding page)
----------------------------------

(1) Includes the results of Comcast Sound Communications Inc. ("Comcast") from
    January 31, 1994.

(2) In 1996, selling, general and administrative expenses included a fourth
    quarter write-off of $1.4 million related to an unconsummated initial public
    offering of the Company's equity securities.

(3) Gross profit margin represents gross profit as a percentage of total
    revenues.

(4) EBITDA represents earnings before interest expense, income taxes,
    depreciation, amortization and other income/expense. EBITDA does not
    represent and should not be considered as an alternative to net income or
    cash flow from operations as determined by generally accepted accounting
    principles. The Company, however, believes that EBITDA provides useful
    information regarding a company's ability to service and/or incur additional
    indebtedness.

(5) Includes additions to property and equipment and additions to deferred costs
    and intangible assets.

(6) For purposes of computing the ratio of earnings to fixed charges, earnings
    include net loss attributable to general and limited partners, redeemable
    preferred returns and interest expense, including that portion of lease
    expense attributable to interest costs. Fixed charges consist of preferred
    returns and interest expense, including that portion of lease expense
    attributable to interest costs. Earnings were insufficient to cover fixed
    charges by $4.0 million, $8.1 million, $6.7 million, $11.7 million, and
    $13.8 million for the years ended December 31, 1993, 1994, 1995, 1996 and
    1997, respectively.

                                       13
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
        CONDITION AND RESULTS OF OPERATIONS.

General

    The Company derives revenues from its business services and from the
sale, installation and servicing of customer premises equipment. The
Company's principal business services include broadcast music services,
on-premise tapes, on-premise music video and audio marketing. Music and other
business services represented approximately 65% of total revenues in 1997.
Equipment and related revenues accounted for the remaining 35% of 1997
revenues. A large majority of the Company's broadcast and on-premise tape
revenues are generated from subscribers who typically execute five-year
contracts at rates ranging from $35 to $75 per month. These subscription
rates typically include the provision of the Company's equipment for use at
the subscriber's location. Royalties received from franchisees and
international distributors are included in broadcast music revenues and
represented approximately 8.6% of total revenues in 1997. The Company's
franchisees pay royalties, including surcharges for satellite transmission
systems, to the Company based generally on 10% to 12.5% of adjusted music
revenues, which are broadcast music revenues less licensing payments and bad
debt write-offs. In-store advertising revenues are generated from the sale of
advertising for delivery to certain subscribers. On-premise music video
revenues are derived from the sale of specialized on-premise music videos
targeted for certain segments of the marketplace. Audio marketing revenues
are generated primarily from the sale of customized audio messages for use
with "on-hold" telephone systems. The Company also provides other broadcast
business services, including AdParting-Registered Trademark-, data delivery
services, custom business television and other music-related services.

    Equipment revenues are derived from the sale and lease of audio
system-related products, principally sound systems and intercoms, to business
music subscribers and other customers. The Company also sells electronic
equipment, principally DBS receivers and dishes, as well as proprietary tape
playback equipment, audio and video equipment to its franchisees to support
their business music services. Installation, service and repair revenues consist
principally of revenues from the installation of sound systems and other
equipment that is not expressly part of a business music contract, such as
paging, security and drive-through systems. These revenues also include revenue
from the installation, service and repair of equipment installed under a
business music contract. Music contract installation revenues are deferred and
recognized over the term of the respective contracts.

    Cost of revenues for business services consists primarily of broadcast,
delivery, manufacturing, licensing and research costs associated with providing
music and other business services to a subscriber or a franchisee. Cost of
revenues for equipment represents the purchase cost plus handling, shipping and
warranty expenses. Cost of revenues for installation, service and repair
consists primarily of service and repair labor and labor for installation that
is not associated with new business music subscribers. Installation costs
associated with new business music subscribers are capitalized and charged to
depreciation expense over ten years.

    Selling, general and administrative expenses include salaries, benefits,
commissions, travel, marketing materials, training and occupancy costs
associated with staffing and operating local and national sales offices. Such
expenses also include personnel and other costs in

                                       14
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
        CONDITION AND RESULTS OF OPERATIONS. (Continued)

connection with the Company's headquarters functions. A significant portion
of commissions and certain other selling costs are capitalized on a
successful-efforts basis and charged as amortization expense over the average
contract term of five years and, accordingly, are not reflected in selling,
general and administrative expenses. The Company capitalized $3.2 million, $3.3
million and $3.8 million of such costs in 1995, 1996 and 1997, respectively. The
Company amortizes leasehold improvements over the shorter of the lease term or
five years and deferred costs and intangible assets over lives ranging from
five to ten years. These deferred costs and intangible assets consist of the
costs associated with subscriber contracts acquired from third parties
(typically amortized on an accelerated basis over eight years), commissions
and certain other sales-related expenses (five years), the acquisition and
production costs of a music library (typically five years), organizational
expenses related to acquiring certain franchise operations (five years) and
capitalized financing costs (over the life of the loans).

    The Company operates as a limited partnership and as such, the income tax
effects of all earnings or losses of the Company are passed directly to the
partners and no provision for income taxes is required.

    On October 2, 1996, the Company and Capital Corp. completed the offering of
$100 million aggregate principal amount (the "Offering") of their 10% Senior
Notes (the "Senior Notes"). The Senior Notes represent unsecured senior
obligations of the Company and Capital Corp., and are senior in right of payment
to all subordinated indebtedness and PARI PASSU in right of payment to all
senior indebtedness. The Senior Notes mature on October 1, 2003. Interest
accrues at a rate of 10% per annum and is payable semi-annually in arrears on
April 1 and October 1 to holders of record on the immediately preceding March 15
and September 15, respectively. A portion of the proceeds from the Senior Notes
was used to repay existing indebtedness and for additional working capital and
other corporate purposes.

    In 1996, the Company adopted, as part of the Offering, a performance-based
Amended and Restated Management Option Plan (the "Amended and Restated Option
Plan") that replaces an option plan implemented in connection with the
acquisition by the Company of substantially all of the assets and business of
the Company (the "1992 Acquisition") from a predecessor entity (the
"Predecessor"). The options granted under the Amended and Restated Option Plan
represent the same proportionate equity interest and carry equivalent exercise
prices as the options granted under the original plan. The Company had not been
required to record non-cash compensation expense for the original plan because
those options were not deemed exercisable. Non-cash compensation expense is
determined with respect to options under the Amended and Restated Option Plan
based on the difference between the exercise price and the fair value of the
partnership units. Such expense is recognized from that date to the date the
options actually become exercisable and is recorded as part of the Company's
operating results. The Company recorded $0.2 million as non-cash compensation
expense related to this plan in 1997.

    Capital Corp., a wholly-owned subsidiary of the Company, was organized on
May 8, 1996, has nominal assets and conducts no business operations. Capital
Corp. has no independent operations and is dependent on the cash flow of the
Company to meet its sole obligation, the payment of interest and principal on
the Senior Notes when due.

                                       15
<PAGE>
Results of Operations

    The following table sets forth certain financial information for the periods
presented and should be read in conjunction with the Company's Financial
Statements, including the Notes thereto:
<TABLE>
<CAPTION>
                                                            Year Ended December 31,         Percentage Change
                                                         -------------------------------  ------------------------
                                                                                           1996 vs.      1997 vs.
                                                           1995       1996       1997        1995          1996
                                                         ---------  ---------  ---------  -----------   -----------
                                                             (dollars in thousands)
<S>                                                      <C>        <C>        <C>        <C>           <C>
Revenues:
    Broadcast Music....................................  $  40,664  $  42,242  $  43,761      3.9%          3.6%
    On-Premise Music...................................      4,895      4,368      4,035    (10.8)%        (7.6)%
    Other Broadcast....................................      1,403      1,530      1,546      9.1%          1.0%
    On Premise Video...................................      1,741      2,108      4,126     21.1%         95.7%
    Audio Marketing....................................      2,027      2,480      3,248     22.3%         31.0%
    In-Store Advertising...............................        913        717        949    (21.5)%        32.4%
    Internet Music Server-SM- .........................          0         22        359       --            --
    Other..............................................        846      1,118      1,327     32.2%         18.7%
                                                         ---------  ---------  ---------
      Total Music and Other Business Services..........     52,489     54,585     59,351      4.0%          8.7%
                                                         ---------  ---------  ---------
  Equipment............................................     23,901     21,873     21,026     (8.5)%        (3.9)%
  Installation, Service & Repair.......................     10,491     10,353     10,827     (1.3)%         4.6%
                                                         ---------  ---------  ---------
      Total Equipment Sales and Related Services.......     34,392     32,226     31,853     (6.3)%        (1.2)%
                                                         ---------  ---------  ---------
    Total Revenues.....................................     86,881     86,811     91,204     (0.1)%         5.1%
Gross Profit:
  Business Services....................................     38,024     39,322     40,849      3.4%          3.9%
  Equipment............................................     10,450     10,316     10,162     (1.3)%        (1.5)%
  Installation, Service & Repair.......................         47        147       (516)      --            --
                                                         ---------  ---------  ---------
    Total Gross Profit.................................     48,521     49,785     50,495      2.6%          1.4%
    Gross Profit Margin (1)............................       55.8%      57.3%      55.4%

Selling, General & Administrative......................     28,496     31,659     33,464      11.1%         5.7%
SG&A Margin (2)........................................       32.8%      36.5%      36.7%
EBITDA (3).............................................     20,025     18,126     17,031      (9.5)%       (6.0)%
Net Loss...............................................  ($  5,714) ($ 10,823) ($ 13,435)       --           --
</TABLE>

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

(1) Gross profit margin represents gross profit as a percentage of total
    revenues.

(2) S,G&A margin represents selling, general and administrative expenses as a
    percentage of total revenues.

(3) EBITDA represents earnings before interest expense, income taxes,
    depreciation, amortization and other income/expense. EBITDA does not
    represent and should not be considered as an alternative to net income or
    cash flow from operations as determined by generally accepted accounting
    principles. The Company, however, believes that EBITDA provides useful
    information regarding a company's ability to service and/or incur additional
    indebtedness.


                                       16
<PAGE>
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996

    Revenues.  Total revenues increased 5.1% from $86.8 million in 1996 to
$91.2 million in 1997 principally as a result of a 8.7% increase in music and
other business services revenues offset by a 1.2% decrease in equipment sales
and related services. Music and other business services revenues increased
due to an increase in the number of broadcast music subscribers and an
increase in the royalties paid by franchisees resulting from an increase in
the broadcast music subscribers in the franchise network. Music and other
business services revenues (with the exception of on-premises tape sales)
increased at more rapid rates than broadcast music revenues due to the
increased marketing of, and increasing customer demand for, on-premise music
video and audio marketing services, among others. On-premise tape revenues
declined due to the Company's conversion of such customers to broadcast
services, primarily DBS transmission. Royalties and other fees from
franchisees and international distributors (included in broadcast music
revenues) accounted for $7.9 million or 8.6% of the Company's revenues in
1997, compared with $7.8 million or 8.9% of the Company's revenues in 1996.
This increase is principally due to a reduction in the surcharges assessed to
franchisees for satellite transmission costs. Equipment revenues decreased
3.9% as the Company has continued to exit the low margin business of
reselling equipment to its franchisees and reduced its participation in lower
margin competitively bid equipment sales. Installation, service and repair
revenues increased 4.6% from the level generated in 1996 due to more
installations and large equipment jobs during 1997.

    Gross Profit.  Total gross profit increased 1.4% from $49.8 million in
1996 to $50.5 million in 1997. As a percentage of total revenues, gross
profit decreased from 57.3% in 1996 to 55.4% in 1997. Declines in gross
profit as a percentage of sales reflect a dilution of the margin percentage
due to the continued development of the Internet Music Server-SM- business
and the EchoStar residential revenues, net of EchoStar satellite costs, both
of which contributed a negative gross profit for the year. Additionally, 1997
was impacted by approximately $0.5 million in one-time charges related to
inventory writedowns.

    Selling, General and Administrative Expenses.  Selling, general and
administrative expenses increased 5.7% from $31.7 million in 1996 to $33.5
million in 1997. As a percentage of total revenues, selling, general and
administrative expenses increased from 36.5% in 1996 to 36.7% in 1997.
Selling and marketing expenses increased 19.6% from $11.5 million in 1996 to
$13.8 million in 1997, principally due to an increase in sales volumes for
business services products. General and administrative costs decreased 2.3%
from $20.1 million in 1996 to $19.7 million in 1997, primarily due costs
associated with the unconsummated IPO in the 1996 period. General and
administrative costs also include $0.8 million in non-recurring severance
charges in 1997 related to certain executive officers.

    Depreciation Expense.  Depreciation expense increased 0.2% from $10.6
million in 1996 to $10.7 million in 1997, principally as a result of an
increased investment in equipment installed at customers' premises due to an
expanded customer base and related to new investments in the EchoStar system
and the Internet MusicServerSM service.

                                       17
<PAGE>
    Amortization Expense.  Amortization expense increased 4.4% from $9.6 million
in 1996 to $10.0 million in 1997. The increase in amortization expense was due
to an increase in intangibles related to the increased investment in the
expanded customer base.

    Interest Expense.  Total interest expense increased 32.8% from $8.1
million in 1996 to $10.8 million in 1997. The increase in interest expense in
1997 compared to 1996 resulted from a full year of interest expense on the
$100 million in Senior Notes issued by the Company in October 1996. The
Company's total interest-bearing debt remained constant at $101.1 million at
December 31, 1996 and 1997.

    Extraordinary Items.  Extraordinary items reflected nonrecurring noncash
charges from the write-off of $3.7 million of deferred financing fees, debt
discount and organizational costs and a nonrecurring gain of $3.1 million from
the retirement of a redeemable preferred limited partnership interest during
1996.

Year Ended December 31, 1996 Compared to Year Ended December 31, 1995

    Revenues.  Total revenues decreased 0.1% from $86.9 million in 1995 to
$86.8 million in 1996 principally as a result of a 6.3% decrease in equipment
and related services offset by a 4.0% increase in business services revenues.
Business services revenues increased due to an increase in the number of
broadcast music subscribers and an increase in the royalty surcharges paid by
franchisees for DBS services. Business services revenues (with the exception
of on-premises tape sales) increased at more rapid rates than broadcast music
revenues due to the increased marketing of, and increasing customer demand
for, on-premise music video and audio marketing services, among others.
On-premise tape revenues declined due to the Company's conversion of such
customers to broadcast services, primarily DBS transmission. In-store
advertising revenues decreased 21.5% principally due to the loss of sales to
a single customer in 1995 that did not continue into 1996. Royalties and
other fees from franchisees and international distributors (included in
broadcast music revenues) accounted for $7.8 million or 8.9% of the Company's
revenues in 1996, compared with $6.9 million or 7.9% of the Company's
revenues in 1995 due to growth in the number of customer locations being
served and additional surcharges assessed to franchisees for satellite
transmission costs. Equipment revenues decreased 8.5% as the Company
maintained its focus on higher margin sales and reduced its participation in
lower margin competitively bid equipment sales. Installation, service and
repair revenues decreased 1.3% from the level generated in 1995 due to fewer
installations and large equipment jobs during 1996.

    Gross Profit.  Total gross profit increased 2.6% from $48.5 million in 1995
to $49.8 million in 1996. As a percentage of total revenues, gross profit
increased from 55.8% in 1995 to 57.3% in 1996. The improvement in the gross
profit percentage in 1996 was due to growth in higher margin business services,
such as broadcast music, audio marketing and on-premise music video services,
and improved equipment margins.

    Selling, General and Administrative Expenses.  Selling, general and
administrative expenses increased 11.1% from $28.5 million in 1995 to $31.7
million in 1996. As a percentage of total revenues, selling, general and
administrative expenses increased from 32.8% in 1995 to 36.5% in 1996. Selling
and marketing expenses increased 7.5% from $10.7 million in 1995 to $11.5
million in 1996, primarily attributable to an increase in the salesforce.
General and administrative costs increased 13.3% from $17.8 million in 1995 to
$20.1 million in 1996,

                                       18
<PAGE>
primarily due to additional personnel to support centralization of local and
national sales office services and consulting expenses for the Internet
MusicServerSM and EchoStar projects, partially offset by lower bad debt expense.
General and administrative costs also include $1.4 million in expense write-offs
in the fourth quarter of 1996 related to an unconsummated public offering of
equity securities.

    Depreciation Expense.  Depreciation expense increased 13.3% from $9.4
million in 1995 to $10.6 million in 1996, principally as a result of an
increased investment in equipment installed at customers' premises due to an
expanded customer base and related to new investments in the EchoStar system and
the Internet MusicServerSM service.

    Amortization Expense.  Amortization expense increased 7.7% from $8.9 million
in 1995 to $9.6 million in 1996. The increase in amortization expense was due to
an increase in intangibles related to the increased investment in the expanded
customer base.

    Interest Expense.  Total interest expense increased 8.4% from $7.5 million
in 1995 to $8.1 million in 1996. The increase in interest expense in 1996
compared to 1995 resulted from the $100 million in Senior Notes issued by the
Company in October 1996. As a result, the Company's total interest-bearing debt
increased from $62.3 million to $101.1 million from 1995 to 1996.

    Extraordinary Items.  Extraordinary items reflected nonrecurring noncash
charges from the write-off of $3.7 million of deferred financing fees, debt
discount and organizational costs and a nonrecurring gain of $3.1 million from
the retirement of a redeemable preferred limited partnership interest during the
fourth quarter of 1996.

Liquidity and Capital Resources

    The Company's liquidity needs have been primarily for capital
expenditures, business acquisitions, debt service and working capital. As of
December 31, 1997, the Company had a working capital surplus of $12.5
million, compared with a working capital surplus of $28.2 million as of
December 31, 1996. This decrease in net working capital for this period was
due to capital requirements to fund the additional growth in business
services products as well as the acquisition of two business music
distributors of the Company's competitors, the acquisition of two of the
Company's franchisees, additional investments in Muzak Europe and the
financing of the purchase of equity units by certain management members, all
partially offset by the proceeds from the sale of a company-owned franchise.

    The Company's on-going investing activities have historically included
the acquisition and installation of on-premise customer equipment (such as
satellite dishes and receivers) and capitalized costs related to business
acquisitions, obtaining customer contracts and creating master recordings.
Capital expenditures principally related to the acquisition and installation
of on-premise equipment were $8.1 million in 1995, $10.9 million in 1996 and
$12.6 million in 1997. Additions to deferred costs and intangibles assets
were $4.6 million in 1995, $5.4 million in 1996 and $6.0 million in 1997. The
Company believes that its future investing activities may include additional
acquisitions of its competitors' business music distributors and the
Company's franchisees to further its operating strategy, as well as capital
expenditures related to the acquisition and installation of on-premise
equipment and deferred customer acquisition costs.

                                       19


<PAGE>

    The Company's primary sources of liquidity have been cash flows from
operations and proceeds from the Offering. Cash provided by the Company's
operations, adjusted for the effect of non-cash items, totaled $7.3 million
in 1997, a decrease of $10.3 million over the $17.6 million provided in 1996,
due primarily to changes in working capital and certain one-time charges,
including severances and inventory write-downs in 1997. Net changes in the
operating assets and liabilities utilized cash of $1.9 million in 1997 as
compared to providing cash of $4.4 million in 1996. The change in operating
assets and liabilities was primarily attributable to an increase in accounts
receivables related to increased sales volumes during 1997, as compared to
increases in accounts payable and accrued expenses primarily due to increased
interest costs related the Senior Notes during 1996.


<PAGE>


    A portion of the proceeds from the Offering of the Senior Notes were used
to pay off the Company's outstanding debt under a term loan and revolving
credit facility provided by Union Bank of Switzerland, New York Branch
("UBS"), and other lenders and subordinated bank debt provided by Barclays
Bank PLC, New York Branch ("Barclays"), and retire a redeemable preferred
partnership interest of the Company. During 1996, the Company reported an
extraordinary loss of approximately $3.7 million on the write-off of deferred
financing fees and debt discount in connection with the extinguishment of the
bank debt. In addition, an extraordinary gain of approximately $3.1 million
was recorded as a result of the retirement of certain redeemable preferred
partnership units of the Company.

    During 1997, the Company sold the Company's Spokane, Washington franchise
for $1.4 million, acquired two additional franchisees for a total of $2.1
million and acquired two business music distributors from its competitors for
a total of $1.8 million.

    The remainder of the proceeds from the Offering have been and will be
used for general corporate purposes, which may include acquisitions of the
Company's franchisees or business music distributors of its competitors' to
further its operating strategy, other acquisitions or investment
opportunities and working capital.

    During 1997, the Company repurchased 1,250,000 limited partnership units
from eight members of former management at a unit price of $2.33 for a total
repurchase amount of $2.9 million. Seventeen existing and new members of
management purchased 889,000 units at a unit price of $2.33 per unit for a
total purchase price of $2.1 million. These purchases were financed in large
part by the Company through promissory notes from these management members
bearing interest at 7% per annum. In addition, options were granted to two
new executive management members to purchase 1,500,000 limited partnership
units for $2.33, subject to certain vesting and exercisability requirements.

    In March 1998, the Company entered into a letter of intent with its joint
venture partner in Muzak Europe that will effectively liquidate the Company's
interest in Muzak Europe in exchange for a promissory note and the right of
the Company to participate in the future revenues of the European venture in
its new role as franchisor.

    Also in March 1998, the Company obtained a credit facility for working
capital purposes with an initial availability of $3.0 million, increasing to
$5.0 million upon the attainment of certain cash flow related targets. The
credit facility is secured by the inventories and receivables of the Company.
Amounts outstanding under the facility will bear a variable rate of interest,
to be paid quarterly, based on the lender's prime rate or LIBOR. The terms of
the credit facility require the Company to maintain certain performance
standards and covenants that, among other things, limit the Company's capital
spending and acquisitions of other businesses, as well as the Company's
ability to incur additional debt and make distributions to partners.

    Subsequent to December 31, 1997, the Company has acquired two more of its
competitors' business music distributors for approximately $0.6 million, has
restructured its San Diego franchise, entered into either a purchase
agreement or a letter of intent for the acquisitions of an additional three
of its competitors' distributors for a total consideration of approximately
$10.0 million, of which $4.0 million is in cash, approximately $3.0 million
in equity in the Company and the remainder in the form of a promissory note to
be paid over eight years.

    The Company leases certain facilities under both operating and capital
leases. Total lease payments for 1996 and 1997 under noncancelable operating
leases were $7.8 million and $8.4 million respectively. This increase is
principally attributable to the additional transponder capacity related to
EchoStar's second satellite being utilized by the Company since February,
1997.

    The Company anticipates capital expenditures, primarily related to
property, of between $10.0 million and $12.0 million in 1998 and additions
to deferred costs and intangible assets of between $6.0 million and $8.0
million in 1998. The level of capital expenditures and additions to deferred
costs and intangible assets are subject to a variety of factors which may
cause these expenditures to exceed the ranges set forth above.

    The Company believes that its cash flows from operations, borrowing
availability and cash on hand will be adequate to support currently planned
business operations, capital expenditures and debt service requirements at
least through December 1999. If the Company

                                       20
<PAGE>

engages in one or more material acquisitions, joint ventures or alliances or
other major business initiatives requiring significant cash commitments, or
incurs unanticipated expenses, additional financing could be required.

    Related to the 1992 Acquisition of the business of the Predecessor by
Centre Capital Investors L.P. ("CCI"), the Washington State Department of
Revenue has levied an assessment against the Predecessor for $1.7 million in
sales and use and business and occupation taxes for the period from 1987
through September 1992. Under successor liability statutes in the State of
Washington, the Company could, if the Predecessor fails to pay its tax
obligation, become liable for the assessment. The assessment is under appeal
by the Predecessor. The seller and certain of its affiliates have agreed to
indemnify the Company for any liabilities in connection with such
assessments. Management does not believe that the assessment will have an
adverse effect on the Company's financial condition or results of operations.

Year 2000 Issue

    The Company is reviewing its computer programs and systems to ensure that
the programs and systems will function properly and be Year 2000 compliant.
In May 1997, the Company engaged the services of an independent consultant to
develop an operating system that is Year 2000 compliant. The Company
presently believes that modifications to its existing software and conversion
to new hardware and software will result in costs to the  Company of
approximately $1.0 million, and will be operational by the third quarter of
1998. Other than the costs associated with this new system and the transition
from its current system to the new operating system, the Company presently
believes that the Year 2000 issue will not pose significant operational
problems for the Company's computer systems. Although the Company presently
believes that the estimated cost of these efforts is not expected to be
material to the Company's financial position or any year's results of
operations, there can be no assurance to this effect. In addition, the Year
2000 problem may impact other entities with which the Company transacts
business, and the Company cannot predict the effect of the Year 2000 problem
on such entities.

Recently Issued Accounting Pronouncements

    The Accounting Standards Executive Committee of the American Institute of
Certified Public Accountants issued Statement of Position (SOP) 98-1,
Accounting for the Cost of Computer Software Developed or Obtained for
Internal Use, on March 4, 1998. This SOP is effective for the Company's year
ending December 31, 1999 and requires certain of the Company's product
research and development expenses related to development of software for
internal use to be capitalized. The Company is currently evaluating the
effects of this Statement, and management is uncertain as to the impact of
its adoption on the financial statements, taken as a whole.

Inflation and Changing Prices

    Management does not believe that inflation and other changing prices have
had a significant impact on the Company's operations.

                                       21
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

         INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
<TABLE>
<CAPTION>
                                                                                                                            Page
                                                                                                                            ----
<S>                                                                                                                          <C>
MUZAK LIMITED PARTNERSHIP
  Independent Auditors' Report.............................................................................................   23
  Consolidated Balance Sheets as of December 31, 1996 and 1997.............................................................   24
  Consolidated Statements of Operations for the years ended December 31, 1995, 1996 and 1997...............................   25
  Consolidated Statements of Partners' Capital (Deficit) for the years ended December 31, 1995, 1996 and 1997..............   26
  Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1996 and 1997...............................   27
  Notes to Financial Statements............................................................................................   28

MUZAK CAPITAL CORPORATION
  Independent Auditors' Report.............................................................................................   44
  Balance Sheets as of December 31, 1996 and 1997..........................................................................   45
  Note to Financial Statements.............................................................................................   46

FINANCIAL STATEMENT SCHEDULE--MUZAK LIMITED PARTNERSHIP
  Valuation and Qualifying Accounts Schedule II............................................................................   47

<CAPTION>
</TABLE>
                                        22
<PAGE>
                          INDEPENDENT AUDITORS' REPORT

General and Limited Partners
Muzak Limited Partnership
Seattle, Washington

    We have audited the accompanying consolidated balance sheets of Muzak
Limited Partnership and subsidiary (the "Company") as of December 31, 1996 and
1997, and the related consolidated statements of operations, partners' capital
(deficit), 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 8 of Form 10-K. These financial statements and
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
the financial statement 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, such consolidated financial statements present fairly, in
all material respects, the financial position of Muzak Limited Partnership and
subsidiary as of December 31, 1996 and 1997, and their results of operations and
their cash flows for each of the three years in the period ended December 31,
1997 in conformity with generally accepted accounting principles. Also, in our
opinion, the financial statement schedule, when considered in relation to the
basic financial statements, taken as a whole, presents fairly in all material
respects the information set forth therein.

/s/ Deloitte & Touche LLP
Seattle, Washington

March 5, 1998
(March 30, 1998 as to Note 11)

                                       23
<PAGE>
                           MUZAK LIMITED PARTNERSHIP

                          CONSOLIDATED BALANCE SHEETS
                                    Balance

                                 (in thousands)

<TABLE>
<CAPTION>
                                                                                                                 December 31,
                                                                                                             --------------------
                                                                                                               1996       1997
                                                                                                             ---------  ---------
<S>                                                                                                          <C>        <C>
                                                             Assets
Current Assets:
  Cash and cash equivalents................................................................................  $  25,686  $   8,524
  Accounts receivable, net of allowance for doubtful accounts of $496 and $501.............................     15,600     16,790
  Inventories..............................................................................................      3,722      3,850
  Prepaid expenses.........................................................................................      1,607      1,400
  Other....................................................................................................        351      1,116
                                                                                                             ---------  ---------
      Total current assets.................................................................................     46,966     31,680

Property and equipment, net................................................................................     37,182     39,659
Deferred costs and intangible assets, net..................................................................     33,765     31,694
Other......................................................................................................      1,129      1,362
                                                                                                             ---------  ---------
      Total assets.........................................................................................  $ 119,042  $ 104,395
                                                                                                             ---------  ---------
                                                                                                             ---------  ---------
                                                Liabilities and Partners' Deficit
Current Liabilities:
  Accounts payable.........................................................................................  $   8,681  $   8,435
  Advance billings.........................................................................................      4,688      5,216
  Accrued interest.........................................................................................      2,500      2,500
  Accrued expenses.........................................................................................      2,423      2,556
  Current portion of long-term obligation..................................................................        482        469
                                                                                                             ---------  ---------
      Total current liabilities............................................................................     18,774     19,176

Long-term obligations, net of current portion..............................................................    100,620    100,575
Unearned installation income...............................................................................      3,636      4,249
Commitments and contingencies (Note 8).....................................................................         --         --
Redeemable preferred partnership interests.................................................................      6,090      6,490

Partners' Deficit:
  Limited partners' interests (deficiencies) (preference in liquidation of $8,303 and $8,841)..............      2,211     (3,597)
  General partners' deficiencies...........................................................................    (12,289)   (22,498)
                                                                                                             ---------  ---------
      Total partners' deficit..............................................................................    (10,078)   (26,095)
                                                                                                             ---------  ---------
      Total liabilities and partners' deficit..............................................................  $ 119,042  $ 104,395
                                                                                                             ---------  ---------
                                                                                                             ---------  ---------

</TABLE>

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

                                       24
<PAGE>
                           MUZAK LIMITED PARTNERSHIP

                      CONSOLIDATED STATEMENTS OF OPERATIONS

                                 (in thousands)
<TABLE>
<CAPTION>
                                                                                            Year Ended
                                                                                            December 31,
                                                                                   --------------------------------
                                                                                     1995       1996        1997
                                                                                   ---------  ---------   ---------
<S>                                                                                <C>        <C>         <C>
Revenues:
  Music and other business services..............................................  $  52,489  $  54,585   $  59,351
  Equipment sales and related services...........................................     34,392     32,226      31,853
                                                                                   ---------  ---------   ---------
    Total revenues...............................................................     86,881     86,811      91,204
                                                                                   ---------  ---------   ---------

Cost of revenues:
  Music and other business services..............................................     14,465     15,263      18,502
  Equipment sales and related services...........................................     23,895     21,763      22,207
                                                                                   ---------  ---------   ---------
    Total cost of revenues.......................................................     38,360     37,026      40,709
                                                                                   ---------  ---------   ---------
Gross profit.....................................................................     48,521     49,785      50,495
Selling, general and administrative expenses.....................................     28,496     31,659      33,464
Depreciation.....................................................................      9,382     10,625      10,652
Amortization.....................................................................      8,908      9,594      10,016
                                                                                   ---------  ---------   ---------
    Operating income (loss)......................................................      1,734     (2,093)     (3,637)

Interest expense.................................................................     (7,483)    (8,112)    (10,775)
Interest income..................................................................        129        438       1,017
Equity in losses of joint venture................................................        --        (225)       (755)
Other, net.......................................................................        (94)      (209)        715
                                                                                   ---------  ---------   ---------
Net loss before extraordinary items..............................................     (5,714)   (10,201)    (13,435)
  Extraordinary loss on write-off of deferred financing
    fees and debt discount ......................................................        --      (3,713)        --
  Extraordinary gain on retirement of redeemable
    preferred partnership interests..............................................        --       3,091         --
                                                                                   ---------  ---------   ---------
  Net loss.......................................................................     (5,714)   (10,823)    (13,435)
  Redeemable preferred return....................................................     (1,029)      (916)       (400)
                                                                                   ---------  ---------   ---------
  Net loss attributable to general and limited partners..........................  $  (6,743) $ (11,739)  $ (13,835)
                                                                                   ---------  ---------   ---------
                                                                                   ---------  ---------   ---------
</TABLE>

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

                                       25
<PAGE>
                           MUZAK LIMITED PARTNERSHIP

             CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL (DEFICIT)

                                 (in thousands)
<TABLE>
<CAPTION>

                        General Partners'                                         Class B
                            Interests        Class A                Class B       Limited      Preferred     Class B
                       -------------------   Limited    Class A     Limited      Partners'      Limited    Partnership
                        Number              Partners'   Put/Call   Partners'   Subscriptions   Partners'      Unit
                       of Units    Amount   Interests   Options    Interests    Receivable     Interests     Options
                       --------   --------  ---------   --------   ---------   -------------   ---------   -----------
<S>                    <C>        <C>       <C>         <C>        <C>         <C>             <C>         <C>
Balance, December 31,
  1994...............   9,101     $    575   $  (122)   $   952     $   171       $  (633)      $ 7,000         --
  Net loss...........               (3,690)     (682)      (621)       (721)
  Payment of foreign
    income taxes.....                  (51)      (14)        (9)        (12)
  Preferred return on
    redeemable
    preferred
    interests........                 (665)     (123)      (112)       (129)
  Preferred return on
    preferred limited
    partners'
    interests........                 (433)      (80)       (73)        (85)                        671
  Principal payments
    on subscriptions
    receivable.......                                                                 259
                       --------   --------  ---------   --------   ---------   -------------   ---------     -----
Balance, December 31,
1995.................   9,101       (4,264)   (1,021)       137        (776)         (374)        7,671         --
  Net loss...........               (6,973)   (1,288)    (1,172)     (1,390)
  Payment of foreign
    income taxes.....                  (54)      (11)        (9)        (10)
  Preferred return on
    redeemable
    preferred
    interests........                 (591)     (109)       (99)       (117)
  Preferred return on
    preferred limited
    partners'
    interests........                 (407)      (75)       (69)        (81)                        632
  Principal payments
    on subscriptions
    receivable.......                                                                 207
  Capital
    contribution from
    noncash incentive
    compensation.....                                                                                           60
  Contribution by
    partner..........                                                   105
                       --------   --------  ---------   --------   ---------   -------------   ---------     -----
Balance, December 31,
1996.................   9,101      (12,289)   (2,504)    (1,212)     (2,269)         (167)        8,303         60
  Net loss...........               (8,730)   (1,593)    (1,293)     (1,819)
  Payment of foreign
    income taxes.....                  (50)       (1)        (9)        (16)
  Preferred return on
    redeemable
    preferred
    interests........                 (257)      (49)       (48)        (46)
  Preferred return on
    preferred limited
    partners'
    interests........                 (367)      (72)       (88)        (85)                        612
  Principal payments
    on subscriptions
    receivable.......                                                                 132
  Capital
    contribution from
    noncash incentive
    compensation.....                                                                                          202
  Contribution by
    partner..........                                                 2,072        (1,601)
  Withdrawal by
    partner..........                 (805)                          (2,032)                        (74)
                       --------   --------  ---------   --------   ---------   -------------   ---------     -----
Balance, December 31,
1997.................   9,101     $(22,498)  $(4,219)   $(2,650)    $(4,195)      $(1,636)      $ 8,841       $262
                       --------   --------  ---------   --------   ---------   -------------   ---------     -----
                       --------   --------  ---------   --------   ---------   -------------   ---------     -----

<CAPTION>

                         Total Limited
                           Partners'
                            Interests           Total
                       ------------------  -------------------
                        Number              Number
                       of Units   Amount   of Units    Amount
                       --------   -------  --------   --------
<S>                    <C>        <C>      <C>        <C>
Balance, December 31,
  1994...............   8,989      $7,368   18,090    $  7,943
  Net loss...........              (2,024)              (5,714)
  Payment of foreign
    income taxes......                 (35)                 (86)
  Preferred return on
    redeemable
    preferred
    interests........                (364)              (1,029)
  Preferred return on
    preferred limited
    partners'
    interests........                 433                   --
  Principal payments
    on subscriptions
    receivable.......                          259         259
                       --------   -------  --------   --------
Balance, December 31,
1995.................   8,989       5,637   18,090       1,373
  Net loss...........              (3,850)             (10,823)
  Payment of foreign
    income taxes.....                 (30)                 (84)
  Preferred return on
    redeemable
    preferred
    interests........                (325)                (916)
  Preferred return on
    preferred limited
    partners'
    interests........                 407                   --
  Principal payments
    on subscriptions
    receivable.......                 207                  207
  Capital
    contribution from
    noncash incentive
    compensation.....                  60                   60
  Contribution by
    partner..........      60         105       60         105
                       --------   -------  --------   --------
Balance, December 31,
1996.................   9,049       2,211   18,150     (10,078)
  Net loss...........              (4,705)             (13,435)
  Payment of foreign
    income taxes.....                 (26)                 (76)
  Preferred return on
    redeemable
    preferred
    interests........                (143)                (400)
  Preferred return on
    preferred limited
    partners'
    interests........                 367                   --
  Principal payments
    on subscriptions
    receivable.......                 132                  132
  Capital
    contribution from
    noncash incentive
    compensation.....                 202                  202
  Contribution
    by partner.......     889         471      889         471
  Withdrawal by
    partner..........  (1,250)     (2,106)  (1,250)     (2,911)
                       --------   -------  --------   --------
Balance, December 31,
1997.................   8,688     $(3,597)  17,789    $(26,095)
                       --------   -------  --------   --------
                       --------   -------  --------   --------
</TABLE>

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

                                       26
<PAGE>
                           MUZAK LIMITED PARTNERSHIP

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

                                 (in thousands)
<TABLE>
<CAPTION>
                                                                                                       Year Ended
                                                                                                      December 31,
                                                                                           ----------------------------------
<S>                                                                                        <C>        <C>         <C>
                                                                                              1995       1996        1997
                                                                                           ---------  ----------  -----------
OPERATING ACTIVITIES
Net loss                                                                                   $  (5,714) $ (10,823)  $ (13,435)
Adjustments to reconcile net loss to net cash provided by operating activities:
  Provision for doubtful accounts........................................................        810        472         620
  Depreciation...........................................................................      9,382     10,625      10,652
  Amortization, net of deferred financing costs..........................................      8,909      9,594      10,016
  Deferred financing cost amortization...................................................      1,310      1,042         653
  Equity in losses of joint venture......................................................         --        225         755
  Noncash incentive compensation.........................................................         --         60         202
  Extraordinary loss on write-off of deferred financing fees and debt discount...........         --      3,713          --
  Extraordinary gain on retirement of redeemable preferred partnership interests.........         --     (3,091)         --
  Gain on sale of territory..............................................................         --         --        (757)
  Loss on write-off of inventories.......................................................         --         --         530
  Loss on write-off of equity offering costs.............................................         --      1,353          --
Changes in operating assets and liabilities:
  Accounts receivable....................................................................       (476)      (555)     (2,498)
  Inventories............................................................................        597       (461)       (658)
  Account payable........................................................................     (1,267)     1,863        (246)
  Accrued interest.......................................................................       (916)       834          --
  Accrued expenses.......................................................................        293      1,188         214
  Advance billings.......................................................................        194        155         528
  Unearned installation income...........................................................      1,110        850         613
  Other, net.............................................................................        (35)       510         139
                                                                                           ---------  ---------   ---------
  Net cash provided by operating activities..............................................     14,197     17,554       7,328
                                                                                           ---------  ---------   ---------
INVESTING ACTIVITIES
  Additions to property and equipment....................................................     (8,116)   (10,913)    (12,639)
  Additions to deferred costs and intangible assets......................................     (4,641)    (5,424)     (6,039)
  Acquisitions of businesses and ventures net of cash acquired...........................       (557)        --      (2,836)
  Other, net............................................................................           3       (291)          6
                                                                                           ---------  ---------   ---------
  Net cash used in investing activities..................................................    (13,311)   (16,628)    (21,508)
                                                                                           ---------  ---------   ---------
FINANCING ACTIVITIES
  Proceeds from issuance of senior notes.................................................         --    100,000          --
  Borrowings (repayment) under revolving notes payable, net..............................      3,300     (9,300)         --
  Principal payments on term debt........................................................     (4,111)   (53,489)        (92)
  Payment of financing fees..............................................................         --     (5,802)         --
  Retirement of redeemable preferred partnership interests...............................         --     (7,456)         --
  Payments on other long-term debt.......................................................        (30)      (123)         --
  Payments under capital leases..........................................................       (432)      (414)       (505)
  Contributions by partners..............................................................        259        312         603
  Withdrawal by partners.................................................................         --         --      (2,911)
  Other, net.............................................................................       (202)       (83)        (77)
                                                                                           ---------  ---------   ---------
  Net cash provided by (used in) financing activities....................................     (1,216)    23,645      (2,982)
                                                                                           ---------  ---------   ---------
  Net increase (decrease) in cash and cash equivalents...................................       (330)    24,571     (17,162)
CASH AND CASH EQUIVALENTS beginning of period............................................      1,445      1,115      25,686
                                                                                           ---------  ---------   ---------
CASH AND CASH EQUIVALENTS, end of period.................................................  $   1,115  $  25,686   $   8,524
                                                                                           ---------  ---------   ---------
</TABLE>

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

                                       27
<PAGE>
                           MUZAK LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. THE COMPANY AND ITS BUSINESS:

    Muzak Limited Partnership (the "Company") provides business music services
and also produces, markets and sells broadcast data delivery, video, audio
marketing and in-store advertising services through a network of domestic and
international franchises and owned operations. The franchisees are charged a fee
based on their revenues, as well as certain other fees, in exchange for
broadcast music, marketing, technical and administrative support. The Company
and its franchisees also sell, install and maintain electronic equipment related
to the Company's business.

    The Company's music is primarily sold for use in public areas, such as
retail establishments and restaurants, and work areas, such as business offices
and manufacturing facilities. Services are distributed through direct broadcast
satellite transmission, local broadcast transmissions and pre-recorded tapes
played on the customers' premises.

    The Company is subject to certain business risks which could affect future
operations and financial performance. These risks include rapid technological
change, competitive pricing, concentrations in and dependence on satellite
delivery capabilities, and development of new services.

    Public Offering

    In August 1996, the general and limited partners authorized a plan for
the filing of a registration statement for the underwritten public offering
of 10% senior notes (the "Offering"). The Offering closed on October 2, 1996.
A portion of the net proceeds of the Offering were used to repay certain bank
debt and other indebtedness and to repurchase the Company's Class C
redeemable preferred partnership interest. The Company has used and will be
using the remaining portion of the net proceeds for certain strategic
investments and other general corporate purposes.

    Business Acquisitions and Sales

    As of September 1, 1992, the Company commenced operations in its current
form (the "Partnership") through an acquisition (the "1992 Acquisition") of
substantially all of the assets, including the right to operate under its
current name, from a predecessor partnership (the "Seller"). The 1992
Acquisition was accounted for as a purchase with the purchase price allocated
to the individual assets, based on their estimated fair values at the date of
acquisition.

    On May 1, 1997, the Company sold its Spokane territory subscriber
accounts and granted the Spokane franchise to an existing franchisee of the
Company for $1.4 million. This transaction resulted in a gain of $0.8 million
to the Company which is included in other income in the consolidated statement
of operations for the year ended December 31, 1997.

    On August 28, 1997, the Company acquired substantially all of the assets,
of Attuned to Music, Inc. These net assets were purchased for approximately
$0.3 million.

                                       28
<PAGE>
                           MUZAK LIMITED PARTNERSHIP

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

1. THE COMPANY AND ITS BUSINESS: (Continued)

The acquisition was financed with cash remaining from the Offering. The
acquisition was accounted for as a purchase with the purchase price allocated
to the individual assets based on the fair market values at the date of
acquisition.

    On September 1, 1997, the Company acquired substantially all of the
assets of Applied Sound. These assets were purchase for approximately $0.2
million. The acquisition was financed with cash remaining from the Offering.
The acquisition was accounted for as a purchase with the purchase price
allocated to the individual assets based on the fair market values at the
date of acquisition.

    On October 1, 1997, the Company acquired substantially all of the assets
of Muzi-Tronic a service of Fetzer Broadcasting. These assets were purchased
for approximately $2.1 million. The acquisition was financed with cash
remaining from the Offering. The acquisition was accounted for as a purchase
with the purchase price allocated to the individual assets based on the fair
market values at the date of acquisition.

    On December 23, 1997, the Company acquired substantially all of the
assets of Superior Sound. These assets were purchased for approximately
$1.5 million. The acquisition was financed with cash remaining from the
Offering. The acquisition was accounted for as a purchase with the
purchase price allocated to the individual assets based on the fair market
values at the date of acquisition.

    The pro forma results of operations to reflect the above transactions
have not been disclosed as the effect on the result of operations are not
considered significant.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

    Cash and Cash Equivalents

    For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments purchased with a maturity of three months or less
to be cash equivalents.

    Cash and cash equivalents at December 31, 1996 and 1997, include commercial
paper investments of approximately $5 million and $23 million respectively. The
remaining balance of cash and cash equivalents at December 31, 1996 and 1997 is
held at various institutions throughout the United States.

    Inventories

    Inventories consist primarily of electronic equipment and are recorded at
the lower of cost (first-in, first-out) or market.

                                       29
<PAGE>
                           MUZAK LIMITED PARTNERSHIP

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued)

    Property and Equipment

    Property and equipment consist primarily of equipment provided to
subscribers and machinery and equipment, recorded at cost. Major renewals and
betterments are capitalized to the property accounts while replacements,
maintenance and repairs that do not improve or extend the lives of the
respective assets are expensed.

    Property and equipment are depreciated on a straight-line basis over the
estimated useful lives of the related assets, ranging from five to forty years.
Assets acquired under capital leases and leasehold improvements are amortized on
a straight-line basis over the shorter of their estimated useful lives or the
term of the related leases.

    Deferred Costs and Intangible Assets

    Income-producing contracts, acquired through acquisitions, are being charged
to amortization expense on an accelerated method over the period of their
expected benefit of eight years. Deferred financing costs are charged to
interest expense on the effective interest method over the term of the related
agreements. Other deferred costs and intangible assets are recorded at cost and
are being charged to amortization expense over their estimated useful lives or
the period of their expected benefit ranging from five and ten years.

    The carrying value of long-lived assets is reviewed on a regular basis for
the existence of facts or circumstances that may indicate that the carrying
amount is not recoverable. To date, no impairment has been indicated. Should
there be an impairment in the future, the Company will measure the impairment
based on the discounted expected future cash flows from the impaired assets.

    Revenue Recognition

    Revenues are recognized in the month that the services are provided. Fees
from franchisees are recognized as music revenues in the month that the
franchisee generates its revenues. Equipment and related services revenues
are recorded in the period that the installation is completed.

    Advance Billings

    The Company bills certain customers in advance for contracted music and
other business services. Amounts billed in advance of the service period are
deferred when billed and recognized as revenue in the period earned.

    Unearned Installation Income

    The Company defers recognition of income from the installation of
equipment provided to subscribers and recognizes these amounts as revenue on
a straight-line basis over the average subscriber service period.

                                       30
<PAGE>
                           MUZAK LIMITED PARTNERSHIP

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued)

    Income Taxes

    The income tax effects of all earnings or losses of the Company are
passed directly to the partners. Payment of foreign income taxes is reflected
as a reduction to the partners' capital accounts. Thus, no provision or
benefit for federal, state, local or foreign income taxes is required.

    Accounting for Equity-Based Compensation

    The Company measures equity-based compensation using Accounting
Principles Board Opinion Number 25 ("APB 25"), which recognizes compensation
cost based on the intrinsic value of the equity instrument when awarded.

    Fair Value of Financial Instruments

    The carrying amount of cash and cash equivalents approximates fair value
because of the short maturity of these instruments. The carrying amount of
long-term debt approximates $104.0 million.

    European Joint Venture

    In 1995, the Company entered into a joint venture agreement to provide
business music services in Europe ("Muzak Europe"). This joint venture is
accounted for using the equity method as the Company owns 50% of that venture
but does not have a controlling interest. Equity in losses of joint venture
in the accompanying consolidated statements of operations include the
Company's share of net losses. As of December 31, 1996 and 1997, the joint
venture had total assets of $7,814,000 and $7,307,000 and total liabilities
of $6,662,000 and $5,509,000 respectively. As of December 31, 1996 and 1997,
the carrying value of the joint venture on the Company's books was $800,000
and $1,100,000 respectively.


                                       31
<PAGE>
                           MUZAK LIMITED PARTNERSHIP

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued)

    The Company uses the foreign countries' local currency as the functional
currency for its overseas operations. The translation gains and losses
resulting from the remeasurement of the foreign operations' financial
statements are insignificant.

    Principles of Consolidation

    The accompanying consolidated financial statements of the Company include
the accounts of the Company and its wholly owned subsidiary, Muzak Capital
Corporation. All significant intercompany accounts and transactions have been
eliminated upon consolidation.

    Recent Accounting Pronouncements

    The Accounting Standards Executive Committee of the American Institute of
Certified Public Accountants issued Statement of Position (SOP) 98-1,
Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use, on March 4, 1998. This SOP is effective for the Company's year
ended December 31, 1999 and requires certain of the Company's product
research and development expenses related to development of software for
internal use to be capitalized. The Company is currently evaluating the
effects of this Statement, and management is uncertain as to the impact of
its adoption on the financial statements, taken as a whole.

    Use of Estimates in Preparation of Financial Statements

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

                                       32
<PAGE>
                           MUZAK LIMITED PARTNERSHIP

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

3. PROPERTY AND EQUIPMENT, NET:

    Property and equipment consist of the following (in thousands):

<TABLE>
<CAPTION>
                                                                                                     December 31,
                                                                                                 --------------------
                                                                                                   1996       1997
                                                                                                 ---------  ---------
<S>                                                                                              <C>        <C>
Equipment provided to subscribers..............................................................  $  49,340  $  57,393
Machinery and equipment........................................................................     10,745     13,129
Vehicles.......................................................................................      3,072      3,337
Furniture and fixtures.........................................................................      2,260      2,546
Land and buildings.............................................................................        858        858
Leasehold improvements.........................................................................        916        865
                                                                                                 ---------  ---------
    Total property and equipment...............................................................     67,191     78,128
Less accumulated depreciation and amortization.................................................    (30,009)   (38,469)
                                                                                                 ---------  ---------
                                                                                                 $  37,182  $  39,659
                                                                                                 ---------  ---------
                                                                                                 ---------  ---------
</TABLE>

4. DEFERRED COSTS AND INTANGIBLE ASSETS, NET:

   Deferred costs and intangible assets consist of the following (in thousands):

<TABLE>
<CAPTION>
                                                                                                     December 31,
                                                                                                 --------------------
                                                                                                   1996       1997
                                                                                                 ---------  ---------
<S>                                                                                              <C>        <C>
Income producing contracts.....................................................................  $  39,830  $  42,152
Deferred subscriber acquisition costs..........................................................     11,056     14,593
Master recording rights and deferred production costs..........................................      9,883     12,125
Organization costs.............................................................................      4,432      4,501
Deferred financing costs.......................................................................      4,423      4,341
Non-compete agreements.........................................................................        846        860
Other..........................................................................................        758        811
                                                                                                 ---------  ---------
    Total deferred costs and intangible assets.................................................     71,228     79,383
Less accumulated amortization..................................................................    (37,463)   (47,689)
                                                                                                 ---------  ---------
                                                                                                 $  33,765  $  31,694
                                                                                                 ---------  ---------
                                                                                                 ---------  ---------
</TABLE>

                                       33
<PAGE>
                           MUZAK LIMITED PARTNERSHIP

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

5. LONG-TERM OBLIGATIONS:

    Long-term obligations are summarized as follows (in thousands):

<TABLE>
<CAPTION>
                                                                                                   December 31,
                                                                                               --------------------
                                                                                                 1996       1997
                                                                                               ---------  ---------
<S>                                                                                            <C>        <C>
Senior notes.................................................................................  $ 100,000  $ 100,000
Variable rate senior term loan...............................................................         --         --
Capital lease obligations....................................................................        935        969
Other........................................................................................        167         75
                                                                                               ---------  ---------
    Total long-term obligations..............................................................    101,102    101,044
Less current portion.........................................................................       (482)      (469)
                                                                                               ---------  ---------
                                                                                               $ 100,620  $ 100,575
                                                                                               ---------  ---------
                                                                                               ---------  ---------
</TABLE>

    Senior Notes

    The senior notes were issued as part of the Offering as discussed in Note
1. These unsecured notes bear interest at 10% and are due on October 1, 2003.
The notes require the maintenance of certain covenants that, among other
things, restrict the Company's ability to incur additional debt, as well as
limit the Company's ability to make certain investments and distributions to
partners.

    The Company has the option to redeem up to 35% of the senior notes during
the first three years after the Offering with the proceeds from an equity
offering, at a redemption price of 109% of the principal amount thereof, plus
accrued and unpaid interest. The entire balance of the senior notes is
redeemable at the option of the Company, in whole or in part, beginning
October 1, 2000. The redemption price is 105% of par value through October 1,
2001, 102.5% through October 1, 2002, and 100% thereafter, through maturity.

    Credit Agreements

    The variable rate senior term loan was a $46,600,000 term loan (the "Credit
Agreement") with a group of banks for which Union Bank of Switzerland (the
"Agent Bank"), an affiliate of a limited partner, was acting as the agent. The
Credit Agreement also included a $13,000,000 revolving credit facility. The
terms of the Credit Agreement required the Company to meet certain financial
ratios and performance criteria and impose restrictions on capital spending, the
incurrence of additional debt, and distributions to partners, among other
things. Distributions to partners were limited to distributions that offset tax
liabilities to the partners resulting from the Company's taxable income.
Substantially all of the Company's assets and proceeds from certain insurance
policies were pledged as collateral under the Credit Agreement. The senior term
loan was repaid on October 2, 1996, with a portion of the net proceeds from the
Offering.

                                       34

<PAGE>
                           MUZAK LIMITED PARTNERSHIP

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

5. LONG-TERM OBLIGATIONS: (Continued)

    The fixed rate subordinated note (the "Subordinated Note") was obtained
from a group of banks that were issued options to purchase Class A limited
partnership units (the "Put/Call Units") in connection with this credit
arrangement. The value of these Put/Call Units was accounted for as debt
discount and amortized on the effective interest method over the expected
term of this note. The Subordinated Note required the Company to maintain
certain performance criteria and covenants, similar to, but less restrictive
than the Credit Agreement. Substantially all of the Company's assets and
proceeds from certain insurance policies were pledged as collateral under
this agreement. This note was repaid on October 2, 1996, with a portion of
the net proceeds from the Offering.

    Interest Rates and Payments

    The senior notes require semi-annual interest payments of 10%. Interest
under the Credit Agreement was paid at an interest rate based on the Agent
Bank's prime rate or LIBOR in quarterly installments. During the years ended
December 31, 1995 and 1996, the effective weighted average interest rates on
borrowings under the Credit Agreement were 11.2% and 10.9%, respectively,
including the effects of the interest rate swap agreement described below.
Interest under the Subordinated Note was paid in semi-annual installments at
a rate of 12.5%, an effective rate of 14.8%, after amortization of the debt
discount. The capital lease obligations require monthly installments of
interest at a weighted average interest rate of approximately 8.4%. Total
cash paid for interest on long-term obligations was approximately $5,760,000,
$5,880,000 and $9,972,000 for the years ended December 31, 1995, 1996 and
1997, respectively.

    Future Maturities

    Total future maturities of long-term obligations, including capital
leases, for the five years following December 31, 1997 are: $409,000 in 1998,
$334,000 in 1999, $207,000 in 2000, $71,000 in 2001, $0 in 2002, and
$100,000,000 thereafter.

    Capital Leases

    Assets acquired under capital leases were $489,000, $579,000 and $635,000
for the years ended December 31, 1995, 1996 and 1997, respectively. Assets
recorded under capital leases were $1,495,000 and $1,944,000 with accumulated
amortization of $522,000 and $635,000 as of December 31, 1996 and 1997,
respectively.

    Interest Rate Hedging

    The Company had entered into an interest rate swap agreement with the
Agent Bank that effectively fixed the rate on $10,000,000 of the debt under
the Credit Agreement at December 31, 1995. Net settlements were recorded in
interest expense. The interest rate swap agreement was terminated in October
1996 in connection with the Offering.

                                       35
<PAGE>
                           MUZAK LIMITED PARTNERSHIP

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

5. LONG-TERM OBLIGATIONS: (Continued)

    Financing and Other Costs Paid to Related Parties

    Prior to the Offering discussed in Note 1, the Agent Bank was an
affiliate of a Class A limited partner. In addition, the Subordinated
Noteholder held the Put/Call Units. During the years ended December 31, 1995,
1996 and 1997, the Company incurred interest expense related to these credit
facilities of $7,367,000, $5,489,000, and $0, respectively. In addition, the
Company paid fees to the holders of the senior and subordinated notes payable
of $122,000, $0, and $0 in 1995, 1996 and 1997, respectively, related to
amendments to the Credit Agreement and the subordinated note agreement, as
well as bank charges, legal costs and agency fees. In addition the Company
has paid board fees of $162,500 and $287,700 for services in 1996 and 1997
respectively.

6. EXTRAORDINARY ITEMS:

    In conjunction with the Offering, the Company used a portion of the net
proceeds to repay the entire balance of the bank debt outstanding as of October
1, 1996. The unamortized portion of the related loan origination fees and loan
discount totaling approximately $3,713,000 were written-off as an extraordinary
loss at the time of the repayment. A portion of the net proceeds from the
Offering were also used to repurchase the Company's Class C redeemable preferred
partnership interest for $7,457,000. The recorded value of the redeemable
limited partnership interest was approximately $10,548,000, resulting in a
extraordinary gain of $3,091,000.

                                       36
<PAGE>
                           MUZAK LIMITED PARTNERSHIP

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

7. BENEFIT PLANS:

    Defined Contribution Plan

    The Company maintains a defined contribution savings and retirement plan
(the "Benefit Plan") that covers substantially all of the Company's
employees. Under the savings portion of the Benefit Plan, eligible employees
may contribute from 1% to 14% of their compensation per year, subject to
certain tax law restrictions. The Company has the option to make a matching
contribution of up to a maximum of 100% of the first 3% and 50% of the next
3%, up to 6% of the total base salary contributed by the employee each year.
Participants are immediately vested in their contributions as well as the
Company's contributions under the savings portion of the Benefit Plan. For
the savings portion of the Benefit Plan, the Company recorded contribution
expense of $181,000, $439,000 and $660,000 for the years ended December 31,
1995, 1996 and 1997, respectively.

    Contributions under the retirement portion of the Benefit Plan are
determined annually by the Company at its discretion for up to 3% of the
eligible employee's compensation. The employees vest in the retirement portion
of the Benefit Plan ratably over five years, but become fully vested in the
event of death, disability or the attainment of the age of 65. No amounts were
recorded for the years ended December 31, 1995, 1996 and 1997.

    Multi-Employer Defined Contribution Plans

    The Company participates in several multi-employer defined contribution
benefit plans that provide benefits to employees covered by certain labor union
contracts. The amount of expense related to contributions to these plans was
approximately $108,000, $136,000 and $138,000 for the years ended December 31,
1995, 1996 and 1997. These amounts were determined by union contract and the
Company does not administer or control the funds.

                                       37
<PAGE>
                           MUZAK LIMITED PARTNERSHIP

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8. COMMITMENTS AND CONTINGENCIES:

    Leases

    The Company leases certain facilities and equipment under both operating and
capital leases. In addition, the Company has entered into agreements to obtain
satellite channel capacity and subsidiary communication authorization rights for
the transmission of programs to the Company's customers. Total rental expense
under operating leases was approximately $7,698,000, $7,751,000 and $8,401,000
for the years ended December 31, 1995, 1996 and 1997, respectively.

    Future annual minimum lease payments under noncancelable operating leases
for the years ended December 31 are as follows (in thousands):

<TABLE>
<S>                                                                                        <C>
1998.....................................................................................  $   7,234
1999.....................................................................................      5,920
2000.....................................................................................      5,468
2001.....................................................................................      1,569
2002.....................................................................................      1,041
Thereafter...............................................................................      1,647
                                                                                           ---------
Total....................................................................................  $  22,879
                                                                                           ---------
                                                                                           ---------
</TABLE>

    Music Licenses

    In the ordinary course of the Company's business, the Company has
agreements with various organizations for the rights to rerecord and play
music in public spaces. The expenses incurred under these agreements were
approximately $3,385,000, $3,578,000 and $4,831,000 for the years ended
December 31, 1995, 1996 and 1997, respectively.

   The Company's agreement with Business Music, Inc. ("BMI") expired on
December 31, 1993. The Company has entered into an interim fee structure with
BMI and is in negotiations with BMI to establish an on-going rate structure.
The interim arrangement with BMI provides for continued payments at 1993
levels and that any settlement may be retroactive to January 1, 1994. The
Company's management does not believe that the results of these negotiations
will have a material adverse effect on the Company's financial condition or
results of operations.

    Joint Venture Guarantee

    The Company has agreed to make pro rata equity contributions to Muzak
Europe to the extent necessary to enable Muzak Europe to maintain minimum net
worth requirements under an outstanding credit facility. As of December 31,
1996 and 1997, the amount outstanding under the credit facility was
$1,744,000 and $1,519,000 respectively.

    Taxes

    An assessment was made against the Seller resulting from an audit
performed by the Washington State Department of Revenue for sales and use and
business and occupation taxes paid for during the period from 1987 through
September 1992. Under successor liability statutes in the state of
Washington, the Company could, if the Seller fails to pay its tax obligation,
become liable for the assessment outstanding against the Seller of
approximately $1,700,000. This assessment is under appeal by the Seller. The
Seller and certain of its affiliates have agreed to indemnify the Company for
any liabilities in connection with such assessment. The Company's management
does not believe

                                       38
<PAGE>
                           MUZAK LIMITED PARTNERSHIP

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8. COMMITMENTS AND CONTINGENCIES: (Continued)

that the assessment will have an adverse effect on the Company's financial
condition or results of operations.

    Employment Agreements

    During 1997, the Company entered into employment agreements with two
executive officers. Under these agreements these officers will receive a
bonus up to 50% of their annual salary if in any given 12-month period
specified performance targets are met by the Company. These agreements also
contain confidentiality covenants and non-solicitation covenants, which
extend for four and two years respectively beyond the term of the agreements.

    Legal Proceedings

    The Company is subject to various legal proceedings which arise in the
ordinary course of business. Company management believes none of these
proceedings, individually or in the aggregate, will have a material adverse
effect on the financial condition or results of operations of the Company.

                                       39
<PAGE>
                           MUZAK LIMITED PARTNERSHIP

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

9. REDEEMABLE PREFERRED PARTNERSHIP INTERESTS:

    The redeemable preferred partnership interests is comprised of a Class C-1,
nonvoting preferred partnership interest that does not participate in the
Company's profits or losses. A summary of this interest and its accumulated
return by period along with a summary of a Class C, nonvoting partnership
interest, that also did not participate in the Company's profits or losses, are
as follows (in thousands):

<TABLE>
<CAPTION>
                                                                                       Class C     Class C-1     Total
                                                                                     -----------  -----------  ---------
<S>                                                                                  <C>          <C>          <C>
Balance, December 31, 1994.........................................................   $   9,373    $   5,320   $  14,693
  Preferred return.................................................................         657          372       1,029
                                                                                     -----------  -----------  ---------
Balance, December 31, 1995.........................................................      10,030        5,692      15,722
  Preferred return.................................................................         518          398         916
  Repurchase of Class C interests..................................................     (10,548)          --     (10,548)
                                                                                     -----------  -----------  ---------
Balance, December 31, 1996.........................................................          --        6,090       6,090
  Preferred return.................................................................          --          400         400
                                                                                     -----------  -----------  ---------
Balance, December 31, 1997.........................................................   $      --    $   6,490   $   6,490
                                                                                     -----------  -----------  ---------
                                                                                     -----------  -----------  ---------
</TABLE>

    Class C Interest

    The Class C limited partner was entitled to receive the amount of its
initial contribution of $8,000,000, plus a return of 7% compounded annually, as
discussed in Note 6. The Company repurchased the Class C limited partner's
interest with a portion of the net proceeds from the Offering in October 1996.

    Class C-1 Interest

    The Class C-1 limited partner is entitled to receive the amount of its
initial contribution of $5,000,000, plus a return of 7%, compounded annually,
through January 31, 2004, the date of redemption. The Class C-1 limited
partner may become, at its option, a participating partner. Upon becoming a
participating partner, the Class C-1 limited partner will forfeit any accrued
portion of the return. If it has not previously become a participating
partner, the Class C-1 limited partner is entitled to a preference in
liquidation equal to its contribution plus accumulated return. The cumulative
return per unit as of December 31, 1996 and 1997, was $0.76 and
$1.04 respectively. Unless the Class C-1 interest becomes a participating
interest, a general partner may, at its sole discretion, require the Class
C-1 limited partner to exchange its interest for a note equal to its then
aggregate liquidation preference amount. If such exchange occurs prior to the
time the Class C-1 limited partner has the opportunity to obtain
participation status, the Class C-1 limited partner will also be issued an
option to acquire the participating interest on substantially the same terms
as if such exchange had not occurred. If the Class C-1 limited partner has
not obtained participation status, or has not exchanged such units for notes,
on or prior to January 31, 2004, the Company is required to redeem such units
for an amount equal to the Class C-1 contribution plus accumulated return.

                                       40
<PAGE>
                           MUZAK LIMITED PARTNERSHIP

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

10. PARTNERS' CAPITAL (DEFICIT):

    Partners' capital (deficit) is comprised of two general partners; Class A
limited partners and Class B limited partners; Put/Call Units, and preferred
limited partners' interests.

    Put/Call Units

    In connection with obtaining a fixed-rate subordinated note payable, the
Company issued an option to purchase 1,529,898 units of Class A limited
partnership interests to a lender, for an aggregate exercise price of $10. These
units are currently exercisable.

    Subscriptions Receivable

    Officers and key employees of the Company have acquired limited partnership
interests, a portion of which were financed with subscription notes. As of
December 31, 1996 and 1997, the Class B limited partners' capital accounts were
reduced by subscription notes receivable. Interest income on the subscriptions
receivable totaled $49,000, $27,000 and $22,000 for the years ended December 31,
1995, 1996 and 1997.

    Preferred Limited Partners' Interests

    The preferred limited partners' interests, do not participate in the
Company's profits or losses. Such limited partners are entitled to receive an
8% return, compounded quarterly, on the amount of their initial contribution
and are generally entitled to a priority on distributions from the Company.
At December 31, 1996 and 1997, the return was credited to the preferred
limited partners. These limited partners are also entitled to a preference in
liquidation equal to their initial contribution plus accumulated and unpaid
return. Upon the occurrence of certain events, the units may, at the option
of the Company, be redeemed by the Company for an amount equal to the then
aggregate liquidation preference amount. The units (and any accrued and
unpaid return) may, at the option of the holder, be converted into units of
Class B limited partnership interest at any time. Cumulative per unit return
as of December 31, 1996 and 1997, was $0.33 and $0.46, respectively, and a
total aggregate return of $1,303,000 and $1,814,000, respectively.

    Other Limited Partners' Interests

    During 1997, the Company repurchased 1,250,000 Class B limited
partnership units from eight members of former management at a unit price of
$2.33 for a total repurchase amount of $2.9 million. Seventeen new and
existing members of management purchased 889,000 units at a unit price of
$2.33 per unit for a total purchase price of $2.1 million. These purchases
were substantially financed by the Company through subscription notes from
these management members bearing 7% interest. This repurchase of partnership
units in exchange for Subscription Notes Receivable is considered a non-cash
transaction for purposes of the statement of cash flows.

    Also during 1997, options to purchase 1,440,000 partnership units at
prices ranging from $1.00 to $1.75 per unit were forfeited by the separated
management members. Additionally, 26,500 options were granted to two former
senior management executives.

    Management Option Plan

    Certain limited partners and key employees of the Company have the ability,
under certain conditions, to exercise options to purchase units of Class B
limited partnership interests (the "Class B Interests") as established in the
management option plan (the "Option Plan").

    Through October 1, 1996, the Company was authorized to grant 1,869,545
units of Class B Interests, which vested at a rate of 20% per year, based on
specific performance standards. The options did not vest prior to October 1,
1996, as these performance standards were not met.

    Effective October 2, 1996, the Company amended the Option Plan (the "Amended
and Restated Option Plan") to, among other things, decrease the number of
options the Company was authorized to grant to 1,840,000 and change the required
performance standards. The options now vest according

                                       41
<PAGE>
                           MUZAK LIMITED PARTNERSHIP

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

10. PARTNERS' CAPITAL (DEFICIT): (Continued)

to the following schedule: 5% of the options vest on the first anniversary of
the Company's Offering, 5% of the options vest on the second anniversary of the
Company's Offering, the remaining 90% vests ratably at each calendar year end
over a five-year period beginning January 1, 1997, and becomes exercisable if
certain performance standards are met. These options expire on October 1, 2003.

    As of December 31, 1996, no options were exercisable. During 1997, 20,800
options vested and are currently exercisable at December 31, 1997. The
Company has recognized $202,000 in compensation expense for the year ended
December 31, 1997 related to the portion of the options for which
exercisability is not based on performance standards. No compensation expense
has been recognized for the portion of the options which vest based on
performance standards, as management, at this time, has deemed the
probability of meeting the performance standards remote.

    Effective May 10, 1997 and June 1, 1997, the Board of Directors granted two
senior officers of the company a total of 1,500,000 options to purchase Class
B limited partnership units for $2.33 per unit. These options vest in equal
amounts over a three year period commencing from the grant date.
Excercisability of 60% of these options is subject to certain performance
standards being met. As of December 31, 1997 no options have vested. No
compensation expense has been recorded for these options, as management's
estimate of the market value as of December 31, 1997 and at the date of grant
approximates the exercise price.


    Activity under the Option Plan and option price information is as follows:

<TABLE>
<CAPTION>
                                                                                                                      Weighted
                                                                                                       Range of        Average
                                                                                         Number of     Exercise       Exercise
                                                                                          Options        Price          Price
                                                                                        -----------  -------------  -------------
<S>                                                                                     <C>          <C>            <C>
Outstanding, December 31, 1994........................................................   1,714,545      1.00-1.75           1.06
  Options granted.....................................................................     150,000           1.75           1.75
  Options forfeited...................................................................     (30,000)          1.00           1.00
                                                                                        -----------  -------------  -------------
Outstanding, December 31, 1995........................................................   1,834,545     1.00--1.75           1.12
  Options granted (weighted average fair value of $1.91)..............................      40,000           3.00           3.00
  Options forfeited ..................................................................     (75,000)          1.00           1.00
                                                                                        -----------  -------------  -------------
Outstanding, December 31, 1996........................................................   1,799,545     1.00--3.00           1.16
  Options granted (weighted average fair value of $0.37)..............................   1,556,500     1.00--3.00           2.32
  Options forfeited ..................................................................  (1,440,000)    1.00--1.75           1.15
                                                                                        -----------  -------------  -------------
Outstanding, December 31, 1997........................................................   1,916,045    $1.00--3.00    $      2.11
                                                                                        -----------  -------------  -------------
                                                                                        -----------  -------------  -------------
</TABLE>


Additional information regarding options outstanding as of December 31, 1997
is as follows:

<TABLE>
<CAPTION>

                                          Weighted Avg.
                                            Remaining
        Range of             Number        Contractual       Weighted Avg.           Number       Weighted Avg.
   Exercise Prices       Outstanding        Life(yrs)       Exercise Price        Exercisable    Exercise Price
  ----------------      -------------    ---------------   ----------------      -------------  ----------------
   <S>                   <C>                  <C>              <C>                 <C>           <C>
    $      1.00             346,045            1.8             $  1.00                17,300      $   1.00
           2.33           1,500,000            6.6                2.33                    --          2.33
           3.00              70,000            6.0                3.00                 3,500          3.00
    -----------           ---------          ------          ------------           ----------    ------------
    $ 1.00-3.00           1,916,045            5.7             $  2.11                20,800      $   1.34
    -----------           ---------          ------          ------------           ----------    ------------
    -----------           ---------          ------          ------------           ----------    ------------

</TABLE>



    Fair Value Stock Based Compensation

    Statement of Financial Accounting Standard No. 123, Accounting for
Stock-Based Compensation, ("SFAS 123") requires the disclosure of the pro
forma net loss had the Company adopted the fair value method as of the
beginning of 1995. The Company has calculated the pro forma net loss under
SFAS 123 using a multiple option valuation approach and certain
weighted-average assumptions deemed reasonable by management. These
assumptions included, among other things, a risk free interest rate of 5.5%,
an expected life of 2 years, a partnership unit volatility of 0.0% and no
partnership distributions over the expected life. The compensation expense
which would be recognized under SFAS 123 would not be significantly different
than reported under APB 25 in 1996 and 1997. No compensation expense would be
reported in 1995 as the Option Plan was amended which changed the terms of
options granted, as described in Note 10. The impact of these pro forma
adjustments may not be indicative of future pro forma adjustments, as various
assumptions and estimates were employed and additional awards in future years
may occur.

    Other Partnership Unit Options

    On December 19, 1996, the Board of Directors granted a member of the
Board options to purchase 30,000 Class B limited partnership units for
$3.00 per unit. These options vest ratably over a five-year period and expire in
September 2003. No options are currently exercisable. No compensation expense
has been recorded for these options, as management's estimate of the market
value was less than the exercise price at the date of the grant.

                                       42
<PAGE>
                           MUZAK LIMITED PARTNERSHIP

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

10. PARTNERS' CAPITAL (DEFICIT): (Continued)

    Put Option

    After September 4, 1998, a general partner and certain of the Class A
limited partners can require the Company to purchase limited partnership
units held by them at fair market value. However, such right may not be
exercised if the purchase of units would have a material adverse effect on
the Company or would be in contravention of any then existing agreement to
which the Company is a party.

    Allocation of Profits and Losses

    Losses are allocated among the general partners and Class A and B limited
partners based upon the total of the interests held by each individual,
including the Put/Call Units under option, as a percentage of the total of
all such interests.

11. SUBSEQUENT EVENTS:

    Subsequent to December 31, 1997 the Company acquired two additional
business music distributors from its competitors for approximately $0.6
million, has restructured its San Diego franchise and entered into either a
purchase agreement or a letter of intent for the acquisition of three
additional business music distributors from its competitors for a total
consideration of $10.0 million, $4.0 million of which is in cash,
approximately $3.0 million of which is in equity in the Company and the
remainder of which is in the form of a promissory note to be paid over eight
years.

    In March 1998, the Company entered into a letter of intent with its joint
venture partner in Muzak Europe that would effectively liquidate the
Company's interest in Muzak Europe in exchange for a promissory note and the
right of the Company to participate in the future revenues of the European
venture in its new role as franchisor.

    Also in March 1998, the Company obtained a credit facility for working
capital purposes with an initial availability of $3.0 million, increasing to
$5.0 million upon the attainment of certain cash flow related targets. The
credit facility is secured by the inventories and receivables of the Company.
Amounts outstanding under the facility will bear a variable rate of interest,
to be paid quarterly, based on the lender's prime rate or LIBOR. The terms of
the credit facility require the Company to maintain certain performance
standards and covenants that, among other things, limit the Company's
capital spending and acquisition of other business as well as the Company's
ability to incur additional debt and make distributions to partners.

                                       43
<PAGE>
                          INDEPENDENT AUDITORS' REPORT

Board of Directors
Muzak Capital Corporation
Seattle, Washington

    We have audited the accompanying balance sheets of Muzak Capital
Corporation (the "Company") as of December 31, 1996 and 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.

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

    In our opinion, such financial statements present fairly, in all material
respects, the financial position of Muzak Capital Corporation as of December
31, 1996 and 1997 in conformity with generally accepted accounting principles.

/s/ Deloitte & Touche LLP
Seattle, Washington

March 5, 1998

                                       44
<PAGE>
                           MUZAK CAPITAL CORPORATION

                                 BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                         DECEMBER 31,       DECEMBER 31,
                                                                                             1996               1997
                                                                                       -----------------  -----------------
<S>                                                                                    <C>                <C>
Assets
  Cash...............................................................................      $       1          $       1
                                                                                                 ---                ---
                                                                                                 ---                ---
Stockholder's Equity
  Preferred Stock--authorized 10,000,000 shares of $0.01 par value each; no shares
    issued and outstanding...........................................................      $      --          $      --
  Common Stock--authorized 30,000,000 shares of $0.01 par value each; 100 shares
    issued and outstanding...........................................................              1                  1
                                                                                                 ---                ---
  Total..............................................................................      $       1          $       1
                                                                                                 ---                ---
                                                                                                 ---                ---
</TABLE>

    The accompanying note is an integral part of these financial statements.

                                       45
<PAGE>
                           MUZAK CAPITAL CORPORATION

                          NOTE TO FINANCIAL STATEMENTS

    Muzak Capital Corporation (the "Company") (formerly Muzak, Inc.), a
wholly-owned subsidiary of Muzak Limited Partnership ("MLP"), was formed on May
8, 1996. The Company filed a registration statement along with MLP for the
underwritten offering of senior notes of which the Company and MLP are
co-issuers. The offering closed in October 1996. The Company is dependent upon
results of operations and cash flow of MLP to meet debt service obligations of
the senior notes. No activity has occurred from May 8, 1996 (date of inception)
through December 31, 1997; therefore, statements of operations and cash flows
have not been included herein.

                                       46
<PAGE>
                           MUZAK LIMITED PARTNERSHIP

                       VALUATION AND QUALIFYING ACCOUNTS

                                 SCHEDULE II

<TABLE>
<CAPTION>
                                                                               ADDITIONS   DEDUCTIONS
                                                                              -----------  -----------
                                                                  BALANCE AT  CHARGED TO   WRITE-OFFS,   BALANCE
                                                                  BEGINNING    COSTS AND     NET OF     AT END OF
DESCRIPTION                                                       OF PERIOD    EXPENSES    RECOVERIES     PERIOD
----------------------------------------------------------------  ----------  -----------  -----------  ----------
<S>                                                               <C>         <C>          <C>          <C>
January 1 through December 31, 1997
Allowance for Doubtful Accounts.................................  $  496,000   $ 620,000   ($  615,000) $  501,000
                                                                  ----------  -----------  -----------  ----------
                                                                  ----------  -----------  -----------  ----------
January 1 through December 31, 1996
Allowance for Doubtful Accounts.................................  $  632,000   $ 472,000   ($  608,000) $  496,000
                                                                  ----------  -----------  -----------  ----------
                                                                  ----------  -----------  -----------  ----------
January 1 through December 31, 1995
Allowance for Doubtful Accounts.................................  $  736,000   $ 810,000   ($  914,000) $  632,000
                                                                  ----------  -----------  -----------  ----------
                                                                  ----------  -----------  -----------  ----------
</TABLE>

                                       47
<PAGE>

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

    None.

                                       48
<PAGE>
                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

    The Board of Directors of Music Holdings Corp. ("Music Holdings"), an
affiliate of Centre Partners and the general partner of MLP Acquisition L.P.
("MLP Acquisition"), the managing general partner of the Company, functions
as the governing body of the Company. Directors are appointed for an
indeterminate term and serve until replaced. MLP Acquisition was organized to
act as managing general partner of the Company, MLP Administration Corp.
("MLP Administration") was organized to act as the administrative general
partner of the Company, and Music Holdings was organized to act as the
general partner of MLP Acquisition. MLP Acquisition, MLP Administration and
Music Holdings are not involved in any investment activities and have no
independent operations, other than the business operations of the Issuers.
Executive officers of the Company also act as officers of Capital Corp., but
do not receive additional compensation for services rendered in that capacity.

Directors, Executive Officers and Other Senior Management Personnel

    Certain information is set forth below concerning (i) executive officers and
other members of senior management of the Company and (ii) directors of Music
Holdings as of March 30, 1998:
<TABLE>
<CAPTION>
Name                                Age   Position with the Company
---------------------------------   ---   -------------------------------------------------
<S>                                 <C>   <C>
Directors and Executive Officers:
William A. Boyd..................    56   Chairman of the Board and Chief Executive Officer
Charles A. Saldarini.............    54   President and Chief Operating Officer
Brad D. Bodenman.................    34   Vice President, Finance and
                                            Administration
Richard Chaffee..................    54   Vice President, Operations
Susan P. Chetwin.................    46   Vice President, Owned Operations
                                            Eastern Division
D. Alvin Collis..................    45   Vice President, Audio Architecture
Jack D. Craig....................    63   Vice President, Affiliate Sales and
                                            Development
Dino J. DeRose...................    37   Vice President, National Sales
Kenneth F. Kahn..................    35   Vice President, Marketing
Steven M. Tracy..................    47   Vice President, Owned Operations
                                            Western Division
William E. Koenig................    50   President, EAIC, Inc.
Paul F. Balser...................    56   Director
Robert A. Bergmann...............    32   Director
Craig I. Fields..................    51   Director
Mark E. Jennings.................    35   Director
Bruce G. Pollack.................    38   Director
</TABLE>

    William A. Boyd has been the Chief Executive Officer of the Company since
1997, Chairman of the Board of Music Holdings since 1997 and a Director of
Music Holdings since 1996. From 1995 to 1996, Mr. Boyd was a private
investor. From 1982 to 1995, Mr. Boyd was owner and president of the largest
franchisee of the Company. Mr. Boyd was President of the Independent Affiliate

                                       49
<PAGE>

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. (Continued)

Organization from 1994 to 1995 and from 1986 to 1987. Mr. Boyd was also
President of the Company's Owned Affiliate division in 1987. Prior to owning
a franchise, Mr. Boyd held various positions with the Predecessor.

    Charles A. Saldarini has been President and Chief Operating Officer since
1997. Prior to joining Muzak, Mr. Saldarini served from 1976 to 1997 as
Senior Vice President of First Union National Bank. From 1971 to 1976 Mr.
Saldarini held commercial/corporate lender positions with Irving Trust
Company.

    Brad D. Bodenman has been Vice President, Finance and Administration
since 1997. Mr. Bodenman served as the Company's controller from 1996 to
1997, as Director of Finance from 1994 to 1996, as Accounting Manager from
1990 to 1994, and Accounting Supervisor from 1989 to 1990. Prior to joining
the Company, he served as an audit supervisor at Price Waterhouse.

    Susan P. Chetwin has been Vice President, Owned Operations Eastern Region
since 1997. Ms. Chetwin was Regional Director from 1994 to 1997, General
Manager in New York from 1989 to 1994, General Manager in Minneapolis from
1988 to 1989 and National Sales Manager of the Predecessor from 1986 to 1988.
Prior to joining the Predecessor, Ms. Chetwin served as Key Account Manager
at A.H. Robins Pharmaceuticals from 1984 to 1986 and as Manager, Industrial
Sales at Bristol-Myers Company from 1973-1984.

    Richard Chaffee has been Vice President, Owned Affiliate Operations of the
Company and the Predecessor since 1987. Since joining a predecessor to the
Predecessor in 1968, Mr. Chaffee has served in both local sales offices and
franchisee operations in New York, Boston, Chicago, Minneapolis and Charlotte,
primarily as Chief Engineer and Operations Manager.

    D. Alvin Collis has been Vice President, Audio Architecture since
September 1997. Prior to that time he has served as Director of Programming
at the Company from 1988 to 1994 and Manager of Programming and a programmer at
the Predecessor from 1984 to 1988. From 1980 to 1983, Mr. Collis was a
partner at MoDaMu (Modern Dance Music) Records. Prior to 1980 Mr. Collis was
a record producer/engineer for various record companies.

    Jack D. Craig has been Vice President, Affiliate Sales and Development of
the Company and the Predecessor since 1988. From 1983 to 1988, Mr. Craig was
Vice President, Dealer Sales for AEI. From 1979 to 1983, Mr. Craig was
Marketing/Sales Manager for Aiphone Corporation, a leading intercom
manufacturer. Prior to joining Aiphone Corporation, Mr. Craig served as Vice
President/Account Supervisor for 11 years with J. Walter Thompson Advertising.

    Dino J. DeRose has been Vice President, National Sales since 1997. Prior
to 1997, Mr. DeRose served as Director of National Sales from 1994 to 1997,
as General Manager of Muzak's Instore Marketing Group from 1992 to 1994, and
as a National Account Executive from 1988 to 1992. From 1985 to 1988, he
served as National Retail Sales Manager with SelfVision and was Regional
Sales Manager at Steidel Wine from 1982 to 1985.

                                       50
<PAGE>

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. (Continued)

    Kenneth F. Kahn has been Vice President, Marketing since 1997.
From 1996 to 1997 Mr. Kahn served as Sales Manager, New York Office. From 1995
to 1996 Mr. Kahn served as Director of Sales and Marketing at Emphasis Music.
From 1992 to 1994 he served as Vice President, Sales and Marketing at Astroland
Amusement Park. From 1989 to 1992 he was Partner and Vice President of Phase One
Distribution. From 1982 to 1989 he was Partner and Vice President at Ezra Kahn &
Associates.

    Steven M. Tracy has been Vice President, Owned Operations Western Region
since 1997. Prior to that time, Mr. Tracy served as Regional Director from 1994
to 1997, General Manager from 1988 to 1994 and Vice President/General Manager
for the Predecessor from 1986 to 1988. Mr. Tracy was the owner of a general
contracting business before joining the Predecessor.

    William E. Koenig has served as President of EAIC, Inc since 1998 and
prior to that served as President, Enso Audio Imaging Division from 1996 to
1998. Mr. Koenig served as a consultant to create the Company's Internet
business from 1995 to 1996. From 1992 to 1995, Mr. Koenig was employed by and
co-founded Kidstar Interactive Media. From 1987 to 1991 Mr. Koenig served as
Vice President, International & Strategic Marketing at Digital Systems
International, Inc. From 1983 to 1987, Mr. Koenig served as Vice President,
Marketing and Product Management at Frank Russell Company. Mr. Koenig served
as Vice President, Marketing and Sales and Manager Marketing Services and
Sales at Automatic Data Processing (ADP) from 1974 to 1983. Mr. Koenig
founded and was Executive Director of Video Access Center from 1972 to 1974
and was a Staff Consultant at the Irwin Management Company from 1970 to 1972.

    Paul F. Balser has been a Director of Music Holdings since 1992. Mr.
Balser was a partner of Centre Partners from 1986 until August 1995. In 1995,
Mr. Balser resigned as an officer of the managing general partner of Centre
Partners to become a founding partner of Generation Capital Partners L.P., a
newly organized private investment partnership. From 1982 to 1986, Mr. Balser
was a Managing Director and a member of the Board of Directors of J. Henry
Schroeder Corp. Mr. Balser currently serves as a director of Kansas City
Southern Industries, Inc. (NYSE), The Carbide/Graphite Group, Inc. (Nasdaq),
The Quarton Group-Publishers, Inc., Scientific Games Holdings Corp. (Nasdaq)
and Jeepers! Inc.

    Robert A. Bergmann has been Director of Music Holdings since 1997. Mr.
Bergmann is a Principal at Centre Partners Management LLC, a private equity
investment firm based in New York, which was formed in December 1995 to manage
investments on behalf of Centre Capital Investors II, L.P. and affiliated
entities. Prior thereto, Mr. Bergmann was in the Corporate Finance Department of
Donaldson, Lufkin & Jenrette. Mr. Bergmann currently serves as a director of
Bravo Corporation and Rembrandt Photo Services.

    Craig I. Fields Ph.D., has been a Director of Music Holdings since 1997.
Dr. Fields is Chairman of the Defense Science Board, and is a Director of
ENSCO, InterTech, Network Solutions, Inc., Firearms Training Systems, Inc.
(Nasdaq), and Projectavision. Dr. Fields serves on the Science and Technology
Advisory Panel (STAP), supporting the Director of Central Intelligence and
the US-Israel Science and Technology Commission. Dr. Fields is on the
Advisory Boards of SRI International and the Economic Strategy Institute. Dr.
Fields is a member of the Visiting Committee of the National Institutes of
Standards and Technology; the Carnegie-Mellon University Department of
Computer Science, and the UCLA Graduate School of Education &

                                       51
<PAGE>
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. (Continued)

Information Studies. Dr. Fields was formerly Vice Chairman of the Board of
Alliance Gaming Corporation, Chairman and Chief Executive Officer of the
Microelectronics and Computer Technology Corporation, Directory of the
Defense Advanced Research Projects Agency (DARPA) and served on the faculty
of Harvard University.

    Mark E. Jennings has been a Director of Music Holdings since 1992. In
1995, Mr. Jennings resigned as an officer of the managing general partner of
Centre Partners to become a founding partner of Generation Capital Partners
L.P. Mr. Jennings was a partner of Centre Partners. From 1986 to 1987, Mr.
Jennings was employed at Goldman, Sachs & Co. in its Corporate Finance
Department. Mr. Jennings currently serves as a director of Snyder
Communications, Inc. (NYSE), Scientific Games Holdings Corp. (Nasdaq),
Jeepers! Inc. and Johnny Rockets Group, Inc.

    Bruce G. Pollack has been a Director of Music Holdings since 1995. Mr.
Pollack is a partner of Centre Partners, which he joined in 1991, and is a
Managing Director of Centre Partners Management LLC, which was formed in
December 1995 to manage investments on behalf of Centre Capital Investors II,
L.P. and affiliated entities. From 1988 to 1991, Mr. Pollack was an officer
and director of RSG Partners, Inc. and its predecessors, and from 1985 to
1988, Mr. Pollack was an officer of TSG Holdings, Inc. Mr. Pollack currently
serves as a director of FireArms Trading Systems, Inc. (Nasdaq), Johnny
Rockets Group, Inc., The Quarton Group-Publishers, Inc., Jeepers! Inc. and
Victory Holdings Corp.

    There are no family relationships among the directors and executive officers
of the Company.

                                       52
<PAGE>

ITEM 11. EXECUTIVE COMPENSATION.

    The following table sets forth information concerning the compensation of
the Company's Chief Executive Officer, each of the Company's four other most
highly compensated executive officers, and certain other individuals,
(collectively, the "Named Executive Officers") for services in all capacities
rendered to the Company and its subsidiaries for the years 1995, 1996 and
1997.

<TABLE>
<CAPTION>
                                                         Summary Compensation Table
                                          --------------------------------------------------------
                                                                                                    Long-Term
                                                                                                   Compensation
                                                            Annual Compensation                    -------------
                                          --------------------------------------------------------  Securities     All Other
                                                                                  Other Annual      Underlying   Compensation
Name and Principal Position                  Year      Salary        Bonus(1)     Compensation      Option/SAR        (2)
----------------------------------------     -----    ---------    -----------   ----------------- ------------  ------------
<S>                                       <C>          <C>          <C>           <C>              <C>           <C>

William A. Boyd.........................     1997    $ 181,983(3)                                  1,530,000     $ 3,062
Chief Executive Officer                      1996    $       0
                                             1995    $       0

Charles A. Saldarini....................     1997    $ 114,583(4)                                    500,000     $ 1,458
President and Chief Operating Officer        1996    $       0
                                             1995    $       0

Dino J. DeRose..........................     1997    $ 164,379      $  15,000                                    $ 5,808
Vice President, National Sales               1996    $ 143,468                                                   $ 4,119
                                             1995    $ 144,600      $   2,000                                    $ 2,097

Susan P. Chetwin........................     1997    $ 124,557      $  30,000                                    $ 4,717
Vice President, Owned Operations             1996    $ 120,694                                                   $ 3,620
Eastern Region                               1995    $ 117,222      $   4,275                                    $ 1,660

Steven M. Tracy.........................     1997    $ 119,685      $  30,000                                    $ 4,531
Vice President, Owned Operations             1996    $ 115,082                                                   $ 3,452
Western Region                               1995    $ 116,784      $   4,275                                    $ 1,654

John R. Jester...........................    1997    $ 110,595(5)                    $ 90,611(6)      16,250     $ 3,310
Former Chief Executive Officer               1996    $ 220,000                                                   $ 4,996
                                             1995    $ 213,725                                                   $ 2,130

James F. Harrison.......................     1997    $  89,645(5)                    $ 73,888(6)      10,250     $ 2,683
Former Senior Vice President                 1996    $ 178,000      $  11,000                                    $ 4,676
                                             1995    $ 172,750                                                   $ 2,310
</TABLE>

----------------------------------
(1) Bonuses in respect of services rendered in 1995 and 1996 were determined and
    paid in 1995 and 1996, respectively. No bonuses will be awarded to Named
    Executive Officers with respect to services rendered in 1997.
(2) Consists of contributions by the Company to a defined contribution 401(k)
    plan.
(3) Mr. Boyd became Chief Executive Officer of the Company in June 1997. This
    figure reflects approximately 7.5 months of employment.
(4) Mr. Saldarini joined the Company as President and Chief Operating Officer
    in July 1997. This figure reflects approximately 5.5 months of employment.
(5) These amounts represent salaries paid by the Company through the date of
    termination of employment.
(6) These amounts are severances paid to these separated management members
    pursuant to severance agreements entered into in May 1997.


                                       53

<PAGE>

ITEM 11. EXECUTIVE COMPENSATION. (Continued)

                       OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
                                        Individual Grants
---------------------------------------------------------------------------------------------------
                                          Number of       Percent of Total
                                         Securities        Options Granted     Exercise or Base
                                      Underlying Option    To Employees In           Price
                Name                     Granted (#)         Fiscal Year           ($/Unit)
                (a)                          (b)                 (c)                  (d)
------------------------------------  -----------------  -------------------  -------------------
<S>                                   <C>                <C>                  <C>
William A. Boyd,....................      1,030,000                66.2%           $2.33-$3.00
  Chief Executive Officer
Charles A. Saldarini,...............        500,000                32.1%           $      2.33
  President and Chief Operating
  Officer
John R. Jester,.....................         16,250                 1.0%           $      1.00
  Former Chief Executive Officer
James F. Harrison,..................         10,250                 0.7%           $      1.00
  Former Senior Vice President

<CAPTION>

                                                                 Potential Realizable Value
                                                                          At Assumed
                                                                 Annual Rates of Unit Price
                                                                       Appreciation For
                                                                         Option Term
                                          Expiration     ------------------------------------------
                Name                        Date             0%          5% ($)         10% ($)
                (a)                          (e)                           (f)            (g)
------------------------------------  -----------------  ---------    -------------  -------------
<S>                                   <C>                <C>          <C>            <C>
William A. Boyd,....................        6/2004        $     0       $ 948,900      $ 2,256,726
  Chief Executive Officer
Charles A. Saldarini,...............        6/2004        $     0       $ 474,272      $ 1,105,255
  President and Chief Operating
  Officer
John R. Jester,.....................        6/2004        $21,613       $  37,018      $    57,525
  Former Chief Executive Officer
James F. Harrison,..................        6/2004        $13,633       $  23,350      $    36,285
  Former Senior Vice President

</TABLE>

There were no options exercised in 1997.

Directors' Compensation

    Directors of Music Holdings, the general partner of the managing partner of
the Company, who are also employees of the Company receive no remuneration for
services as members of the Board or any committee of the Board. Directors who
are not employed by the Company receive an annual retainer of $20,000 plus
$3,000 for each meeting of the Board attended, except in the case of the Centre
Partners designees, who receive an annual retainer of $50,000, in each case plus
reimbursement of expenses. See "Certain Relationships and Related Transactions."

Employment Contracts, Termination of Employment and Change-in-Control
Arrangements

    Effective May 21, 1997 and July 21, 1997, respectively, the Company
entered into four-year employment agreements with William A. Boyd, Chief
Executive Officer of the Company, and Charles A. Saldarini, President and
Chief Operating Officer of the Company. Under his employment agreement, Mr.
Boyd currently receives an annual base salary of $300,000, to be reviewed
annually. Under his employment agreement, Mr. Saldarini currently receives an
annual base salary of $250,000, to be reviewed annually. Mr. Boyd and Mr.
Saldarini will each receive a bonus up to 50% of his annual base salary if,
in any given 12-month fiscal period, the Company achieves a specified
performance target. Both employment agreements also contain confidentiality
covenants and non-solicitation covenants which extend for four and two years,
respectively, beyond the term of the agreements.

    In June 1997, John R. Jester and James F. Harrison were paid severance
compensation approximating six months of their annual salary and they were
granted options to purchase 16,250 and 10,250 limited partnership units at
$1.00 per unit, respectively.


                                       54
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION. (Continued)

Amended and Restated Option Plan

    In August 1992, the Company adopted, and issued options under, the Company's
Management Option Plan (the "Original Option Plan"). As part of the Offering,
the Company adopted the performance-based Amended and Restated Option Plan to
replace the Original Option Plan, which was terminated upon consummation of the
Offering. At the time of the adoption of the Amended and Restated Option Plan,
the total number of outstanding options granted under the Amended and Restated
Option Plan was the same under the Original Option Plan. The purchase price of
the units of partnership interest issuable upon exercise of each option granted
pursuant to the Amended and Restated Option Plan are the same as the exercise
prices of the options granted under the Original Option Plan.

    The Amended and Restated Option Plan provides for the granting of options to
purchase an aggregate of 1,840,000 units of partnership interest which were
granted to 23 existing senior management members at an average exercise price of
$1.12 per unit in substitution of the outstanding options held by such members
of senior management under the Original Option Plan. Options granted under the
Amended and Restated Option Plan are not intended to qualify as "incentive stock
options" within the meaning of Section 422A of the Internal Revenue Code of
1986, as amended (the "Code").

    Options granted under the Amended and Restated Option Plan are
non-transferable, except by will, the laws of descent and distribution, or
pursuant to a qualified domestic relations order. As a condition to the exercise
of any option under the Amended and Restated Option Plan, the optionee is
required to become party to the Company's partnership agreement. Options granted
under the Amended and Restated Option Plan expire seven years from the date of
grant.
                                       55
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION. (Continued)

Compensation Committee Interlocks and Insider Participation

    Executive compensation decisions are made by certain members of the Board
of Directors of Music Holdings, which consists of Messrs. Balser, Boyd,
Jennings and Pollack and consisted of Messrs. Balser, Boyd, Jennings,
Pollack and Jester prior to February, 1997.

    Paul F. Balser and Mark E. Jennings are limited partners of MLP and prior to
August 1995 were officers of Park Road Corporation ("Park Road"), the managing
general partner of Centre Partners. Bruce G. Pollack, a director of Music
Holdings, is a limited partner of MLP and is an officer and director of Park
Road.

    In 1997, the Company paid to Centre Partners $287,700 for services provided
by the Centre Partners designees during 1997.

Benefit Plan

    The Company maintains a 401(k) defined contribution savings and retirement
plan (the "Benefit Plan") that covers substantially all of the Company's
employees, including certain Named Executive Officers. Under the Benefit Plan's
savings portion, eligible employees may contribute from 1% to 14% of their
compensation per year, subject to certain tax law restrictions. The Company may
make a matching contribution of up to a maximum of 100% of the first 3% and 50%
of the next 3%, up to 6% of the total base salary contributed by the employee
each year. The Company's contributions under the retirement portion of the
Benefit Plan are determined annually by the Company, but may not exceed 3% of
the eligible employee's annual compensation. Benefit Plan participants are
immediately vested in their contributions as well as the Company's
contributions.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

    The following table sets forth certain information with respect to the
beneficial ownership of the Company as of the date hereof, by (i) each
interestholder known by the Company to beneficially own more than five percent
of the Company, (ii) each director of the general partner of the managing
general partner of the Company, (iii) the Named Executive Officers and (iv) all
directors of the general partner of the managing general partner of the Company
and executive officers of the Company as a group. The following table excludes
units of partnership interest issuable upon the exercise of options under the
Company's Amended and Restated Option Plan. Except pursuant to applicable
community property laws or as otherwise noted below, each of the owners
identified in the table has sole voting and investment power with respect to the
partnership interests beneficially owned by such person.

                                       56
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
         (Continued)
<TABLE>
<CAPTION>
                                                                   Number of
                                                                  Partnership
Name and Address of Beneficial Owner                               Interests     Percent
----------------------------------------------------------------  -----------    -------
<S>                                                               <C>            <C>
Centre Partners L.P.(1).........................................  12,229,976       63.6%
  30 Rockefeller Plaza Suite
  5050 New York, NY 10020
UBS Capital LLC.................................................   1,747,574        9.1
  299 Park Avenue
  34th Floor New York, NY 10171
Comcast Corporation(2)..........................................   1,429,933        7.4
  1500 Market Street
  Philadelphia, PA 19102
Barclays Bank PLC...............................................   1,358,617        7.1
  600 Fifth Avenue
  New York, NY 10023
William A. Boyd.................................................     210,337        1.1
Charles A. Saldarini............................................     145,959        0.8
Dino J. DeRose..................................................     102,610        0.5
Susan P. Chetwin................................................      65,571        0.3
Steven M. Tracy.................................................      61,805        0.3
Paul F. Balser..................................................         *(3)       *(3)
Mark E. Jennings................................................         *(3)       *(3)
Bruce G. Pollack................................................         *(4)       *(4)
Craig I. Fields.................................................         *          *
Robert A. Bergmann..............................................         *          *
John R. Jester..................................................         *          *
James F. Harrison...............................................         *          *
All directors and executive officers as a group (8 persons).....   977,857(5)       5.1(5)
</TABLE>

----------------------------------
*   Less than 1%.
(1) Includes partnership interests held by MLP, of which Centre Partners is the
    general partner. Centre Partners may be deemed to be indirectly controlled,
    through Park Road, the managing general partner of Centre Partners, by
    Lester Pollack, a Managing Director of Lazard Freres & Co. LLC, an
    underwriter of this Offering, and the father of Bruce G. Pollack, a director
    of the general partner of the managing general partner of the Company.
(2) The Class C-1 Limited Partnership Interest beneficially owned by Comcast
    Corporation is a preferred limited partnership interest convertible into an
    equivalent number of shares of common stock in the event of the
    incorporation of the Company.
(3) Excludes partnership interests held by Centre Partners and MLP. Messrs.
    Balser and Jennings are limited partners of MLP and prior to August 1995
    were officers of Park Road. Each disclaims beneficial ownership of such
    partnership interests.
(4) Excludes partnership interests held by Centre Partners and MLP. Mr. Pollack
    is a limited partner of MLP and is an officer and director of Park Road. He
    disclaims beneficial ownership of such partnership interests.
(5) Excludes partnership interests held by Centre Partners and MLP.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

    The outstanding senior indebtedness and outstanding subordinated
indebtedness was repaid in full with the proceeds of the Offering. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."

    Directors of Music Holdings, the general partner of the managing partner of
the Company, who are also employees of the Company receive no remuneration for
services as members of the Board or any committee of the Board. Directors who
are not employed by the Company receive an annual retainer of $20,000 plus
$3,000 for each meeting of the Board attended, except in the case of the Centre
Partners designees, who receive an annual retainer of $50,000, in each case plus
reimbursement of expenses. See "Directors and Executive Officers of the
Registrant -- Directors' Compensation."

                                       57
<PAGE>
                                    PART IV

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

    (A) The following documents are filed as part of this report:

    (1) Financial Statements

    Audited financial statements and supplementary data required by this item
are presented and listed in Part II, Item 8.

    (2) Financial Statement Schedule

    A financial statement schedule required to be filed as part of this report
is presented in Part II, Item 8.

    (3) Exhibits

<TABLE>
<CAPTION>
  Exhibit
    No.                                                            Description
-----------  -----------------------------------------------------------------------------------------------------------------------
<S>          <C>

       3.1   -- Certificate of Incorporation of Capital Corp. (b)

       3.2   -- By-Laws of Capital Corp. (b)

       3.3   -- Certificate of Amendment to the Certificate of Incorporation of Capital Corp. (b)

       3.4   -- Third Amended and Restated Agreement of Limited Partnership of Muzak Limited Partnership (formerly, MLP Operating,
                L.P.), dated as of November 4, 1994, as amended (b)

       4.1   -- Indenture, dated as of October 2, 1996, among the Registrants and First Trust National Association, as trustee, in
                respect of the Registrants' 10% Senior Notes due 2003 (b)

       4.2   -- Form of Senior Note (included in the form of Indenture filed as Exhibit 4.2 above) (b)

      10.1   -- Asset Purchase Agreement dated as of March 11, 1992, among Muzak Limited Partnership, Field/Muzak Inc., The Field
                Corporation and MLP Operating, L.P., as amended by Muzak Limited Partnership's letters dated April 22, 1992,
                August 6, 1992 and August 20, 1992, Amendment No. 1 dated as of June 26, 1992, Amendment No. 2, dated July 31,
                1992 and Amendment No. 3, dated as of August 26, 1992 (b)

      10.2   -- Asset Purchase Agreement and Contribution Agreement dated as of November 24, 1993 among Comcast Corporation, et al.
                and Muzak Limited Partnership (b)

      10.3   -- Amended and Restated Credit Agreement dated as of September 4, 1992, as amended as of October 22, 1992 and as of
                December 15, 1993; and as amended and restated as of January 31, 1994 among Muzak Limited Partnership, Union Bank
                of Switzerland, New York Branch, Internationale Nederlanden (U.S.) Capital Corporation and the other Lenders
                parties thereto and Union Bank of Switzerland, New York Branch, as Agent; as amended by Waiver and Agreement
                dated as of February 10, 1994; Waiver and Amendment No. 1 dated as of October 31, 1994; Waiver and Amendment No.
                2 dated as of November 2, 1994; Amendment No. 3 and Consent dated as of November 4, 1994; Amendment No. 4 to
                Amended and Restated Credit Agreement dated as of November 17,1994; Waiver dated January 10, 1995; Waiver dated
                as of July 31, 1995; Amendment No. 5 to Amended and Restated Credit Agreement dated as of November 7, 1995; and
                Waiver dated as of April 1, 1996 (b)
</TABLE>

                                       58
<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(Continued)

<TABLE>
<CAPTION>
  Exhibit
    No.                                                            Description
-----------  -----------------------------------------------------------------------------------------------------------------------
<S>          <C>
      10.4   -- Amended and Restated Term Notes issued as of September 4, 1992, amended and restated as of January 31, 1994 (b)

      10.5   -- Subordinated Loan Agreement dated as of September 4, 1992, as amended, between Muzak Limited Partnership and
                Barclays Bank PLC, New York Branch (b)

      10.6   -- Option Agreement dated as of September 4, 1992 between Muzak Limited Partnership and Barclays Bank PLC, New York
                Branch (b)

      10.7   -- Uplink Facility Agreement dated as of December 28, 1995 between EchoStar Satellite Corporation and Muzak Limited
                Partnership (b)

      10.8   -- DBS Programming Affiliation Agreement dated as of December 28, 1995 between EchoStar Satellite Corporation and Muzak
                Limited Partnership (b)

      10.9   -- Video Programming Sales Agent Agreement dated as of December 28, 1995 between EchoStar Satellite Corporation and
                Muzak Limited Partnership (b)

     10.10   -- Form of Muzak-Registered Trademark- Participating Affiliate Agreement (b)

     10.11   -- Third and Board Office Lease dated June 8, 1994, between Martin Selig and Muzak Limited Partnership (b)

     10.12   -- ASCAP License (b)

     10.13   -- Joint Venture Agreement dated August 2, 1995 between Muzak Limited Partnership and Alcas Holdings B.V. (b)

     10.14   -- Muzak-Registered Trademark- Master Affiliate Agreement (Mexico) dated March 1, 1992 between Muzak Limited
                Partnership and Audioplan S.A. (b)

     10.15   -- Muzak-Registered Trademark- Master Affiliate Agreement (Canada) dated August 30, 1990 between Muzak Limited
                Partnership and Chum Limited, as amended (b)

     10.16   -- FCC Licenses (b)

     10.17   -- Form of License Agreement (New Franchise Agreement), as amended (b)

     10.18   -- Form of Music Services Agreement (b)

     10.19   -- Form of Multi-Territory Account Service Agreement (b)

     10.20   -- Form of Sales of Adjunct Services and Form of Muzak Adjunct Services Subscriber Agreement (b)

     10.21   -- Transponder Lease Agreement dated December 9, 1993 between Microspace Communications Corporation and Muzak Limited
                Partnership (b)

     10.22   -- Transmission Lease Agreement dated January 31, 1995 between Microspace Communications Corporation and Muzak and
                Limited Partnership (b)

     10.23   -- Transponder Lease Agreement dated January 31, 1995 between Microspace Communications Corporation and Muzak Limited
                Partnership (b)

     10.24   -- Transponder Lease Agreement dated April 27, 1995 between Microspace Communications Corporation and Muzak Limited
                Partnership (b)

     10.25   -- Transponder Lease Agreement dated July 5, 1995 between Microspace Communications Corporation and Muzak Limited
                Partnership (b)

     10.26   -- Transponder Lease Agreement dated April 29, 1996 between Microspace Communications Corporation and Muzak Limited
                Partnership (b)

     10.27   -- Agreement to Provide Telecommunications Service dated August 8 and 9, 1995 between Keystone Communications
                Corporation and Muzak Limited Partnership (b)

     10.28   -- Sales Agreement and License dated September 28, 1995 between Mainstream Data, Inc. and Muzak Limited Partnership (b)

     10.29   -- Muzak Limited Partnership Tempo Savings and Retirement Plan (b)

     10.30   -- Muzak Limited Partnership Tempo Savings and Retirement Trust (b)

     10.31   -- Muzak Limited Partnership Management Incentive Plan (b)

     10.32   -- Muzak Limited Partnership Management Option Plan (b)

     10.35   -- Employment Agreement dated August 31, 1992 of John R. Jester (b)

     10.36   -- Employment Agreement dated August 31, 1992 of James F. Harrison (b)

     10.37   -- Employment Letter dated July 7, 1995 of Kirk A. Collamer (b)

     10.38   -- Amended and Restated Management Option Plan (b)

     10.39   -- Employment Agreement dated May 28, 1997 of William A. Boyd (a)

     10.40   -- Employment Agreement dated June 12, 1997 of Charles A. Saldarini (a)


                                       59
<PAGE>

        12   -- Statement of Computations of Ratios of Earnings to Fixed Charges (a)

        21   -- List of Subsidiaries of the Registrants (b)

        27   -- Financial Data Schedules (a)
</TABLE>

----------------------------------
(a) Filed herewith
(b) Previously filed as Exhibits to Registration Statement No.'s 333-03741 and
    333-03741-01 filed with the Securities and Exchange Commission.
(c) Reports on Form 8-K
    None

                                       60
<PAGE>
                                   SIGNATURES

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

                                MUZAK LIMITED PARTNERSHIP
                                (REGISTRANT)

                                BY:             MLP ACQUISITION L.P.
                                     ------------------------------------------
                                              MANAGING GENERAL PARTNER

                                BY:              MUSIC HOLDINGS CORP.
                                     ------------------------------------------
                                                   General Partner

                                By:              /s/  William A. Boyd
                                     ------------------------------------------
                                                   William A. Boyd
                                                Chairman of the Board

                                MUZAK CAPITAL CORPORATION
                                (Registrant)

                                By:             /s/ William A. Boyd
                                     ------------------------------------------
                                                  William A. Boyd
March 30, 1998                               Chief Executive 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
registrants and in the capacities and on the dates indicated.

          Signature                        Title                    Date
------------------------------  ---------------------------  -------------------

     /s/ WILLIAM A. BOYD        Chief Executive Officer         March 30, 1998
------------------------------    Officer (Principal
       William A. Boyd            Executive Officer), of
                                  the Company and Capital
                                  Corp. and Chairman of the
                                  Board of Music Holdings
                                  and Capital Corp.

     /s/ BRAD D. BODENMAN      Principal Financial Officer     March 30, 1998
------------------------------    and Principal Accounting
       Brad D. Bodenman           Officer, of the Company

      /s/ PAUL F. BALSER        Director of Music Holdings     March 30, 1998
------------------------------    and Capital Corp.
        Paul F. Balser

     /s/ BRUCE G. POLLACK       Director of Music Holdings     March 30, 1998
------------------------------    and. Capital Corp.
       Bruce G. Pollack

     /s/ MARK E. JENNINGS       Director of Music Holdings     March 30, 1998
------------------------------    and Capital Corp.
       Mark E. Jennings

     /s/ CRAIG I. FIELDS        Director of Music Holdings     March 30, 1998
------------------------------    and Capital Corp.
       Craig I. Fields

     /s/ ROBERT A. BERGMANN     Director of Music Holdings     March 30, 1998
------------------------------    and Capital Corp.
       Robert A. Bergmann



                                       61
<PAGE>
                                 EXHIBIT INDEX
<TABLE>
<CAPTION>

Exhibit
  No.                                                            Description
-------  -----------------------------------------------------------------------------------------------------------------------
<S>      <C>
 3.1     -- Certificate of Incorporation of Capital Corp. (b)

 3.2     -- By-Laws of Capital Corp. (b)

 3.3     -- Certificate of Amendment to the Certificate of Incorporation of Capital Corp. (b)

 3.4     -- Third Amended and Restated Agreement of Limited Partnership of Muzak Limited Partnership (formerly, MLP Operating,
            L.P.), dated as of November 4, 1994, as amended (b)

 4.1     -- Indenture, dated as of October 2, 1996, among the Registrants and First Trust National Association, as trustee, in
            respect of the Registrants' 10% Senior Notes due 2003 (b)

 4.2     -- Form of Senior Note (included in the form of Indenture filed as Exhibit 4.2 above) (b)

10.1     -- Asset Purchase Agreement dated as of March 11, 1992, among Muzak Limited Partnership, Field/Muzak Inc., The Field
            Corporation and MLP Operating, L.P., as amended by Muzak Limited Partnership's letters dated April 22, 1992, August 6,
            1992 and August 20, 1992, Amendment No. 1 dated as of June 26, 1992, Amendment No. 2, dated July 31, 1992 and Amendment
            No. 3, dated as of August 26, 1992 (b)

10.2     -- Asset Purchase Agreement and Contribution Agreement dated as of November 24, 1993 among Comcast Corporation, et al. and
            Muzak Limited Partnership (b)

10.3     -- Amended and Restated Credit Agreement dated as of September 4, 1992, as amended as of October 22, 1992 and as of
            December 15, 1993; and as amended and restated as of January 31, 1994 among Muzak Limited Partnership, Union Bank of
            Switzerland, New York Branch, Internationale Nederlanden (U.S.) Capital Corporation and the other Lenders parties
            thereto and Union Bank of Switzerland, New York Branch, as Agent; as amended by Waiver and Agreement dated as of
            February 10, 1994; Waiver and Amendment No. 1 dated as of October 31, 1994; Waiver and Amendment No. 2 dated as of
            November 2, 1994; Amendment No. 3 and Consent dated as of November 4, 1994; Amendment No. 4 to Amended and Restated
            Credit Agreement dated as of November 17,1994; Waiver dated January 10, 1995; Waiver dated as of July 31, 1995;
            Amendment No. 5 to Amended and Restated Credit Agreement dated as of November 7, 1995; and Waiver dated as of April 1,
            1996 (b)

10.4     -- Amended and Restated Term Notes issued as of September 4, 1992, amended and restated as of January 31, 1994 (b)

10.5     -- Subordinated Loan Agreement dated as of September 4, 1992, as amended, between Muzak Limited Partnership and Barclays
            Bank PLC, New York Branch (b)

10.6     -- Option Agreement dated as of September 4, 1992 between Muzak Limited Partnership and Barclays Bank PLC, New York
            Branch (b)

10.7     -- Uplink Facility Agreement dated as of December 28, 1995 between EchoStar Satellite Corporation and Muzak Limited
            Partnership (b)

10.8     -- DBS Programming Affiliation Agreement dated as of December 28, 1995 between EchoStar Satellite Corporation and Muzak
            Limited Partnership (b)

10.9     -- Video Programming Sales Agent Agreement dated as of December 28, 1995 between EchoStar Satellite Corporation and Muzak
            Limited Partnership (b)

10.10    -- Form of Muzak-Registered Trademark- Participating Affiliate Agreement (b)

10.11    -- Third and Board Office Lease dated June 8, 1994, between Martin Selig and Muzak Limited Partnership (b)

10.12    -- ASCAP License (b)

10.13    -- Joint Venture Agreement dated August 2, 1995 between Muzak Limited Partnership and Alcas Holdings B.V. (b)

10.14    -- Muzak-Registered Trademark- Master Affiliate Agreement (Mexico) dated March 1, 1992 between Muzak Limited Partnership
            and Audioplan S.A. (b)

10.15    -- Muzak-Registered Trademark- Master Affiliate Agreement (Canada) dated August 30, 1990 between Muzak Limited Partnership
            and Chum Limited, as amended (b)

10.16    -- FCC Licenses (b)

10.17    -- Form of License Agreement (New Franchise Agreement), as amended (b)

10.18    -- Form of Music Services Agreement (b)
</TABLE>

                                       62
<PAGE>
<TABLE>
<CAPTION>

Exhibit
  No.                                                            Description
-------  -----------------------------------------------------------------------------------------------------------------------
<S>      <C>
10.19    -- Form of Multi-Territory Account Service Agreement (b)

10.20    -- Form of Sales of Adjunct Services and Form of Muzak Adjunct Services Subscriber Agreement (b)

10.21    -- Transponder Lease Agreement dated December 9, 1993 between Microspace Communications Corporation and Muzak Limited
            Partnership (b)

10.22    -- Transmission Lease Agreement dated January 31, 1995 between Microspace Communications Corporation and Muzak and Limited
            Partnership (b)

10.23    -- Transponder Lease Agreement dated January 31, 1995 between Microspace Communications Corporation and Muzak Limited
            Partnership (b)

10.24    -- Transponder Lease Agreement dated April 27, 1995 between Microspace Communications Corporation and Muzak Limited
            Partnership (b)

10.25    -- Transponder Lease Agreement dated July 5, 1995 between Microspace Communications Corporation and Muzak Limited
            Partnership (b)

10.26    -- Transponder Lease Agreement dated April 29, 1996 between Microspace Communications Corporation and Muzak Limited
            Partnership (b)

10.27    -- Agreement to Provide Telecommunications Service dated August 8 and 9, 1995 between Keystone Communications Corporation
            and Muzak Limited Partnership (b)

10.28    -- Sales Agreement and License dated September 28, 1995 between Mainstream Data, Inc. and Muzak Limited Partnership (b)

10.29    -- Muzak Limited Partnership Tempo Savings and Retirement Plan (b)

10.30    -- Muzak Limited Partnership Tempo Savings and Retirement Trust (b)

10.31    -- Muzak Limited Partnership Management Incentive Plan (b)

10.32    -- Muzak Limited Partnership Management Option Plan (b)

10.35    -- Employment Agreement dated August 31, 1992 of John R. Jester (b)

10.36    -- Employment Agreement dated August 31, 1992 of James F. Harrison (b)

10.37    -- Employment Letter dated July 7, 1995 of Kirk A. Collamer (b)

10.38    -- Amended and Restated Management Option Plan (b)

10.39    -- Employment Agreement dated May 28, 1997 of William A. Boyd (a)

10.40    -- Employment Agreement dated June 12, 1997 of Charles A. Saldarini (a)

   12    -- Statement of Computations of Ratios of Earnings to Fixed Charges (a)

   21    -- List of Subsidiaries of the Registrants (b)

   27    -- Financial Data Schedules (a)
</TABLE>

----------------------------------
(a) Filed herewith
(b) Previously filed as Exhibits to Registration Statement No.'s 333-03741 and
    333-03741-01 filed with the Securities and Exchange Commission.

                                       63
<PAGE>
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                                       67