SECURITIES AND EXCHANGE COMMISSION
                             Washington, D. C. 20549

                                    FORM 10-Q

[ x ]  QUARTERLY  REPORT  PURSUANT  TO  SECTION  13 OR 15(d)  OF THE  SECURITIES
EXCHANGE ACT of 1934 for the quarterly period ended September 30, 1998, or

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT of 1934 for the transition period from to .

Commission file number 1-12259

                                TIME WARNER INC.
             (Exact name of registrant as specified in its charter)

                 Delaware                               13-3527249
     (State or other jurisdiction of                (I.R.S. Employer
      incorporation or organization)             Identification Number)

                              75 Rockefeller Plaza
                            New York, New York 10019
                                 (212) 484-8000

         (Address,  including zip code,  and telephone  number,  including  area
             code, of registrant's principal executive offices)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days.    Yes x      No

Indicate the number of shares  outstanding  of each of the  issuer's  classes of
common stock, as of the latest practicable date.

      Common Stock - $.01 par value                          556,423,784
Series LMCN-V Common Stock - $.01 par value                   57,061,942 
-------------------------------------------                   ---------- 
        Description of Class                              Shares Outstanding
                                                        as of October 31, 1998
<PAGE>


                              TIME WARNER INC. AND
                     TIME WARNER ENTERTAINMENT COMPANY, L.P.

                               INDEX TO FORM 10-Q

                                                                      Page 
                                                                      ---- 
                                                                 Time
                                                                 Warner    TWE
                                                                 ------    ---

PART I.  FINANCIAL INFORMATION
    Management's discussion and analysis of results of operations
       and financial condition...................................    1      47
    Consolidated balance sheets at September 30, 1998 and
       December 31, 1997.........................................   21      58
    Consolidated statements of operations for the three and
       nine months ended September 30, 1998 and 1997.............   22      59
    Consolidated statements of cash flows for the nine
       months ended September 30, 1998 and 1997..................   23      60
    Consolidated statement of shareholders' equity and
       partnership capital for the nine
       months ended September 30, 1998 and 1997..................   24      61
    Notes to consolidated financial statements...................   25      62
    Supplementary information....................................   39      


PART II.  OTHER INFORMATION......................................   70

<PAGE>


                               TIME WARNER INC.
                     MANAGEMENT'S DISCUSSION AND ANALYSIS
               OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

      Time Warner Inc. ("Time Warner" or the "Company")  classifies its business
interests into four fundamental areas: Entertainment,  consisting principally of
interests  in  recorded  music  and  music  publishing,   filmed  entertainment,
television production and television  broadcasting;  Cable Networks,  consisting
principally of interests in cable television programming; Publishing, consisting
principally  of interests in magazine  publishing,  book  publishing  and direct
marketing;  and Cable,  consisting  principally of interests in cable television
systems.  A  majority  of  Time  Warner's  interests  in  filmed  entertainment,
television production, television broadcasting and cable television systems, and
a portion of its  interests in cable  television  programming,  are held through
Time Warner Entertainment  Company,  L.P. ("TWE").  Time Warner owns general and
limited  partnership  interests  in TWE  consisting  of  74.49%  of the pro rata
priority  capital  ("Series A Capital") and residual  equity capital  ("Residual
Capital"), and 100% of the senior priority capital ("Senior Capital") and junior
priority capital ("Series B Capital").  The remaining 25.51% limited partnership
interests  in the  Series A Capital  and  Residual  Capital of TWE are held by a
subsidiary of MediaOne Group,  Inc.  ("MediaOne"),  formerly U S WEST, Inc. Time
Warner  does  not   consolidate   TWE  and  certain   related   companies   (the
"Entertainment  Group")  for  financial  reporting  purposes  because of certain
limited partnership rights related to TWE's interest in certain cable television
systems.  Capitalized  terms are as defined and  described  in the  accompanying
consolidated financial statements, or elsewhere herein.

Use of EBITA

      Time Warner evaluates  operating  performance based on several factors, of
which  the  primary   financial  measure  is  operating  income  before  noncash
amortization  of  intangible  assets  ("EBITA").  Consistent  with  management's
financial  focus on  controlling  capital  spending,  EBITA  measures  operating
performance  after charges for depreciation.  In addition,  EBITA eliminates the
uneven effect across all business  segments of  considerable  amounts of noncash
amortization of intangible assets recognized in business combinations  accounted
for by the purchase  method,  including  the $14 billion  acquisition  of Warner
Communications Inc. in 1989, the $6.2 billion acquisition of Turner Broadcasting
System,  Inc.  in 1996 and the $2.3  billion of cable  acquisitions  in 1996 and
1995.  The exclusion of noncash  amortization  charges is also  consistent  with
management's  belief  that  Time  Warner's  intangible  assets,  such  as  cable
television and sports  franchises,  music  catalogues and  copyrights,  film and
television  libraries and the goodwill associated with its brands, are generally
increasing  in value and  importance  to Time  Warner's  business  objective  of
creating,   extending  and  distributing   recognizable  brands  and  copyrights
throughout  the world.  As such,  the  following  comparative  discussion of the
results of operations of Time Warner and the Entertainment Group includes, among
other factors, an analysis of changes in business segment EBITA. However,  EBITA
should be considered in addition to, not as a substitute for,  operating income,
net income and other  measures of financial  performance  reported in accordance
with generally accepted accounting principles.

RESULTS OF OPERATIONS

      As more  fully  described  herein,  Time  Warner's  and the  Entertainment
Group's  1998  operating  results  have been  affected by certain  cable-related
transactions,  including  (i) the  transfer  of  cable  television  systems  (or
interests therein) serving  approximately 650,000 subscribers that were formerly
owned by  subsidiaries  of Time Warner to the  TWE-Advance/Newhouse  Partnership
("TWE-A/N"), subject to approximately $1 billion of debt, in exchange for common
and  preferred  partnership  interests  therein,  as  well  as  certain  related
transactions (collectively, the "TWE-A/N Transfers"), (ii) the transfer of TWE's
and  TWE-A/N's  direct  broadcast  satellite  operations  and related  assets to
Primestar,   Inc.,  a  separate   holding   company  (the   "Primestar   Roll-up
Transaction"), (iii) the reorganization
<PAGE>


of Time Warner Cable's business  telephony  operations (the "Business  Telephony
Reorganization"),  (iv) the  formation of a joint  venture to operate and expand
Time  Warner  Cable's  and  MediaOne's   existing   high-speed  Internet  access
businesses  (the "Road  Runner Joint  Venture")  and (v) the sale or exchange of
certain  cable  television  systems.  The  effects  of  these  transactions  are
described elsewhere herein.

      EBITA and operating income for Time Warner and the Entertainment Group for
the three and nine months ended September 30, 1998 and 1997 are as follows:

<TABLE>
<CAPTION>


                                           Three Months Ended September 30,        Nine Months Ended September 30,
                                           --------------------------------        -------------------------------
                                              EBITA           Operating Income           EBITA          Operating Income
                                              -----           ----------------           -----          ----------------
                                          1998       1997      1998       1997       1998       1997      1998      1997
                                          ----       ----      ----       ----       ----       ----      ----      ----
                                                                            (millions)
Time Warner:
<S>                                    <C>        <C>        <C>          <C>       <C>       <C>       <C>        <C>  
Publishing                             $   112    $    98    $  102       $ 87      $ 373     $  331    $  346     $ 303
Music                                       99         90        30         17        288        314        80        99
Cable Networks-TBS                         154        128       104         83        505        407       355       267
Filmed Entertainment-TBS                    71         68        47         42         94        103        30        36
Cable                                       81        107        33         38        229        316        79       108
Intersegment elimination                    (1)        (4)       (1)        (4)       (21)       (11)      (21)      (11)
                                       -------    -------   -------    -------    -------    -------   -------   -------

Total                                  $   516    $   487    $  315       $263     $1,468     $1,460    $  869     $ 802
                                       =======    =======    ======    =======    =======    =======   =======   =======

Entertainment Group:
Filmed Entertainment-Warner Bros       $   162    $   106    $  129       $ 75     $  403     $  320     $ 304     $ 229
Broadcasting-The WB Network                (17)       (21)      (17)       (21)       (78)       (60)      (80)      (60)
Cable Networks-HBO                         117        102       117        102        339        291       339       291
Cable (a)                                  336        257       240        179      1,017        759       731       530
                                       -------    -------   -------    -------    -------    -------   -------   -------

Total                                  $   598    $   444    $  469       $335     $1,681    $ 1,311    $1,294     $ 990
                                       =======    =======   =======    =======    =======    ========  =======   =======
-------
(a)Includes net pretax gains  recognized in connection with the sale or exchange
   of certain  cable  television  systems of  approximately  $6 million  and $16
   million for the three months ended September 30, 1998 and 1997, respectively,
   and  approximately  $90 million  and $40  million  for the nine months  ended
   September 30, 1998 and 1997, respectively.

</TABLE>

Three  Months  Ended  September  30,  1998  Compared  to  Three  Months  Ended
September 30, 1997

      Time Warner had  revenues of $3.578  billion and net income of $39 million
($.06 loss per common share after preferred dividend requirements) for the three
months ended September 30, 1998,  compared to revenues of $3.231 billion, a loss
of $28 million before an extraordinary loss on the retirement of debt ($.19 loss
per common share after preferred  dividend  requirements)  and a net loss of $35
million  ($.20 loss per common  share) for the three months ended  September 30,
1997. Time Warner's equity in the pretax income of the  Entertainment  Group was
$164  million for the three  months ended  September  30, 1998,  compared to $96
million for the three months ended September 30, 1997.

      Time  Warner's  net income  increased  to $39 million for the three months
ended  September  30, 1998,  compared to a net loss of $35 million for the three
months ended  September 30, 1997. As discussed  more fully below,  this increase
principally  resulted  from an overall  increase in business  segment  operating
income,  higher  income from Time  Warner's  equity in the pretax  income of the
Entertainment Group, lower interest expense associated with Time
<PAGE>


Warner's debt reduction efforts and the TWE-A/N Transfers,  and the absence of a
$7 million  extraordinary loss on the retirement of debt recognized in 1997. The
positive  effect of these  increases  was offset in part by higher  losses  from
certain  investments  accounted for under the equity  method of  accounting  and
lower gains on foreign exchange contracts.

      The  Entertainment  Group had revenues of $3.222 billion and net income of
$173 million for the three months ended September 30, 1998, compared to revenues
of $2.857  billion  and net income of $80  million  for the three  months  ended
September 30, 1997. As discussed more fully below, the Entertainment Group's net
income  increased  in 1998 as  compared  to 1997  principally  due to an overall
increase in operating income generated by its business  segments  (including the
positive  effect of the  TWE-A/N  Transfers),  offset in part by an  increase in
interest  expense  associated  with the TWE-A/N  Transfers,  higher  losses from
certain  investments  accounted for under the equity  method of  accounting  and
lower gains on foreign exchange contracts.

      The relationship between income before income taxes and income tax expense
of Time Warner is  principally  affected  by the  amortization  of goodwill  and
certain other  financial  statement  expenses that are not deductible for income
tax  purposes.  Income tax  expense of Time  Warner  includes  all income  taxes
related  to its  allocable  share of  partnership  income  and its equity in the
income tax expense of corporate subsidiaries of the Entertainment Group.

Time Warner

      Publishing.  Revenues  increased  to $1.076  billion,  compared  to $1.027
billion in the third quarter of 1997.  EBITA  increased to $112 million from $98
million.  Operating income increased to $102 million from $87 million.  Revenues
benefited primarily from significant increases in magazine advertising revenues,
as well as  increases  in magazine  circulation  revenues.  Contributing  to the
revenue gains were increases achieved by People, Sports Illustrated, Fortune and
In Style.  EBITA and operating income  increased  principally as a result of the
revenue gains,  cost savings and gains on the sale of certain assets,  offset in
part by lower results from direct marketing operations.

      Music. Revenues increased to $938 million, compared to $880 million in the
third  quarter  of 1997.  EBITA  increased  to $99  million  from  $90  million.
Operating income increased to $30 million from $17 million.  Revenues  benefited
from an increase in domestic and international  recorded music sales principally
relating to higher compact disc sales of a broad range of popular  releases from
new and established  artists and movie soundtracks,  as well as lower returns of
product. At the end of September 1998, the Music division had a leading domestic
market  share of 20%, as  measured  by  SoundScan.  EBITA and  operating  income
increased  principally as a result of the revenue gains, offset in part by lower
results from direct marketing operations.

      Cable Networks-TBS.  Revenues increased to $825 million,  compared to $748
million in the third quarter of 1997.  EBITA increased to $154 million from $128
million.  Operating income increased to $104 million from $83 million.  Revenues
benefited  from an  increase  in  subscription  and  advertising  revenues.  The
increase in subscription  revenues  principally related to the conversion of TBS
Superstation   from  an   advertiser-supported   broadcast   superstation  to  a
copyright-paid,  cable  television  service,  which allows TBS  Superstation  to
charge cable operators for the right to carry its cable television  programming.
Subscription   revenues   also   increased   as  a  result  of  an  increase  in
subscriptions,  primarily at CNN, Cartoon Network, TNT/Cartoon Europe and Turner
Classic
<PAGE>


Movies, and  higher rates.  The increase  in advertising  revenues  was due to a
strong overall advertising market for most of the division's networks, including
Cartoon Network, TNT/Cartoon Europe and CNN Headline News. These advertising and
subscription  revenue increases more than offset reductions  attributable to the
absence of National  Football  League  programming  on TNT.  EBITA and operating
income  increased  principally  as a  result  of the  revenue  gains  and  lower
programming costs at TNT, offset in part by higher  programming costs at CNN and
losses associated with the Goodwill Games.

      Filmed Entertainment-TBS.  Revenues increased to $543 million, compared to
$363 million in the third quarter of 1997.  EBITA  increased to $71 million from
$68  million.  Operating  income  increased  to $47  million  from $42  million.
Revenues  benefited from a significant  increase in syndication  sales resulting
from the  renewal by  existing  television  station  customers  of  second-cycle
broadcasting rights for Seinfeld, as well as an increase in worldwide theatrical
and home video revenues at New Line Cinema. EBITA and operating income increased
principally  as a  result  of the  revenue  gains,  offset  in  part  by  higher
participation costs payable to creative talent.

      Cable. Revenues decreased to $236 million, compared to $248 million in the
third  quarter  of 1997.  EBITA  decreased  to $81  million  from $107  million.
Operating income decreased to $33 million from $38 million. The Cable division's
1998  operating  results were reduced by the aggregate net impact of the TWE-A/N
Transfers  and the  deconsolidation  of certain of its  operations in connection
with  each  of  the  Primestar  Roll-up  Transaction,   the  Business  Telephony
Reorganization and the formation of the Road Runner Joint Venture. Excluding the
effect of these transactions,  revenues increased  principally as a result of an
increase in basic  cable  subscribers,  increases  in  regulated  cable rates as
permitted  under  Time  Warner  Cable's  "social   contract"  with  the  Federal
Communications  Commission  ("FCC")  and an increase  in  advertising  revenues.
Similarly excluding the effect of these transactions, EBITA and operating income
increased principally as a result of the revenue gains, offset in part by higher
depreciation related to capital spending.

      Interest  and Other,  Net.  Interest  and other,  net,  increased  to $311
million in the third  quarter  of 1998,  compared  to $309  million in the third
quarter of 1997.  Interest expense  decreased to $214 million,  compared to $258
million in the third  quarter of 1997,  principally  due to lower  average  debt
levels  associated  with the Company's  debt  reduction  efforts and the TWE-A/N
Transfers.  Other expense, net, increased to $97 million in the third quarter of
1998 from $51  million  in the third  quarter  of 1997,  principally  because of
higher losses from certain investments  accounted for under the equity method of
accounting and lower gains on foreign exchange contracts.

Entertainment Group

      Filmed  Entertainment-Warner  Bros.  Revenues increased to $1.729 billion,
compared to $1.399 billion in the third quarter of 1997. EBITA increased to $162
million from $106 million.  Operating  income increased to $129 million from $75
million. Revenues benefited from a significant increase in television production
and  distribution  operations  principally  relating to the initial  off-network
domestic  syndication  availability of Friends and the initial off-network basic
cable availability of ER. EBITA and operating income benefited  principally from
the revenue gains,  offset in part by lower  international  syndication sales of
library  product  and film  write-offs  relating  to  disappointing  results for
certain theatrical releases.
<PAGE>


     Broadcasting - The WB Network.  Revenues increased to $64 million, compared
to $31 million in the third quarter of 1997. EBITA and operating income improved
to a loss of $17 million  from a loss of $21  million.  Revenues  increased as a
result of higher  advertising sales relating to improved  television ratings and
the addition of a fourth night of prime-time  programming  in January 1998 and a
fifth night in September 1998. Operating losses improved principally as a result
of the revenue gains, offset in part by higher programming costs associated with
the expanded programming schedule and a lower allocation of losses to a minority
partner in the network.  Due to the start-up  nature of this national  broadcast
operation, losses are expected to continue.

      Cable Networks-HBO.  Revenues increased to $505 million,  compared to $482
million in the third quarter of 1997.  EBITA and operating  income  increased to
$117 million from $102 million. Revenues benefited primarily from an increase in
subscriptions.  EBITA and operating income increased  principally as a result of
the revenue gains and, to a lesser  extent,  cost savings and higher income from
Comedy Central, a 50%-owned equity investee.

      Cable. Revenues decreased to $1.052 billion, compared to $1.060 billion in
the third  quarter of 1997.  EBITA  increased to $336 million from $257 million.
Operating  income  increased  to $240  million  from  $179  million.  The  Cable
division's 1998 operating results were positively  affected by the aggregate net
impact of the  TWE-A/N  Transfers  and the  deconsolidation  of  certain  of its
operations in connection  with each of the Primestar  Roll-up  Transaction,  the
Business  Telephony  Reorganization  and the  formation of the Road Runner Joint
Venture.  Excluding  the  effect  of  these  transactions,   revenues  increased
principally as a result of an increase in basic cable subscribers,  increases in
regulated cable rates as permitted  under Time Warner Cable's "social  contract"
with the FCC and an increase in advertising  revenues.  Similarly  excluding the
effect of these transactions,  EBITA and operating income increased  principally
as a result of the revenue gains,  offset in part by lower net gains relating to
the sale or exchange of certain cable television systems and higher depreciation
related to capital spending.

      Interest and Other,  Net. Interest and other, net, was $203 million in the
third  quarter of 1998,  compared to $146 million in the third  quarter of 1997.
Interest  expense  increased  to $145  million,  compared to $124 million in the
third quarter of 1997,  principally due to higher average debt levels associated
with the TWE-A/N Transfers.  There was other expense, net, of $58 million in the
third  quarter of 1998,  compared to $22  million in the third  quarter of 1997,
principally  due to higher losses from certain  investments  accounted for under
the equity method of accounting,  lower gains on foreign exchange  contracts and
higher losses associated with TWE's asset securitization program.

Nine Months Ended  September 30, 1998 Compared to Nine Months Ended  September
30, 1997

      Time Warner had revenues of $10.387  billion and net income of $78 million
($.27 loss per common share after preferred dividend  requirements) for the nine
months ended September 30, 1998, compared to revenues of $9.458 billion,  income
of $54 million before an extraordinary loss on the retirement of debt ($.33 loss
per common share) and net income of $30 million ($.37 loss per common share) for
the nine months ended  September 30, 1997.  Time  Warner's  equity in the pretax
income of the  Entertainment  Group was $437  million for the nine months  ended
September 30, 1998, compared to $522 million for the nine months ended September
30, 1997.

      Time  Warner's  net income  increased  to $78  million for the nine months
ended  September  30,  1998,  compared to net income of $30 million for the nine
months ended September 30, 1997. As discussed more fully below,
<PAGE>


net income increased  despite  significantly  lower aggregate,  net pretax gains
recognized  by TWE in  connection  with the sale or  exchange  of certain  cable
television  systems  in each  year and the 1997  sale of  TWE's  interest  in E!
Entertainment Television, Inc. ("E! Entertainment"). These pretax gains amounted
to  approximately  $90 million in 1998 ($.07 per common  share) and $290 million
($.30 per common share) in 1997. The negative effect of these gains on operating
trends,  as well as higher losses from certain  investments  accounted for under
the equity method of accounting and lower gains on foreign  exchange  contracts,
was more than  offset by an  overall  increase  in  business  segment  operating
income,  lower  interest  expense  associated  with Time Warner's debt reduction
efforts  and  the  TWE-A/N   Transfers,   and  the  absence  of  a  $24  million
extraordinary loss on the retirement of debt recognized in 1997.

      The  Entertainment  Group had revenues of $8.987 billion and net income of
$437 million for the nine months ended September 30, 1998,  compared to revenues
of $8.190  billion  and net income of $487  million  for the nine  months  ended
September  30, 1997. As discussed  more fully below and as previously  described
above,  the  Entertainment  Group's net income  decreased in 1998 as compared to
1997  principally  due  to  significantly  lower  aggregate,  net  pretax  gains
recognized in connection  with the sale or exchange of certain cable  television
systems in each year and the 1997 sale of TWE's  interest  in E!  Entertainment.
Excluding the effect of these transactions, the Entertainment Group's net income
increased in 1998  principally  as a result of an overall  increase in operating
income generated by its business segments  (including the positive effect of the
TWE-A/N Transfers), offset in part by an increase in interest expense associated
with the TWE-A/N Transfers, higher losses from certain investments accounted for
under the  equity  method of  accounting  and lower  gains on  foreign  exchange
contracts.

      The relationship between income before income taxes and income tax expense
of Time Warner is  principally  affected  by the  amortization  of goodwill  and
certain other  financial  statement  expenses that are not deductible for income
tax  purposes.  Income tax  expense of Time  Warner  includes  all income  taxes
related  to its  allocable  share of  partnership  income  and its equity in the
income tax expense of corporate subsidiaries of the Entertainment Group.

Time Warner

      Publishing.  Revenues  increased  to $3.160  billion,  compared  to $3.004
billion in the first nine months of 1997.  EBITA  increased to $373 million from
$331  million.  Operating  income  increased to $346 million from $303  million.
Revenues benefited primarily from significant  increases in magazine advertising
revenues, as well as increases in magazine circulation revenues. Contributing to
the revenue gains were increases achieved by People, Time, Fortune and In Style.
EBITA and  operating  income  increased  principally  as a result of the revenue
gains and cost savings,  offset in part by lower  results from direct  marketing
operations.

      Music. Revenues increased to $2.731 billion, compared to $2.635 billion in
the first  nine  months  of 1997.  EBITA  decreased  to $288  million  from $314
million.  Operating income  decreased to $80 million from $99 million.  Revenues
benefited  from an increase in domestic and  international  recorded music sales
principally  relating to higher  compact  disc sales of a broad range of popular
releases  from new and  established  artists and movie  soundtracks,  as well as
lower returns of product. At the end of September 1998, the Music division had a
leading  domestic  market  share of 20%, as measured by  SoundScan.  Despite the
revenue increase, EBITA and operating income declined principally as a result of
lower results from direct marketing  operations,  the negative effect of changes
in
<PAGE>


foreign currency  exchange rates on international  recorded music operations and
the absence of certain one-time gains recognized in 1997.

      Cable  Networks-TBS.  Revenues  increased to $2.459  billion,  compared to
$2.092 billion in the first nine months of 1997. EBITA increased to $505 million
from $407 million. Operating income increased to $355 million from $267 million.
Revenues  benefited from an increase in subscription  and advertising  revenues.
The increase in subscription  revenues  principally related to the conversion of
TBS  Superstation  from  an  advertiser-supported  broadcast  superstation  to a
copyright-paid,  cable  television  service,  which allows TBS  Superstation  to
charge cable operators for the right to carry its cable television  programming.
Subscription   revenues   also   increased   as  a  result  of  an  increase  in
subscriptions,  primarily at CNN, Cartoon Network, TNT/Cartoon Europe and Turner
Classic  Movies,  and higher  rates.  The increase in  advertising  revenues was
principally  due  to a  strong  overall  advertising  market  for  most  of  the
division's  networks,  including TNT, Cartoon Network, CNN International and CNN
Headline News. EBITA and operating  income increased  principally as a result of
the revenue gains and lower  programming  costs at TNT, offset in part by higher
programming costs at CNN and losses associated with the Goodwill Games.

      Filmed  Entertainment-TBS.  Revenues increased to $1.419 billion, compared
to $1.097  billion  in the first nine  months of 1997.  EBITA  decreased  to $94
million from $103 million.  Operating  income  decreased to $30 million from $36
million.  Revenues  benefited from a significant  increase in syndication  sales
resulting  from  the  renewal  by  existing   television  station  customers  of
second-cycle  broadcasting  rights  for  Seinfeld,  as  well as an  increase  in
worldwide  theatrical  and home video  revenues at New Line Cinema.  Despite the
revenue increase,  EBITA and operating income decreased  principally as a result
of film write-offs relating to disappointing  results for theatrical releases of
Castle Rock Entertainment.

      Cable. Revenues decreased to $726 million, compared to $740 million in the
first nine months of 1997.  EBITA  decreased to $229 million from $316  million.
Operating  income  decreased  to  $79  million  from  $108  million.  The  Cable
division's 1998 operating results were negatively  affected by the aggregate net
impact of the  TWE-A/N  Transfers  and the  deconsolidation  of  certain  of its
operations in connection  with each of the Primestar  Roll-up  Transaction,  the
Business  Telephony  Reorganization  and the  formation of the Road Runner Joint
Venture.  Excluding  the  effect  of  these  transactions,   revenues  increased
principally as a result of an increase in basic cable subscribers,  increases in
regulated cable rates as permitted  under Time Warner Cable's "social  contract"
with the FCC and an increase in advertising  revenues.  Similarly  excluding the
effect of these transactions,  EBITA and operating income increased  principally
as a result of the revenue gains, offset in part by higher depreciation  related
to  capital  spending  and the  absence  of a gain on the sale of an  investment
recognized in 1997.

      Interest  and Other,  Net.  Interest  and other,  net,  decreased  to $877
million in the first nine months of 1998,  compared to $904 million in the first
nine months of 1997.  Interest  expense  decreased to $669 million,  compared to
$792 million in the first nine months of 1997,  principally due to lower average
debt levels associated with the Company's debt reduction efforts and the TWE-A/N
Transfers.  Other  expense,  net,  increased  to $208  million in the first nine
months of 1998 from $112  million in the first nine months of 1997,  principally
because of losses from certain investments accounted for under the equity method
of  accounting,  lower gains on foreign  exchange  contracts  and higher  losses
associated with the Company's asset securitization program.
<PAGE>


Entertainment Group

      Filmed  Entertainment-Warner  Bros.  Revenues increased to $4.371 billion,
compared to $3.830 billion in the first nine months of 1997.  EBITA increased to
$403 million from $321 million.  Operating income increased to $304 million from
$229  million.  Revenues  benefited  from a  significant  increase in television
production  and  distribution  operations  principally  relating  to the initial
off-network  domestic  syndication  availability  of  Friends  and  the  initial
off-network  basic cable  availability of ER, as well as an increase in revenues
from  consumer  products  licensing  operations.   EBITA  and  operating  income
benefited   principally  from  the  revenue  gains,  offset  in  part  by  lower
international  syndication sales of library product and film write-offs relating
to disappointing results for certain theatrical releases. In addition, EBITA and
operating  income for each period included certain one-time gains on the sale of
assets  that  were  comparable  in  amount  and  therefore,  did  not  have  any
significant effect on operating trends.

      Broadcasting  - The  WB  Network.  Revenues  increased  to  $170  million,
compared to $84 million in the first nine months of 1997.  EBITA  decreased to a
loss of $78 million from a loss of $60 million.  Operating  losses  increased to
$80  million  from  $60  million.  Revenues  increased  as a  result  of  higher
advertising sales relating to improved  television ratings and the addition of a
fourth  night of  prime-time  programming  in January  1998 and a fifth night in
September 1998. Despite the revenue increase, operating losses increased because
of a lower allocation of losses to a minority  partner in the network.  However,
excluding this minority interest effect,  operating losses improved  principally
as a result of the revenue gains,  which  outweighed  higher  programming  costs
associated with the expanded programming schedule. Due to the start-up nature of
this national broadcast operation, losses are expected to continue.

      Cable  Networks-HBO.  Revenues  increased to $1.526  billion,  compared to
$1.452  billion in the first nine  months of 1997.  EBITA and  operating  income
increased to $339 million from $291 million.  Revenues benefited  primarily from
an increase in subscriptions.  EBITA and operating income increased  principally
as a result of the  revenue  gains and,  to a lesser  extent,  cost  savings and
higher income from Comedy Central, a 50%-owned equity investee.

      Cable. Revenues increased to $3.289 billion, compared to $3.146 billion in
the first nine  months of 1997.  EBITA  increased  to $1.017  billion  from $759
million. Operating income increased to $731 million from $530 million. The Cable
division's 1998 operating results were positively  affected by the aggregate net
impact of the  TWE-A/N  Transfers  and the  deconsolidation  of  certain  of its
operations in connection  with each of the Primestar  Roll-up  Transaction,  the
Business  Telephony  Reorganization  and the  formation of the Road Runner Joint
Venture.  Excluding  the  effect  of  these  transactions,   revenues  increased
principally as a result of an increase in basic cable subscribers,  increases in
regulated cable rates as permitted  under Time Warner Cable's "social  contract"
with the FCC and an increase in advertising  revenues.  Similarly  excluding the
effect of these transactions,  EBITA and operating income increased  principally
as a result of the  revenue  gains and higher net gains  relating to the sale or
exchange  of  certain  cable  television  systems,  offset  in  part  by  higher
depreciation related to capital spending.

      Interest  and Other,  Net.  Interest  and other,  net,  increased  to $550
million in the first nine months of 1998,  compared to $157 million in the first
nine months of 1997.  Interest  expense  increased to $418 million,  compared to
$360 million in the first nine months of 1997, principally due to higher average
debt levels associated with the TWE-A/N Transfers. There was other expense, net,
of $132 million in the first nine months of 1998, compared
<PAGE>


to other  income,  net,  of $203  million  in the  first  nine  months  of 1997,
principally due to the absence of an approximate $250 million pretax gain on the
sale of an interest in E!  Entertainment  recognized in 1997, higher losses from
certain investments  accounted for under the equity method of accounting,  lower
gains on foreign  exchange  contracts  and higher losses  associated  with TWE's
asset securitization program.

FINANCIAL CONDITION AND LIQUIDITY
September 30, 1998

Time Warner

Financial Condition

      At September 30, 1998,  Time Warner had $9.1 billion of debt, $393 million
of cash and equivalents (net debt of $8.7 billion), $1.015 billion of borrowings
against future stock option  proceeds,  $575 million of  mandatorily  redeemable
preferred  securities  of a  subsidiary,  $1.9 billion of Series M  exchangeable
preferred  stock  (see  "Planned   Redemption  of  Series  M  Preferred   Stock"
hereinafter) and $9.1 billion of shareholders' equity, compared to $11.8 billion
of debt, $645 million of cash and equivalents (net debt of $11.2 billion),  $533
million of  borrowings  against  future stock option  proceeds,  $575 million of
mandatorily  redeemable  preferred  securities of a subsidiary,  $1.9 billion of
Series M exchangeable  preferred stock and $9.4 billion of shareholders'  equity
at December 31, 1997. Net debt decreased  principally as a result of the TWE-A/N
Transfers,  the use of cash distributions from TWE to reduce debt and other debt
reduction efforts.

Investment in TWE

      Time  Warner's  investment  in TWE at  September  30,  1998  consisted  of
interests  in 74.49% of the Series A Capital and  Residual  Capital of TWE,  and
100% of the Senior  Capital and Series B Capital of TWE. Such  priority  capital
interests  provide Time Warner (and with  respect to the Series A Capital  only,
MediaOne) with certain priority claims to the net partnership  income of TWE and
distributions   of  TWE  partnership   capital,   including   certain   priority
distributions of partnership  capital in the event of liquidation or dissolution
of TWE. Each level of priority capital  interest  provides for an annual rate of
return equal to or exceeding 8%, including an above-market 13.25% annual rate of
return (11.25% to the extent concurrently  distributed) related to Time Warner's
Series B Capital  interest,  which,  when  taken  together  with  Time  Warner's
contributed capital, represented a cumulative priority Series B Capital interest
of $6.6 billion at September 30, 1998.

      While the TWE  partnership  agreement  contemplates  the  reinvestment  of
significant  partnership  cash  flows in the form of  capital  expenditures  and
otherwise  provides for certain  other  restrictions  that are expected to limit
cash  distributions  on partnership  interests for the foreseeable  future,  TWE
borrowed  $579 million  under its bank credit  agreement in July 1998 and paid a
distribution to Time Warner relating to its Senior Capital interest. Time Warner
used the $579 million of proceeds to reduce bank debt.  Time Warner's  remaining
$591 million Senior Capital  interest and any future  undistributed  partnership
income  allocated  thereto (based on an 8% annual rate of return) is required to
be distributed to Time Warner on July 1, 1999.
<PAGE>


Debt Transactions

      During the  second  quarter  of 1998,  Time  Warner  issued  $600  million
principal  amount of 6.875%  debentures due 2018 and borrowed $550 million under
its bank credit agreement,  which together offset the debt reduction  associated
with the conversion of $1.15 billion accreted amount of zero-coupon  convertible
notes due 2013 (the "Zero-Coupon Convertible Notes") into 18.7 million shares of
Time  Warner  common  stock.  The  net  proceeds  therefrom  have  been  used to
repurchase  common  stock,  including the  repurchase  of 9.1 million  shares of
common stock in connection with the settlement of a forward purchase contract to
acquire such shares (see "Common Stock Repurchase Program"  hereinafter).  These
share repurchases partially offset the dilution resulting from the conversion of
the Zero-Coupon Convertible Notes.

      In April 1998, Time Warner and TWE consummated three previously  announced
transactions,  consisting  of the  sale  of  TWE's  49%  interest  in Six  Flags
Entertainment  Corporation,  the Primestar  Roll-up  Transaction and the sale of
certain cable television systems. As a result of these transactions, Time Warner
and TWE reduced debt by  approximately  $700 million in the aggregate,  of which
$160 million relates to Time Warner and $540 million relates to TWE.

      In February 1998, Time Warner Companies,  Inc. ("TW Companies"),  a wholly
owned subsidiary of Time Warner, repaid all of its $500 million principal amount
of 7.45% notes due February 1, 1998 at their maturity using proceeds raised from
the issuance of $500 million  principal  amount of 6.95%  debentures due January
15, 2028.

      In early 1998, Time Warner transferred approximately $1 billion of debt to
TWE-A/N in connection  with the TWE-A/N  Transfers.  The debt assumed by TWE-A/N
has been guaranteed by TWI Cable Inc., a wholly owned subsidiary of Time Warner,
and certain of its subsidiaries.

      An  extraordinary  loss of $24 million was  recognized  in the nine months
ended September 30, 1997 in connection with certain debt refinancings.

Planned Redemption of Series M Preferred Stock

     In July 1998, Time Warner announced its intention to redeem its outstanding
shares of 10 1/4% Series M  exchangeable  preferred  stock  ("Series M Preferred
Stock") on  December  30,  1998,  at a price  equal to 110% of its $1.9  billion
liquidation  preference  plus  accumulated  and  accrued  and unpaid  dividends,
intending,  based on current borrowing rates, to replace it with lower-cost bank
or public debt (the "Series M Refinancing").  Based on an anticipated 300 to 400
basis  point  reduction  in the  interest  rate  of the  debt  to be  issued  in
comparison to the dividend rate of the Series M Preferred Stock, and including a
reduction in taxes  associated  with the  tax-deductible  nature of the interest
payments on the debt, Time Warner expects to realize  approximately $100 to $125
million  of annual  cash  savings as a result of the  Series M  Refinancing.  As
required  pursuant to the terms of the Series M Preferred  Stock,  Time Warner's
principal  credit rating agencies have confirmed that there will be no impact on
Time  Warner's  current  credit  ratings or ratings  outlook as a result of this
refinancing. In connection with the Series M Refinancing, Time Warner expects to
record  an  estimated  one-time  reduction  in  earnings  per  common  share  of
approximately  $.39 in the fourth quarter of 1998.  This reduction will not have
any impact on net income and  primarily  results from  treating  the  redemption
premium to be paid on the Series M  Preferred  Stock  similarly  to a  preferred
dividend.
 <PAGE>


Common Stock Repurchase Program

      During 1998,  Time Warner  issued  approximately  26.3  million  shares of
common  stock in  connection  with the  conversion  of 12.6  million  shares  of
convertible  preferred stock  (consisting of approximately 5.0 million shares of
Series G preferred stock, 6.3 million shares of Series I preferred stock and 1.3
million shares of Series J preferred  stock).  These conversions are expected to
result in  approximately  $50 million of cash dividend  savings in the aggregate
for Time Warner through the end of 1999.

      As previously described,  in order to offset partially the dilutive effect
relating to the conversion of the  Zero-Coupon  Convertible  Notes,  Time Warner
exercised  its  option  under a  forward  purchase  contract  in June  1998  and
repurchased  9.1 million shares of its common stock at an aggregate cost of $632
million, or $69.12 per common share.

      In  connection  with  these   transactions   and  the  conversion  of  the
Zero-Coupon  Convertible  Notes, Time Warner's Board of Directors  authorized in
1998 an 18.7  million  share  increase in the  Company's  existing  common stock
repurchase program that, along with previous authorizations,  allows the Company
to repurchase, from time to time, up to 53.7 million shares of common stock. The
common stock repurchased under the program is expected to continue to be used to
satisfy a portion of the future  share  issuances  related  to the  exercise  of
existing  employee  stock  options  and  the  potential  conversion  of  certain
convertible  securities.  Actual  repurchases  in any period  will be subject to
market  conditions.  As of  September  30, 1998,  Time Warner had acquired  26.4
million  shares  of its  common  stock in 1998 at an  aggregate  cost of  $1.944
billion. In addition,  in October 1998, Time Warner acquired another 3.2 million
shares of common stock at an aggregate cost of $258 million,  thereby increasing
the cumulative shares purchased under this program to approximately 47.2 million
shares at an aggregate cost of approximately $3 billion.  Except for repurchases
of common stock using $1.1 billion of borrowings  in the second  quarter of 1998
that offset a like-amount  of debt reduction  associated  with the conversion of
the Zero-Coupon Convertible Notes into common stock, these repurchases have been
and are  expected to continue to be funded with stock option  exercise  proceeds
and borrowings  under Time Warner's Stock Option  Proceeds Credit  Facility,  as
described more fully below.

      In early 1998,  Time Warner  entered  into a new  five-year,  $1.3 billion
revolving credit facility (the "Stock Option Proceeds Credit  Facility"),  which
replaced its previously  existing  facility.  Borrowings  under the Stock Option
Proceeds  Credit  Facility are  principally  used to fund stock  repurchases and
future  preferred  dividend  requirements  on Time Warner's Series G, H, I and J
convertible  preferred  stock. At September 30, 1998 and December 31, 1997, Time
Warner had outstanding borrowings against future stock option proceeds of $1.015
billion and $533 million, respectively.

Cash Flows

      During the first nine  months of 1998,  Time  Warner's  cash  provided  by
operations amounted to $1.194 billion and reflected $1.468 billion of EBITA from
its Publishing,  Music, Cable Networks-TBS,  Filmed  Entertainment-TBS and Cable
businesses,  $285  million  of noncash  depreciation  expense,  $102  million of
proceeds from Time  Warner's  asset  securitization  program and $605 million of
distributions  from TWE  (excluding  $455 million  representing  the return of a
portion of the Time Warner General  Partners' Senior Capital  interests that has
<PAGE>


been  classified  as a source  of cash  from  investing  activities),  less $708
million of  interest  payments,  $143  million of income  taxes,  $58 million of
corporate  expenses and $357 million related to an aggregate increase in working
capital  requirements,  other balance  sheet  accounts and noncash  items.  Cash
provided  by  operations  of $639  million  for the  first  nine  months of 1997
reflected  $1.460  billion of business  segment  EBITA,  $277 million of noncash
depreciation  expense  and $354  million of  distributions  from TWE  (similarly
excluding $455 million  representing  the return of a portion of the Time Warner
General  Partners' Senior Capital interests that has been classified as a source
of cash from investing activities), less $822 million of interest payments, $182
million of income  taxes,  $60 million of  corporate  expenses  and $388 million
related to an aggregate increase in working capital requirements,  other balance
sheet accounts and noncash items.

      Cash provided by investing  activities  was $479 million in the first nine
months  of 1998,  compared  to $89  million  in the first  nine  months of 1997,
principally as a result of lower capital expenditures, an increase in investment
proceeds and a decrease in cash used for investments and acquisitions. Cash used
for  investments  and  acquisitions  in 1998 was offset in part by the effect of
consolidating  approximately  $200  million  of cash of  Paragon  Communications
("Paragon")  in  connection  with the TWE-A/N  Transfers.  Capital  expenditures
decreased  to $348  million in the first nine  months of 1998,  compared to $424
million in the first nine months of 1997.

      Cash used by  financing  activities  was $1.925  billion in the first nine
months of 1998,  compared  to $481  million  in the first  nine  months of 1997.
During the first  nine  months of 1998,  excluding  additional  borrowings  that
offset the noncash reduction of $1.15 billion of debt relating to the conversion
of the Zero-Coupon Convertible Notes into common stock, Time Warner reduced debt
by  approximately  $1.8 billion.  Time Warner used proceeds from the  borrowings
associated with the conversion of the Zero-Coupon  Convertible  Notes,  together
with most of the $599 million of proceeds received from the exercise of employee
stock  options and $482 million of net  borrowings  against  future stock option
proceeds, to repurchase  approximately 26.4 million shares of Time Warner common
stock at an aggregate cost of $1.944 billion. Time Warner also paid $394 million
of dividends  in the first nine months of 1998,  compared to $253 million in the
first nine months of 1997,  reflecting  its election in 1998 to pay dividends on
its Series M Preferred Stock in cash rather than in-kind. Cash used by financing
activities in 1997 principally  resulted from approximately $300 million of debt
reduction,  the  repayment of $185 million of  borrowings  against  future stock
option  proceeds,  the repurchase of  approximately  974 thousand shares of Time
Warner common stock at an aggregate  cost of $37 million and the payment of $253
million of dividends,  offset in part by $328 million of proceeds  received from
the exercise of employee stock options.

      The assets and cash flows of TWE are  restricted by certain  borrowing and
partnership  agreements  and are  unavailable  to Time Warner except through the
payment of certain fees, reimbursements, cash distributions and loans, which are
subject to  limitations.  Under its bank credit  agreement,  TWE is permitted to
incur additional  indebtedness to make loans, advances,  distributions and other
cash payments to Time Warner, subject to its individual compliance with the cash
flow coverage and leverage ratio covenants contained therein.

      Management  believes  that Time  Warner's  operating  cash flow,  cash and
equivalents and additional borrowing capacity are sufficient to fund its capital
and liquidity needs for the foreseeable  future without  distributions and loans
from TWE above those permitted by existing agreements.
<PAGE>


Entertainment Group

Financial Condition

      The Entertainment Group had $7.4 billion of debt, $125 million of cash and
equivalents  (net debt of $7.3  billion),  $221 million of preferred  stock of a
subsidiary,  $591 million of Time Warner  General  Partners'  Senior Capital and
$5.9  billion of  partners'  capital at  September  30,  1998,  compared to $6.0
billion  of  debt,  $322  million  of cash  and  equivalents  (net  debt of $5.7
billion), $233 million of preferred stock of a subsidiary,  $1.1 billion of Time
Warner General Partners' Senior Capital and $6.4 billion of partners' capital at
December 31, 1997. Net debt of the Entertainment Group increased  principally as
a result of the TWE-A/N Transfers and cash distributions paid to Time Warner.

Cash Flows

      During the first  nine  months of 1998,  the  Entertainment  Group's  cash
provided by operations  amounted to $1.273 billion and reflected  $1.681 billion
of  EBITA  from  its  Filmed  Entertainment-Warner  Bros.,  Broadcasting-The  WB
Network,  Cable  Networks-HBO  and Cable  businesses,  $698  million  of noncash
depreciation   expense   and  $131   million  of   proceeds   from  TWE's  asset
securitization  program, less $419 million of interest payments,  $57 million of
income taxes,  $54 million of corporate  expenses and $707 million related to an
aggregate increase in working capital requirements, other balance sheet accounts
and noncash items. Cash provided by operations of $918 million in the first nine
months of 1997  reflected  $1.311  billion of  business  segment  EBITA and $706
million of noncash depreciation expense, less $394 million of interest payments,
$55 million of income taxes, $54 million of corporate  expenses and $596 million
related to an aggregate increase in working capital requirements,  other balance
sheet accounts and noncash items.

      Cash used by  investing  activities  was $887  million  in the first  nine
months of 1998,  compared  to $777  million  in the first  nine  months of 1997,
principally  as a result of the  effect of  deconsolidating  approximately  $200
million of Paragon's cash in connection with the TWE-A/N Transfers that has been
included as a reduction of cash flows from investments and acquisitions,  offset
in part by a $96  million  increase in  proceeds  from the sale of  investments.
Capital  expenditures  were $1.092  billion in the first nine months of 1998 and
$1.117 billion in the first nine months of 1997.

      Cash used by  financing  activities  was $583  million  in the first  nine
months  of 1998,  compared  to $61  million  in the first  nine  months of 1997,
principally as a result of the absence of $243 million of aggregate net proceeds
from the issuance of preferred  stock of a  subsidiary  in the first  quarter of
1997 and a $251 million increase in distributions paid to Time Warner, offset in
part by an increase in debt used to fund cash distributions to Time Warner.

      Management  believes that the  Entertainment  Group's operating cash flow,
cash and  equivalents and additional  borrowing  capacity are sufficient to fund
its capital and liquidity needs for the foreseeable future.
<PAGE>


Cable Capital Spending

      Time Warner Cable has been engaged in a plan to upgrade the  technological
capability  and  reliability  of its cable  television  systems  and develop new
services, which it believes will position the business for sustained,  long-term
growth. Capital spending by Time Warner Cable, including the cable operations of
both Time Warner and TWE,  amounted to $1.149  billion in the nine months  ended
September  30,  1998,  compared  to  $1.221  billion  in the nine  months  ended
September  30,  1997.  For the full  year of 1998,  cable  capital  spending  is
expected to be  comparable  to 1997  levels,  with  approximately  $450  million
budgeted  for the  remainder of 1998.  Capital  spending by Time Warner Cable is
expected to continue to be funded by cable  operating cash flow. In exchange for
certain  flexibility in establishing cable rate pricing structures for regulated
services  that went into  effect on  January  1, 1996 and  consistent  with Time
Warner Cable's  long-term  strategic plan, Time Warner Cable agreed with the FCC
to invest a total of $4 billion in capital costs in connection  with the upgrade
of its cable  infrastructure,  which is expected to be  substantially  completed
over a five-year  period ending  December 31, 2000.  The agreement  with the FCC
covers all of the cable operations of Time Warner Cable,  including the owned or
managed cable  television  systems of Time Warner,  TWE and TWE-A/N.  Management
expects to continue to finance such level of investment  through cable operating
cash flow and the development of new revenue  streams from expanded  programming
options, high-speed Internet access and other services.

Cable Financing Strategy

      Time  Warner's  and TWE's cable  financing  strategy is to continue to use
cable operating cash flow to finance the level of capital spending  necessary to
upgrade the technological capability of its cable television systems and develop
new services, while pursuing opportunities to reduce either existing debt and/or
their  share of future  funding  requirements  related  to the cable  television
business and related ancillary businesses.  Consistent with this strategy,  Time
Warner,  TWE and TWE-A/N have  completed a series of  transactions  in 1998,  as
discussed more fully below.

Business Telephony Reorganization

      In  July  1998,  Time  Warner,  TWE and  TWE-A/N  completed  the  Business
Telephony Reorganization by combining their business telephony operations into a
single  entity that is intended to be  self-financing.  This entity,  named Time
Warner  Telecom LLC ("TW  Telecom"),  is a competitive  local  exchange  carrier
(CLEC) in selected metropolitan areas across the United States where it offers a
wide range of telephony services to business  customers.  Time Warner,  MediaOne
and the Advance/Newhouse Partnership ("Advance/Newhouse"), a partner in TWE-A/N,
own  interests in TW Telecom of 61.95%,  18.88% and 19.17%,  respectively.  Time
Warner's  interest in TW Telecom is being  accounted for under the equity method
of accounting because of certain rights held by MediaOne and Advance/Newhouse.

      Following  the  Business  Telephony  Reorganization,   TW  Telecom  raised
approximately  $400  million of cash in July 1998 through the issuance of public
notes that mature in 2008.  Such notes are  non-recourse  to Time Warner and the
proceeds  therefrom  are expected to be used by TW Telecom to continue to expand
and develop its  telephony  networks  and  services.  Due to recent stock market
volatility,  TW Telecom has postponed  indefinitely  its planned  initial public
offering of a minority interest of common stock.
<PAGE>


Road Runner Joint Venture

      In June  1998,  Time  Warner,  TWE,  TWE-A/N,  MediaOne,  Microsoft  Corp.
("Microsoft") and Compaq Computer Corp.  ("Compaq") formed the Road Runner Joint
Venture to operate  and expand  Time  Warner  Cable's  and  MediaOne's  existing
high-speed  Internet  access  businesses.  In exchange  for  contributing  their
existing high-speed  Internet access businesses,  Time Warner received an 11.25%
common  equity  interest in the Road Runner  Joint  Venture,  TWE received a 25%
interest,  TWE-A/N  received a 32.5%  interest  and  MediaOne  received a 31.25%
interest.  In exchange for Microsoft and Compaq each contributing $212.5 million
of cash to the Road Runner Joint  Venture,  Microsoft and Compaq each received a
preferred  equity interest  therein that is convertible into a 10% common equity
interest.  Accordingly,  on a fully diluted basis, the Road Runner Joint Venture
is owned 9% by Time Warner, 20% by TWE, 26% by TWE-A/N, 25% by MediaOne,  10% by
Microsoft and 10% by Compaq. Each of Time Warner's, TWE's and TWE-A/N's interest
in the Road Runner Joint Venture is being  accounted for under the equity method
of accounting.

      The aggregate $425 million of capital  contributed by Microsoft and Compaq
is expected to be used by the Road  Runner  Joint  Venture to continue to expand
the roll out of high-speed Internet access services. In addition, as a result of
Time Warner Cable being a retailer of the Road Runner  business in its franchise
areas whereby Time Warner Cable's technologically advanced,  high-capacity cable
architecture will be used to provide these high-speed  Internet access services,
Time Warner Cable will initially retain 70% of the subscription revenues and 30%
of the  national  advertising  and  transactional  revenues  generated  from the
delivery of these on-line services to its cable subscribers. Time Warner Cable's
share  of  these  revenues  is  expected  to  change   periodically  to  75%  of
subscription revenues and 25% of national advertising and transactional revenues
by 2006.

Primestar Roll-up Transaction

      In April 1998, TWE and  Advance/Newhouse  transferred the direct broadcast
satellite operations conducted by TWE and TWE-A/N (the "DBS Operations") and the
31%  partnership   interest  in  Primestar   Partners,   L.P.  held  by  TWE-A/N
("Primestar" and collectively,  the "Primestar Assets") to Primestar, Inc. ("New
Primestar"),  a separate holding company.  New Primestar owns the DBS Operations
and   Primestar   partnership   interests   formerly   owned  by  TCI  Satellite
Entertainment,  Inc. and other  previously  existing  partners of Primestar.  In
exchange for  contributing its interests in the Primestar  Assets,  TWE received
approximately  48 million shares of common stock of New Primestar  (representing
an approximate 24% equity interest) and realized  approximately  $240 million of
debt reduction.  TWE deconsolidated the DBS Operations  effective as of April 1,
1998 and the equity  interest in New Primestar  received in this  transaction is
being accounted for under the equity method of accounting.

TWE-A/N Transfers

      In early 1998, Time Warner (through a wholly owned subsidiary) contributed
cable television  systems (or interests therein) serving  approximately  650,000
subscribers to TWE-A/N, subject to approximately $1 billion of debt, in exchange
for common and preferred  partnership  interests therein,  and completed certain
related  transactions.  The debt assumed by TWE-A/N has been  guaranteed  by TWI
Cable and certain of its subsidiaries.  TWE-A/N is now owned 65.3% by TWE, 33.3%
by Advance/Newhouse and 1.4% indirectly by Time Warner.
<PAGE>


Filmed Entertainment Backlog

      Backlog represents the amount of future revenue not yet recorded from cash
contracts for the licensing of theatrical and television  product for pay cable,
basic cable,  network and syndicated  television  exhibition.  Backlog of Warner
Bros.  amounted  to $2.054  billion at  September  30,  1998  compared to $2.126
billion at December 31, 1997  (including  amounts  relating to the  licensing of
film product to Time Warner's and TWE's cable television networks, collectively,
of $711 million and $719 million, respectively).

      Because  backlog  generally  relates to  contracts  for the  licensing  of
theatrical  and  television  product  which  have  already  been  produced,  the
recognition of revenue for such completed  product is principally only dependent
upon the commencement of the availability period for telecast under the terms of
the related licensing agreement.  Cash licensing fees are collected periodically
over the term of the related  licensing  agreements or on an  accelerated  basis
using a $600 million  securitization  facility. The portion of backlog for which
cash has not already been received has significant off-balance sheet asset value
as  a  source  of  future  funding.  The  backlog  excludes  advertising  barter
contracts,  which  are also  expected  to result in the  future  realization  of
revenues  and cash through the sale of  advertising  spots  received  under such
contracts.

Year 2000 Technology Preparedness

      Time Warner,  together  with its  Entertainment  Group and like most large
companies,  depends on many  different  computer  systems  and other  chip-based
devices for the continuing  conduct of its business.  Older  computer  programs,
computer  hardware and chip-based  devices may fail to recognize dates beginning
on January 1, 2000 as being valid dates,  and as a result may fail to operate or
may operate improperly when such dates are introduced.

      Time  Warner's  exposure to  potential  Year 2000  problems  exists in two
general areas:  technological  operations in the sole control of the Company and
technological  operations  dependent  in some way on one or more third  parties.
These technological operations include information technology ("IT") systems and
non-IT systems, including those with embedded technology, hardware and software.
Most  of  Time  Warner's  potential  Year  2000  exposures  are in the  area  of
technological  operations  dependent  on one or more third  parties.  Failure to
achieve high levels of Year 2000 compliance in either area could have a material
adverse impact on Time Warner and its financial statements.

     The Company's Year 2000  initiative is being  conducted at the  operational
level by divisional project managers and senior technology  executives  overseen
by senior  divisional  executives,  with  assistance  internally as well as from
outside  professionals.  The  progress of each  division  through the  different
phases  of  remediation - inventorying,    assessment,   remediation   planning,
implementation  and final  testing - is  actively  overseen  and  reviewed  on a
regular basis by an executive oversight group that reports through the Company's
Chief Financial Officer to the Audit Committee of the Board of Directors.

      The Company has generally  completed the process of identifying  potential
Year  2000   difficulties  in  its   technological   operations,   including  IT
applications,  IT technology and support, desktop hardware and software,  non-IT
systems and important third party operations,  and distinguishing those that are
"mission  critical"  from those  that are not.  An item is  considered  "mission
critical" if its Year 2000-related failure would significantly impair the
<PAGE>


ability of one of the Company's major business  units to (1) produce, market and
distribute  the  products or services  that  generate  significant  revenues for
that business, (2) meet its obligations to pay its employees,  artists,  vendors
and other obligations or (3) meet its obligations under regulatory  requirements
and internal accounting controls.  The Company and its divisions,  including the
Entertainment  Group, have identified  approximately  1,000 worldwide,  "mission
critical" potential exposures. Of these, as of September 30, 1998, approximately
10%  have  been  identified  by  the  divisions  as  in  the  assessment  stage,
approximately 30% as in the remediation planning stage, and almost 60% as in the
process of  implementation  or testing or as Year 2000  compliant.  The  Company
currently expects that the assessment phase for these potential exposures should
be  completed  by  the  end  of  1998  and  that  remediation  with  respect  to
technological   operations   in  the  sole   control  of  the  Company  will  be
substantially  completed  in all  material  respects  by the  end of the  second
quarter of 1999.

     In the area of "mission  critical"  technological  operations  dependent in
some  way on one or more  third  parties,  the  situation  is much  less in Time
Warner's ability to predict or control.  In addition,  the Company's business is
heavily  dependent on third  parties that are  themselves  heavily  dependent on
technology. In some cases, the Company's third party dependence is on vendors of
technology who are themselves  working towards  solutions to Year 2000 problems.
For example, in a situation endemic to the cable industry, much of the Company's
headend  equipment  that controls cable set-top boxes is currently not Year 2000
compliant. The box manufacturers are working with cable industry groups and have
recently  developed  solutions  that the Company is  beginning to install in its
headend  equipment.  It is  currently  expected  that  these  solutions  will be
substantially  implemented  by the end of the second  quarter of 1999.  In other
cases,  the  Company's  third party  dependence  is on  suppliers of products or
services that are themselves  computer-intensive.  For example,  if a television
broadcaster or cable  programmer  encounters  Year 2000 problems that impede its
ability to deliver its  programming,  the Company will be unable to provide that
programming  to its cable  customers.  Similarly,  because the Company is also a
programming  supplier,  third-party  signal  delivery  problems could affect its
ability to deliver its  programming to its customers.  The Company has attempted
to include in its "mission critical"  inventory  significant  service providers,
vendors, suppliers,  customers and governmental entities that are believed to be
critical  to  business  operations  and is in various  stages of  attempting  to
ascertain their state of Year 2000 readiness through questionnaires, interviews,
on-site  visits,   industry  group  participation  and  other  available  means.
Moreover,  Time Warner is dependent,  like all large companies, on the continued
functioning,  domestically and  internationally,  of basic, heavily computerized
services  such as  banking   telephony,  and  power,  and  various  distribution
mechanisms  ranging from the mail,  railroads  and trucking to  high-speed  data
transmission.  Time  Warner is taking  steps to attempt to ensure that the third
parties  on which it is  heavily  reliant  are Year 2000  compliant,  but cannot
predict the  likelihood of such  compliance  nor the direct or indirect costs to
the  Company  of  non-compliance  by those  third  parties or of  securing  such
services from alternate compliant third parties.

     The Company,  including the Entertainment  Group,  currently estimates that
the aggregate cost of its Year 2000 remediation program,  which started in 1996,
will be approximately $125 to $175 million, of which an estimated 40% to 50% has
been incurred through  September 30, 1998. These costs include  estimates of the
costs  of  assessment,   replacement,  repair  and  upgrade,  both  planned  and
unplanned,  of  certain  IT and  non-IT  systems  and their  implementation  and
testing.  These expenditures have been and are expected to continue to be funded
from the  Company's  operating  cash flow and have not and are not  expected  to
impact materially the Company's financial statements.
<PAGE>


     Management believes that it has established an effective program to resolve
all  significant  Year 2000 issues in its sole  control in a timely  manner.  As
noted  above,  however,  the  Company  has not yet  completed  all phases of its
program  and is  dependent  on third  parties  whose  progress is not within its
control.  In the event that the Company did not  complete  any of its  currently
planned additional  remediation prior to the Year 2000, management believes that
the Company could experience  significant difficulty in producing and delivering
its products and services and conducting its business in the Year 2000 as it has
in the past. In addition,  disruptions  experienced  by third parties with which
the  Company  does  business  as well as by the  economy  generally  could  also
materially  adversely affect the Company.  The amount of potential liability and
lost revenue cannot be reasonably estimated at this time.

      The  Company  has  been  focusing  its  efforts  on   identification   and
remediation  of its Year 2000  exposures and has not yet  developed  significant
contingency  plans in the event it does not successfully  complete all phases of
its Year 2000 program.  The Company  intends to examine its status at the end of
1998,  and  periodically  thereafter,   to  determine  whether  such  plans  are
necessary.

Euro Conversion

      Effective  January 1, 1999,  the "euro" will be  established as the common
legal currency of more than  two-thirds of the member  countries of the European
Union. These member countries will then have a three-year transitional period to
convert their  existing  sovereign  currencies to the euro. By July 1, 2002, all
participating  member  countries must eliminate their  sovereign  currencies and
replace   their   legal   tender   with   euro-denominated   bills  and   coins.
Notwithstanding  this  transitional  period,  many commercial  transactions  are
expected  to  become  euro-denominated  well  before  the  July  2002  deadline.
Accordingly,  Time Warner is in the process of  evaluating  the  short-term  and
long-term  effects  of  the  euro  conversion  on  its  businesses,  principally
consisting  of its  international  publishing,  music and  filmed  entertainment
operations.

      Time Warner believes that its most significant  short-term impact relating
to the euro  conversion  is the need to modify its  accounting  and  information
systems to handle  transactions  during the transitional period in both the euro
and the existing  sovereign  currencies of the  participating  member countries.
Time Warner is in the process of  identifying  the  accounting  and  information
systems in need of modification and, based on these findings,  will formulate an
action plan to address the nature and timing of  remediation  efforts.  Based on
preliminary information,  costs to modify its accounting and information systems
are not expected to be material.

      Time Warner  believes that its most  significant  long-term  business risk
relating to the euro  conversion  may be  increased  pricing  pressures  for its
products and services brought about by heightened consumer awareness of possible
cross-border  price  differences.  However,  Time  Warner  believes  that  these
business  risks may be offset to some extent by lower  production  costs,  other
cost savings and marketing opportunities. Notwithstanding such risks, management
does not  believe  at this time that the euro  conversion  will have a  material
effect on Time Warner's financial position,  results of operations or cash flows
in future periods.
<PAGE>


Caution Concerning Forward-Looking Statements

      The Securities and Exchange  Commission  encourages  companies to disclose
forward-looking  information so that investors can better understand a company's
future prospects and make informed investment decisions.  This filing,  together
with   management's   public   commentary   related   thereto,   contains   such
"forward-looking  statements"  within  the  meaning  of the  Private  Securities
Litigation  Reform  Act of 1995,  particularly  statements  anticipating  future
growth in revenues,  EBITA and cash flow and forecasting ongoing debt reduction.
Words  such  as  "anticipate",  "estimate",  "expects",  "projects",  "intends",
"plans",  "believes" and words and terms of similar substance used in connection
with any discussion of future operating or financial  performance  identify such
forward-looking  statements.  Those forward-looking  statements are management's
present expectations of future events. As with any projection or forecast,  they
are inherently susceptible to changes in circumstances, and the Company is under
no obligation to (and  expressly  disclaims  any such  obligation  to) update or
alter its forward-looking statements despite such changes.

      Time Warner  operates in highly  competitive,  consumer driven and rapidly
changing  media and  entertainment  businesses  that are dependent on government
regulation  and economic,  political  and social  conditions in the countries in
which  they  operate,  consumer  demand  for their  products  and  services  and
(particularly in view of technological changes) protection of their intellectual
property  rights.  Time Warner's  actual  results could differ  materially  from
management's  expectations because of changes in such factors. Some of the other
factors that also could cause actual  results to differ from those  contained in
the  forward-looking  statements include those identified in Time Warner's other
filings and:

*   For  Time  Warner's  cable   business,   more   aggressive  than  expected
    competition  from new  technologies  and other types of video  programming
    distributors,  including DBS; increases in government  regulation of cable
    or  equipment  rates (or any  failure  to  reduce  rate  regulation  as is
    presently  mandated  by  statute)  or  other  terms  of  service  (such as
    "digital must-carry") or opposition to franchise renewals;  the failure of
    new  equipment  (such as digital  set-top  boxes) or  services to function
    properly,  to appeal to enough  consumers  or to be  delivered in a timely
    fashion;  and greater  than  expected  increases in  programming  or other
    costs.

*   For Time Warner's cable  programming  and television  businesses,  greater
    than expected  programming or production costs;  public and cable operator
    resistance to price increases to offset higher  programming costs (and the
    negative  impact  on  premium  programmers  of  increases  in basic  cable
    rates);  the  sensitivity  of  advertising  to economic  cyclicality;  and
    greater  than  expected  fragmentation  of consumer  viewership  due to an
    increased  number of programming  services or the increased  popularity of
    alternatives to television.

*   For Time Warner's film and television businesses,  their ability to continue
    to attract  and select  desirable  talent and scripts at  manageable  costs;
    increases in production costs  generally;  fragmentation of consumer leisure
    and  entertainment  time (and its possible negative effects on the broadcast
    and cable networks,  which are significant  customers of these  businesses);
    continued   popularity  of  merchandising;   and  the  uncertain  impact  of
    technological developments such as DVD and the Internet.
<PAGE>


*   For Time  Warner's  music  business,  its ability to continue to attract and
    select desirable talent at manageable costs; the timely completion of albums
    by major artists;  the popular demand for particular artists and albums; and
    the overall strength of global music sales.

*   For Time Warner's print media and publishing businesses,  increases in paper
    and  distribution  costs;  the  introduction  and  increased  popularity  of
    alternative technologies for the provision of news and information,  such as
    the Internet; and fluctuations in advertiser and consumer spending.

*   The  ability  of  the  Company  and  its  key  service  providers,  vendors,
    suppliers, customers and governmental entities to replace, modify or upgrade
    computer  systems  in ways that  adequately  address  the Year  2000  issue,
    including their ability to identify and correct all relevant  computer codes
    and   embedded   chips,   unanticipated   difficulties   or  delays  in  the
    implementation  of the Company's  remediation plans and the ability of third
    parties to adequately address their own Year 2000 issues.

      In addition, Time Warner's overall financial strategy,  including improved
financial ratios and a strengthened  balance sheet,  could be adversely affected
by increased interest rates, failure to meet earnings expectations, consequences
of the euro  conversion  and  changes in Time  Warner's  plans,  strategies  and
intentions.

<PAGE>


                             TIME WARNER INC.
                          CONSOLIDATED BALANCE SHEET
                                 (Unaudited)
<TABLE>
<CAPTION>

                                                            September 30,     December 31,
                                                                 1998            1997
                                                                 ----            ----
                                                                  (millions, except
                                                                 per share amounts)
<S>                                                           <C>             <C>    
ASSETS
Current assets
Cash and equivalents .....................................    $   393         $   645
Receivables, less allowances of $926 and $991 million ....      2,240           2,447
Inventories ..............................................        862             830
Prepaid expenses .........................................      1,208           1,089
                                                             --------        --------

Total current assets .....................................      4,703           5,011

Noncurrent inventories ...................................      1,902           1,766
Investments in and amounts due to and from
  Entertainment Group ....................................      5,360           5,549
Other investments ........................................        791           1,495
Property, plant and equipment ............................      2,010           2,089
Music catalogues, contracts and copyrights ...............        867             928
Cable television and sports franchises ...................      3,127           3,982
Goodwill .................................................     12,023          12,572
Other assets .............................................        905             771
                                                             --------        --------

Total assets.......................................... ...    $31,688        $ 34,163
                                                             ========        ========

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable .........................................    $   843        $    912
Participations, royalties and programming costs payable ..      1,112           1,072
Debt due within one year .................................         19               8
Other current liabilities ................................      2,259           2,379
                                                             --------        --------

Total current liabilities ................................      4,233           4,371

Long-term debt ...........................................      9,064          11,833
Borrowings against future stock option proceeds ..........      1,015             533
Deferred income taxes ....................................      3,609           3,960
Unearned portion of paid subscriptions ...................        720             672
Other liabilities ........................................      1,473           1,006
Company-obligated mandatorily redeemable preferred
  securities of a subsidiary holding solely subordinated
  debentures of a subsidiary of the Company ..............        575             575
Series M exchangeable preferred stock, $.10 par value,
  1.9 million shares outstanding and $1.903 billion
  liquidation preference .................................      1,859           1,857

Shareholders' equity
Preferred stock, $.10 par value, 27.3 and 35.4 million
  shares  outstanding, $2.730 and $3.539 billion liquidation
  preference .............................................          3               4
Series LMCN-V Common Stock, $.01 par value, 57.1 million
  shares outstanding .....................................          1               1
Common stock, $.01 par value, 547.9 and 519.0 million
  shares outstanding (excluding 10.4 and 39.4 million
  treasury shares) .......................................          5               5
Paid-in capital ..........................................     12,878          12,680
Accumulated deficit ......................................     (3,747)         (3,334)
                                                             --------        --------

Total shareholders' equity ...............................      9,140           9,356
                                                             --------        --------

Total liabilities and shareholders' equity................    $31,688        $ 34,163
                                                             ========        ========

See accompanying notes.
</TABLE>

<PAGE>


                                TIME WARNER INC.
                      CONSOLIDATED STATEMENT OF OPERATIONS
                                   (Unaudited)
<TABLE>
<CAPTION>

                                                      Three Months                Nine Months
                                                   Ended September 30,         Ended September 30,
                                                   -------------------         -------------------
                                                   1998          1997          1998          1997 
                                                   ----          ----          ----          ---- 
                                                           (millions, except per share amounts)

<S>                                             <C>            <C>          <C>           <C>    
Revenues (a) ................................   $ 3,578        $3,231       $10,387       $ 9,458
                                                -------        ------       -------       -------

Cost of revenues (a)(b) .....................     2,052         1,964         6,016         5,417
Selling, general and administrative (a)(b) ..     1,211         1,004         3,502         3,239
                                                  -----         -----         -----         -----

Operating expenses ..........................     3,263         2,968         9,518         8,656
                                                  -----         -----         -----         -----

Business segment operating income ...........       315           263           869           802
Equity in pretax income of Entertainment
  Group (a) .................................       164            96           437           522
Interest and other, net (a) .................      (311)         (309)         (877)         (904)
Corporate expenses (a) ......................       (20)          (17)          (58)          (60)
                                                  -----         -----         -----         ----- 

Income before income taxes ..................       148            33           371           360
Income tax provision ........................      (109)          (61)         (293)         (306)
                                                  -----         -----         -----         ----- 

Income (loss) before extraordinary item .....        39           (28)           78           54
Extraordinary loss on retirement of debt,
   net of $5 million and $16 million income
   tax benefits in 1997 .....................         -            (7)            -           (24)
                                                  -----         -----         -----         -----

Net income (loss) ...........................        39           (35)           78            30
Preferred dividend requirements .............       (76)          (81)         (236)         (238)
                                                  -----         -----         -----         ----- 

Net loss applicable to common shares.........     $ (37)      $  (116)      $  (158)      $  (208)
                                                  =====       =======       =======       ======= 

Basic and diluted loss per common share:
Loss before extraordinary item...............     $(.06)      $  (.19)      $  (.27)      $  (.33)
                                                  =====       =======       =======       ======= 

Net loss.....................................     $(.06)      $  (.20)      $  (.27)      $  (.37)
                                                  =====       =======       =======       ======= 

Average  common  shares .....................     601.3         573.3         592.0         564.4
                                                  =====       =======       =======       =======

(a) Includes the following income  (expenses)  resulting from  transactions with
    the  Entertainment  Group and other related companies for the three and nine
    months ended  September 30, 1998,  respectively,  and for the  corresponding
    periods in the prior year:  revenues-$120  million and $334 million in 1998,
    $94 million and $241  million in 1997;  cost of  revenues-$(70)  million and
    $(207) million in 1998,  $(67) million and $(188) million in 1997;  selling,
    general  and  administrative-$(8)  million  and $(28)  million in 1998,  $12
    million and $20 million in 1997;  equity in pretax  income of  Entertainment
    Group-$72  million and $52  million in 1998,  $11 million and $35 million in
    1997;  interest and other,  net-$(2)  million and $(8) million in 1998, $(9)
    million and $(30) million in 1997;  and corporate  expenses-$18  million and
    $54 million in 1998, $18 million and $54 million in 1997.

(b) Includes depreciation and amortization 
    expense of:                                    $295          $320          $884          $935
                                                   ====          ====          ====          ====


See accompanying notes.
</TABLE>

<PAGE>


                                TIME WARNER INC.
                      CONSOLIDATED STATEMENT OF CASH FLOWS
                                   (Unaudited)

                                                               Nine Months
                                                          Ended September 30,
                                                          -------------------
                                                             1998     1997
                                                             ----     ----
                                                              (millions)
OPERATIONS
Net income................................................. $  78    $  30
Adjustments for noncash and nonoperating items:
Extraordinary loss on retirement of debt...................     -       24
Depreciation and amortization..............................   884      935
Noncash interest expense...................................    29       75
Excess (deficiency) of distributions over equity in
  pretax income of Entertainment Group.....................   168     (168)
Changes in operating assets and liabilities................    35     (257)
                                                            -----    ----- 

Cash provided by operations................................ 1,194      639
                                                            -----    -----

INVESTING ACTIVITIES
Investments and acquisitions...............................   (86)     (98)
Capital expenditures.......................................  (348)    (424)
Investment proceeds........................................   458      156
Proceeds received from distribution of Senior 
  Capital contributed to TWE                                  455      455
                                                            -----    -----

Cash provided by investing activities......................   479       89
                                                            -----    -----

FINANCING ACTIVITIES
Borrowings................................................. 1,669    1,945
Debt repayments............................................(2,300)  (2,243)
Borrowings against future stock option proceeds............ 1,015        -
Repayments of borrowings against future stock 
  option proceeds .........................................  (533)    (185)
Repurchases of Time Warner common stock....................(1,944)     (37)
Dividends paid.............................................  (394)    (253)
Proceeds received from stock option and dividend 
  reinvestment plans ......................................   599      328
Other, principally financing costs.........................   (37)     (36)
                                                            -----    -----

Cash used by financing activities..........................(1,925)    (481)
                                                           ------    -----

INCREASE (DECREASE) IN CASH AND EQUIVALENTS................  (252)     247

CASH AND EQUIVALENTS AT BEGINNING OF PERIOD (a)............   645      514
                                                            -----    -----

CASH AND EQUIVALENTS AT END OF PERIOD......................  $393     $761
                                                            =====    =====
---------------
(a) Includes current and noncurrent cash and equivalents at December 31, 1996.



See accompanying notes.


<PAGE>


                                TIME WARNER INC.
                 CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
                                   (Unaudited)


                                                                 Nine Months
                                                             Ended September 30,
                                                             -------------------
                                                                 1998    1997
                                                                 ----    ----
                                                                 (millions)

BALANCE AT BEGINNING OF YEAR................................   $9,356  $9,502

Net income..................................................       78      30
Decrease in unrealized gains on securities, net of 
  $6 million tax benefit ...................................        -      (9)
Foreign currency translation adjustments....................      (18)    (70)
Increase in realized and unrealized losses on derivative
  financial instruments, net of $28 million tax benefit.....      (41)      -
Cumulative effect of change in accounting for derivative 
  financial instruments, net of $3 million tax benefit......      (18)      -
                                                                -----   -----
Comprehensive income (loss)(a)..............................        1     (49)

Common stock dividends......................................     (161)   (152)
Preferred stock dividends...................................     (236)   (238)
Repurchases of Time Warner common stock.....................   (1,944)    (37)
Issuance of common stock in connection with the conversion 
  of the zero-coupon convertible notes due 2013.............    1,150       -
Issuance of common stock in connection with the acquisition
   of Turner Broadcasting System, Inc.......................        -      67
Other, principally shares issued pursuant to stock option, 
  dividend reinvestment and benefit plans...................      974     437
                                                               ------  ------


BALANCE AT SEPTEMBER 30,.......................................$9,140  $9,530
                                                               ======  ======

---------------
(a) Comprehensive  loss for the three months ended  September  30, 1998 and 1997
    was $16 million and $55 million,  respectively.  Comprehensive  loss for the
    three-month  period ended  September  30, 1998 has been  increased by an $18
    million cumulative effect of a change in accounting for derivative financial
    instruments.



See accompanying notes.


<PAGE>


                                TIME WARNER INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

1.    DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

Description of Business

      Time Warner Inc.  ("Time Warner" or the "Company") is the world's  leading
media and entertainment company, whose principal business objective is to create
and distribute branded information and entertainment  copyrights  throughout the
world.  Time Warner  classifies  its business  interests  into four  fundamental
areas: Entertainment,  consisting principally of interests in recorded music and
music publishing,  filmed  entertainment,  television  production and television
broadcasting;  Cable  Networks,  consisting  principally  of  interests in cable
television  programming;  Publishing,  consisting  principally  of  interests in
magazine publishing, book publishing and direct marketing; and Cable, consisting
principally  of  interests  in cable  television  systems.  A  majority  of Time
Warner's interests in filmed entertainment,  television  production,  television
broadcasting  and cable  television  systems,  and a portion of its interests in
cable  television  programming,  are  held  through  Time  Warner  Entertainment
Company,  L.P.  ("TWE").  Time  Warner  owns  general  and  limited  partnership
interests in TWE consisting of 74.49% of the pro rata priority  capital ("Series
A Capital") and residual equity capital  ("Residual  Capital"),  and 100% of the
senior priority capital ("Senior  Capital") and junior priority capital ("Series
B Capital").  The remaining 25.51% limited partnership interests in the Series A
Capital and Residual  Capital of TWE are held by a subsidiary of MediaOne Group,
Inc. ("MediaOne"),  formerly U S WEST, Inc. Time Warner does not consolidate TWE
and  certain  related  companies  (the  "Entertainment   Group")  for  financial
reporting  purposes  because of certain  limited  partnership  rights related to
TWE's interest in certain cable television systems.

      The operating  results of Time  Warner's  various  business  interests are
presented herein as an indication of financial performance (Note 10). Except for
start-up  losses  incurred  in  connection  with The WB Network,  Time  Warner's
principal business interests generate significant operating income and cash flow
from  operations.  The cash  flow from  operations  generated  by such  business
interests is considerably greater than their operating income due to significant
amounts of noncash  amortization  of  intangible  assets  recognized  in various
acquisitions  accounted  for by  the  purchase  method  of  accounting.  Noncash
amortization of intangible assets recorded by Time Warner's business  interests,
including the  unconsolidated  business  interests of the  Entertainment  Group,
amounted to $330 million and $333  million for the three months ended  September
30, 1998 and 1997, respectively,  and $986 million and $979 million for the nine
months ended September 30, 1998 and 1997, respectively.

Basis of Presentation

      The accompanying financial statements are unaudited but, in the opinion of
management,  contain  all the  adjustments  (consisting  of  those  of a  normal
recurring nature) considered  necessary to present fairly the financial position
and the  results of  operations  and cash  flows for the  periods  presented  in
conformity with generally accepted accounting  principles  applicable to interim
periods.  The accompanying  financial  statements  should be read in conjunction
with the audited  consolidated  financial statements of Time Warner for the year
ended December 31, 1997. Certain  reclassifications  have been made to the prior
year's financial statements to conform to the 1998 presentation.

      Effective July 1, 1998, Time Warner adopted Financial Accounting Standards
Board  Statement No. 133,  "Accounting  for Derivative  Instruments  and Hedging
Activities"  ("FAS  133").  FAS  133  requires  that  all  derivative  financial
instruments, such as interest rate swap contracts, interest rate lock agreements
and foreign exchange
<PAGE>


contracts,  be recognized in the financial statements and measured at fair value
regardless  of the purpose or intent for holding  them.  The adoption of FAS 133
did not have a material effect on Time Warner's  primary  financial  statements,
but  did  reduce  comprehensive  income  by  $18  million  in  the  accompanying
consolidated statement of shareholders' equity.

2.    CABLE TRANSACTIONS

      In addition to continuing to use cable  operating cash flow to finance the
level of capital spending  necessary to upgrade the technological  capability of
their cable television  systems and develop new services,  Time Warner,  TWE and
the  TWE-Advance/Newhouse  Partnership  ("TWE-A/N")  have  completed a series of
transactions  in 1998  related  to the cable  television  business  and  related
ancillary  businesses that either reduced existing debt and/or Time Warner's and
TWE's  share  of  future  funding   requirements  for  such  businesses.   These
transactions are discussed more fully below.

Business Telephony Reorganization

      In July 1998, in an effort to combine their business telephony  operations
into a single entity that is intended to be self-financing, Time Warner, TWE and
TWE-A/N completed a reorganization of their business  telephony  operations (the
"Business Telephony  Reorganization"),  whereby (i) the operations  conducted by
Time Warner,  TWE and TWE-A/N  were each  contributed  to a new holding  company
named Time Warner Telecom LLC ("TW Telecom"),  and then (ii) TWE's and TWE-A/N's
interests  in TW  Telecom  were  distributed  to their  partners,  Time  Warner,
MediaOne and the Advance/Newhouse Partnership ("Advance/Newhouse").  As a result
of  the  Business   Telephony   Reorganization,   Time   Warner,   MediaOne  and
Advance/Newhouse  own  interests  in TW Telecom of  61.95%,  18.88% and  19.17%,
respectively.  Time Warner's interest in TW Telecom is being accounted for under
the equity method of accounting  because of certain  rights held by MediaOne and
Advance/Newhouse.

       TW Telecom is a competitive  local  exchange  carrier  (CLEC) in selected
metropolitan  areas  across  the United  States  where it offers a wide range of
telephony  services to business  customers.  Following  the  Business  Telephony
Reorganization,  TW Telecom  raised  approximately  $400 million of cash in July
1998 through the  issuance of public  notes that mature in 2008.  Such notes are
non-recourse  to Time Warner and the proceeds  therefrom are expected to be used
by TW Telecom to  continue  to expand and develop  its  telephony  networks  and
services.

Road Runner Joint Venture

      In June  1998,  Time  Warner,  TWE,  TWE-A/N,  MediaOne,  Microsoft  Corp.
("Microsoft")  and Compaq  Computer Corp.  ("Compaq")  formed a joint venture to
operate and expand  Time  Warner  Cable's  and  MediaOne's  existing  high-speed
Internet access  businesses (the "Road Runner Joint  Venture").  In exchange for
contributing their existing high-speed  Internet access businesses,  Time Warner
received a common  equity  interest in the Road Runner Joint  Venture of 11.25%,
TWE  received a 25%  interest,  TWE-A/N  received a 32.5%  interest and MediaOne
received  a  31.25%  interest.   In  exchange  for  Microsoft  and  Compaq  each
contributing $212.5 million of cash to the Road Runner Joint Venture,  Microsoft
and Compaq each received a preferred equity interest therein that is convertible
into a 10% common equity  interest.  Accordingly,  on a fully diluted basis, the
Road  Runner  Joint  Venture  is owned  9% by Time  Warner,  20% by TWE,  26% by
TWE-A/N, 25% by MediaOne, 10% by Microsoft
<PAGE>


and 10% by Compaq.  Each of Time Warner's,  TWE's and TWE-A/N's  interest in the
Road Runner  Joint  Venture is being  accounted  for under the equity  method of
accounting.

Primestar

      In April 1998,  TWE and  Advance/Newhouse,  a limited  partner in TWE-A/N,
transferred  the direct  broadcast  satellite  operations  conducted  by TWE and
TWE-A/N (the "DBS  Operations")  and the 31%  partnership  interest in Primestar
Partners,  L.P. held by TWE-A/N  ("Primestar" and  collectively,  the "Primestar
Assets") to Primestar,  Inc. ("New Primestar"),  a separate holding company. New
Primestar owns the DBS Operations and Primestar  partnership  interests formerly
owned  by TCI  Satellite  Entertainment,  Inc.  and  other  previously  existing
partners of  Primestar.  In  exchange  for  contributing  its  interests  in the
Primestar Assets,  TWE received  approximately 48 million shares of common stock
of New Primestar  (representing an approximate 24% equity interest) and realized
approximately  $240  million of debt  reduction.  In partial  consideration  for
contributing  its  indirect   interest  in  certain  of  the  Primestar  Assets,
Advance/Newhouse received an approximate 6% equity interest in New Primestar. As
a result of this transaction,  effective as of April 1, 1998, TWE deconsolidated
the DBS Operations and the 24% equity interest in New Primestar  received in the
transaction is being  accounted for under the equity method of accounting.  This
transaction is referred to herein as the "Primestar Roll-up Transaction."

      In a related transaction, Primestar also entered into an agreement in June
1997 with The News  Corporation  Limited  ("News  Corp."),  MCI  WorldCom,  Inc.
("MCI") and  American  Sky  Broadcasting  LLC  ("ASkyB"),  pursuant to which New
Primestar  would  acquire  certain  assets  relating to the  high-power,  direct
broadcast  satellite business of ASkyB (the "Primestar ASkyB  Transaction").  In
May  1998,  the U.S.  Department  of  Justice  brought  a civil  action  against
Primestar,  each of its cable owners,  including TWE, and News Corp. and MCI, to
enjoin on  antitrust  grounds the  Primestar  ASkyB  Transaction.  Although  the
parties had  discussions  with the U.S.  Department  of Justice in an attempt to
restructure  the  transaction,   no  resolution  was  reached  and  the  parties
terminated their agreement in October 1998.

TWE-A/N Transfers

      In early 1998, Time Warner (through a wholly owned subsidiary) contributed
cable television  systems (or interests therein) serving  approximately  650,000
subscribers to TWE-A/N, subject to approximately $1 billion of debt, in exchange
for common and preferred  partnership  interests therein,  and completed certain
related  transactions  (collectively,   the  "TWE-A/N  Transfers").   The  cable
television systems  transferred to TWE-A/N were formerly owned by TWI Cable Inc.
("TWI  Cable"),   a  wholly  owned  subsidiary  of  Time  Warner,   and  Paragon
Communications  ("Paragon"),  a  partnership  formerly  owning cable  television
systems  serving  approximately 1 million  subscribers  that was wholly owned by
subsidiaries of Time Warner, with 50% beneficially owned in the aggregate by TWE
and TWE-A/N.  The debt assumed by TWE-A/N has been  guaranteed  by TWI Cable and
certain of its subsidiaries, including Paragon.

     As part of the TWE-A/N Transfers,  TWE and TWE-A/N exchanged  substantially
all of their respective  beneficial interests in Paragon for an equivalent share
of  Paragon's  cable   television   systems  (or  interests   therein)   serving
approximately  500,000  subscribers,  resulting in wholly owned  subsidiaries of
Time Warner owning 100% of the  restructured  Paragon entity,  with less than 1%
beneficially held for TWE. Accordingly, effective as of
<PAGE>


January 1, 1998, Time Warner has consolidated Paragon.  Because this transaction
represented an exchange of TWE's and TWE-A/N's  beneficial  interests in Paragon
for an  equivalent  amount of its cable  television  systems,  it did not have a
significant economic impact on Time Warner, TWE or TWE-A/N.

      In connection with the TWE-A/N Transfers,  Advance/Newhouse made a capital
contribution  to  TWE-A/N  in order to  maintain  its 33.3%  common  partnership
interest  therein.  Accordingly,  TWE-A/N  is now owned  65.3% by TWE,  33.3% by
Advance/Newhouse  and 1.4% indirectly by Time Warner. The TWE-A/N Transfers were
accounted for  effective as of January 1, 1998.  Time Warner did not recognize a
gain or loss on the TWE-A/N Transfers.  TWE has continued to consolidate TWE-A/N
and Time  Warner has  accounted  for its  interest  in TWE-A/N  under the equity
method of accounting.

      On a pro forma basis,  giving  effect to the TWE-A/N  Transfers as if they
had occurred at the  beginning of 1997,  Time Warner would have reported for the
three and nine months ended September 30, 1997, respectively, revenues of $3.217
billion  and  $9.414  billion,  depreciation  expense  of $95  million  and $273
million,  operating income before noncash  amortization of intangible  assets of
$458  million  and $1.372  billion,  operating  income of $251  million and $763
million,  equity in the pretax income of the Entertainment  Group of $94 million
and $518 million,  income (loss) before  extraordinary item of $(26) million and
$59 million ($.19 and $.32 loss per common share) and net income (loss) of $(33)
million and $35 million ($.20 and $.36 loss per common share).

3.    ENTERTAINMENT GROUP

      Time Warner's  investment in and amounts due to and from the Entertainment
Group at September 30, 1998 and December 31, 1997 consists of the following:

                                                      September 30, December 31,
                                                           1998         1997
                                                           ----         ----
                                                              (millions)
Investment in TWE....................................... $4,491       $5,577
Stock option related distributions due from TWE.........    682          417
Credit agreement debt due to TWE........................   (400)        (400)
Other net liabilities due to TWE, principally 
  related to home video distribution....................   (132)        (141)
                                                         ------       ------
Investment in and amounts due to and from TWE...........  4,641        5,453
Investment in TWE-A/N and other Entertainment Group 
  companies ............................................    719           96
                                                         ------       ------

Total................................................... $5,360       $5,549
                                                         ======       ======

Partnership Structure and Allocation of Income

      TWE is a Delaware  limited  partnership  that was  capitalized on June 30,
1992 to own and  operate  substantially  all of the Filmed  Entertainment-Warner
Bros., Cable Networks-HBO and Cable businesses  previously owned by subsidiaries
of Time Warner. Time Warner, through its wholly owned subsidiaries, collectively
owns general and limited  partnership  interests in TWE  consisting of 74.49% of
the Series A Capital and  Residual  Capital  and 100% of the Senior  Capital and
Series B Capital.  The remaining  25.51%  limited  partnership  interests in the
Series A Capital and Residual Capital of TWE are owned by MediaOne. Certain Time
Warner  subsidiaries  are the general  partners of TWE (the "Time Warner General
Partners").
<PAGE>


      The TWE partnership  agreement provides for special allocations of income,
loss and distributions of partnership capital,  including priority distributions
in the event of  liquidation.  TWE  reported net income of $435 million and $483
million in the nine months ended September 30, 1998 and 1997,  respectively,  no
portion of which was allocated to the limited partnership interests.

Summarized Financial Information of the Entertainment Group

      Set forth below is summarized  financial  information of the Entertainment
Group, which reflects the TWE-A/N Transfers effective as of January 1, 1998, the
Primestar  Roll-up  Transaction  effective as of April 1, 1998, the formation of
the Road Runner  Joint  Venture  effective  as of June 30, 1998 and the Business
Telephony Reorganization effective as of July 1, 1998.

                                          Three Months          Nine Months
                                       Ended September 30,  Ended September 30,
                                       -------------------  -------------------
                                            1998    1997       1998      1997
                                            ----    ----       ----      ----
                                                       (millions)
Operating Statement Information
Revenues................................. $3,222  $2,857     $8,987    $8,190
Depreciation and amortization............   (358)   (366)    (1,085)   (1,027)
Business segment operating income(1).....    469     335      1,294       990
Interest and other, net(2) ..............   (203)   (146)      (550)     (157)
Minority interest........................    (52)    (64)      (198)     (228)
Income before income taxes ..............    196     107        492       551
Net income...............................    173      80        437       487
------------------
(1) Includes net pretax gains recognized in connection with the sale or exchange
    of certain  cable  television  systems of  approximately  $6 million and $16
    million  for  the  three   months  ended   September   30,  1998  and  1997,
    respectively,  and  approximately  $90  million and $40 million for the nine
    months ended September 30, 1998 and 1997, respectively.
(2) Includes a pretax gain of approximately $250 million recognized in the first
    quarter of 1997 related to the sale of an interest in E!
    Entertainment Television, Inc.
                                                                Nine Months
                                                            Ended September 30,
                                                            -------------------
                                                               1998      1997 
                                                               ----      ---- 
                                                                 (millions)
Cash Flow Information
Cash provided by operations...............................   $1,273   $   918
Capital expenditures......................................   (1,092)   (1,117)
Investments and acquisitions..............................     (335)     (104)
Investment proceeds.......................................      540       444
Borrowings................................................    1,515       905
Debt repayments...........................................     (840)     (323)
Issuance of preferred stock of subsidiary.................        -       243
Capital distributions.....................................   (1,060)     (809)
Other financing activities, net...........................     (198)      (77)
Increase (decrease) in cash and equivalents...............     (197)       80

<PAGE>


                                                    September 30,   December 31,
                                                         1998           1997
                                                         ----           ----
                                                              (millions)
Balance Sheet Information
Cash and equivalents................................  $   125        $   322
Total current assets................................    4,050          3,623
Total assets........................................   22,417         20,739
Total current liabilities...........................    4,310          3,976
Long-term debt......................................    7,435          5,990
Minority interests..................................    1,440          1,210
Preferred stock of subsidiary.......................      221            233
Time Warner General Partners' Senior Capital........      591          1,118
Partners' capital ..................................    5,854          6,430

Capital Distributions

      The assets and cash flows of TWE are restricted by the TWE partnership and
credit agreements and are unavailable for use by the partners except through the
payment of certain fees, reimbursements, cash distributions and loans, which are
subject to  limitations.  At September 30, 1998 and December 31, 1997,  the Time
Warner   General   Partners  had  recorded   $682  million  and  $417   million,
respectively,  of stock  option  related  distributions  due from TWE,  based on
closing  prices of Time Warner common stock of $87.56 and $62.00,  respectively.
Time  Warner is paid when the  options are  exercised.  The Time Warner  General
Partners also receive  tax-related  distributions  from TWE on a current  basis.
During the nine  months  ended  September  30,  1998,  the Time  Warner  General
Partners received cash  distributions  from TWE in the amount of $1.060 billion,
consisting of $579 million of Senior  Capital  distributions  (representing  the
return of $455  million of  contributed  capital  and the  distribution  of $124
million of priority capital return),  $264 million of tax-related  distributions
and $217 million of stock option related  distributions.  During the nine months
ended  September  30,  1997,  the Time Warner  General  Partners  received  cash
distributions from TWE in the amount of $809 million, consisting of $535 million
of Senior  Capital  distributions  (representing  the return of $455  million of
contributed  capital and the  distribution  of $80  million of priority  capital
return),  $232  million of  tax-related  distributions  and $42 million of stock
option related distributions.

      In addition, in connection with the Business Telephony Reorganization, TWE
recorded a $193 million noncash  distribution to its partners,  of which certain
wholly  owned  subsidiaries  of Time  Warner  received an interest in TW Telecom
valued at $144 million  based on TWE's  historical  cost of the net assets (Note
2).

Six Flags

      In  April  1998,  TWE  sold  its  remaining  49%  interest  in  Six  Flags
Entertainment  Corporation  ("Six Flags") to Premier Parks Inc.  ("Premier"),  a
regional theme park operator,  for approximately  $475 million of cash. TWE used
the  net,   after-tax   proceeds  from  this   transaction  to  reduce  debt  by
approximately  $300 million.  As part of the  transaction,  TWE will continue to
license its  animated  cartoon and comic book  characters  to Six Flags's  theme
parks and will  similarly  license such rights to  Premier's  theme parks in the
United  States and Canada under a long-term  agreement  covering an aggregate of
twenty-five existing and all future locations. A substantial portion of the gain
on this  transaction  has been deferred by TWE,  principally  as a result of its
continuing  guarantees of certain significant long-term obligations of Six Flags
relating to the Six Flags Over Texas and Six Flags Over Georgia theme parks.
<PAGE>


4. INVENTORIES Inventories consist of:

                                         September 30, 1998   December 31, 1997
                                         ------------------   -----------------
                                         Current  Noncurrent  Current Noncurrent
                                         -------    --------  ------- ----------
                                                        (millions)
Film costs:
   Released, less amortization...........  $ 86   $  290        $ 68   $  228
   Completed and not released............    11        2          88       48
   In process and other..................     4      184           -      141
   Library, less amortization............     -    1,021           -    1,064
Programming costs, less amortization.....   315      405         293      285
Magazines, books and recorded music......   446        -         381        -
                                          -----    -----       -----    -----

Total....................................  $862   $1,902        $830   $1,766
                                           ====   ======        ====   ======

5.    LONG-TERM DEBT

      In July 1998,  Time Warner  reduced  bank debt by $579  million  using the
proceeds  received  from a  distribution  by TWE relating to its Senior  Capital
interest.

      During the  second  quarter  of 1998,  Time  Warner  issued  $600  million
principal  amount of 6.875%  debentures due 2018 and borrowed $550 million under
its bank credit agreement,  which together offset the debt reduction  associated
with the conversion of $1.15 billion accreted amount of zero-coupon  convertible
notes due 2013 (the "Zero-Coupon Convertible Notes") into 18.7 million shares of
Time  Warner  common  stock.  The  net  proceeds  therefrom  have  been  used to
repurchase  common  stock,  including the  repurchase  of 9.1 million  shares of
common stock in connection with the settlement of a forward purchase contract to
acquire  such shares  (Note 8).  These share  repurchases  partially  offset the
dilution resulting from the conversion of the Zero-Coupon Convertible Notes.

      In February 1998, Time Warner Companies,  Inc. ("TW Companies"),  a wholly
owned subsidiary of Time Warner, repaid all of its $500 million principal amount
of 7.45% notes due February 1, 1998 at their maturity using proceeds raised from
the issuance of $500 million  principal  amount of 6.95%  debentures due January
15, 2028.

      In early 1998,  Time Warner  reduced debt by  approximately  $1 billion in
connection with the TWE-A/N  Transfers (see Note 2). The debt assumed by TWE-A/N
has been  guaranteed  by TWI Cable and  certain of its  subsidiaries,  including
Paragon.

      An  extraordinary  loss of $24 million was  recognized  in the nine months
ended September 30, 1997 in connection with certain debt refinancings,  of which
$7 million was recognized in the third quarter.

6.    BORROWINGS AGAINST FUTURE STOCK OPTION PROCEEDS

      In connection with Time Warner's  common stock  repurchase  program,  Time
Warner entered into a new five-year, $1.3 billion revolving credit facility (the
"Stock  Option  Proceeds  Credit  Facility") in early 1998,  which  replaced its
previously existing facility.  Borrowings under the Stock Option Proceeds Credit
Facility are principally  used to fund stock  repurchases  and future  preferred
dividend requirements on Time Warner's Series G, H, I and
<PAGE>


J Preferred  Stock. At September 30, 1998 and December 31, 1997, Time Warner had
outstanding  borrowings  against future stock option  proceeds of $1.015 billion
and $533 million, respectively.

7.    MANDATORILY REDEEMABLE PREFERRED SECURITIES

     In  December   1995,   TW  Companies   issued   approximately   23  million
Company-obligated  mandatorily redeemable preferred securities of a wholly owned
subsidiary  ("Preferred Trust  Securities") for aggregate gross proceeds of $575
million.  The sole assets of the subsidiary that is the obligor on the Preferred
Trust  Securities  are $592  million  principal  amount  of 8 7/8%  subordinated
debentures of TW Companies due December 31, 2025.  Cumulative cash distributions
are payable on the Preferred  Trust  Securities at an annual rate of 8 7/8%. The
Preferred Trust  Securities are mandatorily  redeemable for cash on December 31,
2025, and TW Companies has the right to redeem the Preferred  Trust  Securities,
in  whole or in  part,  on or  after  December  31,  2000,  or in other  certain
circumstances,  in each case at an amount per Preferred  Trust Security equal to
$25 plus accrued and unpaid distributions thereon.

      Time  Warner has  certain  obligations  relating  to the  Preferred  Trust
Securities which amount to a full and unconditional  guaranty (on a subordinated
basis) of its subsidiary's obligations with respect thereto.

8.    SHAREHOLDERS' EQUITY

      During 1998,  Time Warner  issued  approximately  26.3  million  shares of
common  stock in  connection  with the  conversion  of 12.6  million  shares  of
convertible  preferred  stock  (consisting of  approximately 5 million shares of
Series G preferred stock, 6.3 million shares of Series I preferred stock and 1.3
million shares of Series J preferred  stock).  These conversions are expected to
result in  approximately  $50 million of cash dividend  savings in the aggregate
for Time Warner through the end of 1999.

      In June 1998, in order to offset partially the dilutive effect relating to
the  conversion  of the  Zero-Coupon  Convertible  Notes  (Note 5),  Time Warner
exercised  its option  under a forward  purchase  contract and  repurchased  9.1
million  shares of its common stock at an  aggregate  cost of $632  million,  or
$69.12 per common share.

      In  connection  with  these   transactions   and  the  conversion  of  the
Zero-Coupon  Convertible  Notes, Time Warner's Board of Directors  authorized in
1998 an 18.7  million  share  increase in the  Company's  existing  common stock
repurchase program that, along with previous authorizations,  allows the Company
to repurchase, from time to time, up to 53.7 million shares of common stock. The
common stock repurchased under the program is expected to continue to be used to
satisfy a portion of the future  share  issuances  related  to the  exercise  of
existing  employee  stock  options  and  the  potential  conversion  of  certain
convertible  securities.  Actual  repurchases  in any period  will be subject to
market  conditions.  As of  September  30, 1998,  Time Warner had acquired  26.4
million  shares  of its  common  stock in 1998 at an  aggregate  cost of  $1.944
billion. In addition,  in October 1998, Time Warner acquired another 3.2 million
shares of common stock at an aggregate cost of $258 million,  thereby increasing
the cumulative shares purchased under this program to approximately 47.2 million
shares at an aggregate cost of approximately $3 billion.  Except for repurchases
of common stock using $1.1 billion of borrowings  in the second  quarter of 1998
that offset a like-amount  of debt reduction  associated  with the conversion of
the Zero-Coupon Convertible Notes into common stock, these repurchases have been
and are expected to continue to be funded with stock option
<PAGE>


exercise  proceeds and  borrowings  under Time  Warner's  Stock Option  Proceeds
Credit Facility, as described more fully above.

9.    DERIVATIVE FINANCIAL INSTRUMENTS

      Time Warner uses derivative  financial  instruments  principally to manage
the risk that changes in interest rates will affect either the fair value of its
debt obligations or the amount of its future interest  payments and, with regard
to foreign currency  exchange rates, to manage the risk that changes in exchange
rates will affect the amount of unremitted or future  royalties and license fees
to be received from the sale of U.S.  copyrighted products abroad. The following
is a summary of Time Warner's risk management strategies and the effect of these
strategies on Time Warner's consolidated financial statements.

Interest Rate Risk Management

Interest Rate Swap Contracts

      Interest rate swap  contracts  are used to adjust the  proportion of total
debt that is subject to variable  and fixed  interest  rates.  Under an interest
rate swap  contract,  Time  Warner  either  agrees  to pay an amount  equal to a
specified  variable-rate of interest times a notional  principal amount,  and to
receive in return an amount equal to a specified  fixed-rate  of interest  times
the same notional  principal  amount or, vice versa,  to receive a variable-rate
amount and to pay a fixed-rate  amount. The notional amounts of the contract are
not exchanged. No other cash payments are made unless the contract is terminated
prior to maturity,  in which case the amount paid or received in  settlement  is
established by agreement at the time of termination,  and usually represents the
net present value, at current rates of interest, of the remaining obligations to
exchange payments under the terms of the contract.  Interest rate swap contracts
are  entered  into with a number  of major  financial  institutions  in order to
minimize credit risk.

      Time Warner  accounts for its  interest  rate swap  contracts  differently
based on  whether  it has agreed to pay an amount  based on a  variable-rate  or
fixed-rate of interest. For interest rate swap contracts under which Time Warner
agrees to pay variable-rates of interest, these contracts are considered to be a
hedge  against  changes  in the fair  value  of Time  Warner's  fixed-rate  debt
obligations. Accordingly, the interest rate swap contracts are reflected at fair
value in Time Warner's  consolidated  balance  sheet and the related  portion of
fixed-rate  debt being  hedged is reflected at an amount equal to the sum of its
carrying value plus an adjustment  representing  the change in fair value of the
debt obligations  attributable to the interest rate risk being hedged.  In turn,
changes  during any  accounting  period in the fair value of these interest rate
swap contracts,  as well as offsetting changes in the adjusted carrying value of
the  related  portion  of  fixed-rate  debt  being  hedged,  are  recognized  as
adjustments  to interest  expense in Time  Warner's  consolidated  statement  of
operations. The net effect of this accounting on Time Warner's operating results
is that  interest  expense on the  portion of  fixed-rate  debt being  hedged is
generally recorded based on variable interest rates.

      For interest  rate swap  contracts  under which Time Warner  agrees to pay
fixed-rates  of interest,  these  contracts are considered to be a hedge against
changes  in the  amount of  future  cash  flows  associated  with Time  Warner's
interest payments.  Accordingly,  the interest rate swap contracts are reflected
at fair value in Time
<PAGE>


Warner's  consolidated  balance  sheet and the related  gains or losses on these
contracts are deferred in shareholders'  equity (as a component of comprehensive
income).  These deferred gains and losses are then amortized as an adjustment to
interest  expense  over the same period in which the related  interest  payments
being hedged are recognized in income.  However, to the extent that any of these
contracts are not considered to be perfectly  effective in offsetting the change
in the value of the interest  payments  being hedged,  any changes in fair value
relating  to  the  ineffective   portion  of  these  contracts  are  immediately
recognized  in  income.  The net  effect  of this  accounting  on Time  Warner's
operating results is that interest expense on the portion of variable-rate  debt
being hedged is generally recorded based on fixed interest rates.

      At September 30, 1998, Time Warner had interest rate swap contracts to pay
variable-rates of interest  (average  six-month LIBOR rate of 5.75%) and receive
fixed-rates of interest  (average rate of 5.51%) on $1.6 billion notional amount
of  indebtedness,  which  resulted  in  approximately  34.7%  of  Time  Warner's
underlying debt, and 41% of Time Warner's and the Entertainment Group's combined
debt,  being  subject to variable  interest  rates.  At December 31, 1997,  Time
Warner had  interest  rate swap  contracts on $2.3  billion  notional  amount of
indebtedness.  The net gain or loss on the ineffective portion of these interest
rate swap contracts was not material in any period.

Interest Rate Lock Agreements

      Interest rate lock  agreements are used to hedge the risk that the cost of
a future  issuance  of debt may be  adversely  affected  by changes in  interest
rates.  Under an interest  rate lock  agreement,  Time  Warner  agrees to pay or
receive an amount equal to the  difference  between the net present value of the
cash flows for a notional principal amount of indebtedness based on the existing
yield of a U.S.  treasury bond at the date when the hedge is established and the
existing  yield of a U.S.  treasury  bond at the date when the hedge is settled,
typically  when  Time  Warner  issues  new debt.  The  notional  amounts  of the
agreement are not exchanged. Interest rate lock agreements are entered into with
a number of major financial institutions in order to minimize credit risk.

      Interest rate lock agreements are reflected at fair value in Time Warner's
consolidated  balance sheet and the related gains or losses on these  agreements
are deferred in shareholders'  equity (as a component of comprehensive  income).
These  deferred gains and losses are then amortized as an adjustment to interest
expense over the same period in which the related interest costs on the new debt
issuances are recognized in income.

      At September 30, 1998,  Time Warner had interest  rate lock  agreements on
$1.015 billion notional amount of indebtedness, which are principally being used
to hedge future debt issuances in connection with the planned redemption of Time
Warner's Series M Preferred Stock on December 30, 1998. Time Warner had deferred
approximately  $55 million of net losses on  interest  rate lock  agreements  at
September  30,  1998,  of which  approximately  $4  million  is  expected  to be
recognized in income over the next twelve months.

Foreign Currency Risk Management

     Foreign  exchange  contracts are used primarily by Time Warner to hedge the
risk that unremitted or future royalties and license fees owed to Time Warner or
TWE domestic  companies  for the sale or  anticipated  sale of U.S.  copyrighted
products  abroad may be  adversely  affected  by  changes  in  foreign  currency
exchange rates. As part of its overall  strategy to manage the level of exposure
to the risk of foreign currency exchange rate fluctuations, Time
<PAGE>


Warner hedges a portion of its and TWE's  combined  foreign  currency  exposures
anticipated  over the ensuing twelve month period.  At September 30, 1998,  Time
Warner had  effectively  hedged  approximately  half of the  combined  estimated
foreign currency  exposures that principally relate to anticipated cash flows to
be remitted to the U.S.  over the ensuing  twelve month  period,  using  foreign
exchange contracts that generally have maturities of three months or less, which
generally are rolled over to provide  continuing  coverage  throughout the year.
Time Warner often closes  foreign  exchange  sale  contracts  by  purchasing  an
offsetting purchase contract. Time Warner reimburses or is reimbursed by TWE for
contract gains and losses related to TWE's foreign  currency  exposure.  Foreign
exchange  contracts are placed with a number of major financial  institutions in
order to minimize credit risk.

      Time Warner records these foreign exchange  contracts at fair value in its
consolidated  balance sheet and the related  gains or losses on these  contracts
are deferred in shareholders'  equity (as a component of comprehensive  income).
These  deferred gains and losses are recognized in income in the period in which
the related  royalties and license fees being hedged are received and recognized
in income. However, to the extent that any of these contracts are not considered
to be perfectly effective in offsetting the change in the value of the royalties
and  license  fees being  hedged,  any  changes in fair  value  relating  to the
ineffective  portion of these  contracts are  immediately  recognized in income.
Gains and losses on foreign  exchange  contracts  are  generally  included  as a
component of interest and other, net, in Time Warner's consolidated statement of
operations.

      At September  30,  1998,  Time Warner had  contracts  for the sale of $608
million and the purchase of $267 million of foreign  currencies  at fixed rates,
primarily  Japanese yen (39% of contract  value),  German marks (42%) and French
francs  (16%),  compared  to  contracts  for the  sale of $507  million  and the
purchase of $139 million of foreign currencies at December 31, 1997. Time Warner
had  deferred  approximately  $4  million  of net  losses  on  foreign  exchange
contracts at  September  30, 1998,  which is all  expected to be  recognized  in
income over the next twelve months.

10.   SEGMENT INFORMATION

      Time  Warner  classifies  its  businesses  into  four  fundamental  areas:
Entertainment,  consisting  principally of interests in recorded music and music
publishing,   filmed   entertainment,   television   production  and  television
broadcasting;  Cable  Networks,  consisting  principally  of  interests in cable
television  programming;  Publishing,  consisting  principally  of  interests in
magazine publishing, book publishing and direct marketing; and Cable, consisting
principally  of  interests  in cable  television  systems.  A  majority  of Time
Warner's interests in filmed entertainment,  television  production,  television
broadcasting  and cable  television  systems,  and a portion of its interests in
cable  television   programming  are  held  by  the  Entertainment   Group.  The
Entertainment Group is not consolidated for financial reporting purposes.

      Information  as to the  operations  of Time  Warner and the  Entertainment
Group in different  business  segments is set forth below based on the nature of
the products and services  offered.  Time Warner evaluates  performance based on
several  factors,  of which the primary  financial  measure is business  segment
operating income before noncash amortization of intangible assets ("EBITA"). The
operating results of Time Warner's and the Entertainment  Group's cable segments
reflect the TWE-A/N  Transfers  effective as of January 1, 1998,  the  Primestar
Roll-up  Transaction  effective as of April 1, 1998,  the  formation of the Road
Runner Joint  Venture  effective as of June 30, 1998 and the Business  Telephony
Reorganization effective as of July 1, 1998.
<PAGE>


<TABLE>
<CAPTION>

                                                    Three Months           Nine Months
                                                Ended September 30,     Ended September 30,
                                                -------------------     -------------------
                                                  1998     1997           1998     1997  
                                                  ----     ----           ----     ----  
                                                               (millions)
Revenues
<S>                                             <C>     <C>            <C>      <C>    
Time Warner:
Publishing ..................................   $1,076  $ 1,027        $ 3,160  $ 3,004
Music .......................................      938      880          2,731    2,635
Cable Networks-TBS ..........................      825      748          2,459    2,092
Filmed Entertainment-TBS ....................      543      363          1,419    1,097
Cable .......................................      236      248            726      740
Intersegment elimination ....................      (40)     (35)          (108)    (110)
                                                ------   ------        -------  -------
Total........................................   $3,578   $3,231        $10,387  $ 9,458
                                                ======   ======        =======  =======

Entertainment Group:
Filmed Entertainment-Warner Bros............    $1,729  $ 1,399        $ 4,371  $ 3,830
Broadcasting-The WB Network ................        64       31            170       84
Cable Networks-HBO .........................       505      482          1,526    1,452
Cable.......................................     1,052    1,060          3,289    3,146
Intersegment elimination ...................      (128)    (115)          (369)    (322)
                                                ------   ------        -------  -------

Total.......................................    $3,222  $ 2,857        $ 8,987  $ 8,190
                                                ======  =======        =======  =======


                                                    Three Months           Nine Months
                                                Ended September 30,     Ended September 30,
                                                -------------------     -------------------
                                                  1998     1997           1998     1997 
                                                  ----     ----           ----     ---- 
                                                               (millions)
EBITA(1)
Time Warner:
Publishing .................................   $   112  $    98        $   373  $   331
Music ......................................        99       90            288      314
Cable Networks-TBS .........................       154      128            505      407
Filmed Entertainment-TBS ...................        71       68             94      103
Cable ......................................        81      107            229      316
Intersegment elimination ...................        (1)      (4)           (21)     (11)
                                               -------  -------        -------  -------

Total ......................................   $   516  $   487        $ 1,468  $ 1,460
                                               =======  =======        =======  =======

Entertainment Group:
Filmed Entertainment-Warner Bros ...........   $   162  $   106        $   403  $   321
Broadcasting-The WB Network ................       (17)     (21)           (78)     (60)
Cable Networks-HBO .........................       117      102            339      291
Cable(2) ...................................       336      257          1,017      759
                                               -------  -------        -------  -------
Total ......................................   $   598  $   444        $ 1,681  $ 1,311
                                               =======  =======        =======  =======
---------------
(1)EBITA   represents   business   segment   operating   income  before  noncash
   amortization of intangible assets. After deducting amortization of intangible
   assets,  Time Warner's  business  segment  operating income for the three and
   nine months ended September 30, 1998, respectively, and for the corresponding
   periods in the prior year was $315 million and $869 million in 1998, and $263
   million  and $802  million in 1997.  Similarly,  business  segment  operating
   income  of the  Entertainment  Group  for the  three  and nine  months  ended
   September 30, 1998,  respectively,  and for the corresponding  periods in the
   prior year was $469 million and $1.294  billion in 1998, and $335 million and
   $990 million in 1997.
(2)Includes net pretax gains  recognized in connection with the sale or exchange
   of certain  cable  television  systems of  approximately  $6 million  and $16
   million for the three months ended September 30, 1998 and 1997, respectively,
   and $90 million and $40 million for the nine months ended  September 30, 1998
   and 1997, respectively.

</TABLE>

<PAGE>

<TABLE>
<CAPTION>

                                                   Three Months            Nine Months
                                                Ended September 30,     Ended September 30,
                                                -------------------     -------------------
                                                  1998     1997           1998     1997
                                                  ----     ----           ----     ----
                                                                (millions)
Depreciation of Property, Plant and Equipment
<S>                                               <C>      <C>            <C>      <C> 
Time Warner:
Publishing.....................................   $ 20     $ 16           $ 58     $ 49
Music..........................................     16       21             54       62
Cable Networks-TBS.............................     25       23             72       65
Filmed Entertainment-TBS.......................      1        2              4        5
Cable..........................................     32       34             97       96
                                                  ----     ----           ----     ----

Total..........................................   $ 94     $ 96           $285     $277
                                                  ====     ====           ====     ====

Entertainment Group:
Filmed Entertainment-Warner Bros...............   $ 48     $ 55           $126     $145
Broadcasting-The WB Network....................      1        -              1        1
Cable Networks-HBO.............................      6        5             16       15
Cable..........................................    174      197            555      545
                                                  ----     ----           ----     ----

Total..........................................   $229     $257           $698     $706
                                                  ====     ====           ====     ====


                                                  Three Months              Nine Months
                                                Ended September 30,     Ended September 30,
                                                -------------------     -------------------
                                                  1998     1997           1998     1997
                                                  ----     ----           ----     ----
                                                              (millions)
Amortization of Intangible Assets(1)
Time Warner:
Publishing.....................................   $ 10     $ 11           $ 27     $ 28
Music..........................................     69       73            208      215
Cable Networks-TBS.............................     50       45            150      140
Filmed Entertainment-TBS.......................     24       26             64       67
Cable..........................................     48       69            150      208
                                                  ----     ----           ----     ----

Total..........................................   $201     $224           $599     $658
                                                  ====     ====           ====     ====

Entertainment Group:
Filmed Entertainment-Warner Bros...............   $ 33     $ 31           $ 99     $ 92
Broadcasting-The WB Network....................      -        -              2        -
Cable Networks-HBO.............................      -        -              -        -
Cable..........................................     96       78            286      229
                                                  ----     ----           ----     ----

Total..........................................   $129     $109           $387     $321
                                                  ====     ====           ====     ====

(1)Amortization  includes  amortization  relating to all  business  combinations
   accounted for by the purchase method,  including the $14 billion  acquisition
   of Warner Communications Inc. in 1989, the $6.2 billion acquisition of Turner
   Broadcasting  System, Inc. in 1996 and the $2.3 billion of cable acquisitions
   in 1996 and 1995.

</TABLE>

<PAGE>


11.         COMMITMENTS AND CONTINGENCIES

      Pending  legal  proceedings  are   substantially   limited  to  litigation
incidental to the  businesses  of Time Warner and alleged  damages in connection
with  class  action  lawsuits.  In  the  opinion  of  management,  the  ultimate
resolution of these matters will not have a material effect on the  consolidated
financial statements of Time Warner.

12.   ADDITIONAL FINANCIAL INFORMATION

      Additional financial information with respect to cash flows is as follows:

                                                             Nine Months
                                                         Ended September 30,
                                                         -------------------
                                                           1998     1997
                                                           ----     ----
                                                             (millions)

Interest expense.....................................      $669     $792
Cash payments made for interest......................       708      822
Cash payments made for income taxes..................       191      225
Tax-related distributions received from TWE..........       264      232
Income tax refunds received..........................        48       43

      Noncash investing activities in the first nine months of 1998 included the
Business  Telephony  Reorganization,  the  formation  of the Road  Runner  Joint
Venture  and the  TWE-A/N  Transfers  (Note  2).  Noncash  financing  activities
included  the  conversion  of  $1.15  billion  accreted  amount  of Zero  Coupon
Convertible  Notes into 18.7  million  shares of common  stock in the first nine
months of 1998 (Note 5), the  conversion of 12.6 million  shares of  convertible
preferred stock into  approximately 26.3 million shares of common stock (Note 8)
and the payment of $137  million of noncash  dividends on the Series M Preferred
Stock in the first nine months of 1997.  During the nine months ended  September
30,  1998,  Time  Warner  received  $102  million  of  proceeds  under its asset
securitization program.

<PAGE>


                                TIME WARNER INC.
                            SUPPLEMENTARY INFORMATION
                  CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
                                   (unaudited)

      Time Warner  Companies,  Inc.  ("TW  Companies")  and Turner  Broadcasting
System,   Inc.   ("TBS"  and,   together  with  TW  Companies,   the  "Guarantor
Subsidiaries")  are  wholly  owned  subsidiaries  of  Time  Warner  Inc.  ("Time
Warner").  Time  Warner,  TW  Companies  and TBS have fully and  unconditionally
guaranteed all of the outstanding  publicly  traded  indebtedness of each other.
Set forth below are condensed consolidating financial statements of Time Warner,
including each of the Guarantor  Subsidiaries,  presented for the information of
each  company's  public  debtholders.  Separate  financial  statements and other
disclosures  relating  to the  Guarantor  Subsidiaries  have not been  presented
because management has determined that this information would not be material to
such debtholders.  The following condensed  consolidating  financial  statements
present the results of operations, financial position and cash flows of (i) Time
Warner,  TW  Companies  and TBS (in each  case,  reflecting  investments  in its
consolidated  subsidiaries  under the  equity  method of  accounting),  (ii) the
direct and  indirect  non-guarantor  subsidiaries  of Time  Warner and (iii) the
eliminations  necessary  to  arrive  at the  information  for Time  Warner  on a
consolidated basis. These condensed consolidating financial statements should be
read in conjunction with the accompanying  consolidated  financial statements of
Time Warner.

                    Consolidating Statement of Operations
                For The Three Months Ended September 30, 1998
                                  (unaudited)

<TABLE>
<CAPTION>
                                                                                           Non-                      Time
                                                     Time           TW                   Guarantor     Elimina-      Warner
                                                    Warner       Companies      TBS     Subsidiaries    tions      Consolidated
                                                    ------       ---------      ---     ------------    -----      ------------
                                                                                 (millions)

<S>                                                 <C>           <C>          <C>         <C>           <C>         <C>    
Revenues ........................................   $    -        $    -       $ 176       $ 3,418       $ (16)      $ 3,578
                                                    ------        ------       -----       -------       -----       -------

Cost of revenues (1) ............................        -             -          83         1,985         (16)        2,052
Selling, general and administrative (1) .........        -             -          45         1,166           -         1,211
                                                    ------        ------       -----       -------       -----       -------

Operating expenses ..............................        -             -         128         3,151         (16)        3,263
                                                    ------        ------       -----       -------       -----       -------
Business segment operating income ...............        -             -          48           267           -           315
Equity in pretax income of consolidated
  subsidiaries ..................................      203           335          87             -        (625)            -
Equity in pretax income of Entertainment Group ..        -             -           -           196         (32)          164
Interest and other, net .........................      (35)         (183)        (37)          (40)        (16)         (311)
Corporate expenses ..............................      (20)          (14)         (3)          (15)         32           (20)
                                                    ------        ------       -----       -------       -----       -------
Income before income taxes ......................      148           138          95           408        (641)          148
Income tax provision ............................     (109)         (102)        (54)         (232)        388          (109)
                                                    ------        ------       -----       -------       -----       -------
Net income ......................................   $   39        $   36       $  41       $   176       $(253)      $    39
                                                    ======        ======       =====       =======       =====       =======


(1) Includes depreciation and amortization
      expense of: ...............................   $    -        $    -       $   2       $   293       $   -       $   295
                                                    ======        ======       =====       =======       =====       =======
</TABLE>

<PAGE>

                    Consolidating Statement of Operations
                For The Three Months Ended September 30, 1997
                                  (unaudited)

<TABLE>
<CAPTION>


                                                                                           Non-                      Time
                                                     Time           TW                   Guarantor     Elimina-      Warner
                                                    Warner       Companies      TBS     Subsidiaries    tions      Consolidated
                                                    ------       ---------      ---     ------------    -----      ------------
                                                                                 (millions) 

<S>                                                 <C>           <C>         <C>          <C>           <C>         <C>    
Revenues .........................................  $    -        $    -      $  121       $ 3,110       $   -       $ 3,231
                                                    ------        ------      ------       -------       -----       -------
Cost of revenues (1) .............................       -             -          67         1,897           -         1,964
Selling, general and administrative (1) ..........       -             -          35           969           -         1,004
                                                    ------        ------      ------       -------       -----       -------
Operating expenses ...............................       -             -         102         2,866           -         2,968
                                                    ------        ------      ------       -------       -----       -------
Business segment operating income ................       -             -          19           244           -           263
Equity in pretax income of consolidated
  subsidiaries ...................................      43           173         124             -        (340)            -
Equity in pretax income of Entertainment Group ...       -             -           -           107         (11)           96
Interest and other, net ..........................       7          (187)        (60)          (53)        (16)         (309)
Corporate expenses ...............................     (17)          (10)         (2)          (11)         23           (17)
                                                    ------        ------      ------       -------       -----       -------
Income (loss) before income taxes ................      33           (24)         81           287        (344)           33
Income tax provision .............................     (61)          (24)        (41)         (161)        226           (61)
                                                    ------        ------      ------       -------       -----       -------
Income (loss) before extraordinary item ..........     (28)          (48)         40           126        (118)          (28)
Extraordinary loss on retirement of
  debt, net of tax ...............................      (7)           (7)          -            (7)         14            (7)
                                                    ------        ------      ------       -------       -----       -------
Net income (loss) ................................  $  (35)       $  (55)     $   40       $   119       $(104)      $   (35)
                                                    ======        ======      ======       =======       =====       =======


(1) Includes depreciation and amortization
      expense of: ................................  $    -        $    -      $    5       $   315      $    -       $   320
                                                    ======        ======      ======       =======       =====       =======

</TABLE>

<PAGE>



                    Consolidating Statement of Operations
                 For The Nine Months Ended September 30, 1998
                                  (unaudited)

<TABLE>
<CAPTION>

                                                                                            Non-                      Time
                                                     Time           TW                   Guarantor     Elimina-      Warner
                                                    Warner       Companies      TBS     Subsidiaries    tions      Consolidated
                                                    ------       ---------      ---     ------------    -----      ------------
                                                                                 (millions)

<S>                                                 <C>           <C>         <C>          <C>         <C>           <C>    
Revenues .........................................  $    -        $    -      $  542       $ 9,861     $   (16)      $10,387
                                                    ------        ------       -----       -------     -------       -------
Cost of revenues (1) .............................       -             -         244         5,788         (16)        6,016
Selling, general and administrative (1) ..........       -             -         142         3,360           -         3,502
                                                    ------        ------       -----       -------     -------       -------
Operating expenses ...............................       -             -         386         9,148         (16)        9,518
                                                    ------        ------       -----       -------     -------       -------

Business segment operating income ................       -             -         156           713           -           869
Equity in pretax income of consolidated
  subsidiaries ...................................     486           949         165             -      (1,600)            -
Equity in pretax income of Entertainment Group ...       -             -           -           492         (55)          437
Interest and other, net ..........................     (57)         (570)       (121)          (91)        (38)         (877)
Corporate expenses ...............................     (58)          (40)        (11)          (46)         97           (58)
                                                    ------        ------       -----       -------     -------       -------

Income before income taxes .......................     371           339         189         1,068      (1,596)          371
Income tax provision .............................    (293)         (237)       (127)         (599)        963          (293)
                                                    ------        ------       -----       -------     -------       -------

Net income ......................................   $   78        $  102      $   62       $   469     $  (633)      $    78
                                                    ======        ======      ======       =======     =======       =======

(1) Includes depreciation and amortization
      expense of: ................................  $    -        $    -      $    6       $   878     $     -       $   884
                                                    ======       =======      ======       =======     =======       =======
</TABLE>

 <PAGE>


                   Consolidating Statement of Operations
                 For The Nine Months Ended September 30, 1997
                                  (unaudited)

<TABLE>
<CAPTION>

                                                                                           Non-                      Time
                                                     Time           TW                   Guarantor     Elimina-      Warner
                                                    Warner       Companies      TBS     Subsidiaries    tions      Consolidated
                                                    ------       ---------      ---     ------------    -----      ------------
                                                                                (millions)

<S>                                                 <C>           <C>          <C>         <C>         <C>           <C>    
Revenues .........................................  $    -        $    -       $ 387       $ 9,071     $     -       $ 9,458
                                                    ------        ------       -----       -------     -------       -------
Cost of revenues (1) .............................       -             -         192         5,225           -         5,417
Selling, general and administrative (1) ..........       -             -         126         3,113           -         3,239
                                                    ------        ------       -----       -------     -------       -------

Operating expenses ...............................       -             -         318         8,338           -         8,656
                                                    ------        ------       -----       -------     -------       -------

Business segment operating income ................       -             -          69           733           -           802
Equity in pretax income of consolidated
  subsidiaries ...................................     402           871         238             -      (1,511)            -
Equity in pretax income of Entertainment Group ...       -             -           -           551         (29)          522
Interest and other, net ..........................      18          (564)       (155)         (174)        (29)         (904)
Corporate expenses ...............................     (60)          (38)        (10)          (43)         91           (60)
                                                    ------        ------       -----       -------     -------       -------

Income before income taxes .......................     360           269         142         1,067      (1,478)          360
Income tax provision .............................    (306)         (211)       (104)         (594)        909          (306)
                                                    ------        ------       -----       -------     -------       -------

Income before extraordinary item .................      54            58          38           473        (569)           54
Extraordinary loss on retirement of debt,
  net of tax .....................................     (24)          (20)         (4)          (20)         44           (24)
                                                    ------        ------       -----       -------     -------       -------

Net income .......................................  $   30        $   38       $  34       $   453     $  (525)      $    30
                                                    ======        ======       =====       =======     =======       =======


(1) Includes depreciation and amortization
      expense of: ................................   $   -        $    -       $  16         $ 919      $    -        $  935
                                                    ======       =======       =====       =======       =====       =======

</TABLE>

<PAGE>

                        Consolidating Balance Sheet
                              September 30, 1998
                                  (unaudited)
<TABLE>
<CAPTION>

                                                                                           Non-                      Time
                                                     Time           TW                   Guarantor     Elimina-      Warner
                                                    Warner       Companies      TBS     Subsidiaries    tions      Consolidated
                                                    ------       ---------      ---     ------------    -----      ------------
                                                                                 (millions)
<S>                                                <C>           <C>         <C>           <C>        <C>           <C>   
ASSETS
Current assets
Cash and equivalents ............................. $     -       $     8     $    11       $   374    $      -      $    393
Receivables, net .................................       5            52          77         2,109          (3)        2,240
Inventories ......................................       -             -          75           787           -           862
Prepaid expenses .................................      17             -           2         1,192          (3)        1,208
                                                    ------        ------       -----       -------     -------       -------
Total current assets .............................      22            60         165         4,462          (6)        4,703

Noncurrent inventories ...........................       -             -         181         1,721           -         1,902
Investments in and amounts due to and from
  consolidated subsidiaries ......................  16,616        14,024       9,800             -     (40,440)            -
Investments in and amounts due to and
  from Entertainment Group .......................       -           944           -         4,513         (97)        5,360
Other investments ................................     170            12          24         1,211        (626)          791
Property, plant and equipment, net ...............      56             -          44         1,910           -         2,010
Music catalogues, contracts and copyrights .......       -             -           -           867           -           867 
Cable television and sports franchises ...........       -             -           -         3,127           -         3,127
Goodwill .........................................       -             -           -        12,023           -        12,023
Other assets .....................................      58           116         119           619          (7)          905
                                                    ------        ------       -----       -------     -------       -------

Total assets ..................................... $16,922       $15,156     $10,333       $30,453    $(41,176)     $ 31,688
                                                   =======       =======     =======       =======    ========      ========

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable ................................. $     3       $     -     $    13       $   827    $      -      $    843
Participations, royalties and programming costs 
  payable ........................................       -             -          30         1,082           -         1,112
Debt due within one year .........................       -             -           -            19           -            19
Other current liabilities ........................     319           187         131         1,622           -         2,259
                                                    ------        ------       -----       -------     -------       -------
Total current liabilities ........................     322           187         174         3,550           -         4,233

Long-term debt ...................................     594         7,357         747           367           -         9,065
Debt due to affiliates ...........................       -             -       1,647           158      (1,805)            -
Borrowings against future stock option proceeds ..   1,015             -           -             -           -         1,015
Deferred income taxes ............................   3,609         3,443         245         3,689      (7,377)        3,609
Unearned portion of paid subscriptions ...........       -             -           -           720           -           720
Other liabilities ................................     383             -         117           972           -         1,472
TW Companies-obligated mandatorily redeemable
  preferred securities of a subsidiary holding
  solely subordinated debentures of TW Companies .       -             -           -           575           -           575
Series M exchangeable preferred stock ............   1,859             -           -             -           -         1,859

Shareholders' equity
Due to (from) Time Warner and subsidiaries .......       -        (2,102)          -          (853)      2,955             -
Other shareholders' equity .......................   9,140         6,271       7,403        21,275     (34,949)        9,140
                                                    ------        ------       -----       -------     -------       -------
Total shareholders' equity .......................   9,140         4,169       7,403        20,422     (31,994)        9,140
                                                    ------        ------       -----       -------     -------       -------
Total liabilities and shareholders' equity ....... $16,922       $15,156     $10,333       $30,453    $(41,176)     $ 31,688
                                                   =======       =======     =======       =======    ========      ========
</TABLE>

<PAGE>

                        Consolidating Balance Sheet
                              December 31, 1997
                                  (unaudited)

<TABLE>
<CAPTION>


                                                                                            Non-                      Time
                                                     Time           TW                   Guarantor     Elimina-      Warner
                                                    Warner       Companies      TBS     Subsidiaries    tions      Consolidated
                                                    ------       ---------      ---     ------------    -----      ------------
                                                                                 (millions)
<S>                                                <C>           <C>         <C>           <C>        <C>           <C>  
ASSETS
Current assets
Cash and equivalents ............................. $     -       $   372     $     9       $   264    $      -      $    645
Receivables, net .................................      34            82           9         2,350         (28)        2,447
Inventories ......................................       -             -         112           718           -           830
Prepaid expenses .................................      21            14           5         1,063         (14)        1,089
                                                    ------        ------       -----       -------     -------       -------
Total current assets .............................      55           468         135         4,395         (42)        5,011

Noncurrent inventories ...........................       -             -         123         1,643          -          1,766
Investments in and amounts due to and from
  consolidated subsidiaries ......................  16,189        14,995       9,950             -     (41,134)            -
Investments in and amounts due to and
  from Entertainment Group .......................       -           970           -         4,620         (41)        5,549
Other investments ................................     106             1          24         1,957        (593)        1,495
Property, plant and equipment, net ...............      68             -          48         1,973           -         2,089
Music catalogues, contracts and copyrights .......       -             -           -           928           -           928
Cable television and sports franchises ...........       -             -           -         3,982           -         3,982
Goodwill .........................................       -             -           -        12,572           -        12,572
Other assets .....................................      54           124         118           483          (8)          771
                                                    ------        ------       -----       -------     -------       -------
Total assets ..................................... $16,472       $16,558     $10,398       $32,553    $(41,818)     $ 34,163
                                                   =======       =======     =======       =======    ========       =======

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable........................ ......... $    24       $     -     $    11       $   877    $      -      $    912
Participations, royalties and programming costs
  payable ........................................       -             -          10         1,062           -         1,072
Debt due within one year .........................       -             -           -             8           -             8
Other current liabilities ........................     442           284         234         1,371          48         2,379
                                                    ------        ------       -----       -------     -------       -------
Total current liabilities ........................     466           284         255         3,318          48         4,371

Long-term debt ...................................       -         8,462         747         2,624           -        11,833
Debt due to affiliates ...........................       -             -       1,722           158      (1,880)            -
Borrowings against future stock option proceeds ..     533             -           -             -           -           533
Deferred income taxes ............................   3,960         3,797         243         4,040      (8,080)        3,960
Unearned portion of paid subscriptions ...........       -             -           -           672           -           672
Other liabilities ................................     300            20          90           596           -         1,006
TW Companies-obligated mandatorily redeemable
  preferred securities of a subsidiary holding 
  solely subordinated debentures of TW Companies..       -             -           -           575           -           575
Series M exchangeable preferred stock ............   1,857             -           -             -           -         1,857

Shareholders' equity
Due to (from) Time Warner and subsidiaries .......       -        (2,195)          -          (256)      2,451             -
Other shareholders' equity .......................   9,356         6,190       7,341        20,826     (34,357)        9,356
                                                    ------        ------       -----       -------     -------       -------
Total shareholders' equity .......................   9,356         3,995       7,341        20,570     (31,906)        9,356
                                                    ------        ------       -----       -------     -------       -------
Total liabilities and shareholders' equity ....... $16,472       $16,558     $10,398       $32,553    $(41,818)     $ 34,163
                                                   =======       =======     =======       =======    ========       =======

</TABLE>

<PAGE>


                   Consolidating Statement of Cash Flows
                 For The Nine Months Ended September 30, 1998
                                  (unaudited)
<TABLE>
<CAPTION>


                                                                                            Non-                      Time
                                                     Time           TW                   Guarantor     Elimina-      Warner
                                                    Warner       Companies      TBS     Subsidiaries    tions      Consolidated
                                                    ------       ---------      ---     ------------    -----      ------------
                                                                                 (millions)
<S>                                                 <C>           <C>         <C>          <C>         <C>           <C>
OPERATIONS
Net income............................... ........  $   78        $  102      $   62       $   469     $  (633)      $    78
Adjustments for noncash and nonoperating items:
Depreciation and amortization ....................       -             -           6           878           -           884
Noncash interest expense .........................       -            29           -             -           -            29
Excess (deficiency) of distributions over equity in
  pretax income of consolidated subsidiaries .....   1,140          (467)        335             -      (1,008)            -
Excess of equity in pretax income of
  Entertainment Group over distributions .........       -             -           -           113          55           168
Changes in operating assets and liabilities ......     472             5        (125)         (233)        (84)           35
                                                    ------        ------      ------       -------     -------       -------
Cash provided (used) by operations ...............   1,690          (331)        278         1,227      (1,670)        1,194
                                                    ------        ------      ------       -------     -------       -------
INVESTING ACTIVITIES
Investments and acquisitions .....................    (213)            -           -           127           -           (86)
Advances to parents and consolidated subsidiaries .   (873)         (187)          -           (39)      1,099             -
Repayment of advances from consolidated subsidiaries    75           360           -             -        (435)            -
Capital expenditures .............................       -             -          (9)         (339)          -          (348)
Investment proceeds ..............................       -             -           -           458           -           458
Proceeds received from distribution of Senior 
  Capital contributed to TWE .....................       -             -           -           455           -           455
                                                    ------        ------      ------       -------     -------       -------
Cash provided (used) by investing activities .....  (1,011)          173          (9)          662         664           479
                                                    ------        ------      ------       -------     -------       -------
FINANCING ACTIVITIES
Borrowings .......................................     601           496           -           579          (7)        1,669
Debt repayments ..................................       -          (500)        (75)       (1,800)         75        (2,300)
Change in due to/from parent .....................       -          (188)       (192)         (558)        938             -
Borrowings against future stock option proceeds ..   1,015             -           -             -           -         1,015
Repayments of borrowings against future stock
  option proceeds ................................    (533)            -           -             -           -          (533)
Repurchases of Time Warner common stock...........  (1,944)            -           -             -           -             -
Dividends paid ...................................    (394)            -           -             -           -          (394)
Proceeds received from stock options and
  dividend reinvestment plans.....................     599             -           -             -           -           599
Other ............................................     (23)          (14)          -             -           -           (37)
                                                    ------        ------      ------       -------     -------       -------
Cash used by financing activities ................    (679)         (206)       (267)       (1,779)      1,006        (1,925)
                                                    ------        ------      ------       -------     -------       -------
INCREASE (DECREASE) IN CASH AND
  EQUIVALENTS ....................................       -          (364)          2           110           -          (252)
                                                    ------        ------      ------       -------     -------       -------
CASH AND EQUIVALENTS AT
  BEGINNING OF PERIOD ............................       -           372           9           264           -           645
                                                    ------        ------      ------       -------     -------       -------
CASH AND EQUIVALENTS AT END OF PERIOD.............  $    -        $    8      $   11       $   374     $     -       $   393
                                                    ======        ======      ======       =======     =======       =======
</TABLE>

<PAGE>


                    Consolidating Statement of Cash Flows
                 For The Nine Months Ended September 30, 1997
                                  (unaudited)
<TABLE>
<CAPTION>

                                                                                           Non-                      Time
                                                     Time           TW                   Guarantor     Elimina-      Warner
                                                    Warner       Companies      TBS     Subsidiaries    tions      Consolidated
                                                    ------       ---------      ---     ------------    -----      ------------
                                                                                 (millions)
OPERATIONS
<S>                                                  <C>          <C>          <C>         <C>         <C>           <C> 
Net income ......................................... $  30        $   38       $  34       $   453     $  (525)      $    30
Adjustments for noncash and nonoperating items:
Extraordinary loss on retirement of debt ...........    24            20           4            20         (44)           24
Depreciation and amortization ......................     -             -          16           919           -           935
Noncash interest expense ...........................     -            73           2             -           -            75
Excess of distributions over equity in pretax
  income of consolidated subsidiaries ..............   490           597         272             -      (1,359)            -
Excess (deficiency) of equity in pretax income of
  Entertainment Group over distributions ...........     -             -           -          (197)         29          (168)
Changes in operating assets and liabilities ........   225          (293)       (118)          482        (553)         (257)
                                                     -----        ------       -----       -------     -------       -------
Cash provided by operations ........................   769           435         210         1,677      (2,452)          639
                                                     -----        ------       -----       -------     -------       -------

INVESTING ACTIVITIES
Investments and acquisitions .......................   (17)            -           -           (81)          -           (98)
Advance to parents and consolidated subsidiaries ...  (778)         (134)          -             -         912             -
Capital expenditures ...............................     -             -          (8)         (416)          -          (424)
Investment proceeds ................................     -             -           -           156           -           156
Proceeds received from distribution of Senior 
  Capital contributed to TWE .......................     -             -           -           455           -           455
                                                     -----        ------       -----       -------     -------       -------

Cash provided (used) by investing activities .......  (795)         (134)         (8)          114         912            89
                                                     -----        ------       -----       -------     -------       -------

FINANCING ACTIVITIES
Borrowings .........................................     -         1,575         762           370        (762)        1,945
Debt repayments ....................................     -          (833)       (964)         (446)          -        (2,243)
Change in due to/from parent .......................   111          (785)          -        (1,628)      2,302             -
Repayments of borrowings against
  future stock option proceeds .....................  (185)            -           -             -           -          (185)
Repurchases of Time Warner common stock ............   (37)            -           -             -           -           (37)
Dividends paid .....................................  (253)            -           -             -           -          (253)
Proceeds received from stock option and dividend
  reinvestment plans ...............................   328             -           -             -           -           328
Other ..............................................     -            (6)          -           (30)          -           (36)
                                                     -----        ------       -----       -------     -------       -------

Cash used by financing activities ..................   (36)          (49)       (202)       (1,734)      1,540          (481)
                                                     -----        ------       -----       -------     -------       -------

INCREASE (DECREASE) IN CASH AND EQUIVALENTS .......    (62)          252           -            57           -           247

CASH AND EQUIVALENTS AT
  BEGINNING OF PERIOD .............................     62           137           -           315           -           514
                                                     -----        ------       -----       -------     -------       -------

CASH AND EQUIVALENTS AT END OF PERIOD .............  $   -        $  389       $   -       $   372     $     -       $   $761
                                                     =====        ======       =====       =======     =======       =======
</TABLE>


<PAGE>


                  TIME WARNER ENTERTAINMENT COMPANY, L.P.
                     MANAGEMENT'S DISCUSSION AND ANALYSIS
               OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

      Time  Warner  Entertainment   Company,   L.P.  ("TWE"  or  the  "Company")
classifies its business interests into three fundamental  areas:  Entertainment,
consisting   principally  of  interests  in  filmed  entertainment,   television
production and television broadcasting;  Cable Networks,  consisting principally
of interests in cable television programming;  and Cable, consisting principally
of interests in cable television systems.  TWE also manages the cable properties
owned by Time Warner and the combined cable television  operations are conducted
under  the name of Time  Warner  Cable.  Capitalized  terms are as  defined  and
described in the accompanying  consolidated  financial statements,  or elsewhere
herein.

Use of EBITA

      TWE evaluates operating performance based on several factors, of which the
primary  financial  measure is operating  income before noncash  amortization of
intangible  assets ("EBITA").  Consistent with  management's  financial focus on
controlling capital spending, EBITA measures operating performance after charges
for  depreciation.  In addition,  EBITA  eliminates the uneven effect across all
business segments of considerable  amounts of noncash amortization of intangible
assets recognized in business combinations accounted for by the purchase method,
including Time Warner's $14 billion acquisition of Warner Communications Inc. in
1989  and  $1.3  billion  acquisition  of  the  minority  interest  in  American
Television  and  Communications  Corporation  in 1992.  The exclusion of noncash
amortization  charges is also  consistent  with  management's  belief that TWE's
intangible  assets,  such as cable  television  franchises,  film and television
libraries and the goodwill associated with its brands, are generally  increasing
in value and importance to TWE's business  objective of creating,  extending and
distributing  recognizable brands and copyrights  throughout the world. As such,
the  following  comparative  discussion  of the  results  of  operations  of TWE
includes, among other factors, an analysis of changes in business segment EBITA.
However,  EBITA should be  considered  in addition to, not as a substitute  for,
operating  income,  net  income  and other  measures  of  financial  performance
reported in accordance with generally accepted accounting principles.

RESULTS OF OPERATIONS

      As more fully  described  herein,  TWE's 1998 operating  results have been
affected by certain  cable-related  transactions,  including (i) the transfer of
cable television  systems (or interests therein) serving  approximately  650,000
subscribers  that were  formerly  owned by  subsidiaries  of Time  Warner to the
TWE-Advance/Newhouse   Partnership  ("TWE-A/N"),  subject  to  approximately  $1
billion of debt,  in exchange  for common and  preferred  partnership  interests
therein,  as well as certain related  transactions  (collectively,  the "TWE-A/N
Transfers"), (ii) the transfer of TWE's and TWE-A/N's direct broadcast satellite
operations and related  assets to Primestar,  Inc., a separate  holding  company
(the "Primestar Roll-up  Transaction"),  (iii) the reorganization of Time Warner
Cable's business telephony operations (the "Business Telephony Reorganization"),
(iv) the formation of a joint venture to operate and expand Time Warner  Cable's
and MediaOne's  existing high-speed Internet access businesses (the "Road Runner
Joint  Venture")  and (v) the  sale or  exchange  of  certain  cable  television
systems. The effects of these transactions are described elsewhere herein.
<PAGE>


      EBITA and  operating  income for TWE for the three and nine  months  ended
September 30, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>

                                       Three Months Ended September 30,         Nine Months Ended September 30,
                                       --------------------------------         -------------------------------
                                                            Operating                                Operating
                                             EBITA            Income                 EBITA             Income 
                                             -----            ------                 -----             ------ 
                                         1998     1997     1998     1997        1998      1997      1998     1997
                                         ----     ----     ----     ----        ----      ----      ----     ----
                                                                       (millions)
<S>                                      <C>      <C>      <C>      <C>        <C>       <C>       <C>       <C> 
Filmed Entertainment-Warner Bros         $161     $106     $128     $ 75      $  401    $  315    $  302     $223
Broadcasting-The WB Network               (17)     (21)     (17)     (21)        (78)      (60)      (80)     (60)
Cable Networks-HBO                        117      102      117      102         339       291       339      291
Cable(a)                                  336      257      240      179       1,017       759       731      530
                                          ---      ---      ---      ---       -----       ---       ---      ---

Total                                    $597     $444     $468     $335      $1,679    $1,305    $1,292     $984
                                         ====     ====     ====     ====      ======    ======    ======     ====
---------------
(a) Includes net pretax gains recognized in connection with the sale or exchange
    of certain  cable  television  systems of  approximately  $6 million and $16
    million  for  the  three   months  ended   September   30,  1998  and  1997,
    respectively,  and  approximately  $90  million and $40 million for the nine
    months ended September 30, 1998 and 1997, respectively.
</TABLE>

Three  Months  Ended  September  30, 1998  Compared to the Three  Months Ended
September 30, 1997

      TWE had revenues of $3.220  billion and net income of $172 million for the
three months ended  September 30, 1998,  compared to revenues of $2.855  billion
and net income of $81 million for the three months ended  September 30, 1997. As
discussed  more fully below,  TWE's net income  increased in 1998 as compared to
1997 principally due to an overall increase in operating income generated by its
business  segments  (including  the positive  effect of the TWE-A/N  Transfers),
offset in part by an increase in interest  expense  associated  with the TWE-A/N
Transfers, higher losses from certain investments accounted for under the equity
method of accounting and lower gains on foreign exchange contracts.

      As a U.S. partnership, TWE is not subject to U.S. federal and state income
taxation.  Income and  withholding  taxes of $23 million and $27 million for the
three months ended September 30, 1998 and 1997, respectively, have been provided
for the operations of TWE's domestic and foreign subsidiary corporations.

      Filmed  Entertainment-Warner  Bros.  Revenues increased to $1.727 billion,
compared to $1.397 billion in the third quarter of 1997. EBITA increased to $161
million from $106 million.  Operating  income increased to $128 million from $75
million. Revenues benefited from a significant increase in television production
and  distribution  operations  principally  relating to the initial  off-network
domestic  syndication  availability of Friends and the initial off-network basic
cable availability of ER. EBITA and operating income benefited  principally from
the revenue gains,  offset in part by lower  international  syndication sales of
library  product  and film  write-offs  relating  to  disappointing  results for
certain theatrical releases.

      Broadcasting - The WB Network. Revenues increased to $64 million, compared
to $31 million in the third quarter of 1997. EBITA and operating income improved
to a loss of $17 million  from a loss of $21  million.  Revenues  increased as a
result of higher  advertising sales relating to improved  television ratings and
the addition of a fourth night of prime-time  programming  in January 1998 and a
fifth night in September 1998. Operating losses improved principally as a result
of the revenue gains, offset in part by higher programming costs associated with
<PAGE>


the expanded programming schedule and a lower allocation of losses to a minority
partner in the network.  Due to the start-up  nature of this national  broadcast
operation, losses are expected to continue.

      Cable Networks-HBO.  Revenues increased to $505 million,  compared to $482
million in the third quarter of 1997.  EBITA and operating  income  increased to
$117 million from $102 million. Revenues benefited primarily from an increase in
subscriptions.  EBITA and operating income increased  principally as a result of
the revenue gains, and, to a lesser extent,  cost savings and higher income from
Comedy Central, a 50%-owned equity investee.

      Cable. Revenues decreased to $1.052 billion, compared to $1.060 billion in
the third  quarter of 1997.  EBITA  increased to $336 million from $257 million.
Operating  income  increased  to $240  million  from  $179  million.  The  Cable
division's 1998 operating results were positively  affected by the aggregate net
impact of the  TWE-A/N  Transfers  and the  deconsolidation  of  certain  of its
operations in connection  with each of the Primestar  Roll-up  Transaction,  the
Business  Telephony  Reorganization  and the  formation of the Road Runner Joint
Venture.  Excluding  the  effect  of  these  transactions,   revenues  increased
principally as a result of an increase in basic cable subscribers,  increases in
regulated cable rates as permitted  under Time Warner Cable's "social  contract"
with  the  Federal   Communications   Commission  ("FCC")  and  an  increase  in
advertising  revenues.  Similarly  excluding  the effect of these  transactions,
EBITA and  operating  income  increased  principally  as a result of the revenue
gains,  offset in part by lower net gains  relating  to the sale or  exchange of
certain  cable  television  systems and higher  depreciation  related to capital
spending.

      Interest and Other,  Net. Interest and other, net, was $203 million in the
third  quarter of 1998,  compared to $145 million in the third  quarter of 1997.
Interest  expense  increased  to $145  million,  compared to $123 million in the
third quarter of 1997,  principally due to higher average debt levels associated
with the TWE-A/N Transfers.  There was other expense, net, of $58 million in the
third  quarter of 1998,  compared to $22  million in the third  quarter of 1997,
principally  due to higher losses from certain  investments  accounted for under
the equity method of accounting,  lower gains on foreign exchange  contracts and
higher losses associated with TWE's asset securitization program.

Nine  Months  Ended  September  30, 1998  Compared  to the Nine  Months  Ended
September 30, 1997

      TWE had revenues of $8.980  billion and net income of $435 million for the
nine months ended September 30, 1998, compared to revenues of $8.183 billion and
net income of $483 million for the nine months  ended  September  30,  1997.  As
discussed more fully below and as previously  described above,  TWE's net income
decreased in 1998 as compared to 1997  principally  due to  significantly  lower
aggregate,  net pretax gains  recognized in connection with the sale or exchange
of  certain  cable  television  systems  in each year and the 1997 sale of TWE's
interest in E! Entertainment Television,  Inc. ("E!  Entertainment").  Excluding
the effect of these transactions, TWE's net income increased in 1998 principally
as a result of an overall increase in operating income generated by its business
segments  (including the positive  effect of the TWE-A/N  Transfers),  offset in
part by an increase in interest expense  associated with the TWE-A/N  Transfers,
higher losses from certain investments  accounted for under the equity method of
accounting and lower gains on foreign exchange contracts.
 <PAGE>


      As a U.S. partnership, TWE is not subject to U.S. federal and state income
taxation.  Income and  withholding  taxes of $55 million and $64 million for the
nine months ended September 30, 1998 and 1997, respectively,  have been provided
for the operations of TWE's domestic and foreign subsidiary corporations.

      Filmed  Entertainment-Warner  Bros.  Revenues increased to $4.364 billion,
compared to $3.823 billion in the first nine months of 1997.  EBITA increased to
$401 million from $315 million.  Operating income increased to $302 million from
$223  million.  Revenues  benefited  from a  significant  increase in television
production  and  distribution  operations  principally  relating  to the initial
off-network  domestic  syndication  availability  of  Friends  and  the  initial
off-network  basic cable  availability of ER, as well as an increase in revenues
from  consumer  products  licensing  operations.   EBITA  and  operating  income
benefited   principally  from  the  revenue  gains,  offset  in  part  by  lower
international  syndication sales of library product and film write-offs relating
to disappointing results for certain theatrical releases. In addition, EBITA and
operating  income for each period included certain one-time gains on the sale of
assets  that  were  comparable  in  amount  and  therefore,  did  not  have  any
significant effect on operating trends.

      Broadcasting  - The  WB  Network.  Revenues  increased  to  $170  million,
compared to $84 million in the first nine months of 1997.  EBITA  decreased to a
loss of $78 million from a loss of $60 million.  Operating  losses  increased to
$80  million  from  $60  million.  Revenues  increased  as a  result  of  higher
advertising sales relating to improved  television ratings and the addition of a
fourth  night of  prime-time  programming  in January  1998 and a fifth night in
September 1998. Despite the revenue increase, operating losses increased because
of a lower allocation of losses to a minority  partner in the network.  However,
excluding this minority interest effect,  operating losses improved  principally
as a result of the revenue gains,  which  outweighed  higher  programming  costs
associated with the expanded programming schedule. Due to the start-up nature of
this national broadcast operation, losses are expected to continue.

      Cable  Networks-HBO.  Revenues  increased to $1.526  billion,  compared to
$1.452  billion in the first nine  months of 1997.  EBITA and  operating  income
increased to $339 million from $291 million.  Revenues benefited  primarily from
an increase in subscriptions.  EBITA and operating income increased  principally
as a result of the revenue  gains,  and, to a lesser  extent,  cost  savings and
higher income from Comedy Central, a 50%-owned equity investee.

      Cable. Revenues increased to $3.289 billion, compared to $3.146 billion in
the first nine  months of 1997.  EBITA  increased  to $1.017  billion  from $759
million. Operating income increased to $731 million from $530 million. The Cable
division's 1998 operating results were positively  affected by the aggregate net
impact of the  TWE-A/N  Transfers  and the  deconsolidation  of  certain  of its
operations in connection  with each of the Primestar  Roll-up  Transaction,  the
Business  Telephony  Reorganization  and the  formation of the Road Runner Joint
Venture.  Excluding  the  effect  of  these  transactions,   revenues  increased
principally as a result of an increase in basic cable subscribers,  increases in
regulated cable rates as permitted  under Time Warner Cable's "social  contract"
with the FCC and an increase in advertising  revenues.  Similarly  excluding the
effect of these transactions,  EBITA and operating income increased  principally
as a result of the  revenue  gains and higher net gains  relating to the sale or
exchange  of  certain  cable  television  systems,  offset  in  part  by  higher
depreciation related to capital spending.
<PAGE>


     Interest and Other,  Net.  Interest and other, net, was $550 million in the
first nine months of 1998,  compared to $155 million in the first nine months of
1997.  Interest expense  increased to $418 million,  compared to $358 million in
1997,  principally due to higher average debt levels associated with the TWE-A/N
Transfers.  There was other  expense,  net,  of $132  million  in the first nine
months of 1998, compared to other income, net, of $203 million in the first nine
months of 1997,  principally  due to the absence of an approximate  $250 million
pretax gain on the sale of an interest in E!  Entertainment  recognized in 1997,
higher losses from certain investments  accounted for under the equity method of
accounting,  lower  gains  on  foreign  exchange  contracts  and  higher  losses
associated with TWE's asset securitization program.


FINANCIAL CONDITION AND LIQUIDITY
September 30, 1998

Financial Condition

       TWE had $7.4 billion of debt, $125 million of cash and  equivalents  (net
debt of $7.3  billion),  $221 million of preferred  stock of a subsidiary,  $591
million of Time Warner  General  Partners'  Senior  Capital and $5.8  billion of
partners' capital at September 30, 1998,  compared to $6.0 billion of debt, $322
million of cash and  equivalents  (net debt of $5.7  billion),  $233  million of
preferred stock of a subsidiary,  $1.1 billion of Time Warner General  Partners'
Senior  Capital and $6.3 billion of partners'  capital at December 31, 1997. Net
debt  increased  principally  as a  result  of the  TWE-A/N  Transfers  and cash
distributions paid to Time Warner.

Debt Transactions

      In July 1998,  TWE borrowed $579 million  under its bank credit  agreement
and paid a distribution  to the Time Warner General  Partners  relating to their
Senior Capital interests.

      In April 1998,  TWE  consummated  two previously  announced  transactions,
consisting  of the  sale  of  TWE's  49%  interest  in Six  Flags  Entertainment
Corporation  and  the  Primestar  Roll-up  Transaction.  As a  result  of  these
transactions, TWE reduced debt by approximately $540 million.

      In early 1998,  TWE-A/N assumed  approximately $1 billion of debt from TWI
Cable  Inc.  ("TWI  Cable"),  a  wholly  owned  subsidiary  of Time  Warner,  in
connection  with the  TWE-A/N  Transfers.  The debt  assumed by TWE-A/N has been
guaranteed by TWI Cable and certain of its subsidiaries.

Cash Flows

      During the first nine months of 1998,  TWE's cash  provided by  operations
amounted to $1.273 billion and reflected $1.679 billion of EBITA from its Filmed
Entertainment-Warner Bros.,  Broadcasting-The WB Network, Cable Networks-HBO and
Cable businesses,  $698 million of noncash depreciation expense and $131 million
of  proceeds  from TWE's  asset  securitization  program,  less $419  million of
interest  payments,  $57  million of income  taxes,  $54  million  of  corporate
expenses,  and $705 million related to an aggregate  increase in working capital
requirements,  other balance sheet accounts and noncash items.  Cash provided by
operations of $918 million in the first nine
<PAGE>


months of 1997  reflected  $1.305  billion of  business  segment  EBITA and $692
million of noncash depreciation expense, less $394 million of interest payments,
$55 million of income taxes, $54 million of corporate  expenses and $576 million
related to an aggregate increase in working capital requirements,  other balance
sheet accounts and noncash items.

      Cash used by  investing  activities  was $887  million  in the first  nine
months of 1998,  compared  to $777  million  in the first  nine  months of 1997,
principally  as a result of the  effect of  deconsolidating  approximately  $200
million  of cash of  Paragon  Communications  in  connection  with  the  TWE-A/N
Transfers  that has been included as a reduction of cash flows from  investments
and acquisitions,  offset in part by a $96 million increase in proceeds from the
sale of investments.  Capital expenditures were $1.092 billion in the first nine
months of 1998 and $1.117 billion in the first nine months of 1997.

      Cash used by  financing  activities  was $583  million  in the first  nine
months  of 1998,  compared  to $61  million  in the first  nine  months of 1997,
principally as a result of the absence of $243 million of aggregate net proceeds
from the issuance of preferred  stock of a  subsidiary  in the first  quarter of
1997 and a $251 million increase in distributions paid to Time Warner, offset in
part by an increase in debt used to fund cash distributions to Time Warner.

      Management  believes that TWE's  operating cash flow, cash and equivalents
and  additional  borrowing  capacity  are  sufficient  to fund its  capital  and
liquidity needs for the foreseeable future.

Cable Capital Spending

      Time Warner Cable has been engaged in a plan to upgrade the  technological
capability  and  reliability  of its cable  television  systems  and develop new
services, which it believes will position the business for sustained,  long-term
growth. Capital spending by TWE's Cable division amounted to $991 million in the
nine months ended  September  30, 1998,  compared to $1.013  billion in the nine
months  ended  September  30,  1997.  For the full year of 1998,  cable  capital
spending is expected to be comparable to 1997 levels,  with  approximately  $400
million  budgeted  for the  remainder of 1998.  Capital  spending by TWE's Cable
division is expected to continue to be funded by cable  operating  cash flow. In
exchange for certain  flexibility in establishing  cable rate pricing structures
for regulated  services that went into effect on January 1, 1996 and  consistent
with Time Warner Cable's long-term strategic plan, Time Warner Cable agreed with
the FCC to invest a total of $4 billion in capital costs in connection  with the
upgrade  of its cable  infrastructure,  which is  expected  to be  substantially
completed over a five-year  period ending  December 31, 2000. The agreement with
the FCC covers all of the cable  operations of Time Warner Cable,  including the
owned or managed  cable  television  systems of TWE,  TWE-A/N  and Time  Warner.
Management expects to continue to finance such level of investment through cable
operating  cash flow and the  development  of new revenue  streams from expanded
programming options, high-speed Internet access and other services.

Cable Financing Strategy

      Time  Warner's  and TWE's cable  financing  strategy is to continue to use
cable operating cash flow to finance the level of capital spending  necessary to
upgrade the technological capability of its cable television systems and develop
new services, while pursuing opportunities to reduce either existing debt and/or
their share of future
<PAGE>


funding  requirements  related  to the cable  television  business  and  related
ancillary  businesses.  Consistent  with this  strategy,  Time  Warner,  TWE and
TWE-A/N have completed a series of transactions in 1998, as discussed more fully
below.

Business Telephony Reorganization

      In July 1998, Time Warner,  TWE and TWE-A/N  completed a reorganization of
their business telephony operations (the "Business Telephony Reorganization") by
combining  such  operations  into  a  single  entity  that  is  intended  to  be
self-financing.  This entity, named Time Warner Telecom LLC ("TW Telecom"), is a
competitive local exchange carrier (CLEC) in selected  metropolitan areas across
the United States where it offers a wide range of telephony services to business
customers.  Time Warner,  MediaOne Group, Inc.  ("MediaOne,"  formerly U S WEST,
Inc.)  and the  Advance/Newhouse  Partnership  ("Advance/Newhouse"),  a  limited
partner in TWE-A/N,  own  interests in TW Telecom of 61.95%,  18.88% and 19.17%,
respectively.  As a result of the  Business  Telephony  Reorganization,  TWE and
TWE-A/N do not have  continuing  equity  interests in these  business  telephony
operations.

Road Runner Joint Venture

     In  June  1998,  Time  Warner,  TWE,  TWE-A/N,  MediaOne,  Microsoft  Corp.
("Microsoft")  and Compaq  Computer Corp.  ("Compaq")  formed a joint venture to
operate and expand  Time  Warner  Cable's  and  MediaOne's  existing  high-speed
Internet access  businesses (the "Road Runner Joint  Venture").  In exchange for
contributing their existing high-speed  Internet access businesses,  Time Warner
received an 11.25% common equity interest in the Road Runner Joint Venture,  TWE
received a 25% interest, TWE-A/N received a 32.5% interest and MediaOne received
a 31.25% interest. In exchange for Microsoft and Compaq each contributing $212.5
million of cash to the Road  Runner  Joint  Venture,  Microsoft  and Compaq each
received a preferred  equity  interest  therein that is  convertible  into a 10%
common equity interest.  Accordingly,  on a fully diluted basis, the Road Runner
Joint  Venture is owned 9% by Time Warner,  20% by TWE,  26% by TWE-A/N,  25% by
MediaOne,  10% by Microsoft and 10% by Compaq.  As a result of this transaction,
effective as of June 30, 1998, TWE and TWE-A/N  deconsolidated  their high-speed
Internet access operations and each of TWE's and TWE-A/N's  interest in the Road
Runner  Joint  Venture  is being  accounted  for  under  the  equity  method  of
accounting.

      The aggregate $425 million of capital  contributed by Microsoft and Compaq
is expected to be used by the Road  Runner  Joint  Venture to continue to expand
the roll out of high-speed Internet access services. In addition, as a result of
Time Warner Cable being a retailer of the Road Runner  business in its franchise
areas whereby Time Warner Cable's technologically advanced,  high-capacity cable
architecture will be used to provide these high-speed  Internet access services,
Time Warner Cable will initially retain 70% of the subscription revenues and 30%
of the  national  advertising  and  transactional  revenues  generated  from the
delivery of these on-line services to its cable subscribers. Time Warner Cable's
share  of  these  revenues  is  expected  to  change   periodically  to  75%  of
subscription revenues and 25% of national advertising and transactional revenues
by 2006.

Primestar Roll-up Transaction

      In April 1998, TWE and  Advance/Newhouse  transferred the direct broadcast
satellite operations conducted by TWE and TWE-A/N (the "DBS Operations") and the
31% partnership interest in Primestar Partners, L.P. held
<PAGE>


by TWE-A/N ("Primestar" and collectively,  the "Primestar Assets") to Primestar,
Inc. ("New Primestar"),  a separate holding company.  New Primestar owns the DBS
Operations and Primestar  partnership  interests formerly owned by TCI Satellite
Entertainment,  Inc. and other  previously  existing  partners of Primestar.  In
exchange for  contributing its interests in the Primestar  Assets,  TWE received
approximately  48 million shares of common stock of New Primestar  (representing
an approximate 24% equity interest) and realized  approximately  $240 million of
debt reduction.  TWE deconsolidated the DBS Operations  effective as of April 1,
1998 and the equity  interest in New Primestar  received in this  transaction is
being accounted for under the equity method of accounting.

TWE-A/N Transfers

      In early 1998, Time Warner (through a wholly owned subsidiary) contributed
cable television  systems (or interests therein) serving  approximately  650,000
subscribers to TWE-A/N, subject to approximately $1 billion of debt, in exchange
for common and preferred  partnership  interests therein,  and completed certain
related  transactions.  The debt assumed by TWE-A/N has been  guaranteed  by TWI
Cable and certain of its subsidiaries.  TWE-A/N is now owned 65.3% by TWE, 33.3%
by Advance/Newhouse and 1.4% indirectly by Time Warner.

Warner Bros. Backlog

      Warner Bros.' backlog,  representing  the amount of future revenue not yet
recorded from cash  contracts for the  licensing of  theatrical  and  television
product  for  pay  cable,  basic  cable,   network  and  syndicated   television
exhibition, amounted to $2.054 billion at September 30, 1998, compared to $2.126
billion  at  December  31,  1997  (including  amounts  relating  to TWE's  cable
television networks of $211 million and $238 million,  respectively, and to Time
Warner's   cable   television   networks  of  $500  million  and  $481  million,
respectively).

      Because  backlog  generally  relates to  contracts  for the  licensing  of
theatrical  and  television  product  which  have  already  been  produced,  the
recognition of revenue for such completed  product is principally only dependent
upon the commencement of the availability period for telecast under the terms of
the related licensing agreement.  Cash licensing fees are collected periodically
over the term of the related  licensing  agreements or on an  accelerated  basis
using a $600 million  securitization  facility. The portion of backlog for which
cash has not already been received has significant off-balance sheet asset value
as  a  source  of  future  funding.  The  backlog  excludes  advertising  barter
contracts,  which  are also  expected  to result in the  future  realization  of
revenues  and cash through the sale of  advertising  spots  received  under such
contracts.

Year 2000 Technology Preparedness

      TWE, like most large companies, depends on many different computer systems
and other chip-based devices for the continuing  conduct of its business.  Older
computer  programs,  computer  hardware  and  chip-based  devices  may  fail  to
recognize  dates  beginning  on January 1, 2000 as being valid  dates,  and as a
result  may fail to  operate  or may  operate  improperly  when  such  dates are
introduced.

      TWE's  exposure  to  potential  Year 2000  problems  exists in two general
areas:  technological  operations  in  the  sole  control  of  the  Company  and
technological  operations  dependent  in some way on one or more third  parties.
These technological operations include information technology ("IT") systems and
non-IT systems, including those
<PAGE>


with embedded  technology,  hardware and software.  Most of TWE's potential Year
2000 exposures are in the area of technological  operations  dependent on one or
more third  parties.  Failure to achieve high levels of Year 2000  compliance in
either  area  could  have a  material  adverse  impact on TWE and its  financial
statements.

     The Company's Year 2000  initiative is being  conducted at the  operational
level by divisional project managers and senior technology  executives  overseen
by senior  divisional  executives,  with  assistance  internally as well as from
outside  professionals.  The  progress of each  division  through the  different
phases  of  remediation  -  inventorying,   assessment,   remediation  planning,
implementation  and final  testing - is  actively  overseen  and  reviewed  on a
regular basis by an executive oversight group.

      The Company has generally  completed the process of identifying  potential
Year  2000   difficulties  in  its   technological   operations,   including  IT
applications,  IT technology and support, desktop hardware and software,  non-IT
systems and important third party operations,  and distinguishing those that are
"mission  critical"  from those  that are not.  An item is  considered  "mission
critical"  if its Year  2000-related  failure  would  significantly  impair  the
ability of one of the Company's major business units to (1) produce,  market and
distribute the products or services that generate  significant revenues for that
business, (2) meet its obligations to pay its employees,  artists,  vendors  and
other obligations or (3) meet its obligations under regulatory  requirements and
internal  accounting  controls.  The Company and its divisions  have  identified
approximately 600 worldwide,  "mission critical" potential exposures.  Of these,
as of  September  30,  1998,  approximately  10%  have  been  identified  by the
divisions as in the assessment  stage,  approximately  40% as in the remediation
planning stage, and almost 50% as in the process of implementation or testing or
as Year 2000 compliant.  The Company currently expects that the assessment phase
for these  potential  exposures  should be completed by the end of 1998 and that
remediation with respect to technological  operations in the sole control of the
Company will be substantially  completed in all material  respects by the end of
the second quarter of 1999.

     In the area of "mission  critical"  technological  operations  dependent in
some way on one or more  third  parties,  the  situation  is much  less in TWE's
ability to predict or control.  In addition,  the Company's  business is heavily
dependent on third parties that are themselves  heavily dependent on technology.
In some cases,  the Company's third party dependence is on vendors of technology
who are themselves working towards solutions to Year 2000 problems. For example,
in a situation  endemic to the cable  industry,  much of the  Company's  headend
equipment  that  controls  cable  set-top  boxes  is  currently  not  Year  2000
compliant. The box manufacturers are working with cable industry groups and have
recently  developed  solutions  that the Company is  beginning to install in its
headend  equipment.  It is  currently  expected  that  these  solutions  will be
substantially  implemented  by the end of the second  quarter of 1999.  In other
cases,  the  Company's  third party  dependence  is on  suppliers of products or
services that are themselves  computer-intensive.  For example,  if a television
broadcaster or cable  programmer  encounters  Year 2000 problems that impede its
ability to deliver its  programming,  the Company will be unable to provide that
programming  to its cable  customers.  Similarly,  because the Company is also a
programming  supplier,  third-party  signal  delivery  problems could affect its
ability to deliver its  programming to its customers.  The Company has attempted
to include in its "mission critical"  inventory  significant  service providers,
vendors, suppliers,  customers and governmental entities that are believed to be
critical  to  business  operations  and is in various  stages of  attempting  to
ascertain their state of Year 2000 readiness through questionnaires, interviews,
on-site  visits,  industry  group  participation  and  other  available  means.
<PAGE>


Moreover,  TWE  is  dependent,  like  all  large  companies,  on  the  continued
functioning,  domestically and  internationally,  of basic, heavily computerized
services  such  as  banking,  telephony  and  power,  and  various  distribution
mechanisms  ranging from the mail,  railroads  and trucking to  high-speed  data
transmission. TWE is taking steps to attempt to ensure that the third parties on
which it is heavily  reliant  are Year 2000  compliant,  but cannot  predict the
likelihood of such compliance nor the direct or indirect costs to the Company of
non-compliance  by  those  third  parties  or of  securing  such  services  from
alternate compliant third parties.

     The Company  currently  estimates  that the aggregate cost of its Year 2000
remediation  program,  which started in 1996, will be  approximately  $50 to $85
million,  of which an estimated 40% to 50% has been incurred  through  September
30, 1998. These costs include estimates of the costs of assessment, replacement,
repair and upgrade, both planned and unplanned, of certain IT and non-IT systems
and their  implementation  and  testing.  These  expenditures  have been and are
expected to continue to be funded  from the  Company's  operating  cash flow and
have not and are not  expected  to impact  materially  the  Company's  financial
statements.

      Management  believes  that it has  established  an  effective  program  to
resolve all significant Year 2000 issues in its sole control in a timely manner.
As noted above,  however,  the Company has not yet  completed  all phases of its
program  and is  dependent  on third  parties  whose  progress is not within its
control.  In the event that the Company did not  complete  any of its  currently
planned additional  remediation prior to the Year 2000, management believes that
the Company could experience  significant difficulty in producing and delivering
its products and services and conducting its business in the Year 2000 as it has
in the past. In addition,  disruptions  experienced  by third parties with which
the  Company  does  business  as well as by the  economy  generally  could  also
materially  adversely affect the Company.  The amount of potential liability and
lost revenue cannot be reasonably estimated at this time.

      The  Company  has  been  focusing  its  efforts  on   identification   and
remediation  of its Year 2000  exposures and has not yet  developed  significant
contingency  plans in the event it does not successfully  complete all phases of
its Year 2000 program.  The Company  intends to examine its status at the end of
1998,  and  periodically  thereafter,   to  determine  whether  such  plans  are
necessary.

Euro Conversion

      Effective  January 1, 1999,  the "euro" will be  established as the common
legal currency of more than  two-thirds of the member  countries of the European
Union. These member countries will then have a three-year transitional period to
convert their  existing  sovereign  currencies to the euro. By July 1, 2002, all
participating  member  countries must eliminate their  sovereign  currencies and
replace   their   legal   tender   with   euro-denominated   bills  and   coins.
Notwithstanding  this  transitional  period,  many commercial  transactions  are
expected  to  become  euro-denominated  well  before  the  July  2002  deadline.
Accordingly,  TWE is in the process of evaluating  the  short-term and long-term
effects of the euro conversion on its businesses,  principally consisting of its
international filmed entertainment operations.

      TWE believes that its most significant  short-term  impact relating to the
euro conversion is the need to modify its accounting and information  systems to
handle  transactions  during  the  transitional  period in both the euro and the
existing sovereign currencies of the participating  member countries.  TWE is in
the process of identifying
<PAGE>


the accounting and  information  systems in need of  modification  and, based on
these  findings,  will formulate an action plan to address the nature and timing
of remediation efforts.  Based on preliminary  information,  costs to modify its
accounting and information systems are not expected to be material.

      TWE believes that its most significant long-term business risk relating to
the euro  conversion  may be increased  pricing  pressures  for its products and
services brought about by heightened consumer awareness of possible cross-border
price differences. However, TWE believes that these business risks may be offset
to some extent by lower  production  costs,  other cost  savings  and  marketing
opportunities.  Notwithstanding such risks,  management does not believe at this
time that the euro  conversion  will have a material  effect on TWE's  financial
position, results of operations or cash flows in future periods.

Caution Concerning Forward-Looking Statements

      The Securities and Exchange  Commission  encourages  companies to disclose
forward-looking  information so that investors can better understand a company's
future prospects and make informed investment decisions.  This filing,  together
with   management's   public   commentary   related   thereto,   contains   such
"forward-looking  statements"  within  the  meaning  of the  Private  Securities
Litigation  Reform  Act of 1995,  particularly  statements  anticipating  future
growth in revenues,  EBITA and cash flow and forecasting ongoing debt reduction.
Words  such  as  "anticipate",  "estimate",  "expects",  "projects",  "intends",
"plans",  "believes" and words and terms of similar substance used in connection
with any discussion of future operating or financial  performance  identify such
forward-looking  statements.  Those forward-looking  statements are management's
present expectations of future events. As with any projection or forecast,  they
are  inherently  susceptible  to changes in  circumstances,  and TWE is under no
obligation to (and expressly  disclaims any such  obligation to) update or alter
its forward-looking statements despite such changes.

      TWE operates in highly  competitive,  consumer driven and rapidly changing
media and entertainment  businesses that are dependent on government  regulation
and  economic,  political  and social  conditions in the countries in which they
operate,  consumer demand for their products and services and  (particularly  in
view of technological changes) protection of their intellectual property rights.
TWE's actual  results could differ  materially  from  management's  expectations
because of changes in such  factors.  Some of the other  factors that also could
cause  actual  results to differ  from those  contained  in the  forward-looking
statements include those identified in TWE's other filings and:

*   For TWE's cable business,  more aggressive than expected  competition from
    new  technologies  and  other  types  of video  programming  distributors,
    including  DBS;  increases in government  regulation of cable or equipment
    rates (or any failure to reduce rate  regulation as is presently  mandated
    by statute) or other terms of service (such as "digital  must-carry")  or
    opposition to franchise  renewals;  the failure of new equipment  (such as
    digital  set-top  boxes) or services to  function  properly,  to appeal to
    enough consumers or to be delivered in a timely fashion;  and greater than
    expected increases in programming or other costs.

*   For TWE's cable programming and television businesses, greater than expected
    programming or production  costs;  public and cable  operator  resistance to
    price increases to offset higher  programming costs (and the negative impact
    on premium  programmers of increases in basic cable rates);  the sensitivity
    of advertising to
<PAGE>


    economic  cyclicality;  and greater than expected  fragmentation of consumer
    viewership  due  to an  increased  number  of  programming  services  or the
    increased popularity of alternatives to television.

*   For TWE's film and  television  businesses,  their  ability to  continue  to
    attract  and select  desirable  talent  and  scripts  at  manageable  costs;
    increases in production costs  generally;  fragmentation of consumer leisure
    and  entertainment  time (and its possible negative effects on the broadcast
    and cable networks,  which are significant  customers of these  businesses);
    continued   popularity  of  merchandising;   and  the  uncertain  impact  of
    technological developments such as DVD and the Internet.

*   The  ability  of  the  Company  and  its  key  service  providers,  vendors,
    suppliers, customers and governmental entities to replace, modify or upgrade
    computer  systems  in ways that  adequately  address  the Year  2000  issue,
    including their ability to identify and correct all relevant  computer codes
    and   embedded   chips,   unanticipated   difficulties   or  delays  in  the
    implementation  of the Company's  remediation plans and the ability of third
    parties to adequately address their own Year 2000 issues.

      In  addition,   TWE's  overall  financial  strategy,   including  improved
financial ratios and a strengthened  balance sheet,  could be adversely affected
by increased interest rates, failure to meet earnings expectations, consequences
of the euro conversion and changes in TWE's plans, strategies and intentions.


<PAGE>


                     TIME WARNER ENTERTAINMENT COMPANY, L.P.
                           CONSOLIDATED BALANCE SHEET
                                   (Unaudited)
                                                      September 30, December 31,
                                                         1998          1997
                                                         ----          ----
                                                            (millions)
ASSETS
Current assets
Cash and equivalents................................ $    125       $   322
Receivables, including $485 and $385 million due 
  from Time Warner, less allowances of $407 and 
  $424 million ......................................   2,438         1,914
Inventories..........................................   1,310         1,204
Prepaid expenses.....................................     173           182
                                                     --------       -------

Total current assets.................................   4,046         3,622

Noncurrent inventories...............................   2,281         2,254
Loan receivable from Time Warner.....................     400           400
Investments..........................................     724           315
Property, plant and equipment........................   6,050         6,557
Cable television franchises..........................   4,000         3,063
Goodwill.............................................   4,080         3,859
Other assets.........................................     826           661
                                                     --------       -------

Total assets.........................................$ 22,407       $20,731
                                                     ========       =======

LIABILITIES AND PARTNERS' CAPITAL
Current liabilities
Accounts payable..................................... $ 1,077       $ 1,123
Participations and programming costs payable.........   1,393         1,176
Debt due within one year.............................       7             8
Other current liabilities, including $353 and 
  $184 million due to Time Warner ...................   1,828         1,667
                                                     --------       -------

Total current liabilities............................   4,305         3,974

Long-term debt.......................................   7,435         5,990
Other long-term liabilities, including $682 and 
  $477 million due to Time Warner....................   2,659         1,873
Minority interests...................................   1,440         1,210
Preferred stock of subsidiary holding solely a 
  mortgage note of its parent .......................     221           233
Time Warner General Partners' Senior Capital.........     591         1,118

Partners' capital
Contributed capital..................................   7,344         7,537
Undistributed partnership earnings (deficit).........  (1,588)       (1,204)
                                                     --------       ------- 

Total partners' capital..............................   5,756         6,333
                                                     --------       -------

Total liabilities and partners' capital..............$ 22,407       $20,731
                                                     ========       =======

See accompanying notes.

<PAGE>


                     TIME WARNER ENTERTAINMENT COMPANY, L.P.
                      CONSOLIDATED STATEMENT OF OPERATIONS
                                   (Unaudited)

<TABLE>
<CAPTION>

                                                       Three Months            Nine Months
                                                    Ended September 30,      Ended September 30,
                                                    -------------------      -------------------
                                                     1998       1997          1998       1997
                                                     ----       ----          ----       ----
                                                                    (millions)

<S>                                                <C>       <C>           <C>        <C>    
Revenues (a).....................................  $3,220    $ 2,855       $ 8,980    $ 8,183
                                                   ------    -------       -------    -------

Cost of revenues (a)(b) .........................   2,175      1,905         5,927      5,352
Selling, general and administrative (a)(b) ......     577        615         1,761      1,847
                                                   ------    -------       -------    -------

Operating expenses ..............................   2,752      2,520         7,688      7,199
                                                   ------    -------       -------    -------

Business segment operating income ...............     468        335         1,292        984
Interest and other, net (a) .....................    (203)      (145)         (550)      (155)
Minority interest ...............................     (52)       (64)         (198)      (228)
Corporate services (a) ..........................     (18)       (18)          (54)       (54)
                                                   ------    -------       -------    -------

Income before income taxes ......................     195        108           490        547
Income taxes ....................................     (23)       (27)          (55)       (64)
                                                   ------    -------       -------    -------

Net income.......................................  $  172    $    81       $   435    $   483
                                                   ======    =======       =======    =======

------- 
(a)  Includes  the  following  income  (expenses)  resulting  from transactions  with
     the partners of TWE and other related companies for the three and  nine  months
     ended   September  30,  1998,   respectively,   and  for  the corresponding periods
     in the prior year:  revenues-$227 million and $474 million in 1998, $103 million and 
     $224 million in 1997; cost of  revenues-$(49)  million and $(142) million in 1998,
     $ (11)  million  and  $(47)  million  in 1997;  selling,  general  and
     administrative-$(14)  million  and $(16)  million in 1998,  $20  million and $60
     million in 1997;  interest and other,  net-$1 million and $6 million in 1998, $8
     million and $25 million in 1997; and corporate  services-$(18) million and $(54)
     million in 1998, $(18) million and $(54) million in 1997

(b)  Includes depreciation and amortization 
     expense of:.................................  $  358    $   361       $ 1,085    $ 1,013
                                                   ======    =======       =======    =======
</TABLE>


See accompanying notes.

<PAGE>


                     TIME WARNER ENTERTAINMENT COMPANY, L.P.
                      CONSOLIDATED STATEMENT OF CASH FLOWS
                                   (Unaudited)


                                                               Nine Months
                                                            Ended September 30,
                                                            -------------------
                                                               1998     1997
                                                               ----     ----
                                                                (millions)
OPERATIONS
Net income...................................................$  435  $   483
Adjustments for noncash and nonoperating items:
Depreciation and amortization................................ 1,085    1,013
Changes in operating assets and liabilities..................  (247)    (578)
                                                              ------  -------

Cash provided by operations.................................. 1,273      918
                                                             ------  -------
INVESTING ACTIVITIES
Investments and acquisitions.................................  (335)    (104)
Capital expenditures.........................................(1,092)  (1,117)
Investment proceeds..........................................   540      444
                                                             ------  -------
Cash used by investing activities............................  (887)    (777)
                                                             ------  -------
FINANCING ACTIVITIES
Borrowings................................................... 1,515      905
Debt repayments..............................................  (840)    (323)
Issuance of preferred stock of subsidiary....................     -      243
Capital distributions........................................(1,060)    (809)
Other........................................................  (198)     (77)
                                                             ------  -------
Cash used by financing activities............................  (583)     (61)
                                                             ------  -------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS..................  (197)      80

CASH AND EQUIVALENTS AT BEGINNING OF PERIOD..................   322      216
                                                             ------  -------
CASH AND EQUIVALENTS AT END OF PERIOD........................$  125  $   296
                                                             ======  =======



See accompanying notes.


<PAGE>


                   TIME WARNER ENTERTAINMENT COMPANY, L.P.
                CONSOLIDATED STATEMENT OF PARTNERSHIP CAPITAL
                                 (Unaudited)


                                                                Nine Months
                                                            Ended September 30,
                                                            -------------------
                                                               1998     1997
                                                               ----     ----
                                                                 (millions)

BALANCE AT BEGINNING OF YEAR.................................$6,333   $6,574

Net income...................................................   435      483
Increase (decrease) in unrealized gains on securities........    (2)       5
Foreign currency translation adjustments.....................   (18)     (28)
Increase in realized and unrealized losses on 
  derivative financial instruments ..........................    (1)       -
                                                             ------   ------
Comprehensive income(a)......................................   414      460

Stock option and tax-related distributions...................  (746)    (586)
Distribution of business telephony interests.................  (193)       -
Allocation of income to Time Warner General Partners'
   Senior Capital ...........................................   (52)     (88)
                                                             ------   ------

BALANCE AT SEPTEMBER 30,.................................... $5,756   $6,360
                                                             ======   ======

---------------
(a) Comprehensive  income for the three months ended September 30, 1998 and 1997
    was $167 million and $72 million, respectively.





See accompanying notes.


<PAGE>


                     TIME WARNER ENTERTAINMENT COMPANY, L.P.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

1.    DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

Description of Business

      Time Warner  Entertainment  Company,  L.P., a Delaware limited partnership
("TWE"),  classifies its businesses into three fundamental areas: Entertainment,
consisting   principally  of  interests  in  filmed  entertainment,   television
production and television broadcasting;  Cable Networks,  consisting principally
of interests in cable television programming;  and Cable, consisting principally
of interests in cable television systems.

      The operating  results of TWE's various  business  interests are presented
herein as an indication of financial  performance  (Note 6). Except for start-up
losses  incurred in connection  with The WB Network,  TWE's  principal  business
interests generate  significant  operating income and cash flow from operations.
The  cash  flow  from  operations   generated  by  such  business  interests  is
considerably  greater than their operating income due to significant  amounts of
noncash amortization of intangible assets recognized  principally in Time Warner
Companies,   Inc.'s   ("Time   Warner")  $14  billion   acquisition   of  Warner
Communications Inc. ("WCI") in 1989 and $1.3 billion acquisition of the minority
interest in American Television and Communications  Corporation ("ATC") in 1992,
a portion  of which cost was  allocated  to TWE upon the  capitalization  of the
partnership.  Noncash  amortization  of  intangible  assets  recorded  by  TWE's
businesses  amounted to $129 million and $109 million for the three months ended
September 30, 1998 and 1997, respectively, and $387 million and $321 million for
the nine months ended September 30, 1998 and 1997, respectively.

      Time Warner and certain of its wholly owned subsidiaries  collectively own
general and limited partnership interests in TWE consisting of 74.49% of the pro
rata  priority   capital  ("Series  A  Capital")  and  residual  equity  capital
("Residual Capital"), and 100% of the senior priority capital ("Senior Capital")
and junior priority capital  ("Series B Capital").  The remaining 25.51% limited
partnership  interests in the Series A Capital and  Residual  Capital of TWE are
held by a subsidiary of MediaOne Group,  Inc.  ("MediaOne"),  formerly U S WEST,
Inc.  Certain of Time  Warner's  subsidiaries  are the  general  partners of TWE
("Time Warner General Partners").

Basis of Presentation

      The accompanying financial statements are unaudited but, in the opinion of
management,  contain  all the  adjustments  (consisting  of  those  of a  normal
recurring nature) considered  necessary to present fairly the financial position
and the  results of  operations  and cash  flows for the  periods  presented  in
conformity with generally accepted accounting  principles  applicable to interim
periods.  The accompanying  financial  statements  should be read in conjunction
with the audited  consolidated  financial  statements  of TWE for the year ended
December 31, 1997. Certain  reclassifications have been made to the prior year's
financial statements to conform to the 1998 presentation.

      Effective July 1, 1998, TWE adopted Financial  Accounting  Standards Board
Statement  No.  133,   "Accounting   for  Derivative   Instruments  and  Hedging
Activities"  ("FAS  133").  FAS  133  requires  that  all  derivative  financial
instruments,  such as foreign exchange contracts, be recognized in the financial
statements  and measured at fair value  regardless  of the purpose or intent for
holding  them.  The adoption of FAS 133 did not have a material  effect on TWE's
financial statements.
 <PAGE>


2.    ACQUISITIONS AND DISPOSITIONS

Cable Transactions

      In addition to continuing to use cable  operating cash flow to finance the
level of capital spending  necessary to upgrade the technological  capability of
their cable television  systems and develop new services,  Time Warner,  TWE and
the  TWE-Advance/Newhouse  Partnership  ("TWE-A/N")  have  completed a series of
transactions  in 1998  related  to the cable  television  business  and  related
ancillary  businesses  that either  reduced  existing debt and/or TWE's share of
future  funding  requirements  for  such  businesses.   These  transactions  are
discussed more fully below.

Business Telephony Reorganization

      In July 1998, in an effort to combine their business telephony  operations
into a single entity that is intended to be self-financing, Time Warner, TWE and
TWE-A/N completed a reorganization of their business  telephony  operations (the
"Business Telephony  Reorganization"),  whereby (i) the operations  conducted by
Time Warner,  TWE and TWE-A/N  were each  contributed  to a new holding  company
named Time Warner Telecom LLC ("TW Telecom"),  and then (ii) TWE's and TWE-A/N's
interests  in TW  Telecom  were  distributed  to their  partners,  Time  Warner,
MediaOne  and  Advance/Newhouse.  TW Telecom  is a  competitive  local  exchange
carrier (CLEC) in selected  metropolitan areas across the United States where it
offers a wide range of telephony services to business customers.  As a result of
the   Business   Telephony    Reorganization,    Time   Warner,   MediaOne   and
Advance/Newhouse  own  interests  in TW Telecom of  61.95%,  18.88% and  19.17%,
respectively.  TWE and TWE-A/N do not have continuing  equity interests in these
business  telephony  operations.  TWE and TWE-A/N  recorded the  distribution of
their business  telephony  operations to their respective  partners based on the
$244  million  historical  cost of the net  assets,  of which $193  million  was
recorded as a reduction in  partners'  capital and $51 million was recorded as a
reduction in minority interest in TWE's consolidated balance sheet.

Road Runner Joint Venture

      In June  1998,  Time  Warner,  TWE,  TWE-A/N,  MediaOne,  Microsoft  Corp.
("Microsoft")  and Compaq  Computer Corp.  ("Compaq")  formed a joint venture to
operate and expand  Time  Warner  Cable's  and  MediaOne's  existing  high-speed
Internet access  businesses (the "Road Runner Joint  Venture").  In exchange for
contributing their existing high-speed  Internet access businesses,  Time Warner
received a common  equity  interest in the Road Runner Joint  Venture of 11.25%,
TWE  received a 25%  interest,  TWE-A/N  received a 32.5%  interest and MediaOne
received  a  31.25%  interest.   In  exchange  for  Microsoft  and  Compaq  each
contributing $212.5 million of cash to the Road Runner Joint Venture,  Microsoft
and Compaq each received a preferred equity interest therein that is convertible
into a 10% common equity  interest.  Accordingly,  on a fully diluted basis, the
Road  Runner  Joint  Venture  is owned  9% by Time  Warner,  20% by TWE,  26% by
TWE-A/N,  25% by MediaOne,  10% by Microsoft  and 10% by Compaq.  As a result of
this transaction,  effective as of June 30, 1998, TWE and TWE-A/N deconsolidated
their  high-speed  Internet  access  operations  and each of TWE's and TWE-A/N's
interest  in the Road  Runner  Joint  Venture is being  accounted  for under the
equity method of accounting.
 <PAGE>


Primestar

      In April 1998,  TWE and  Advance/Newhouse,  a limited  partner in TWE-A/N,
transferred  the direct  broadcast  satellite  operations  conducted  by TWE and
TWE-A/N (the "DBS  Operations")  and the 31%  partnership  interest in Primestar
Partners,  L.P. held by TWE-A/N  ("Primestar" and  collectively,  the "Primestar
Assets") to Primestar,  Inc. ("New Primestar"),  a separate holding company. New
Primestar owns the DBS Operations and Primestar  partnership  interests formerly
owned  by TCI  Satellite  Entertainment,  Inc.  and  other  previously  existing
partners of  Primestar.  In  exchange  for  contributing  its  interests  in the
Primestar Assets,  TWE received  approximately 48 million shares of common stock
of New Primestar  (representing an approximate 24% equity interest) and realized
approximately  $240  million of debt  reduction.  In partial  consideration  for
contributing  its  indirect   interest  in  certain  of  the  Primestar  Assets,
Advance/Newhouse received an approximate 6% equity interest in New Primestar. As
a result of this transaction,  effective as of April 1, 1998, TWE deconsolidated
the DBS Operations and the 24% equity interest in New Primestar  received in the
transaction is being  accounted for under the equity method of accounting.  This
transaction is referred to herein as the "Primestar Roll-up Transaction."

      In a related transaction, Primestar also entered into an agreement in June
1997 with The News  Corporation  Limited  ("News  Corp."),  MCI  WorldCom,  Inc.
("MCI") and  American  Sky  Broadcasting  LLC  ("ASkyB"),  pursuant to which New
Primestar  would  acquire  certain  assets  relating to the  high-power,  direct
broadcast  satellite business of ASkyB (the "Primestar ASkyB  Transaction").  In
May  1998,  the U.S.  Department  of  Justice  brought  a civil  action  against
Primestar,  each of its cable owners,  including TWE, and News Corp. and MCI, to
enjoin on  antitrust  grounds the  Primestar  ASkyB  Transaction.  Although  the
parties had  discussions  with the U.S.  Department  of Justice in an attempt to
restructure  the  transaction,   no  resolution  was  reached  and  the  parties
terminated their agreement in October 1998.

TWE-A/N Transfers

      In early 1998, Time Warner (through a wholly owned subsidiary) contributed
cable television  systems (or interests therein) serving  approximately  650,000
subscribers to TWE-A/N, subject to approximately $1 billion of debt, in exchange
for common and preferred  partnership  interests therein,  and completed certain
related  transactions  (collectively,   the  "TWE-A/N  Transfers").   The  cable
television systems  transferred to TWE-A/N were formerly owned by TWI Cable Inc.
("TWI  Cable"),   a  wholly  owned  subsidiary  of  Time  Warner,   and  Paragon
Communications  ("Paragon"),  a  partnership  formerly  owning cable  television
systems  serving  approximately 1 million  subscribers  that was wholly owned by
subsidiaries of Time Warner, with 50% beneficially owned in the aggregate by TWE
and TWE-A/N.  The debt assumed by TWE-A/N has been  guaranteed  by TWI Cable and
certain of its subsidiaries, including Paragon.

      As part of the TWE-A/N Transfers,  TWE and TWE-A/N exchanged substantially
all of their respective  beneficial interests in Paragon for an equivalent share
of  Paragon's  cable   television   systems  (or  interests   therein)   serving
approximately  500,000  subscribers,  resulting in wholly owned  subsidiaries of
Time Warner owning 100% of the  restructured  Paragon entity,  with less than 1%
beneficially  held for TWE.  Accordingly,  effective as of January 1, 1998, Time
Warner  has  consolidated  Paragon.  Because  this  transaction  represented  an
exchange  of  TWE's  and  TWE-A/N's  beneficial  interests  in  Paragon  for  an
equivalent amount of its cable television systems, it did not have a significant
economic impact on Time Warner, TWE or TWE-A/N.
 <PAGE>


      In connection with the TWE-A/N Transfers,  Advance/Newhouse made a capital
contribution  to  TWE-A/N  in order to  maintain  its 33.3%  common  partnership
interest  therein.  Accordingly,  TWE-A/N  is now owned  65.3% by TWE,  33.3% by
Advance/Newhouse  and 1.4% indirectly by Time Warner. The TWE-A/N Transfers were
accounted for  effective as of January 1, 1998.  Time Warner did not recognize a
gain or loss on the TWE-A/N Transfers.  TWE has continued to consolidate TWE-A/N
and Time  Warner has  accounted  for its  interest  in TWE-A/N  under the equity
method of accounting.

      On a pro forma basis,  giving  effect to the TWE-A/N  Transfers as if they
had occurred at the beginning of 1997, TWE would have reported for the three and
nine months ended September 30, 1997,  respectively,  revenues of $2.869 billion
and $8.227  billion,  depreciation  expense of $253  million  and $696  million,
operating  income  before  noncash  amortization  of  intangible  assets of $473
million and $1.393 billion, operating income of $347 million and $1.023 billion,
and net income of $79 million and $479 million.

Sale or Exchange of Cable Television Systems

      In 1998 and 1997, in an effort to enhance their  geographic  clustering of
cable  television  properties,  TWE sold or exchanged  various cable  television
systems. As a result of these  transactions,  TWE recognized net pretax gains of
approximately  $6 million and $16 million for the three months  ended  September
30, 1998 and 1997,  respectively,  and approximately $90 million and $40 million
for the nine  months  ended  September  30,  1998 and 1997,  respectively.  Such
amounts have been included in operating income in the accompanying  consolidated
statement of operations.

Six Flags

      In  April  1998,  TWE  sold  its  remaining  49%  interest  in  Six  Flags
Entertainment  Corporation  ("Six Flags") to Premier Parks Inc.  ("Premier"),  a
regional theme park operator,  for approximately  $475 million of cash. TWE used
the  net,   after-tax   proceeds  from  this   transaction  to  reduce  debt  by
approximately  $300 million.  As part of the  transaction,  TWE will continue to
license its  animated  cartoon and comic book  characters  to Six Flags's  theme
parks and will  similarly  license such rights to  Premier's  theme parks in the
United  States and Canada under a long-term  agreement  covering an aggregate of
twenty-five existing and all future locations. A substantial portion of the gain
on  this  transaction  has  been  deferred  principally  as a  result  of  TWE's
continuing  guarantees of certain significant long-term obligations of Six Flags
relating to the Six Flags Over Texas and Six Flags Over Georgia theme parks.

E! Entertainment Television, Inc.

      In March 1997, TWE sold its 58% interest in E!  Entertainment  Television,
Inc. A pretax gain of approximately  $250 million relating to this sale has been
included in the accompanying  consolidated  statement of operations for the nine
months ended September 30, 1997.
<PAGE>


3.    INVENTORIES

      TWE's inventories consist of:
                                         September 30, 1998   December 31, 1997
                                         ------------------   -----------------
                                        Current  Noncurrent  Current  Noncurrent
                                        -------  ----------  -------  ----------
                                                      (millions)
Film costs:
   Released, less amortization............$  555   $  662     $  545   $  658
   Completed and not released.............   263       93        170       50
   In process and other...................    51      600         27      595
   Library, less amortization.............     -      573          -      612
Programming costs, less amortization......   352      353        382      339
Merchandise...............................    89        -         80        -
                                          ------   ------     ------   ------
Total.....................................$1,310   $2,281     $1,204   $2,254
                                          ======   ======     ======   ======

4.    PARTNERS' CAPITAL

      TWE is required to make distributions to reimburse the partners for income
taxes at statutory rates based on their  allocable share of taxable income,  and
to reimburse Time Warner for stock options  granted to employees of TWE based on
the amount by which the market price of Time Warner Inc.  common  stock  exceeds
the option  exercise  price on the  exercise  date or,  with  respect to options
granted prior to the TWE  capitalization  on September 30, 1992,  the greater of
the exercise price and the $27.75 market price of Time Warner Inc.  common stock
at the time of the TWE  capitalization.  TWE accrues a stock option distribution
and a  corresponding  liability  with  respect to  unexercised  options when the
market price of Time Warner Inc.  common stock  increases  during the accounting
period,  and reverses  previously  accrued  stock option  distributions  and the
corresponding  liability when the market price of Time Warner Inc.  common stock
declines.

      During the nine months ended  September 30, 1998, TWE accrued $264 million
of  tax-related  distributions  and $482 million of stock option  distributions,
based on closing  prices of Time Warner  common stock of $87.56 at September 30,
1998 and $62.00 at December 31, 1997. During the nine months ended September 30,
1997, TWE accrued $232 million of tax-related  distributions and $354 million of
stock option distributions as a result of an increase at that time in the market
price of Time Warner Inc.  common stock.  In the nine months ended September 30,
1998, TWE paid cash  distributions  to the Time Warner  General  Partners in the
amount  of  $1.060   billion,   consisting   of  $264  million  of   tax-related
distributions,  $217 million of stock option  related  distributions  and a $579
million  distribution  to the Time  Warner  General  Partners  relating to their
Senior Capital interests.  In the nine months ended September 30, 1997, TWE paid
the Time  Warner  General  Partners  cash  distributions  in the  amount of $809
million, consisting of $232 million of tax-related distributions, $42 million of
stock option related  distributions and a $535 million  distribution to the Time
Warner General Partners relating to their Senior Capital interests.

      In addition, in connection with the Business Telephony Reorganization, TWE
recorded  a $193  million  noncash  distribution  to its  partners  based on the
historical cost of the net assets (Note 2).
 <PAGE>


5.    DERIVATIVE FINANCIAL INSTRUMENTS

     TWE uses derivative  financial  instruments  principally to manage the risk
that changes in exchange  rates will affect the amount of  unremitted  or future
license fees to be received from the sale of U.S.  copyrighted  products abroad.
The following is a summary of TWE's foreign  currency risk  management  strategy
and the effect of this strategy on TWE's consolidated financial statements.

Foreign Currency Risk Management

      Foreign exchange  contracts are used primarily by Time Warner to hedge the
risk that  unremitted or future license fees owed to TWE domestic  companies for
the  sale or  anticipated  sale  of  U.S.  copyrighted  products  abroad  may be
adversely affected by changes in foreign currency exchange rates. As part of its
overall strategy to manage the level of exposure to the risk of foreign currency
exchange rate fluctuations, Time Warner hedges a portion of its foreign currency
exposures  anticipated  over the ensuing  twelve month period,  including  those
related to TWE.  At  September  30,  1998,  Time Warner had  effectively  hedged
approximately   half  of  TWE's  estimated   foreign  currency   exposures  that
principally relate to anticipated cash flows to be remitted to the U.S. over the
ensuing  twelve month period,  using foreign  exchange  contracts that generally
have  maturities  of three months or less,  which  generally  are rolled over to
provide  continuing  coverage  throughout  the year.  Time Warner  often  closes
foreign exchange sale contracts by purchasing an offsetting  purchase  contract.
Time Warner  reimburses or is  reimbursed  by TWE for contract  gains and losses
related to TWE's  foreign  currency  exposure.  Foreign  exchange  contracts are
placed with a number of major financial institutions in order to minimize credit
risk.

      TWE  records  these  foreign  exchange  contracts  at  fair  value  in its
consolidated  balance sheet and the related  gains or losses on these  contracts
are deferred in  partners'  capital (as a component  of  comprehensive  income).
These  deferred gains and losses are recognized in income in the period in which
the related  license fees being hedged are  received and  recognized  in income.
However,  to the extent that any of these  contracts  are not  considered  to be
perfectly  effective in  offsetting  the change in the value of the license fees
being hedged,  any changes in fair value relating to the ineffective  portion of
these  contracts  are  immediately  recognized  in  income.  Gains and losses on
foreign exchange contracts are generally included as a component of interest and
other, net, in TWE's consolidated statement of operations.

      At September  30,  1998,  Time Warner had  contracts  for the sale of $608
million and the purchase of $267 million of foreign  currencies  at fixed rates.
Of Time  Warner's  $341  million  net sale  contract  position,  none of foreign
exchange  purchase  contracts  and $96  million  of the  foreign  exchange  sale
contracts related to TWE's foreign currencies  exposure,  primarily Japanese yen
(32% of net contract position related to TWE), English pounds (5%), German marks
(13%),  Canadian  dollars (7%) and French  francs  (9%),  compared to a net sale
contract  position of $105 million of foreign  currencies  at December 31, 1997.
TWE had  deferred  approximately  $1 million  of net losses on foreign  exchange
contracts at  September  30, 1998,  which is all  expected to be  recognized  in
income over the next twelve months.
 <PAGE>


6.    SEGMENT INFORMATION

      TWE classifies its businesses into three fundamental areas: Entertainment,
consisting   principally  of  interests  in  filmed  entertainment,   television
production and television broadcasting;  Cable Networks,  consisting principally
of interests in cable television programming;  and Cable, consisting principally
of interests in cable television systems.

      Information as to the operations of TWE in different  business segments is
set forth below based on the nature of the products and  services  offered.  TWE
evaluates  performance based on several factors,  of which the primary financial
measure is business  segment  operating  income before noncash  amortization  of
intangible  assets  ("EBITA").  The  operating  results of TWE's  cable  segment
reflect the TWE-A/N  Transfers  effective as of January 1, 1998,  the  Primestar
Roll-up  Transaction  effective as of April 1, 1998,  the  formation of the Road
Runner Joint  Venture  effective as of June 30, 1998 and the Business  Telephony
Reorganization effective as of July 1, 1998.

      Information as to the operations of TWE in different  business segments is
set forth below.

                                             Three Months      Nine Months
                                       Ended September 30,  Ended September 30,
                                       -------------------  -------------------
                                       
                                            1998     1997     1998     1997
                                            ----     ----     ----     ----
                                                       (millions)
Revenues
Filmed Entertainment-Warner Bros......... $1,727   $1,397   $4,364   $3,823
Broadcasting-The WB Network..............     64       31      170       84
Cable Networks-HBO.......................    505      482    1,526    1,452
Cable....................................  1,052    1,060    3,289    3,146
Intersegment elimination.................   (128)    (115)    (369)    (322)
                                          ------   ------   ------   ------

Total.................................... $3,220   $2,855   $8,980   $8,183
                                          ======   ======   ======   ======

                                             Three Months        Nine Months
                                        Ended September 30,  Ended September 30,
                                        -------------------  -------------------
                                            1998     1997     1998     1997
                                            ----     ----     ----     ----
                                                      (millions)
EBITA(1)
Filmed Entertainment-Warner Bros.........  $ 161   $  106   $  401   $  315
Broadcasting-The WB Network..............    (17)     (21)     (78)     (60)
Cable Networks-HBO.......................    117      102      339      291
Cable(2).................................    336      257    1,017      759
                                           -----   ------   ------   ------

Total....................................  $ 597   $  444   $1,679   $1,305
                                           =====   ======   ======   ======
---------------
(1)EBITA   represents   business   segment   operating   income  before  noncash
   amortization of intangible assets. After deducting amortization of intangible
   assets, TWE's business segment operating income for the three and nine months
   ended September 30, 1998, respectively,  and for the corresponding periods in
   the prior year was $468 million and $1.292  billion in 1998, and $335 million
   and $984 million in 1997.
(2)Includes net pretax gains  recognized in connection with the sale or exchange
   of certain  cable  television  systems of  approximately  $6 million  and $16
   million for the three months ended September 30, 1998 and 1997, respectively,
   and  approximately  $90 million  and $40  million  for the nine months  ended
   September 30, 1998 and 1997, respectively.
<PAGE>



                                            Three Months        Nine Months
                                        Ended September 30,  Ended September 30,
                                        -------------------  -------------------
                                            1998     1997     1998     1997
                                            ----     ----     ----     ----
                                                       (millions)
Depreciation of Property, Plant and Equipment
Filmed Entertainment-Warner Bros.........   $ 48     $ 50     $126     $131
Broadcasting-The WB Network..............      1        -        1        1
Cable Networks-HBO.......................      6        5       16       15
Cable....................................    174      197      555      545
                                            ----     ----     ----     ----

Total....................................   $229     $252     $698     $692
                                            ====     ====     ====     ====


                                            Three Months        Nine Months
                                        Ended September 30,  Ended September 30,
                                        -------------------  -------------------
                                            1998     1997     1998     1997
                                            ----     ----     ----     ----
                                                      (millions)
Amortization of Intangible Assets (1)
Filmed Entertainment-Warner Bros..........  $ 33     $ 31     $ 99     $ 92
Broadcasting-The WB Network...............     -        -        2        -
Cable Networks-HBO........................     -        -        -        -
Cable.....................................    96       78      286      229
                                            ----     ----     ----     ----

Total.....................................  $129     $109     $387     $321
                                            ====     ====     ====     ====
---------------
(1)Amortization  includes  amortization  relating to all  business  combinations
   accounted  for by the purchase  method,  including  Time Warner's $14 billion
   acquisition  of WCI in 1989  and $1.3  billion  acquisition  of the  minority
   interest in ATC in 1992.


7.    COMMITMENTS AND CONTINGENCIES

      Pending  legal  proceedings  are   substantially   limited  to  litigation
incidental to the businesses of TWE. In the opinion of management,  the ultimate
resolution of these matters will not have a material effect on the  consolidated
financial statements of TWE.


8.          ADDITIONAL FINANCIAL INFORMATION

      Additional financial information with respect to cash flows is as follows:
                                                             Nine Months
                                                          Ended September 30,
                                                          -------------------
                                                            1998     1997
                                                            ----     ----
                                                              (millions)

Interest expense.......................................     $418     $358
Cash payments made for interest........................      419      394
Cash payments made for income taxes, net...............       57       55
Noncash capital distributions..........................      675      354

      Noncash  investing  and  financing  activities in the first nine months of
1998 included the Business Telephony Reorganization,  the TWE-A/N Transfers, the
Primestar  Roll-up  Transaction  and the  exchange of certain  cable  television
systems (Note 2). During the nine months ended  September 30, 1998, TWE received
$131 million of proceeds under its asset securitization program.
<PAGE>


                         Part II. Other Information

Item 1.   Legal Proceedings.

      Reference is made to the litigation entitled Six Flags Over Georgia, Inc.,
et al. v. Six Flags Fund,  Ltd., et al.  commenced in Superior Court in Gwinnett
County,  Georgia in connection with the management of the Six Flags Over Georgia
Theme Park  described on pages I-28 and I-29 of TWE's Annual Report on Form 10-K
for the year ended  December  31,  1997.  TWE and its former 51%  partner in Six
Flags retained financial responsibility for this litigation following completion
of the sale of Six  Flags.  Discovery  has now  concluded,  although a number of
motions relating to discovery and discovery-related practices are still pending.
Plaintiffs  in the action moved on October 22, 1998 to amend their  complaint so
as to drop  their  claim  for  fraud and to  modify  their  claim for  breach of
contract.  Trial on the  remaining  claims  seeking  damages  in  excess of $250
million is scheduled to commence November 16, 1998.

      Reference is made to the civil action  brought by the U.S.  Department  of
Justice in the United States District Court for the District of Columbia against
Primestar,  Inc.  ("Primestar")  to  enjoin  on  antitrust  grounds  Primestar's
proposed  acquisition  of certain  assets  described on page 62 of Time Warner's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 (the "June 30,
1998 Form 10-Q").  Abandonment  of the  proposed  acquisition  was  announced on
October  15,  1998  and it is  expected  that  such  abandonment  will  moot the
litigation.

     Reference  is made to the  litigation  entitled  Coppola  v.  Warner  Bros.
described on page 62 of the June 30, 1998 Form 10-Q.  On October 15,  1998,  the
Court  vacated the jury award against  Warner Bros.  for $60 million in punitive
damages but affirmed the award of $20 million in compensatory damages and denied
Warner  Bros.'  motion for a new trial.  Both sides have stated they will appeal
the Court's ruling.

     Reference is made to the  litigation  entitled  Samuel D. Moore,  et al. v.
American  Federation of Television and Radio Artists, et al., described on pages
I-36 and I-37 of Time  Warner's  Annual  Report on Form 10-K for the year  ended
December 31, 1997 and on page 62 of the June 30, 1998 Form 10-Q.  By Order dated
October 6, 1998,  the 11th Circuit  Court of Appeals has accepted  interlocutory
review  of the  District  Court's  Order  dated  June 22,  1998,  denying  class
certification. This appeal will now proceed to briefing and argument.


Item 6.  Exhibits and Reports on Form 8-K.

      (a)  Exhibits.

      The  exhibits  listed  on the  accompanying  Exhibit  Index  are  filed or
incorporated  by reference  as a part of this report and such  Exhibit  Index is
incorporated herein by reference.

      (b) Reports on Form 8-K.

      No Current  Report on Form 8-K was filed by Time Warner during the quarter
ended September 30, 1998.
<PAGE>

                                TIME WARNER INC.

                                    SIGNATURE



       Pursuant to the requirements of the Securities  Exchange Act of 1934, the
registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned thereunto duly authorized.

                                    Time Warner Inc.
                                        (Registrant)



                                    By:    /s/  Richard J. Bressler 
                                    Name:     Richard J. Bressler
                                    Title:    Executive Vice President and
                                              Chief Financial Officer



Dated: November 12, 1998

<PAGE>



                                  EXHIBIT INDEX
                     Pursuant to Item 601 of Regulations S-K



Exhibit No.       Description of Exhibit


27                Financial Data Schedule.