<PAGE>
<PAGE>



                       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 June 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             542,242,060
   Series LMCN-V Common Stock - $.01 par value         57,061,942
   -------------------------------------------       ---------------
           Description of Class                     Shares Outstanding
                                                      as of July 31, 1998





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<PAGE>





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

                               INDEX TO FORM 10-Q


<TABLE>
<CAPTION>


                                                                                                        PAGE
                                                                                                 ------------------
                                                                                                  TIME
                                                                                                 WARNER        TWE
                                                                                                 ------        ---
<S>                                                                                              <C>          <C>
PART I.  FINANCIAL INFORMATION
     Management's discussion and analysis of results of operations and financial condition.....     1          41
     Consolidated balance sheets at June 30, 1998 and December 31, 1997........................    18          51
     Consolidated statements of operations for the three and six months ended
          June 30, 1998 and 1997...............................................................    19          52
     Consolidated statements of cash flows for the six months ended June 30, 1998
          and 1997.............................................................................    20          53
     Consolidated statement of shareholders' equity and partnership capital....................    21          54
     Notes to consolidated financial statements................................................    22          55
     Supplementary information.................................................................    33


PART II.  OTHER INFORMATION....................................................................    62
</TABLE>





<PAGE>
<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.



                                       1




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<PAGE>




                                TIME WARNER INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
          OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(CONTINUED)



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") and (iii) 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 six months ended June 30, 1998 and 1997 are as follows:


<TABLE>
<CAPTION>

                                                  THREE MONTHS ENDED JUNE 30,         SIX MONTHS ENDED JUNE 30,
                                            ----------------------------------  --------------------------------
                                                 EBITA        OPERATING INCOME       EBITA       OPERATING INCOME
                                            ---------------   ----------------  -------------   ----------------
                                            1998      1997    1998     1997     1998     1997     1998     1997
                                            ----      -----   -----    ------   ----     ----   -------    -----
                                                                        (MILLIONS)
<S>                                         <C>       <C>      <C>      <C>      <C>       <C>      <C>      <C>
TIME WARNER:
Publishing...............................   $176      $157     $168     $149     $261      $233     $244     $216
Music....................................     96       106       25       32      189       224       50       82
Cable Networks-TBS.......................    198       165      148      115      351       279      251      184
Filmed Entertainment-TBS.................     38        29       18       10       23        35      (17)      (6)
Cable....................................     74       104       26       35      148       209       46       70
Intersegment elimination.................     (1)        4       (1)       4      (20)       (7)     (20)      (7)
                                            ----      ----     ----     ----     ----      ----     ----     ----

Total....................................   $581      $565     $384     $345     $952      $973     $554     $539
                                            ====      ====     ====     ====     ====      ====     ====     ====

ENTERTAINMENT GROUP:
Filmed Entertainment-Warner Bros.........   $122      $110     $ 89     $ 80     $241      $215     $175     $154
Broadcasting-The WB Network..............    (23)      (19)     (24)     (19)     (61)      (39)     (63)     (39)
Cable Networks-HBO.......................    113        98      113       98      222       189      222      189
Cable (a)................................    374       243      278      168      681       502      491      351
                                            ----      ----     ----     ----     ----      ----     ----     ----

Total....................................   $586      $432     $456     $327   $1,083      $867     $825     $655
                                            ====      ====     ====     ====     ====      ====     ====     ====
</TABLE>

---------------
(a) Includes net pretax gains relating to the sale or exchange of certain cable
    television systems of approximately $70 million in the second quarter of
    1998, and approximately $84 million and $24 million in the six months ended
    June 30, 1998 and 1997, respectively.


THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997

         Time Warner had revenues of $3.672 billion and net income of $101
million ($.04 income per common share after preferred dividend requirements) for
the three months ended June 30, 1998, compared to revenues of $3.193 billion and
net income of $30 million ($.09 loss per common share after preferred dividend
requirements) for the three months ended June 30, 1997. Time Warner's equity in
the pretax income of the Entertainment Group was $166 million for the three
months ended June 30, 1998, compared to $108 million for the three months ended
June 30, 1997.



                                       2

<PAGE>
<PAGE>



                                TIME WARNER INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
          OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(CONTINUED)


         Time Warner's net income increased to $101 million for the three months
ended June 30, 1998, compared to $30 million for the three months ended June 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 and lower
interest expense associated with Time Warner's debt reduction efforts and the
TWE-A/N Transfers. Time Warner's equity in the pretax income of the
Entertainment Group includes $70 million ($.05 per common share) of net pretax
gains recognized by TWE in 1998 relating to the sale or exchange of certain
cable television systems.

         The Entertainment Group had revenues of $2.853 billion and net income
of $156 million for the three months ended June 30, 1998, compared to revenues
of $2.731 billion and net income of $89 million for the three months ended June
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 and the $70 million of net gains noted above),
offset in part by an increase in interest expense and minority interest expense
related to the TWE-A/N Transfers.

         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 $1.136 billion, compared to $1.053
billion in the second quarter of 1997. EBITA increased to $176 million from $157
million. Operating income increased to $168 million from $149 million. Revenues
benefited from increases in magazine advertising and circulation revenues,
offset in part by a decrease in direct marketing 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, to a lesser extent, cost savings.

         Music. Revenues increased to $905 million, compared to $822 million in
the second quarter of 1997. EBITA decreased to $96 million from $106 million.
Operating income decreased to $25 million from $32 million. Revenues benefited
from an increase in domestic and international recorded music sales principally
relating to higher compact disc sales of new releases from popular established
artists and movie soundtracks. At the end of June 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 activities.

         Cable Networks-TBS. Revenues increased to $906 million, compared to
$750 million in the second quarter of 1997. EBITA increased to $198 million from
$165 million. Operating income increased to $148 million from $115 million.
Revenues benefited from a significant increase in subscription revenues, as well
as an increase in 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 TNT, CNN,
Cartoon Network and Turner




                                       3

<PAGE>
<PAGE>



                                TIME WARNER INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
          OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(CONTINUED)


Classic Movies, and higher rates. The increase in advertising revenues was due
to a strong overall advertising market for most of the division's major branded
networks, including TNT, Cartoon Network and CNN Headline News. EBITA and
operating income increased principally as a result of the revenue gains and cost
savings.

         Filmed Entertainment-TBS. Revenues increased to $504 million, compared
to $337 million in the second quarter of 1997. EBITA increased to $38 million
from $29 million. Operating income increased to $18 million from $10 million.
Revenues benefited from an increase in worldwide theatrical revenues and a
significant increase in syndication sales resulting from the renewal by existing
television station customers of second-cycle broadcasting rights for Seinfeld,
offset in part by lower worldwide home video revenues. EBITA and operating
income increased principally as a result of the revenue gains, offset in part by
film write-offs relating to disappointing results for theatrical releases of
Castle Rock Entertainment.

         Cable. Revenues decreased to $242 million, compared to $250 million in
the second quarter of 1997. EBITA decreased to $74 million from $104 million.
Operating income decreased to $26 million from $35 million. The Cable division's
1998 operating results were negatively affected by the TWE-A/N Transfers.
Excluding the effect of the TWE-A/N Transfers, revenues benefited from 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 the TWE-A/N Transfers, 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, decreased to $283
million in the second quarter of 1998, compared to $303 million in the second
quarter of 1997. Interest expense decreased to $222 million, compared to $256
million in the second 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 $61 million in the second quarter of
1998 from $47 million in the second quarter of 1997, principally because of
lower investment-related income relating to the absence of a gain on the sale of
an investment recognized in 1997.

ENTERTAINMENT GROUP

         Filmed Entertainment-Warner Bros. Revenues increased to $1.330 billion,
compared to $1.257 billion in the second quarter of 1997. EBITA increased to
$122 million from $110 million. Operating income increased to $89 million from
$80 million. Revenues benefited from increases in worldwide television
production and distribution, home video and consumer products licensing
operations, offset in part by lower worldwide theatrical revenues. EBITA and
operating income benefited principally from the revenue gains, as well as a gain
on the sale of certain assets.

         Broadcasting - The WB Network. Revenues increased to $61 million,
compared to $29 million in the second quarter of 1997. EBITA decreased to a loss
of $23 million from a loss of $19 million. Operating losses increased to $24
million from $19 million. Revenues increased as a result of improved television
ratings and the addition of a fourth night of prime-time programming in January
1998, but were offset by higher programming costs associated with the expanded
programming schedule. Operating losses increased primarily as a result of a
lower allocation of losses to a limited partner in the network. In October 1998,
The WB Network plans to expand its prime-time



                                       4

<PAGE>
<PAGE>



                                TIME WARNER INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
          OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(CONTINUED)


programming schedule to five nights a week. Due to the start-up nature of this
national broadcast operation, losses are expected to continue.

         Cable Networks-HBO. Revenues increased to $509 million, compared to
$487 million in the second quarter of 1997. EBITA and operating income increased
to $113 million from $98 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.

         Cable. Revenues increased to $1.084 billion, compared to $1.066 billion
in the second quarter of 1997. EBITA increased to $374 million from $243
million. Operating income increased to $278 million from $168 million. The Cable
division's 1998 operating results were affected by the TWE-A/N Transfers and the
deconsolidation of its direct broadcast satellite operations in connection with
the Primestar Roll-up Transaction. Excluding the effect of the TWE-A/N Transfers
and the Primestar Roll-up Transaction, revenues benefited from 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 the TWE-A/N Transfers
and Primestar Roll-up Transaction, 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, was $183 million in
the second quarter of 1998, compared to $139 million in the second quarter of
1997. Interest expense increased to $132 million, compared to $120 million in
the second quarter of 1997, principally due to higher average debt levels
associated with the TWE-A/N Transfers. There was other expense, net, of $51
million in the second quarter of 1998, compared to $19 million in the second
quarter of 1997, principally due to higher losses from certain investments
accounted for under the equity method of accounting.

SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997

         Time Warner had revenues of $6.809 billion and net income of $39
million ($.21 loss per common share after preferred dividend requirements) for
the six months ended June 30, 1998, compared to revenues of $6.227 billion,
income of $82 million before an extraordinary loss on the retirement of debt
($.13 loss per common share) and net income of $65 million ($.16 loss per common
share) for the six months ended June 30, 1997. Time Warner's equity in the
pretax income of the Entertainment Group was $273 million for the six months
ended June 30, 1998, compared to $426 million for the six months ended June 30,
1997.

         Time Warner's net income decreased to $39 million for the six months
ended June 30, 1998 compared to $65 million for the six months ended June 30,
1997. As discussed more fully below, this decrease principally resulted from
lower, 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 $84 million in 1998 ($.06 per common
share) and $274 million ($.29 per common share) in 1997. Excluding the effect of
these transactions, net income increased in 1998 principally as a result of 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 Warner's debt reduction



                                       5

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<PAGE>



                                TIME WARNER INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
          OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(CONTINUED)


efforts and the TWE-A/N Transfers, and the absence of a $17 million
extraordinary loss on the retirement of debt recognized in 1997.

         The Entertainment Group had revenues of $5.765 billion and net income
of $264 million for the six months ended June 30, 1998, compared to revenues of
$5.333 billion and net income of $407 million for the six months ended June 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 lower, 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 and minority interest expense related to
the TWE-A/N Transfers.

         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 $2.084 billion, compared to $1.977
billion in the first six months of 1997. EBITA increased to $261 million from
$233 million. Operating income increased to $244 million from $216 million.
Revenues benefited from increases in magazine advertising and circulation
revenues, offset in part by a decrease in direct marketing 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, to a lesser extent, cost savings.

         Music. Revenues increased to $1.793 billion, compared to $1.755 billion
in the first six months of 1997. EBITA decreased to $189 million from $224
million. Operating income decreased to $50 million from $82 million. Revenues
benefited from an increase in domestic recorded music sales, which more than
offset a marginal decrease in international recorded music sales. The increase
in domestic recorded music revenues principally related to higher compact disc
sales of new releases from popular established artists and movie soundtracks. At
the end of June 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
activities and the absence of certain one-time gains recognized in 1997.

         Cable Networks-TBS. Revenues increased to $1.634 billion, compared to
$1.344 billion in the first six months of 1997. EBITA increased to $351 million
from $279 million. Operating income increased to $251 million from $184 million.
Revenues benefited from a significant increase in subscription revenues, as well
as an increase in 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 TNT, CNN,
Cartoon



                                       6

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<PAGE>



                                TIME WARNER INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
          OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(CONTINUED)


Network and Turner Classic Movies, and higher rates. The increase in advertising
revenues was due to a strong overall advertising market for most of the
division's major branded networks, including TNT, Cartoon Network, CNN and CNN
Headline News. EBITA and operating income increased principally as a result of
the revenue gains and cost savings.

         Filmed Entertainment-TBS. Revenues increased to $876 million, compared
to $734 million in the first six months of 1997. EBITA decreased to $23 million
from $35 million. Operating losses increased to $17 million from $6 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, offset in part by lower worldwide theatrical
and home video revenues. 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 $490 million, compared to $492 million in
the first six months of 1997. EBITA decreased to $148 million from $209 million.
Operating income decreased to $46 million from $70 million. The Cable division's
1998 operating results were negatively affected by the TWE-A/N Transfers.
Excluding the effect of the TWE-A/N Transfers, revenues benefited from 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 the TWE-A/N
Transfers, 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 $566
million in the first six months of 1998, compared to $595 million in the first
six months of 1997. Interest expense decreased to $455 million, compared to $534
million in the first six 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 $111 million in the first six months
of 1998 from $61 million in the first six months of 1997, principally because of
lower gains on foreign exchange contracts, lower investment-related income
relating to the absence of a gain on the sale of an investment recognized in
1997 and higher losses associated with the Company's asset securitization
program.

ENTERTAINMENT GROUP

         Filmed Entertainment-Warner Bros. Revenues increased to $2.642 billion,
compared to $2.431 billion in the first six months of 1997. EBITA increased to
$241 million from $215 million. Operating income increased to $175 million from
$154 million. Revenues benefited from increases in worldwide television
production and distribution and consumer products licensing operations, offset
in part by lower worldwide theatrical and home video revenues. EBITA and
operating income benefited principally from the revenue gains.

         Broadcasting - The WB Network. Revenues increased to $106 million,
compared to $53 million in the first six months of 1997. EBITA decreased to a
loss of $61 million from a loss of $39 million. Operating losses increased to
$63 million from $39 million. Revenues increased as a result of improved
television ratings and the addition of a fourth night of prime-time programming
in January 1998, but were offset by higher programming costs associated with the
expanded programming schedule. Operating losses increased primarily as a result
of a lower allocation of losses to a limited partner in the network. In October
1998, The WB Network plans to expand its prime-time



                                       7

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<PAGE>



                                TIME WARNER INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
          OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(CONTINUED)


programming schedule to five nights a week. Due to the start-up nature of this
national broadcast operation, losses are expected to continue.

         Cable Networks-HBO. Revenues increased to $1.021 billion, compared to
$970 million in the first six months of 1997. EBITA and operating income
increased to $222 million from $189 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.

         Cable. Revenues increased to $2.237 billion, compared to $2.086 billion
in the first six months of 1997. EBITA increased to $681 million from $502
million. Operating income increased to $491 million from $351 million. The Cable
division's 1998 operating results were affected by the TWE-A/N Transfers and the
deconsolidation of its direct broadcast satellite operations in connection with
the Primestar Roll-up Transaction. Excluding the effect of the TWE-A/N Transfers
and Primestar Roll-up Transaction, revenues benefited from 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 the TWE-A/N Transfers and the
Primestar Roll-up Transaction, 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, was $347 million in
the first six months of 1998, compared to $11 million in the first six months of
1997. Interest expense increased to $273 million, compared to $236 million in
the first six months of 1997, principally due to higher average debt levels
associated with the TWE-A/N Transfers. There was other expense, net, of $74
million in the first six months of 1998, compared to other income, net, of $225
million in the first six 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 and higher losses from certain investments
accounted for under the equity method of accounting.

FINANCIAL CONDITION AND LIQUIDITY
JUNE 30, 1998

TIME WARNER

FINANCIAL CONDITION

         At June 30, 1998, Time Warner had $9.9 billion of debt, $344 million of
cash and equivalents (net debt of $9.6 billion), $525 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 (see "Planned Redemption of Series M Preferred Stock"
hereinafter) and $9.3 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.



                                       8

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                                TIME WARNER INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
          OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(CONTINUED)



INVESTMENT IN TWE

         Time Warner's investment in TWE at June 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 $6.4 billion at June 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
$584 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.

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 all $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 comon 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.




                                       9

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<PAGE>



                                TIME WARNER INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
          OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(CONTINUED)





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.

COMMON STOCK REPURCHASE PROGRAM

         In March 1998, Toshiba Corporation and ITOCHU Corporation sold 9.1
million shares of Time Warner common stock to certain banks, after electing to
convert a portion of their Time Warner convertible preferred stock into common
stock. In a related transaction, Time Warner entered into a forward purchase
contract with affiliates of such banks that provided it with an option to
acquire an equal number of 9.1 million shares of its common stock. These
transactions will result in an aggregate $26 million of preferred dividend
savings for Time Warner through October 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 the 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 June 30, 1998, Time Warner had acquired 23.2 million
shares of its common stock in 1998 at an aggregate cost of $1.661 billion,
thereby increasing the cumulative shares purchased under this program to
approximately 40.8 million shares at an aggregate cost of $2.461 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.



                                       10

<PAGE>
<PAGE>



                                TIME WARNER INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
          OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(CONTINUED)


         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
Preferred Stock. At June 30, 1998 and December 31, 1997, Time Warner had
outstanding borrowings against future stock option proceeds of $525 million and
$533 million, respectively.

CASH FLOWS

         During the first six months of 1998, Time Warner's cash provided by
operations amounted to $889 million and reflected $952 million of EBITA from its
Publishing, Music, Cable Networks-TBS, Filmed Entertainment-TBS and Cable
businesses, $191 million of noncash depreciation expense, $132 million of
proceeds from Time Warner's asset securitization program and $298 million of
distributions from TWE, less $404 million of interest payments, $79 million of
income taxes, $38 million of corporate expenses and $163 million related to an
aggregate increase in working capital requirements, other balance sheet accounts
and noncash items. Cash provided by operations of $433 million for the first six
months of 1997 reflected $973 million of business segment EBITA, $181 million of
noncash depreciation expense and $203 million of distributions from TWE, less
$488 million of interest payments, $132 million of income taxes, $43 million of
corporate expenses and $261 million related to an aggregate increase in working
capital requirements, balance sheet accounts and noncash items.

         Cash provided by investing activities was $93 million in the first six
months of 1998, compared to cash used by investing activities of $226 million in
the first six months of 1997, principally as a result of lower capital
expenditures and an increase in investment proceeds, partially offset by an
increase 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 $228 million in the first six months of 1998, compared to $283
million in the first six months of 1997.

         Cash used by financing activities was $1.283 billion in the first six
months of 1998, compared to $251 million in the first six months of 1997. During
the first six months of 1998, Time Warner had 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 principally
used the proceeds from such borrowings, together with $460 million of
proceeds received from the exercise of employee stock options, to repurchase
approximately 23.2 million shares of Time Warner common stock at an aggregate
cost of $1.661 billion. Time Warner also paid $265 million of dividends
in the first six months of 1998, compared to $167 million in the first
six 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 the repurchase of
approximately 954 thousand shares of Time Warner common stock at an aggregate
cost of $36 million, the payment of $167 million of dividends and the repayment
of $86 million of borrowings against future stock option proceeds.

         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



                                       11

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<PAGE>



                                TIME WARNER INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
          OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(CONTINUED)

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.

ENTERTAINMENT GROUP

FINANCIAL CONDITION

         The Entertainment Group had $6.8 billion of debt, $72 million of cash
and equivalents (net debt of $6.7 billion), $225 million of preferred stock of a
subsidiary, $1.2 billion of Time Warner General Partners' Senior Capital and
$6.1 billion of partners' capital at June 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.

CASH FLOWS

         During the first six months of 1998, the Entertainment Group's cash
provided by operations amounted to $586 million and reflected $1.083 billion of
EBITA from its Filmed Entertainment-Warner Bros., Broadcasting-The WB Network,
Cable Networks-HBO and Cable businesses, $469 million of noncash depreciation
expense and $135 million of proceeds from TWE's asset securitization program,
less $260 million of interest payments, $39 million of income taxes, $36 million
of corporate expenses and $766 million related to an aggregate increase in
working capital requirements, other balance sheet accounts and noncash items.
Cash provided by operations of $416 million in the first six months of 1997
reflected $867 million of business segment EBITA and $449 million of noncash
depreciation expense, less $243 million of interest payments, $35 million of
income taxes, $36 million of corporate expenses and $586 million related to an
aggregate increase in working capital requirements, other balance sheet accounts
and noncash items.

         Cash used by investing activities was $493 million in the first six
months of 1998, compared to $425 million in the first six 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 $135 million increase in proceeds from the sale of investments.
Capital expenditures were $734 million in the first six months of 1998 and 1997.

         Cash used by financing activities was $343 million in the first six
months of 1998, compared to cash provided by financing activities of $86 million
in the first six 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 $95 million increase in
distributions paid to Time Warner, offset in part by an increase in debt used to
fund cash distributions to Time Warner.



                                       12

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<PAGE>



                                TIME WARNER INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
          OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(CONTINUED)



         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.

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 $776 million in
the six months ended June 30, 1998, compared to $791 million in the six months
ended June 30, 1997. For the full year of 1998, cable capital spending is
expected to be comparable to 1997 levels, with approximately $800 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 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 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
will be 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



                                       13

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<PAGE>



                                TIME WARNER INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
          OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(CONTINUED)



and the proceeds therefrom are expected to be used by TW Telecom to continue to
expand and develop its telephony networks and services. TW Telecom plans to
complete an initial public offering of a minority interest of common stock
in the second half of 1998, subject to market and other conditions.

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'TM' 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, which, upon conversion,
will dilute each of the common equity holders' interests accordingly. 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 an
approximate 24% equity interest in New Primestar 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.



                                       14

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<PAGE>



                                TIME WARNER INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
          OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(CONTINUED)


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.

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 $2.225 billion at June 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 $790 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. The
majority of Time Warner's exposure to potential Year 2000 problems is in the
latter area. Failure to achieve high levels of Year 2000 compliance in either
area could have a material adverse impact on Time Warner.

         In the former area, technological operations in the sole control of the
Company, Time Warner is engaged in a thorough process involving the
identification and remediation of affected technological functions. Time Warner
has generally completed the process of identifying significant potential Year
2000 difficulties and has an action plan in place to address them. At present,
it is anticipated that the action plan will be successfully completed in all
material respects in advance of January 1, 2000, and that its cost to the
Company will not be material.

         In the latter area, 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, although Time Warner has in place an extensive system to
test for and attempt to resolve potential Year 2000 difficulties. The Company's
business is heavily dependent on third parties, many of whom 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.



                                       15

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<PAGE>



                                TIME WARNER INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
          OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(CONTINUED)



For example, in a situation endemic to the cable industry, much of the Company's
headend equipment that controls cable set-top boxes is presently not Year 2000
compliant. The box manufacturers are working with cable industry groups towards
a solution that is presently expected to be implemented successfully before the
end of 1999; however, that process is not within the Company's control. 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 result in the
interruption of its signal, the Company will be unable to provide that signal to
its cable customers. Moreover, Time Warner is dependent, like all large
companies, on the continued functioning of basic, heavily computerized services
such as banking and telephony. Time Warner is making considerable efforts to
ensure that the third parties on which it is heavily reliant are Year 2000
compliant, but cannot predict the likelihood of such compliance occurring nor
the direct or indirect costs to the Company of non-compliance by those third
parties or of securing such services from compliant third parties. However, Time
Warner believes that it is in no worse position, and likely a better one, than
most U.S.-based companies of its size with respect to the potential for Year
2000 problems and their impact.

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, 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 other terms of service (or any failure to reduce rate regulation
     as is presently mandated by statute) 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.



                                       16

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<PAGE>




                                TIME WARNER INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
          OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(CONTINUED)



     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.

     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.

         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,
Year 2000 compliance failures and changes in Time Warner's plans, strategies and
intentions.




                                       17

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<PAGE>




                                TIME WARNER INC.
                           CONSOLIDATED BALANCE SHEET
                                   (UNAUDITED)


<TABLE>
<CAPTION>

                                                                                             JUNE 30,   DECEMBER 31,
                                                                                              1998         1997
                                                                                            --------    ------------
                                                                                                (MILLIONS, EXCEPT
                                                                                                PER SHARE AMOUNTS)
ASSETS
CURRENT ASSETS
<S>                                                                                          <C>          <C>
Cash and equivalents.......................................................................  $   344      $   645
Receivables, less allowances of $935 and $991 million......................................    2,139        2,447
Inventories................................................................................      810          830
Prepaid expenses...........................................................................    1,136        1,089
                                                                                              ------      -------

Total current assets.......................................................................    4,429        5,011

Noncurrent inventories.....................................................................    1,807        1,766
Investments in and amounts due to and from Entertainment Group.............................    6,051        5,549
Other investments..........................................................................      523        1,495
Property, plant and equipment..............................................................    2,007        2,089
Music catalogues, contracts and copyrights.................................................      878          928
Cable television and sports franchises.....................................................    3,171        3,982
Goodwill...................................................................................   12,121       12,572
Other assets...............................................................................      863          771
                                                                                              ------      -------

Total assets...............................................................................  $31,850      $34,163
                                                                                             =======      =======

LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable...........................................................................  $   742     $    912
Participations, royalties and programming costs payable....................................    1,146        1,072
Debt due within one year...................................................................       21            8
Other current liabilities..................................................................    2,105        2,379
                                                                                              ------      -------

Total current liabilities..................................................................    4,014        4,371

Long-term debt ............................................................................    9,915       11,833
Borrowings against future stock option proceeds............................................      525          533
Deferred income taxes......................................................................    3,688        3,960
Unearned portion of paid subscriptions.....................................................      714          672
Other liabilities..........................................................................    1,240        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, 29.7 and 35.4 million shares outstanding,
   $2.970 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, 541.7 and 519.0 million shares outstanding
   (excluding 16.7 and 39.4 million treasury shares).......................................        5            5
Paid-in capital............................................................................   12,982       12,680
Accumulated deficit........................................................................   (3,671)      (3,334)
                                                                                              ------      -------
Total shareholders' equity.................................................................    9,320        9,356
                                                                                              ------      -------

Total liabilities and shareholders' equity.................................................  $31,850      $34,163
                                                                                             =======      =======
</TABLE>


See accompanying notes.



                                       18

<PAGE>
<PAGE>




                                TIME WARNER INC.
                      CONSOLIDATED STATEMENT OF OPERATIONS
                                  (UNAUDITED)


<TABLE>
<CAPTION>

                                                                       THREE MONTHS ENDED        SIX MONTHS ENDED
                                                                            JUNE 30,                 JUNE 30,
                                                                      --------------------     -------------------
                                                                       1998          1997       1998         1997
                                                                      ------        ------     ------       ------
                                                                          (MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S>                                                                   <C>          <C>         <C>         <C>
Revenues (a).......................................................   $3,672       $3,193      $6,809      $6,227
                                                                      ------       ------      ------      ------

Cost of revenues (a)(b)............................................    2,077        1,603       3,964       3,453
Selling, general and administrative (a)(b).........................    1,211        1,245       2,291       2,235
                                                                      ------       ------      ------      ------

Operating expenses.................................................    3,288        2,848       6,255       5,688
                                                                      ------       ------      ------      ------

Business segment operating income..................................      384          345         554         539
Equity in pretax income of Entertainment Group (a).................      166          108         273         426
Interest and other, net (a)........................................     (283)        (303)       (566)       (595)
Corporate expenses (a).............................................      (19)         (22)        (38)        (43)
                                                                      ------       ------      ------      ------

Income before income taxes.........................................      248          128         223         327
Income tax provision...............................................     (147)         (98)       (184)       (245)
                                                                      ------       ------      ------      ------

Income before extraordinary item...................................      101           30          39          82
Extraordinary loss on retirement of debt, net of $11 million
   income tax benefit in 1997......................................        -            -           -         (17)
                                                                      ------       ------      ------      ------

Net income.........................................................      101           30          39          65
Preferred dividend requirements....................................      (78)         (79)       (160)       (157)
                                                                      ------       ------      ------      ------

Net income (loss) applicable to common shares......................   $   23       $  (49)     $ (121)     $  (92)
                                                                      ======       ======      ======      ======

Basic and diluted loss per common share:
Income (loss) before extraordinary item............................   $  .04       $ (.09)     $ (.21)     $ (.13)
                                                                      ======       ======      ======      ======

Net income (loss)..................................................   $  .04       $ (.09)     $ (.21)     $ (.16)
                                                                      ======       ======      ======      ======

Average common shares..............................................    596.3        561.0       587.3       559.9
                                                                      ======       ======      ======      ======
</TABLE>

--------------
(a) Includes the following income (expenses) resulting from transactions with
    the Entertainment Group and other related companies for the three and six
    months ended June 30, 1998, respectively, and for the corresponding periods
    in the prior year: revenues-$102 million and $214 million in 1998, $73
    million and $147 million in 1997; cost of revenues-$(70) million and $(137)
    million in 1998, $(61) million and $(121) million in 1997; selling, general
    and administrative-$(11) million and $(20) million in 1998, $3 million and
    $8 million in 1997; equity in pretax income of Entertainment Group-$(15)
    million and $(20) million in 1998, $13 million and $24 million in 1997;
    interest and other, net-$(3) million and $(6) million in 1998, $(7) and
    $(21) million in 1997; and corporate expenses-$18 million and $36 million in
    each of 1998 and 1997.

<TABLE>
<S>                                                                   <C>          <C>         <C>         <C>
(b) Includes depreciation and amortization expense of:.............   $  293       $  310      $  589      $  615
                                                                      ======       ======      ======      ======
</TABLE>


See accompanying notes.



                                       19

<PAGE>
<PAGE>





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

<TABLE>
<CAPTION>

                                                                                                      SIX MONTHS
                                                                                                    ENDED JUNE 30,
                                                                                                    --------------
                                                                                                1998           1997
                                                                                              --------       --------
                                                                                                    (MILLIONS)
<S>                                                                                            <C>          <C>  
OPERATIONS
Net income..................................................................................   $   39       $  65
Adjustments for noncash and nonoperating items:
Extraordinary loss on retirement of debt....................................................        -          17
Depreciation and amortization...............................................................      589         615
Noncash interest expense....................................................................       29          51
Excess (deficiency) of distributions over equity in pretax income of
   Entertainment Group......................................................................       25        (223)
Changes in operating assets and liabilities.................................................      207         (92)
                                                                                               ------       -----

Cash provided by operations.................................................................      889         433
                                                                                               ------       -----

INVESTING ACTIVITIES
Investments and acquisitions................................................................      (74)        (56)
Capital expenditures........................................................................     (228)       (283)
Investment proceeds.........................................................................      395         113
                                                                                               ------       -----

Cash provided (used) by investing activities................................................       93        (226)
                                                                                               ------       -----

FINANCING ACTIVITIES
Borrowings..................................................................................    1,603       1,039
Debt repayments.............................................................................   (1,377)     (1,094)
Borrowings against future stock option proceeds.............................................      525           -
Repayments of borrowings against future stock option proceeds...............................     (533)        (86)
Repurchases of Time Warner common stock.....................................................   (1,661)        (36)
Dividends paid..............................................................................     (265)       (167)
Proceeds received from stock option and dividend reinvestment plans.........................      460           -
Other, principally financing costs..........................................................      (35)         93
                                                                                               ------       -----

Cash used by financing activities...........................................................   (1,283)       (251)
                                                                                               ------       -----

DECREASE IN CASH AND EQUIVALENTS............................................................     (301)        (44)

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

CASH AND EQUIVALENTS AT END OF PERIOD.......................................................   $  344       $  470
                                                                                               ======       ======
</TABLE>

---------------
(a) Includes current and noncurrent cash and equivalents at December 31, 1996.


See accompanying notes.



                                       20

<PAGE>
<PAGE>




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

<TABLE>
<CAPTION>

                                                                                                    SIX MONTHS
                                                                                                  ENDED JUNE 30,
                                                                                                  --------------
                                                                                                1998         1997
                                                                                               ------       ------
                                                                                                    (MILLIONS)
<S>                                                                                            <C>         <C>   
BALANCE AT BEGINNING OF YEAR................................................................   $9,356      $9,502

Net income..................................................................................       39          65
Other comprehensive income (loss)...........................................................      (22)        (59)
                                                                                               ------      ------
Comprehensive income (loss).................................................................       17           6
Common stock dividends......................................................................     (106)       (101)
Preferred stock dividends...................................................................     (160)       (157)
Repurchases of Time Warner common stock.....................................................   (1,661)        (36)
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...........................................................      724         142
                                                                                               ------      ------

BALANCE AT JUNE 30,.........................................................................   $9,320      $9,423
                                                                                               ======      ======
</TABLE>


See accompanying notes.



                                       21

<PAGE>
<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 9). 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 $327 million and $325 million for the three months ended June 30,
1998 and 1997, respectively, and $656 million and $646 million in the six months
ended June 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.




                                       22

<PAGE>
<PAGE>


                                TIME WARNER INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
                                   (UNAUDITED)


         In June 1998, the Financial Accounting Standards Board issued Statement
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("FAS
133"), effective for years beginning after June 15, 1999, with early application
encouraged. The new rules establish standards requiring that all derivative
financial instruments, such as interest rate swap contracts and foreign exchange
contracts, be recognized and measured at fair value regardless of the purpose
or intent for holding them. Time Warner plans to adopt FAS 133 effective as of
July 1, 1998, and it is not expected that the adoption will have a material
effect on Time Warner's financial statements.

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 will be 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'TM' 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



                                       23

<PAGE>
<PAGE>



                                TIME WARNER INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
                                   (UNAUDITED)


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.

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 an approximate 24% equity interest in New
Primestar 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
Telecommunications Corporation ("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 exchange for such assets, ASkyB would receive non-voting
securities of New Primestar that would be convertible into non-voting common
stock of New Primestar and, accordingly, would reduce TWE's equity interest in
New Primestar to approximately 16% on a fully diluted basis. 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. The parties have had discussions with
the U.S. Department of Justice in an attempt to restructure the transaction and
reach a resolution on such matters, but there can be no assurance that an
agreement can be reached or that necessary governmental and regulatory approvals
will be obtained.

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.



                                       24

<PAGE>
<PAGE>




                                TIME WARNER INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
                                   (UNAUDITED)

         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.

         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 six months ended June 30, 1997, respectively, revenues of $3.179
billion and $6.197 billion, depreciation expense of $88 million and $178
million, operating income before noncash amortization of intangible assets of
$535 million and $914 million, operating income of $331 million and $512
million, equity in the pretax income of the Entertainment Group of $108 million
and $424 million, income before extraordinary item of $31 million and $85
million ($.09 loss and $.13 loss per common share) and net income of $31 million
and $68 million ($.09 loss and $.16 loss per common share).

3. ENTERTAINMENT GROUP

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

<TABLE>
<CAPTION>

                                                                                              JUNE 30,      DECEMBER 31,
                                                                                                1998            1997
                                                                                              --------        -------
                                                                                                     (MILLIONS)
<S>                                                                                            <C>            <C>
Investment in TWE...........................................................................   $5,265         $5,577
Stock option related distributions due from TWE.............................................      671            417
Credit agreement debt due to TWE............................................................     (400)          (400)
Other net liabilities due to TWE, principally related to home video distribution............     (213)          (141)
                                                                                               ------         ------
Investment in and amounts due to and from TWE...............................................    5,323          5,453
Investment in TWE-A/N and other Entertainment Group companies...............................      728             96
                                                                                               ------         ------

Total.......................................................................................   $6,051         $5,549
                                                                                               ======         ======
</TABLE>

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%



                                       25

<PAGE>
<PAGE>



                                TIME WARNER INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
                                   (UNAUDITED)



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").

         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 $263
million and $402 million in the six months ended June 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 and the Primestar Roll-up Transaction effective as of April 1,
1998.

<TABLE>
<CAPTION>

                                                                           THREE MONTHS             SIX MONTHS
                                                                          ENDED JUNE 30,          ENDED JUNE 30,
                                                                      --------------------     ------------------
                                                                        1998         1997       1998        1997
                                                                      -------      -------     ------      ------
                                                                                       (MILLIONS)
<S>                                                                   <C>          <C>         <C>         <C>

OPERATING STATEMENT INFORMATION
Revenues...........................................................   $2,853       $2,731      $5,765      $5,333
Depreciation and amortization......................................     (356)        (332)       (727)       (661)
Business segment operating income(1)...............................      456          327         825         655
Interest and other, net(2) ........................................     (183)        (139)       (347)        (11)
Minority interest..................................................      (82)         (56)       (146)       (164)
Income before income taxes ........................................      173          114         296         444
Net income.........................................................      156           89         264         407
</TABLE>

------------------
(1)   Includes net pretax gains relating to the sale or exchange of certain
      cable television systems of approximately $70 million recognized in the
      second quarter of 1998, and approximately $84 million and $24 million for
      the six months ended June 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.


<TABLE>
<CAPTION>

                                                                                                     SIX MONTHS
                                                                                                   ENDED JUNE 30,
                                                                                                 1998        1997
                                                                                                ------      ------
                                                                                                    (MILLIONS)

<S>                                                                                             <C>         <C>  
CASH FLOW INFORMATION
Cash provided by operations.................................................................    $ 586       $ 416
Capital expenditures........................................................................     (734)       (734)
Investments and acquisitions................................................................     (265)        (62)
Investment proceeds.........................................................................      506         371
Borrowings..................................................................................      503         428
Debt repayments.............................................................................     (492)       (323)
Issuance of preferred stock of subsidiary...................................................        -         243
Capital distributions.......................................................................     (298)       (203)
Other financing activities, net.............................................................      (56)        (59)
Increase (decrease) in cash and equivalents.................................................     (250)         77
</TABLE>




                                       26

<PAGE>
<PAGE>




                                TIME WARNER INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
                                   (UNAUDITED)


<TABLE>
<CAPTION>

                                                                                             JUNE 30,   DECEMBER 31,
                                                                                               1998        1997
                                                                                             --------     ------
                                                                                                  (MILLIONS)
<S>                                                                                            <C>        <C>
BALANCE SHEET INFORMATION
Cash and equivalents........................................................................   $   72     $   322
Total current assets........................................................................    3,681       3,623
Total assets................................................................................   22,160      20,739
Total current liabilities...................................................................    3,867       3,976
Long-term debt..............................................................................    6,771       5,990
Minority interests..........................................................................    1,477       1,210
Preferred stock of subsidiary...............................................................      225         233
Time Warner General Partners' Senior Capital................................................    1,163       1,118
Partners' capital ..........................................................................    6,080       6,430
</TABLE>


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 June 30, 1998 and December 31, 1997, the Time
Warner General Partners had recorded $671 million and $417 million,
respectively, of stock option related distributions due from TWE, based on
closing prices of Time Warner common stock of $85.44 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 six months ended June 30, 1998, the Time Warner General Partners
received distributions from TWE in the amount of $298 million, consisting of
$138 of tax-related distributions and $160 of stock option related
distributions. During the six months ended June 30, 1997, the Time Warner
General Partners received distributions from TWE in the amount of $203 million,
consisting of $192 million of tax-related distributions and $11 million of stock
option related distributions. 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.

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.



                                       27

<PAGE>
<PAGE>



                                TIME WARNER INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
                                   (UNAUDITED)



4. INVENTORIES

         Inventories consist of:

<TABLE>
<CAPTION>

                                                                         JUNE 30, 1998           DECEMBER 31, 1997
                                                                       -----------------        --------------------
                                                                     CURRENT      NONCURRENT    CURRENT   NONCURRENT
                                                                     -------      ----------    -------   -----------
                                                                                          (MILLIONS)
<S>                                                                     <C>        <C>           <C>       <C>
Film costs:
   Released, less amortization.....................................     $106       $  270        $ 68      $  228
   Completed and not released......................................        8            -          88          48
   In process and other............................................        -          172           -         141
   Library, less amortization......................................        -        1,035           -       1,064
Programming costs, less amortization...............................      273          330         293         285
Magazines, books and recorded music................................      423            -         381           -
                                                                        ----       ------        ----      ------

Total  ............................................................     $810       $1,807        $830      $1,766
                                                                        ====       ======        ====      ======
</TABLE>


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 all $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 $17 million was recognized in the first
quarter of 1997 in connection with certain debt refinancings.

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 J Preferred



                                       28

<PAGE>
<PAGE>



                                TIME WARNER INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
                                   (UNAUDITED)


Stock. At June 30, 1998 and December 31, 1997, Time Warner had outstanding
borrowings against future stock option proceeds of $525 million 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 % 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 %. 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

         In March 1998, Toshiba Corporation and ITOCHU Corporation sold 9.1
million shares of Time Warner common stock to certain banks, after electing to
convert a portion of their Time Warner convertible preferred stock into common
stock. In a related transaction, Time Warner entered into a forward purchase
contract with affiliates of such banks that provided it with an option to
acquire an equal number of 9.1 million shares of its common stock. These
transactions will result in an aggregate $26 million of preferred dividend
savings for Time Warner through October 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 the 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 June 30, 1998, Time Warner had acquired 23.2 million
shares of its common stock in 1998 at an aggregate cost of $1.661 billion,
thereby increasing the cumulative shares purchased under this program to
approximately 40.8 million shares at an aggregate cost of $2.461 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.



                                       29

<PAGE>
<PAGE>



                                TIME WARNER INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
                                   (UNAUDITED)


         In May 1998, Time Warner issued approximately 2.9 million shares of its
common stock as a result of the conversion of approximately 1.3 million shares
of its Series J preferred stock.

9. 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 and the Primestar
Roll-up Transaction effective as of April 1, 1998.


<TABLE>
<CAPTION>


                                                                          THREE MONTHS             SIX MONTHS
                                                                         ENDED JUNE 30,           ENDED JUNE 30,
                                                                      -------------------      -------------------
                                                                       1998         1997        1998         1997
                                                                      ------       ------      ------       ------
                                                                                       (MILLIONS)
<S>                                                                   <C>          <C>         <C>         <C>   
REVENUES
Time Warner:
Publishing.........................................................   $1,136       $1,053      $2,084      $1,977
Music..............................................................      905          822       1,793       1,755
Cable Networks-TBS.................................................      906          750       1,634       1,344
Filmed Entertainment-TBS...........................................      504          337         876         734
Cable..............................................................      242          250         490         492
Intersegment elimination...........................................      (21)         (19)        (68)        (75)
                                                                        ----        -----        ----      ------

Total..............................................................   $3,672       $3,193      $6,809      $6,227
                                                                      ======       ======      ======      ======

Entertainment Group:
Filmed Entertainment-Warner Bros...................................   $1,330       $1,257      $2,642      $2,431
Broadcasting-The WB Network........................................       61           29         106          53
Cable Networks-HBO.................................................      509          487       1,021         970
Cable..............................................................    1,084        1,066       2,237       2,086
Intersegment elimination...........................................     (131)        (108)       (241)       (207)
                                                                        ----        -----        ----      ------

Total..............................................................   $2,853       $2,731      $5,765      $5,333
                                                                      ======       ======      ======      ======
</TABLE>



                                       30



<PAGE>
<PAGE>



                                TIME WARNER INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
                                   (UNAUDITED)



<TABLE>
<CAPTION>

                                                                          THREE MONTHS             SIX MONTHS
                                                                         ENDED JUNE 30,           ENDED JUNE 30,
                                                                      -------------------      -------------------
                                                                       1998         1997        1998         1997
                                                                      ------       ------      ------       ------
                                                                                       (MILLIONS)
<S>                                                                   <C>          <C>         <C>         <C>   
EBITA(1)
Time Warner:
Publishing.........................................................   $  176         $157      $  261        $233
Music..............................................................       96          106         189         224
Cable Networks-TBS.................................................      198          165         351         279
Filmed Entertainment-TBS...........................................       38           29          23          35
Cable..............................................................       74          104         148         209
Intersegment elimination...........................................       (1)           4         (20)         (7)
                                                                        ----        -----        ----      ------

Total..............................................................   $  581         $565      $  952        $973
                                                                      ======       ======      ======      ======

Entertainment Group:
Filmed Entertainment-Warner Bros...................................   $  122         $110      $  241        $215
Broadcasting-The WB Network........................................      (23)         (19)        (61)        (39)
Cable Networks-HBO.................................................      113           98         222         189
Cable(2)...........................................................      374          243         681         502
                                                                        ----        -----        ----      ------

Total..............................................................   $  586         $432      $1,083        $867
                                                                      ======       ======      ======      ======
</TABLE>


---------------
(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 six months ended June 30, 1998, respectively, and for the
    corresponding periods in the prior year was $384 million and $554 million in
    1998, $345 million and $539 million in 1997. Similarly, business segment
    operating income of the Entertainment Group for the three and six months
    ended June 30, 1998, respectively, and for the corresponding periods in the
    prior year was $456 million and $825 million in 1998, $327 million and $655
    million in 1997.

(2) Includes net pretax gains relating to the sale or exchange of certain cable
    television systems of approximately $70 million recognized in the second
    quarter of 1998, and approximately $84 million and $24 million for the six
    months ended June 30, 1998 and 1997, respectively.




<TABLE>
<CAPTION>

                                                                          THREE MONTHS             SIX MONTHS
                                                                         ENDED JUNE 30,           ENDED JUNE 30,
                                                                      -------------------      -------------------
                                                                       1998         1997        1998         1997
                                                                      ------       ------      ------       ------
                                                                                       (MILLIONS)
<S>                                                                   <C>          <C>         <C>         <C>   
DEPRECIATION OF PROPERTY, PLANT AND EQUIPMENT
Time Warner:
Publishing.........................................................     $ 19         $ 17        $ 38       $  33
Music..............................................................       19           19          38          41
Cable Networks-TBS.................................................       25           21          47          42
Filmed Entertainment-TBS...........................................        1            2           3           3
Cable..............................................................       32           31          65          62
                                                                        ----        -----        ----      ------

Total..............................................................     $ 96         $ 90        $191        $181
                                                                      ======       ======      ======      ======

Entertainment Group:
Filmed Entertainment-Warner Bros...................................     $ 38         $ 45        $ 78       $  90
Broadcasting-The WB Network........................................        -            1           -           1
Cable Networks-HBO.................................................        5            5          10          10
Cable..............................................................      183          176         381         348
                                                                        ----        -----        ----      ------

Total..............................................................     $226         $227        $469        $449
                                                                      ======       ======      ======      ======
</TABLE>



                                       31

<PAGE>
<PAGE>



                                TIME WARNER INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
                                   (UNAUDITED)


<TABLE>
<CAPTION>

                                                                           THREE MONTHS             SIX MONTHS
                                                                          ENDED JUNE 30,          ENDED JUNE 30,
                                                                       -------------------     -------------------
                                                                        1998         1997       1998         1997
                                                                       ------       ------     ------       ------
                                                                                       (MILLIONS)
<S>                                                                     <C>         <C>          <C>         <C> 

AMORTIZATION OF INTANGIBLE ASSETS(1)
Time Warner:
Publishing.........................................................     $  8        $   8        $ 17        $ 17
Music..............................................................       71           74         139         142
Cable Networks-TBS.................................................       50           50         100          95
Filmed Entertainment-TBS...........................................       20           19          40          41
Cable..............................................................       48           69         102         139
                                                                        ----         ----        ----        ----

Total..............................................................     $197         $220        $398        $434
                                                                        ====         ====        ====        ====

Entertainment Group:
Filmed Entertainment-Warner Bros...................................     $ 33          $30        $ 66         $61
Broadcasting-The WB Network........................................        1            -           2           -
Cable Networks-HBO.................................................        -            -           -           -
Cable..............................................................       96           75         190         151
                                                                        ----         ----        ----        ----

Total..............................................................     $130         $105        $258        $212
                                                                        ====         ====        ====        ====
</TABLE>


(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.

10. 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.

11. ADDITIONAL FINANCIAL INFORMATION

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


<TABLE>
<CAPTION>

                                                                                                    SIX MONTHS
                                                                                                  ENDED JUNE 30,
                                                                                                 ----------------
                                                                                                 1998        1997
                                                                                                ------      ------
                                                                                                    (MILLIONS)
<S>                                                                                              <C>         <C>
Interest expense............................................................................     $455        $534
Cash payments made for interest............................................................       404         488
Cash payments made for income taxes.........................................................      122         166
Tax-related distributions received from TWE.................................................      138         192
Income tax refunds received.................................................................       43          34
</TABLE>


         Noncash investing activities in the first six months of 1998 included
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 six months of 1998 (Note
5) and the payment of $91 million of noncash dividends on the Series M Preferred
Stock in the first six months of 1997. During the six months ended June 30,
1998, Time Warner received $132 million of proceeds under its asset
securitization program.



                                       32

<PAGE>
<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 June 30, 1998

<TABLE>
<CAPTION>
                                                                                   Non-                     Time
                                              Time          TW                   Guarantor    Elimina-     Warner
                                             Warner      Companies      TBS    Subsidiaries     tions   Consolidated
                                             ------      ---------      ---    ------------   --------- ------------
                                                                              (millions)
<S>                                           <C>         <C>           <C>        <C>         <C>         <C>   
Revenues ...................................  $   -       $    -        $198       $3,474      $    -      $3,672
                                              -----       ------        ----       ------      ------      ------
Cost of revenues (1)........................      -            -         100        1,977           -       2,077
Selling, general and administrative (1).....      -            -          47        1,164           -       1,211
                                              -----        -----        ----       ------       -----      ------
Operating expenses..........................      -            -         147        3,141           -       3,288
                                              -----        -----        ----       ------       -----      ------
Business segment operating income...........      -            -          51          333           -         384
Equity in pretax income of consolidated
   subsidiaries.............................    279          397          99            -        (775)          -
Equity in pretax income of Entertainment
   Group ...................................      -            -           -          173          (7)        166
Interest and other, net.....................    (12)        (202)        (40)         (11)        (18)       (283)
Corporate expenses..........................    (19)         (13)         (4)         (15)         32         (19)
                                              -----        -----       -----        -----       -----      ------
Income before income taxes..................    248          182         106          480        (768)        248
Income tax provision........................   (147)        (117)        (60)        (261)        438        (147)
                                              -----        -----       -----        -----       -----       -----
Net income..................................   $101        $  65        $ 46       $  219       $(330)       $101
                                               ====        =====        ====       ======       =====        ====
(1) Includes depreciation and amortization
       expense of:.......................... $    -       $    -       $   2       $  291      $    -       $ 293
                                             ======       ======       =====       ======      ======       =====
</TABLE>


                                       33

<PAGE>

<PAGE>


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

                      Consolidating Statement of Operations
                    For The Three Months Ended June 30, 1997

<TABLE>
<CAPTION>

                                                                                   Non-                     Time
                                              Time          TW                   Guarantor    Elimina-     Warner
                                             Warner      Companies      TBS    Subsidiaries     tions   Consolidated
                                             ------      ---------      ---    ------------   --------  ------------
                                                                             (millions)
<S>                                           <C>         <C>          <C>         <C>         <C>         <C>   
Revenues ...................................  $   -       $    -       $ 148       $3,045      $    -      $3,193
                                              -----       ------       -----       ------      ------      ------
Cost of revenues (1)........................      -            -          70        1,533           -       1,603
Selling, general and administrative (1).....      -            -          49        1,196           -       1,245
                                              -----        -----       -----       ------       -----      ------
Operating expenses..........................      -            -         119        2,729           -       2,848
                                              -----        -----       -----        -----       -----       -----
Business segment operating income...........      -            -          29          316           -         345
Equity in pretax income of consolidated
   subsidiaries.............................    148          274          98            -        (520)          -
Equity in pretax income of Entertainment
   Group ...................................      -            -           -          114          (6)        108
Interest and other, net.....................      2         (195)        (38)         (59)        (13)       (303)
Corporate expenses..........................    (22)         (14)         (4)         (16)         34         (22)
                                              -----       ------       -----        -----      ------      ------
Income (loss) before income taxes...........    128           65          85          355        (505)        128
Income tax provision........................    (98)         (50)        (51)        (190)        291         (98)
                                              -----       ------       -----        -----      ------       -----
Net income (loss)...........................  $  30       $   15       $  34        $ 165       $(214)      $  30
                                              =====       ======       =====        =====       =====       =====
(1) Includes depreciation and amortization
       expense of:.......................... $    -       $    -      $    6        $ 304      $    -       $ 310
                                             ======       ======      ======        =====      ======       =====
</TABLE>





                                       34


<PAGE>

<PAGE>


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

                      Consolidating Statement of Operations
                     For The Six Months Ended June 30, 1998
<TABLE>
<CAPTION>
                                                                                   Non-                     Time
                                              Time          TW                   Guarantor    Elimina-     Warner
                                             Warner      Companies      TBS    Subsidiaries     tions   Consolidated
                                             ------      ---------      ---    ------------   --------  ------------
                                                                             (millions)
<S>                                           <C>         <C>          <C>         <C>         <C>         <C>   
Revenues ...................................  $   -       $    -        $366       $6,443      $    -      $6,809
                                              -----       ------        ----       ------      ------      ------
Cost of revenues (1)........................      -            -         161        3,803           -       3,964
Selling, general and administrative (1).....      -            -          97        2,194           -       2,291
                                              -----        -----        ----       ------       -----      ------
Operating expenses..........................      -            -         258        5,997           -       6,255
                                              -----        -----        ----       ------       -----      ------
Business segment operating income...........      -            -         108          446           -         554
Equity in pretax income of consolidated
   subsidiaries.............................    283          614          78            -        (975)          -
Equity in pretax income of Entertainment
   Group ...................................      -            -           -          296         (23)        273
Interest and other, net.....................    (22)        (387)        (84)         (51)        (22)       (566)
Corporate expenses..........................    (38)         (26)         (8)         (31)         65         (38)
                                              -----       ------       -----        -----       -----      ------
Income before income taxes..................    223          201          94          660        (955)        223
Income tax provision........................   (184)        (135)        (73)        (367)        575        (184)
                                              -----        -----       -----        -----       -----        ----
Net income.................................. $   39        $  66       $  21       $  293       $(380)      $  39
                                             ======        =====       =====       ======       =====       =====
(1) Includes depreciation and amortization
       expense of:.......................... $    -       $    -       $   4       $  585      $    -        $589
                                             ======       ======       =====       ======      ======        ====
</TABLE>


                                       35

<PAGE>

<PAGE>


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

                      Consolidating Statement of Operations
                     For The Six Months Ended June 30, 1997

<TABLE>
<CAPTION>
                                                                                   Non-                     Time
                                              Time          TW                   Guarantor    Elimina-     Warner
                                             Warner      Companies      TBS    Subsidiaries     tions   Consolidated
                                             ------      ---------      ---    ------------   --------  ------------
                                                                             (millions)
<S>                                           <C>         <C>          <C>         <C>         <C>         <C>   
Revenues ...................................  $   -       $    -       $ 266       $5,961      $    -      $6,227
                                              -----       ------       -----       ------      ------      ------
Cost of revenues (1)........................      -            -         125        3,328           -       3,453
Selling, general and administrative (1).....      -            -          91        2,144           -       2,235
                                              -----        -----       -----       ------       -----      ------
Operating expenses..........................      -            -         216        5,472           -       5,688
                                              -----        -----       -----        -----       -----      ------
Business segment operating income...........      -            -          50          489           -         539
Equity in pretax income of consolidated
   subsidiaries.............................    359          698         114            -      (1,171)          -
Equity in pretax income of Entertainment
   Group ...................................      -            -           -          444         (18)        426
Interest and other, net.....................     11         (377)        (95)        (121)        (13)       (595)
Corporate expenses..........................    (43)         (28)         (8)         (32)         68         (43)
                                              -----       ------       -----        -----       -----      ------
Income (loss) before income taxes...........    327          293          61          780      (1,134)        327
Income tax provision........................   (245)        (187)        (63)        (433)        683        (245)
                                              -----       ------       -----        -----      ------      ------
Income (loss) before extraordinary item.....     82          106          (2)         347        (451)         82
Extraordinary loss on retirement of debt,
   net of tax...............................    (17)         (13)         (4)         (13)         30         (17)
                                             ------       ------      ------       ------      ------      ------
Net income (loss)...........................  $  65        $  93       $  (6)       $ 334      $ (421)       $ 65
                                              =====        =====       =====        =====      ======        ====
(1) Includes depreciation and amortization
       expense of:.......................... $    -       $    -       $  11        $ 604      $    -       $ 615
                                             ======       ======       =====        =====      ======       =====
</TABLE>



                                       36

<PAGE>

<PAGE>


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

                           Consolidating Balance Sheet
                                  June 30, 1998
<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.......................................  $    -   $   62   $   16    $  266      $   -  $   344
Receivables, net...........................................      16       53      129     1,945         (4)   2,139
Inventories................................................       -        -       90       720          -      810
Prepaid expenses...........................................      15        4        6     1,117         (6)   1,136
                                                              -----    -----    -----   -------     ------  -------
Total current assets.......................................      31      119      241     4,048        (10)   4,429
Noncurrent inventories.....................................       -        -      142     1,665          -    1,807
Investments in and amounts due to and from
   consolidated subsidiaries...............................  16,295   14,730    9,798         -    (40,823)       -
Investments in and amounts due to and
   from Entertainment Group................................       -      960        -     5,156        (65)   6,051
Other investments..........................................     106        1       24     1,003       (611)     523
Property, plant and equipment, net.........................      57        -       45     1,905          -    2,007
Music catalogues, contracts and copyrights.................       -        -        -       878          -      878
Cable television and sports franchises.....................       -        -        -     3,171          -    3,171
Goodwill...................................................       -        -        -    12,121          -   12,121
Other assets...............................................      75      134      120       542         (8)     863
                                                             ------   ------   ------   -------     ------  -------
Total assets............................................... $16,564  $15,944  $10,370   $30,489   $(41,517) $31,850
                                                            =======  =======  =======   =======   ========  =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable........................................... $    25  $     -  $    11   $   706   $      -  $   742
Participations, royalties and programming costs
   payable.................................................       -        -       30     1,116          -    1,146
Debt due within one year...................................       -        -        -        21          -       21
Other current liabilities..................................     244      314      242     1,421       (116)   2,105
                                                             ------   ------   ------   -------    -------  -------
Total current liabilities..................................     269      314      283     3,264       (116)   4,014
Long-term debt ............................................     593    7,336      747     1,239          -    9,915
Debt due to affiliates.....................................       -        -    1,647       158     (1,805)       -
Borrowings against future stock option proceeds............     525        -        -         -          -      525
Deferred income taxes......................................   3,688    3,525      243     3,768     (7,536)   3,688
Unearned portion of paid subscriptions.....................       -        -        -       714          -      714
Other liabilities..........................................     310       19       92       819          -    1,240
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.................       -   (1,486)       -    (1,165)     2,651        -
Other shareholders' equity.................................   9,320    6,236    7,358    21,117    (34,711)   9,320
                                                            -------  -------   ------   -------    -------  -------
Total shareholders' equity.................................   9,320    4,750    7,358    19,952    (32,060)   9,320
                                                            -------  -------   ------   -------    -------  -------
Total liabilities and shareholders' equity................. $16,564  $15,944  $10,370   $30,489   $(41,517) $31,850
                                                            =======  =======  =======   =======   ========  =======
</TABLE>



                                       37

<PAGE>

<PAGE>

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

                           Consolidating Balance Sheet
                                December 31, 1997

<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>




                                       38

<PAGE>

<PAGE>


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

                      Consolidating Statement of Cash Flows
                     For The Six Months Ended June 30, 1998


<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.................................................    $ 39     $ 66      $21      $293      $(380)    $ 39
Adjustments for noncash and nonoperating items:
Depreciation and amortization..............................       -        -        4       585          -      589
Noncash interest expense...................................       -       29        -         -          -       29
Excess (deficiency) of distributions over equity in
   pretax income of consolidated subsidiaries..............     838     (313)     145         -       (670)       -
Excess of equity in pretax income of
   Entertainment Group over distributions..................       -        -        -         2         23       25
Changes in operating assets and liabilities................     160       91      (81)       81        (44)     207
                                                              -----     ----     ----      -----     -----     ----
Cash provided by operations................................   1,037     (127)      89       961     (1,071)     889
                                                              -----     ----     ----      ----      -----     ----
INVESTING ACTIVITIES
Investments and acquisitions...............................    (213)       -        -       139          -      (74)
Advances to parents and consolidated subsidiaries..........       -     (187)       -       (26)       213        -
Repayment of advances from consolidated subsidiaries.......      75        -        -         -        (75)       - 
Capital expenditures.......................................       -        -       (7)     (221)         -     (228)
Investment proceeds........................................       -        -        -       395          -      395
                                                              -----    -----    -----      ----      -----     ----
Cash provided (used) by investing activities...............    (138)    (187)      (7)      287        138       93
                                                              -----    -----    -----      ----      -----     ----
FINANCING ACTIVITIES
Borrowings.................................................     597      496        -       514         (4)   1,603
Debt repayments............................................       -     (500)     (75)     (877)        75   (1,377)
Change in due to/from parent...............................       -       21        -      (883)       862        -
Borrowings against future stock option proceeds............     525        -        -         -          -      525
Repayments of borrowings against future stock
   option proceeds.........................................    (533)       -        -         -          -     (533)
Repurchases of Time Warner common stock....................  (1,661)       -        -         -          -   (1,661)
Dividends paid.............................................    (265)       -        -         -          -     (265)
Proceeds from the issuance of stock options and
   dividend reinvestment...................................     460        -        -         -          -      460
Other......................................................     (22)     (13)       -         -          -      (35)
                                                              -----   -------   -----     -----     ------    ------
Cash used by financing activities..........................    (899)       4      (75)   (1,246)       933   (1,283)
                                                              -----   -------   ------   -------    ------   -------
INCREASE (DECREASE) IN CASH AND
   EQUIVALENTS.............................................       -     (310)       7         2          -     (301)
                                                             ------    ------   -----    ------     ------   -------
CASH AND EQUIVALENTS AT
   BEGINNING OF PERIOD.....................................       -      372        9       264          -      645
                                                              -----    -----    -----     -----     ------    -----
CASH AND EQUIVALENTS AT END OF PERIOD......................  $    -    $  62    $  16     $ 266     $    -    $ 344
                                                             ======    =====    =====     =====     ======    =====
</TABLE>




                                       39

<PAGE>

<PAGE>

                                TIME WARNER INC.
                            SUPPLEMENTARY INFORMATION
            CONDENSED CONSOLIDATING FINANCIAL STATEMENTS--(Continued)
                                   (unaudited)
                      Consolidating Statement of Cash Flows
                     For The Six Months Ended June 30, 1997

<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 (loss)..........................................    $ 65     $ 93     $ (6)     $334      $(421)    $ 65
Adjustments for noncash and nonoperating items:
Extraordinary loss on retirement of debt...................      17       13        4        13        (30)      17
Depreciation and amortization..............................       -        -       11       604          -      615
Noncash interest expense...................................       -       49        2         -          -       51
Excess of distributions over equity in pretax
   income of consolidated subsidiaries.....................     668      147      194         -     (1,009)       -
Excess (deficiency) of equity in pretax income of
   Entertainment Group over distributions..................       -        -        -      (241)        18     (223)
Changes in operating assets and liabilities................     (49)    (205)     (88)      305        (55)     (92)
                                                               -----    -----    -----   ------       ----    ------
Cash provided (used) by operations.........................     701       97      117     1,015     (1,497)     433
                                                               ----     ----     ----    ------     -------   -----
INVESTING ACTIVITIES
Investments and acquisitions...............................     (14)       -        -       (42)         -      (56)
Advance to parents and consolidated subsidiaries...........    (571)       -        -         -        571        -
Capital expenditures.......................................       -        -       (2)     (281)         -     (283)
Investment proceeds........................................       -        -        -       113          -      113
                                                              -----     ----    -----     -----     ------    -----
Cash used by investing activities..........................    (585)       -       (2)     (210)       571     (226)
                                                              ------   -----    ------    ------    ------    -----
FINANCING ACTIVITIES
Borrowings.................................................       -      699      571       340       (571)   1,039
Debt repayments............................................       -     (105)    (684)     (305)         -   (1,094)
Change in due to/from parent...............................       -     (784)       -      (713)     1,497        -
Repayments of borrowings against
   future stock option proceeds............................     (86)       -        -         -          -      (86)
Repurchases of Time Warner common stock....................     (36)       -        -         -          -      (36)
Dividends paid.............................................    (167)       -        -         -          -     (167)
Other......................................................     113       (4)       -       (16)         -       93
                                                               ----     -----   -----     ------     -----    -----
Cash used by financing activities..........................    (176)    (194)    (113)     (694)       926     (251)
                                                              ------   ------   ------    ------      ----    ------
INCREASE (DECREASE) IN CASH AND
   EQUIVALENTS.............................................     (60)     (97)       2       111          -      (44)
CASH AND EQUIVALENTS AT
   BEGINNING OF PERIOD.....................................      62      137        -       315          -      514
                                                              -----    -----   ------     -----      -----    -----
CASH AND EQUIVALENTS AT END OF PERIOD......................  $    2    $  40   $    2     $ 426     $    -    $ 470
                                                             ======    =====   ======     =====     ======    =====
</TABLE>


                                       40

<PAGE>
<PAGE>





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

         TWE 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") and (iii) the sale or exchange of certain
cable television systems. The effects of these transactions are described
elsewhere herein.



                                       41

<PAGE>
<PAGE>



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


         EBITA and operating income for TWE for the three and six months ended
June 30, 1998 and 1997 are as follows:


<TABLE>
<CAPTION>

                                                        THREE MONTHS ENDED JUNE 30,    SIX MONTHS ENDED JUNE 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.....................  $121    $103    $ 88   $ 73   $ 240    $209    $174   $148
Broadcasting-The WB Network..........................   (23)    (19)    (24)   (19)    (61)    (39)    (63)   (39)
Cable Networks-HBO...................................   113      98     113     98     222     189     222    189
Cable(a).............................................   374     243     278    168     681     502     491    351
                                                        ---     ---     ---    ---     ---     ---     ---    ---

Total................................................  $585    $425    $455   $320  $1,082    $861    $824   $649
                                                       ====    ====    ====   ====  ======    ====    ====   ====
</TABLE>

---------------
(a)   Includes net pretax gains relating to the sale or exchange of certain
      cable television systems of approximately $70 million in the second
      quarter of 1998, and approximately $84 million and $24 million for the six
      months ended June 30, 1998 and 1997, respectively.

THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THE THREE MONTHS ENDED JUNE 30,
1997

         TWE had revenues of $2.850 billion and net income of $155 million for
the three months ended June 30, 1998, compared to revenues of $2.728 billion and
net income of $82 million for the three months ended June 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 and
$70 million of net gains recognized by TWE in 1998 relating to the sale or
exchange of certain cable television systems), offset in part by an increase in
interest expense and minority interest expense related to the TWE-A/N Transfers.

         As a U.S. partnership, TWE is not subject to U.S. federal and state
income taxation. Income and withholding taxes of $17 million and $25 million for
the three months ended June 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 $1.327 billion,
compared to $1.254 billion in the second quarter of 1997. EBITA increased to
$121 million from $103 million. Operating income increased to $88 million from
$73 million. Revenues benefited from increases in worldwide television
production and distribution, home video and consumer products licensing
operations, offset in part by lower worldwide theatrical revenues. EBITA and
operating income benefited principally from the revenue gains, as well as a gain
on the sale of certain assets.

         Broadcasting - The WB Network. Revenues increased to $61 million,
compared to $29 million in the second quarter of 1997. EBITA decreased to a loss
of $23 million from a loss of $19 million. Operating losses increased to $24
million from $19 million. Revenues increased as a result of improved television
ratings and the addition of a fourth night of prime-time programming in January
1998, but were offset by higher programming costs associated with the expanded
programming schedule. Operating losses increased primarily as a result of a
lower allocation of losses to a limited partner in the network. In October 1998,
The WB Network plans to expand its prime-time programming schedule to five
nights a week. Due to the start-up nature of this national broadcast operation,
losses are expected to continue.


                                       42


<PAGE>
<PAGE>



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


         Cable Networks-HBO. Revenues increased to $509 million, compared to
$487 million in the second quarter of 1997. EBITA and operating income increased
to $113 million from $98 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.

         Cable. Revenues increased to $1.084 billion, compared to $1.066 billion
in the second quarter of 1997. EBITA increased to $374 million from $243
million. Operating income increased to $278 million from $168 million. The Cable
division's 1998 operating results were affected by the TWE-A/N Transfers and the
deconsolidation of its direct broadcast satellite operations in connection with
the Primestar Roll-up Transaction. Excluding the effect of the TWE-A/N Transfers
and Primestar Roll-up Transaction, revenues benefited from 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 the TWE-A/N Transfers and Primestar Roll-up Transaction, 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, was $183 million in
the second quarter of 1998, compared to $139 million in the second quarter of
1997. Interest expense increased to $132 million, compared to $120 million in
the second quarter of 1997, principally due to higher average debt levels
associated with the TWE-A/N Transfers. There was other expense, net, of $51
million in the second quarter of 1998, compared to $19 million in the second
quarter of 1997, principally due to higher losses from certain investments
accounted for under the equity method of accounting.

SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1997

         TWE had revenues of $5.760 billion and net income of $263 million for
the six months ended June 30, 1998, compared to revenues of $5.328 billion and
net income of $402 million for the six months ended June 30, 1997. As discussed
more fully below, TWE's net income decreased in 1998 as compared to 1997
principally due to lower, 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 and
minority interest expense related to the TWE-A/N Transfers.

         As a U.S. partnership, TWE is not subject to U.S. federal and state
income taxation. Income and withholding taxes of $32 million and $37 million for
the six months ended June 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 $2.637 billion,
compared to $2.426 billion in the first six months of 1997. EBITA increased to
$240 million from $209 million. Operating income increased to $174 million from
$148 million. Revenues benefited from increases in worldwide television
production and



                                       43

<PAGE>
<PAGE>



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


distribution and consumer products licensing operations, offset in part by
lower worldwide theatrical and home video revenues. EBITA and operating income
benefited principally from the revenue gains.

         Broadcasting - The WB Network. Revenues increased to $106 million,
compared to $53 million in the first six months of 1997. EBITA decreased to a
loss of $61 million from a loss of $39 million. Operating losses increased to
$63 million from $39 million. Revenues increased as a result of improved
television ratings and the addition of a fourth night of prime-time programming
in January 1998, but were offset by higher programming costs associated with the
expanded programming schedule. Operating losses increased principally as a
result of a lower allocation of losses to a limited partner in the network. In
October 1998, The WB Network plans to expand its prime-time programming schedule
to five nights a week. Due to the start-up nature of this national broadcast
operation, losses are expected to continue.

         Cable Networks-HBO. Revenues increased to $1.021 billion, compared to
$970 million in the first six months of 1997. EBITA and operating income
increased to $222 million from $189 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.

         Cable. Revenues increased to $2.237 billion, compared to $2.086 billion
in the first six months of 1997. EBITA increased to $681 million from $502
million. Operating income increased to $491 million from $351 million. The Cable
division's 1998 operating results were affected by the TWE-A/N Transfers and the
deconsolidation of its direct broadcast satellite operations in connection with
the Primestar Roll-up Transaction. Excluding the effect of the TWE-/AN Transfers
and Primestar Roll-up Transaction, revenues benefited from 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 the TWE-A/N Transfers and the
Primestar Roll-up Transaction, 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, was $347 million in
the first six months of 1998, compared to $10 million in the first six months of
1997. Interest expense increased to $273 million, compared to $235 million in
1997, principally due to higher average debt levels associated with the TWE-A/N
Transfers. There was other expense, net, of $74 million in the first six months
of 1998, compared to other income, net, of $225 million in the first six 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 and
higher losses from certain investments accounted for under the equity method of
accounting.

FINANCIAL CONDITION AND LIQUIDITY
JUNE 30, 1998

FINANCIAL CONDITION

          TWE had $6.8 billion of debt, $72 million of cash and equivalents (net
debt of $6.7 billion), $225 million of preferred stock of a subsidiary, $1.2
billion of Time Warner General Partners' Senior Capital and $6.0



                                       44



<PAGE>
<PAGE>




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


billion of partners' capital at June 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.

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 six months of 1998, TWE's cash provided by operations
amounted to $586 million and reflected $1.082 billion of EBITA from its Filmed
Entertainment-Warner Bros., Broadcasting-The WB Network, Cable Networks-HBO and
Cable businesses, $469 million of noncash depreciation expense and $135 million
of proceeds from TWE's asset securitization program, less $260 million of
interest payments, $39 million of income taxes, $36 million of corporate
expenses, and $765 million related to an aggregate increase in working capital
requirements, other balance sheet accounts and noncash items. Cash provided by
operations of $416 million in the first six months of 1997 reflected $861
million of business segment EBITA and $440 million of noncash depreciation
expense, less $243 million of interest payments, $35 million of income taxes,
$36 million of corporate expenses and $571 million related to an aggregate
reduction in working capital requirements, other balance sheet accounts and
noncash items.

         Cash used by investing activities was $493 million in the first six
months of 1998, compared to $425 million in the first six 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 $135 million increase in proceeds from the
sale of investments. Capital expenditures were $734 million in the first six
months of 1998 and 1997.

         Cash used by financing activities was $343 million in the first six
months of 1998, compared to cash provided by financing activities of $86 million
in the first six 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 $95 million increase in
distributions paid to Time Warner, offset in part by an increase in debt used to
fund cash distributions to Time Warner.



                                       45

<PAGE>
<PAGE>



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



         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 $666 million in the six months ended June 30, 1998, compared to $662 million
the six months ended June 30, 1997. For the full year of 1998, cable capital
spending is expected to be comparable to 1997 levels, with approximately $700
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 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.




                                       46

<PAGE>
<PAGE>



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

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'TM' 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 which, upon conversion, will dilute each of
the common equity holders' interests accordingly. 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
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 an
approximate 24% equity interest in New Primestar 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.




                                       47

<PAGE>
<PAGE>



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



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 $2.225 billion at June 30, 1998, compared to $2.126
billion at December 31, 1997 (including amounts relating to TWE's cable
television networks of $222 million and $238 million, respectively, and to Time
Warner's cable television networks of $568 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 TWE, and technological
operations dependent in some way on one or more third parties. The majority of
TWE's exposure to potential Year 2000 problems is in the latter area. Failure to
achieve high levels of Year 2000 compliance in either area could have a material
adverse impact on TWE.

         In the former area, technological operations in the sole control of
TWE, TWE is engaged in a thorough process involving the identification and
remediation of affected technological functions. TWE has generally completed the
process of identifying significant potential Year 2000 difficulties and has an
action plan in place to address them. At present, it is anticipated that the
action plan will be successfully completed in all material respects in advance
of January 1, 2000, and that its cost to TWE will not be material.

         In the latter area, 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, although TWE has in place an extensive system to test for
and attempt to resolve potential Year 2000 difficulties. TWE's business is
heavily dependent on third parties, many of whom are themselves heavily
dependent on technology. In some cases, TWE'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
TWE's headend equipment that controls cable set-top boxes is presently not Year
2000 compliant. The box manufacturers are working with cable industry groups
towards a solution that is presently expected to be implemented successfully
before the end of 1999;



                                       48

<PAGE>
<PAGE>



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



however, that process is not within TWE's control. In other cases, TWE'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 result in the interruption of its signal, TWE
will be unable to provide that signal to its cable customers. Moreover, TWE is
dependent, like all large companies, on the continued functioning of basic,
heavily computerized services such as banking and telephony. TWE is making
considerable efforts to ensure that the third parties on which it is heavily
reliant are Year 2000 compliant, but cannot predict the likelihood of such
compliance occurring nor the direct or indirect costs to TWE of non-compliance
by those third parties or of securing such services from compliant third
parties. However, TWE believes that it is in no worse position, and likely a
better one, than most U.S.-based companies of its size with respect to the
potential for Year 2000 problems and their impact.

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, 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 other terms of service (or any failure to reduce rate regulation
     as is presently mandated by statute) 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



                                       49

<PAGE>
<PAGE>



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



     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.

         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, Year 2000
compliance failures and changes in TWE's plans, strategies and intentions.



                                       50

<PAGE>
<PAGE>




                     TIME WARNER ENTERTAINMENT COMPANY, L.P.
                           CONSOLIDATED BALANCE SHEET
                                   (UNAUDITED)


<TABLE>
<CAPTION>

                                                                                              JUNE 30,   DECEMBER 31,
                                                                                                1998         1997
                                                                                              --------     -------
                                                                                                    (MILLIONS)
<S>                                                                                          <C>           <C>    
ASSETS
CURRENT ASSETS
Cash and equivalents........................................................................ $     72      $   322
Receivables, including $556 and $385 million due from Time Warner,
    less allowances of $410 and $424 million................................................    2,199        1,914
Inventories.................................................................................    1,226        1,204
Prepaid expenses............................................................................      183          182
                                                                                                  ---          ---

Total current assets........................................................................    3,680        3,622

Noncurrent inventories......................................................................    2,364        2,254
Loan receivable from Time Warner............................................................      400          400
Investments.................................................................................      543          315
Property, plant and equipment...............................................................    6,360        6,557
Cable television franchises.................................................................    4,061        3,063
Goodwill....................................................................................    4,114        3,859
Other assets................................................................................      631          661
                                                                                               ------         ----

Total assets................................................................................  $22,153      $20,731
                                                                                              =======      =======

LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES
Accounts payable............................................................................ $    864      $ 1,123
Participations and programming costs payable................................................    1,340        1,176
Debt due within one year....................................................................        7            8
Other current liabilities, including $274 and $184 million due to Time Warner...............    1,653        1,667
                                                                                              -------       ------

Total current liabilities...................................................................    3,864        3,974

Long-term debt..............................................................................    6,771        5,990
Other long-term liabilities, including $740 and $477 million due to Time Warner.............    2,670        1,873
Minority interests..........................................................................    1,477        1,210
Preferred stock of subsidiary holding solely a mortgage note of its parent..................      225          233
Time Warner General Partners' Senior Capital................................................    1,163        1,118

PARTNERS' CAPITAL
Contributed capital.........................................................................    7,537        7,537
Undistributed partnership earnings (deficit)................................................   (1,554)      (1,204)
                                                                                               ------        -----

Total partners' capital.....................................................................    5,983        6,333
                                                                                               ------        -----

Total liabilities and partners' capital.....................................................  $22,153      $20,731
                                                                                              =======      =======
</TABLE>



See accompanying notes.


                                       51

<PAGE>
<PAGE>




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


<TABLE>
<CAPTION>

                                                                           THREE MONTHS             SIX MONTHS
                                                                          ENDED JUNE 30,          ENDED JUNE 30,
                                                                      -------------------       -----------------
                                                                        1998        1997        1998        1997
                                                                      -------------------       -----------------
                                                                                        (MILLIONS)

<S>                                                                   <C>          <C>         <C>         <C>
Revenues (a).......................................................   $2,850       $2,728      $5,760      $5,328
                                                                      ------       ------      ------      ------

Cost of revenues (a)(b)............................................    1,806        1,782       3,752       3,447
Selling, general and administrative (a)(b).........................      589          626       1,184       1,232

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

Operating expenses.................................................    2,395        2,408       4,936       4,679
                                                                      ------       ------      ------      ------

Business segment operating income..................................      455          320         824         649
Interest and other, net (a)........................................     (183)        (139)       (347)        (10)
Minority interest..................................................      (82)         (56)       (146)       (164)
Corporate services (a).............................................      (18)         (18)        (36)        (36)
                                                                      ------       ------      ------      ------

Income before income taxes.........................................      172          107         295         439
Income taxes.......................................................      (17)         (25)        (32)        (37)
                                                                      ------       ------      ------      ------

Net income.........................................................   $  155       $   82      $  263      $  402
                                                                      ======       ======      ======      ======
</TABLE>


---------------
(a)  Includes the following income (expenses) resulting from transactions with
     the partners of TWE and other related companies for the three and six
     months ended June 30, 1998, respectively, and for the corresponding periods
     in the prior year: revenues-$118 million and $247 million in 1998, $55
     million and $121 million in 1997; cost of revenues-$(55) million and $(93)
     million in 1998, $(26) million and $(36) million in 1997; selling, general
     and administrative-$(3) million and $(2) million in 1998, $21 million and
     $40 million in 1997; interest and other, net-$3 million and $5 million in
     1998, $5 million and $17 million in 1997; and corporate services-$(18)
     million and $(36) million in each of 1998 and 1997.

<TABLE>
<S>                                                                   <C>          <C>         <C>         <C>
(b) Includes depreciation and amortization expense of:.............     $356         $328        $727        $652
                                                                        ====         ====        ====        ====
</TABLE>






See accompanying notes.



                                       52



<PAGE>
<PAGE>



                     TIME WARNER ENTERTAINMENT COMPANY, L.P.
                      CONSOLIDATED STATEMENT OF CASH FLOWS
                                   (UNAUDITED)
<TABLE>
<CAPTION>
                                                                                                     SIX MONTHS
                                                                                                   ENDED JUNE 30,
                                                                                                 ----------------
                                                                                                 1998        1997
                                                                                                 ----        ----
                                                                                                    (MILLIONS)
<S>                                                                                              <C>       <C>
OPERATIONS
Net income..................................................................................     $263      $  402
Adjustments for noncash and nonoperating items:
Depreciation and amortization...............................................................      727         652
Changes in operating assets and liabilities.................................................     (404)       (638)
                                                                                                 ----       -----

Cash provided by operations.................................................................      586         416
                                                                                                 ----       -----

INVESTING ACTIVITIES
Investments and acquisitions................................................................     (265)        (62)
Capital expenditures........................................................................     (734)       (734)
Investment proceeds.........................................................................      506         371
                                                                                                 ----       -----

Cash used by investing activities...........................................................     (493)       (425)
                                                                                                 ----       -----

FINANCING ACTIVITIES
Borrowings..................................................................................      503         428
Debt repayments.............................................................................     (492)       (323)
Issuance of preferred stock of subsidiary...................................................        -         243
Capital distributions.......................................................................     (298)       (203)
Other.......................................................................................      (56)        (59)
                                                                                                 ----       -----

Cash provided (used) by financing activities................................................     (343)         86
                                                                                                 ----       -----

INCREASE (DECREASE) IN CASH AND EQUIVALENTS.................................................     (250)         77

CASH AND EQUIVALENTS AT BEGINNING OF PERIOD.................................................      322         216
                                                                                                 ----       -----

CASH AND EQUIVALENTS AT END OF PERIOD.......................................................     $ 72        $293
                                                                                                 ====       =====
</TABLE>




See accompanying notes.



                                       53

<PAGE>
<PAGE>




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

<TABLE>
<CAPTION>


                                                                                                   SIX MONTHS
                                                                                                 ENDED JUNE 30,
                                                                                               -----------------
                                                                                               1998         1997
                                                                                               ----        -----
                                                                                                   (MILLIONS)
<S>                                                                                            <C>         <C>   
BALANCE AT BEGINNING OF YEAR................................................................   $6,333      $6,574

Net income..................................................................................      263         402
Other comprehensive income (loss)...........................................................      (16)        (14)
                                                                                                -----       -----
Comprehensive income........................................................................      247         388

Distributions...............................................................................     (552)       (369)
Allocation of income to Time Warner General Partners' Senior Capital........................      (45)        (62)
                                                                                                -----       -----

BALANCE AT JUNE 30,.........................................................................   $5,983      $6,531
                                                                                               ======      ======
</TABLE>





See accompanying notes.



                                       54

<PAGE>
<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 5). 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 $130 million and $105 million in the three months ended
June 30, 1998 and 1997, respectively and $258 million and $212 million for the
six months ended June 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.

         In June 1998, the Financial Accounting Standards Board issued Statement
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("FAS
133"), effective for years beginning after June 15, 1999, with early application
encouraged. The new rules establish standards requiring that all derivative
financial instruments, such as foreign exchange contracts, be recognized and
measured at fair value regardless of the purpose or intent for holding them.
TWE plans to adopt FAS 133 effective as of July 1, 1998, and it is not expected
that the adoption will have a material effect on TWE's financial statements.




                                       55

<PAGE>
<PAGE>



                     TIME WARNER ENTERTAINMENT COMPANY, L.P.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
                             (UNAUDITED)


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
approximate $235 million historical cost of the net assets.

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'TM' 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. 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.

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



                                       56

<PAGE>
<PAGE>




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


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 an approximate 24% equity
interest in New Primestar 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
Telecommunications Corporation ("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 exchange for such assets, ASkyB would receive non-voting
securities of New Primestar that would be convertible into non-voting common
stock of New Primestar and, accordingly, would reduce TWE's equity interest in
New Primestar to approximately 16% on a fully diluted basis. 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. The parties have had discussions with
the U.S. Department of Justice in an attempt to restructure the transaction and
reach a resolution on such matters, but there can be no assurance that an
agreement can be reached or that necessary governmental and regulatory approvals
will be obtained.

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.



                                       57

<PAGE>
<PAGE>



                     TIME WARNER ENTERTAINMENT COMPANY, L.P.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
                              (UNAUDITED)


         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
six months ended June 30, 1997, respectively, revenues of $2.742 billion and
$5.358 billion, depreciation expense of $225 million and $443 million, operating
income before noncash amortization of intangible assets of $455 million and $920
million, operating income of $334 million and $676 million, and net income of
$82 million and $400 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 $70 million for the three months ended June 30, 1998, and
approximately $84 million and $24 million for the six months ended June 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 six months ended June 30, 1997.



                                       58

<PAGE>
<PAGE>


                     TIME WARNER ENTERTAINMENT COMPANY, L.P.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
                             (UNAUDITED)


3. INVENTORIES

         TWE's inventories consist of:

<TABLE>
<CAPTION>

                                                                            JUNE 30, 1998         DECEMBER 31, 1997
                                                                       ----------------------   ---------------------
                                                                       CURRENT     NONCURRENT   CURRENT    NONCURRENT
                                                                       -------     ----------   -------    ----------
                                                                                        (MILLIONS)
<S>                                                                   <C>         <C>           <C>         <C>  
Film costs:
   Released, less amortization.....................................   $  487      $   686       $ 545       $ 658
   Completed and not released......................................      241           67         170          50
   In process and other............................................       59          701          27         595
   Library, less amortization......................................        -          586           -         612
Programming costs, less amortization...............................      366          324         382         339
Merchandise........................................................       73            -          80           -
                                                                      ------       ------      ------      ------
Total..............................................................   $1,226       $2,364      $1,204      $2,254
                                                                      ======       ======      ======      ======
</TABLE>

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 six months ended June 30, 1998, TWE accrued $138 million of
tax-related distributions and $414 million of stock option distributions, based
on closing prices of Time Warner common stock of $85.44 at June 30, 1998 and
$62.00 at December 31, 1997. During the six months ended June 30, 1997, TWE
accrued $192 million of tax-related distributions and $177 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 six months ended June 30, 1998, TWE
paid distributions to the Time Warner General Partners in the amount of $298
million, consisting of $138 million of tax-related distributions and $160
million of stock option related distributions. In the six months ended June 30,
1997, TWE paid the Time Warner General Partners distributions in the amount of
$203 million, consisting of $192 million of tax-related distributions and $11
million of stock option related distributions. 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.


                                       59

<PAGE>
<PAGE>



                     TIME WARNER ENTERTAINMENT COMPANY, L.P.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
                             (UNAUDITED)



5. 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
reflects the TWE-A/N Transfers effective as of January 1, 1998 and the Primestar
Roll-up Transaction effective as of April 1, 1998.

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


<TABLE>
<CAPTION>
                                                                         THREE MONTHS               SIX MONTHS
                                                                        ENDED JUNE 30,            ENDED JUNE 30,
                                                                     -------------------      ------------------
                                                                       1998        1997        1998        1997
                                                                     -------      ------      ------      ------
                                                                                        (MILLIONS)
<S>                                                                   <C>          <C>         <C>         <C>   
REVENUES
Filmed Entertainment-Warner Bros...................................   $1,327       $1,254      $2,637      $2,426
Broadcasting-The WB Network........................................       61           29         106          53
Cable Networks-HBO.................................................      509          487       1,021         970
Cable..............................................................    1,084        1,066       2,237       2,086
Intersegment elimination...........................................     (131)        (108)       (241)       (207)
                                                                      ------       ------      ------      ------
Total..............................................................   $2,850       $2,728      $5,760      $5,328
                                                                      ======       ======      ======      ======
</TABLE>

<TABLE>
<CAPTION>
                                                                         THREE MONTHS              SIX MONTHS
                                                                        ENDED JUNE 30,           ENDED JUNE 30,
                                                                     -------------------      ------------------
                                                                       1998        1997        1998        1997
                                                                     -------      ------      ------      ------
                                                                                        (MILLIONS)
<S>                                                                   <C>          <C>       <C>           <C> 
EBITA(1)
Filmed Entertainment-Warner Bros...................................   $121         $103      $  240        $209
Broadcasting-The WB Network........................................    (23)         (19)        (61)        (39)
Cable Networks-HBO.................................................    113           98         222         189
Cable(2)...........................................................    374          243         681         502
                                                                      ----         ----      ------        ----
Total..............................................................   $585         $425      $1,082        $861
                                                                      ====         ====      ======        ====
</TABLE>
---------------
(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
    six months ended June 30, 1998, respectively, and for the corresponding
    periods in the prior year was $455 million and $824 million in 1998 and $320
    million and $649 million in 1997.

(2) Includes net pretax gains relating to the sale or exchange of certain cable
    television systems of approximately $70 million recognized in the second
    quarter of 1998, and approximately $84 million and $24 million for the six
    months ended June 30, 1998 and 1997, respectively.



                                       60

<PAGE>
<PAGE>



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



<TABLE>
<CAPTION>
                                                                           THREE MONTHS             SIX MONTHS
                                                                          ENDED JUNE 30,          ENDED JUNE 30,
                                                                        -----------------       -----------------
                                                                        1998         1997       1998         1997
                                                                        ----         ----       ----         ----
                                                                                         (MILLIONS)
<S>                                                                     <C>          <C>         <C>         <C> 
DEPRECIATION OF PROPERTY, PLANT AND EQUIPMENT
Filmed Entertainment-Warner Bros...................................     $ 38         $ 41        $ 78        $ 81
Broadcasting-The WB Network........................................        -            1           -           1
Cable Networks-HBO.................................................        5            5          10          10
Cable..............................................................      183          176         381         348
                                                                        ----         ----        ----        ----
Total..............................................................     $226         $223        $469        $440
                                                                        ====         ====        ====        ====
</TABLE>

<TABLE>
<CAPTION>
                                                                           THREE MONTHS             SIX MONTHS
                                                                          ENDED JUNE 30,          ENDED JUNE 30,
                                                                        -----------------       -----------------
                                                                        1998         1997       1998         1997
                                                                        ----         ----       ----         ----
                                                                                         (MILLIONS)
<S>                                                                     <C>          <C>         <C>         <C> 
AMORTIZATION OF INTANGIBLE ASSETS (1)
Filmed Entertainment-Warner Bros...................................     $ 33         $ 30        $ 66        $ 61
Broadcasting-The WB Network........................................        1            -           2           -
Cable Networks-HBO.................................................        -            -           -           -
Cable..............................................................       96           75         190         151
                                                                        ----         ----        ----        ----
Total..............................................................     $130         $105        $258        $212
                                                                        ====         ====        ====        ====
</TABLE>

--------------
(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.

6. 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.

7. ADDITIONAL FINANCIAL INFORMATION

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

<TABLE>
<CAPTION>
                                                          SIX MONTHS
                                                        ENDED JUNE 30,
                                                      -----------------
                                                      1998         1997
                                                      ----         ----
                                                          (MILLIONS)
<S>                                                   <C>         <C> 
Interest expense.................................     $273        $235
Cash payments made for interest..................      260         243
Cash payments made for income taxes, net.........       39          35
Noncash capital distributions....................      414         177
</TABLE>

         Noncash investing activities in the first six months of 1998 included
the TWE-A/N Transfers, the Primestar Roll-up Transaction and the exchange of
certain cable television systems (Note 2). During the six months ended June 30,
1998, TWE received $135 million of proceeds under its asset securitization
program.



                                       61

<PAGE>
<PAGE>





                           PART II. OTHER INFORMATION

ITEM 1.   LEGAL PROCEEDINGS.

         On May 12, 1998, the U.S. Department of Justice brought a civil action
in the United States District Court for the District of Columbia against
Primestar, Inc. ("Primestar"), each of its cable company owners, including TWE,
and The News Corporation Limited and MCI Telecommunications Corporation, to
enjoin on antitrust grounds Primestar's proposed acquisition of certain assets
relating to the high-power, direct broadcast satellite business of American Sky
Broadcasting LLC. For further information with respect to such proposed
acquisition, see Footnote 2 "Cable Transactions," to Time Warner's consolidated
financial statements included herein.

         Reference is made to the fifteen TBS shareholder actions filed in
Georgia in connection with the TBS Transaction described on pages I-37 and I-38
of Time Warner's Annual Report on Form 10-K for the year ended December 31, 1997
(the "1997 Form 10-K"). On June 10, 1998, the Georgia Court of Appeal affirmed
the lower court's grant of defendants' motion for summary judgment on
plaintiffs' fourth amended complaint and defendants' motion for final judgment
on plaintiffs' third amended complaint. Plaintiffs have not sought reargument or
further appeal within the time allotted; this matter is therefore concluded.

         On September 13, 1995, Francis Ford Coppola, Fred Fuchs and FFC, Inc.
("Coppola") filed a lawsuit in the Superior Court of California, County of Los
Angeles, against Warner Bros. entitled Coppola v. Warner Bros., alleging that
Warner Bros. unlawfully interfered with Coppola's efforts to develop with
another film studio a previously unproduced film project based on "Pinocchio."
Among other things, Coppola asked that the Court declare that any prior
agreement between Coppola and Warner Bros. to produce the film was void or that
it be rescinded. In 1997, the Court granted the plaintiffs' motion to declare
that any alleged agreement between Warner Bros. and Coppola was void under the
Copyright Act's statute of frauds provision. On June 1, 1998 the case went to
trial and on July 2, 1998, the jury found in Coppola's favor with respect to the
interference claims and awarded $20 million compensatory damages; on July 9,
1998, the jury awarded $60 million in punitive damages for these claims.
Warner Bros. intends to move for judgment notwithstanding the verdict and for
a new trial, which motions will be decided no later than 60 days after judgment
is entered. If the motions are denied, Warner Bros. intends to appeal the jury
verdict.

         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 the 1997 Form 10-K. By Order dated June 22, 1998, the Court
granted plaintiffs' motion to certify its Order denying class certification for
appeal to the 11th Circuit Court of Appeals, and granted plaintiffs' motion for
entry of judgment pursuant to Rule 54(b) on the ERISA claims against the Record
Company Defendants. Based on the Court's Order, plaintiffs have filed a motion
with the 11th Circuit Court of Appeals seeking interlocutory review of the
Court's Order denying class certification, which motion was opposed by the
Record Company Defendants.

         Reference is made to the purported class action entitled Ottinger &
Silvey, et. al., v. EMI Music Distribution, Inc., Sony Music Entertainment,
Inc., Warner Elektra Atlantic Corporation, UNI Distribution Corporation,
Bertelsmann Music Group, Inc., and Polygram Group Distribution, Inc. described
on page I-39 of the 1997 Form 10-K. On May 11, 1998, Warner Elektra Atlantic
Corporation and other defendants filed a motion to dismiss the complaint for
failure to state a cause of action.



                                       62

<PAGE>
<PAGE>


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

         (a) The Annual Meeting of Stockholders of Time Warner was held on May
14, 1998 (the "1998 Annual Meeting").

         (b) The following were elected directors of Time Warner at the 1998
Annual Meeting:

                  Merv Adelson
                  J. Carter Bacot
                  Stephen F. Bollenbach
                  John C. Danforth
                  Beverly Sills Greenough
                  Gerald Greenwald
                  Carla A. Hills
                  Gerald M. Levin
                  Reuben Mark
                  Michael A. Miles
                  Richard D. Parsons
                  R. E. Turner
                  Francis T. Vincent, Jr.

         (c) The following matters were voted upon at the 1998 Annual Meeting:

                  (i)   Election of directors for terms expiring in 1998:

<TABLE>
<CAPTION>
                                                                                              Broker
                                                          For               Withheld         Non-Votes
                                                          ---               --------         ---------
                  <S>                                <C>                   <C>                   <C>
                  Merv Adelson                       485,869,848           3,251,849             0
                  J. Carter Bacot                    486,212,414           2,909,283             0
                  Stephen F. Bollenbach              486,209,353           2,912,344             0
                  John C. Danforth                   486,116,915           3,004,782             0
                  Beverly Sills Greenough            485,838,218           3,283,479             0
                  Gerald Greenwald                   486,256,067           2,865,630             0
                  Carla A. Hills                     486,110,015           3,011,682             0
                  Gerald M. Levin                    485,892,172           3,229,525             0
                  Reuben Mark                        486,219,783           2,901,914             0
                  Michael A. Miles                   486,004,035           3,117,662             0
                  Richard D. Parsons                 486,152,557           2,969,140             0
                  R. E. Turner                       486,166,621           2,955,076             0
                  Francis T. Vincent, Jr.            485,994,809           3,126,888             0
</TABLE>

                  (ii) Approval of the appointment of Ernst & Young LLP as
         independent auditors of Time Warner for 1998:

<TABLE>
<CAPTION>
                                                                        Broker
                   Votes For        Votes Against     Abstentions     Non-Votes
                   ---------        -------------     -----------     ---------
               <S>                    <C>               <C>               <C>
                  487,219,458         521,459           810,159           0
</TABLE>

         (d) Not applicable.



                                       63

<PAGE>
<PAGE>


ITEM 5.  OTHER INFORMATION.

         Time Warner's By-laws establish an advance notice procedure with regard
to stockholder proposals to be brought before an annual meeting of stockholders
that are not included in Time Warner's proxy statement. To be presented at Time
Warner's 1999 annual meeting, notice of such a proposal must be received by the
Secretary of the Company after January 14, 1999 but no later than March 4, 1999
and must contain specified information concerning the matters to be brought
before such meeting and concerning the stockholder proposing such matters. If
the date of the annual meeting is more than 30 days earlier or more than 60 days
later than May 14, 1999, notice must be received not earlier than the 120th day
prior to such annual meeting and not later than the close of business on the
later of the 70th day prior to such annual meeting or the 10th day following the
day on which public announcement of the date of such meeting is first made.

         Stockholder proposals that the proponent wishes to have included in
Time Warner's proxy statement for consideration at the 1999 annual meeting are
covered by separate procedures as described in Time Warner's proxy statement for
its 1998 annual meeting and must generally be submitted to the Secretary of the
Company no later than November 23, 1998.

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 June 30, 1998.



                                       64

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<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: August 10, 1998



<PAGE>
<PAGE>



                                  EXHIBIT INDEX
                     Pursuant to Item 601 of Regulations S-K
<TABLE>
<CAPTION>

Exhibit No.                Description of Exhibit
-----------                ----------------------
<S>               <C>                               
4                 Indenture dated as of June 1, 1998 among the Registrant, Time
                  Warner Companies, Inc., Turner Broadcasting System, Inc. and
                  The Chase Manhattan Bank, as Trustee.

27                Financial Data Schedule.
</TABLE>




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