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________________________________________________________________________________
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                            ------------------------
 
                                   FORM 10-K
             [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
               THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995.
                         COMMISSION FILE NUMBER 1-8637

                            ------------------------
 
                                TIME WARNER INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

                            ------------------------
 
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<S>                                                        <C>
                        DELAWARE                                                  13-1388520
             (STATE OR OTHER JURISDICTION OF                                   (I.R.S. EMPLOYER
             INCORPORATION OR ORGANIZATION)                                   IDENTIFICATION NO.)
            75 ROCKEFELLER PLAZA, YORK, N.Y.                                         10019
        (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                                  (ZIP CODE)
</TABLE>
 
                            ------------------------
 
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 484-8000

                            ------------------------
 
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
 
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<CAPTION>
                                                                                      NAME OF EACH EXCHANGE
                             TITLE OF EACH CLASS                                       ON WHICH REGISTERED
------------------------------------------------------------------------------  ---------------------------------
<S>                                                                             <C>
Common Stock, $1.00 par value                                                   New York Stock Exchange
                                                                                Pacific Stock Exchange
Rights to Purchase Series A Participating Cumulative                            New York Stock Exchange
  Preferred Stock                                                               Pacific Stock Exchange
6.85% Debentures due 2026                                                       New York Stock Exchange
7.45% Notes due 1998                                                            New York Stock Exchange
7.48% Debentures due 2008                                                       New York Stock Exchange
7.75% Notes due 2005                                                            New York Stock Exchange
7.95% Notes due 2000                                                            New York Stock Exchange
7.975% Notes due 2004                                                           New York Stock Exchange
8.05% Debentures due 2016                                                       New York Stock Exchange
8.11% Debentures due 2006                                                       New York Stock Exchange
8.18% Debentures due 2007                                                       New York Stock Exchange
8.30% Discount Debentures due 2036                                              New York Stock Exchange
8 3/4% Debentures due 2017                                                      New York Stock Exchange
9 1/8% Debentures due 2013                                                      New York Stock Exchange
9.15% Debentures due 2023                                                       New York Stock Exchange
Liquid Yield Option'tm' Notes due 2012                                          American Stock Exchange
Liquid Yield Option'tm' Notes due 2013                                          New York Stock Exchange
</TABLE>
 
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
 
                                      NONE
 
     Indicate  by check  mark whether the  registrant (1) has  filed all reports
required to be filed by  Section 13 or 15(d) of  the Securities Exchange Act  of
1934  during the preceding  12 months, and  (2) has been  subject to such filing
requirements for the past 90 days. Yes [X]  No
     Indicate by check mark if disclosure of delinquent filers pursuant to  Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best  of registrant's knowledge,  in definitive proxy  or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
 
     As of March 20, 1996, there were 392,488,134 shares of registrant's  Common
Stock  outstanding  and  the  aggregate  market value  of  such  shares  held by
non-affiliates of the registrant (based upon the closing price of such shares on
the New York Stock Exchange Composite Tape on March 20, 1996) was  approximately
$16.3 billion.
 
                      DOCUMENTS INCORPORATED BY REFERENCE:
 
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<CAPTION>
                        DESCRIPTION OF DOCUMENT                                   PART OF THE FORM 10-K
------------------------------------------------------------------------   -----------------------------------
<S>                                                                        <C>
Portions of the Definitive Proxy Statement to be used in connection with    Part III (Item 10 through Item 13)
  the registrant's 1996 Annual Meeting of Stockholders.
</TABLE>
 
________________________________________________________________________________

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                                     PART I
 
ITEM 1. BUSINESS
 
     Time  Warner Inc. (the 'Company') was incorporated in the State of Delaware
in August  1983  and is  the  successor to  a  New York  corporation  originally
organized in 1922. The Company changed its name from Time Incorporated following
its  acquisition  of 59.3%  of the  common stock  of Warner  Communications Inc.
('WCI') in July 1989.  WCI became a  wholly owned subsidiary  of the Company  in
January  1990 upon the completion  of the merger of WCI  and a subsidiary of the
Company. As used in this report, the terms 'Registrant,' the 'Company' and 'Time
Warner' refer  to Time  Warner  Inc. and  its  subsidiaries and  divisions,  and
includes  Time Warner  Entertainment Company,  L.P. ('TWE'),  unless the context
otherwise requires. See below for a  description of TWE and its relationship  to
the Company.
 
     The  Company is  the world's  leading media  company, and  has interests in
three fundamental areas  of business: Entertainment,  consisting principally  of
interests   in  recorded  music  and  music  publishing,  filmed  entertainment,
broadcasting,  theme   parks  and   cable  television   programming;  News   and
Information,  consisting principally  of interests in  magazine publishing, book
publishing and direct marketing; and Telecommunications, consisting  principally
of  interests in  cable television systems.  Substantially all  of the Company's
interests  in  filmed  entertainment,   broadcasting,  theme  parks  and   cable
television  programming are held through TWE and  most of its interests in cable
television systems are held through TWE.
 
     In September 1995, the Company announced  that it had agreed to merge  with
Turner   Broadcasting  System,  Inc.  ('TBS'),  a  diversified  information  and
entertainment company, by acquiring the remaining approximately 80% interest  in
TBS  that the  Company does  not already  own. The  Company has  entered into an
Amended and Restated Agreement and Plan of Merger dated as of September 22, 1995
(the 'Merger Agreement'), which provides for  the merger of each of the  Company
and  TBS with separate subsidiaries of a  holding company ('New Time Warner' and
collectively, the 'TBS  Transaction'). In connection  therewith, the issued  and
outstanding  shares of each  class of the  capital stock of  the Company will be
converted into shares of a substantially identical class of capital stock of New
Time Warner.  In  addition,  the  Company  has  agreed  to  enter  into  certain
agreements  and related transactions with certain shareholders of TBS, including
R.E.  Turner   and  Liberty   Media  Corporation   ('LMC'),  an   affiliate   of
Tele-Communications,  Inc.  ('TCI'). The  Merger  Agreement and  certain related
agreements provide for the  issuance by New Time  Warner of approximately  172.8
million  shares of common stock, par value $.01 per share including 50.6 million
shares of a special  class of non-redeemable  common stock to  be issued to  LMC
(the  'LMC Class  Common Stock'),  in exchange  for the  outstanding TBS capital
stock, the  issuance  of approximately  13  million employee  stock  options  to
replace  all outstanding TBS  employee stock options and  the assumption of TBS'
indebtedness (which approximated $2.5 billion at December 31, 1995). As part  of
the  TBS Transaction, LMC will receive an  additional five million shares of LMC
Class Common Stock pursuant to a separate option agreement which, together  with
the 50.6 million shares it will receive pursuant to the TBS Transaction, will be
placed  in a voting trust of which Gerald M. Levin, Chairman and Chief Executive
Officer of the Company, will be the trustee (the 'Liberty Voting Trust'), or, in
certain  circumstances,  exchanged  for  shares  of  another  special  class  of
non-voting,  non-redeemable common stock of New Time Warner that will be held by
LMC.
 
     The TBS Transaction is subject  to customary closing conditions,  including
the  approval  of the  shareholders of  TBS  and of  the Company,  all necessary
approvals of  the  Federal  Communications Commission  ('FCC')  and  appropriate
antitrust  approvals. There can be no assurance  that all these approvals can be
obtained or, in  the case of  governmental approvals, if  obtained, will not  be
conditioned  upon changes to  the terms of  the Merger Agreement  or the related
agreements.
 
     In 1995 and  early 1996,  the Company  completed its  acquisition of  three
significant  cable  television  companies:  Summit  Communications  Group,  Inc.
('Summit'),  KBLCOM   Incorporated   ('KBLCOM')   and   Cablevision   Industries
Corporation  ('CVI')  and related  companies and,  through  TWE, formed  a cable
television joint  venture  (the  'TWE-A/N  Partnership')  with  Advance/Newhouse
Partnership  ('Advance/Newhouse'), in which  TWE owns a  66 2/3% interest (these
transactions  being   collectively  referred   to  hereinafter   as  the   '1995
 
                                      I-1
 
<PAGE>
<PAGE>
Cable  Transactions'). (See  below for a  more detailed discussion  of each 1995
Cable Transaction.) Currently, Summit, KBLCOM (which has been renamed TWI  Cable
Inc.)  and  CVI  and related  companies  are  wholly owned  subsidiaries  of the
Company, and the Company's interest in  the TWE-A/N Partnership is held by  TWE.
Time Warner Cable ('Time Warner Cable'), a division of TWE, operates and manages
substantially  all of  the cable  television systems  acquired through  the 1995
Cable Transactions, as well as those systems held by TWE prior to the 1995 Cable
Transactions. Time Warner Cable does  not manage those cable television  systems
of the Company which are located within the 14-state telephone service area of U
S  WEST, Inc., a Colorado corporation ('U  S WEST'). See 'Entertainment -- Cable
Division -- Television.'
 
     TWE was formed as a Delaware limited partnership in February 1992  pursuant
to an Agreement of Limited Partnership, dated as of October 29, 1991, as amended
(the 'TWE Partnership Agreement'), and has, since its capitalization on June 30,
1992  (the 'TWE  Capitalization'), owned and  operated substantially  all of the
Filmed Entertainment, Programming-HBO and  Cable businesses previously owned  by
subsidiaries  of the Company. Upon the  TWE Capitalization, certain wholly owned
subsidiaries of the  Company (the 'Time  Warner General Partners'),  contributed
such  businesses, or assigned the net cash  flow derived therefrom (or an amount
equal to  the  net cash  flow  derived therefrom),  to  TWE and  became  general
partners  of TWE. Also upon the TWE Capitalization, wholly owned subsidiaries of
ITOCHU Corporation (formerly C. Itoh & Co., Ltd.), a corporation organized under
the laws of Japan ('ITOCHU'),  and Toshiba Corporation, a corporation  organized
under  the laws of Japan ('Toshiba'), collectively contributed $1 billion to TWE
and became limited partners of TWE.
 
     On September 15, 1993, TWE consummated the transactions contemplated by the
Admission Agreement,  dated as  of  May 16,  1993,  as amended  (the  'Admission
Agreement'),  between TWE and U  S WEST. Pursuant to  the Admission Agreement, a
wholly owned  subsidiary of  U S  WEST  made a  capital contribution  of  $2.553
billion  and became a limited  partner of TWE (the  'U S WEST Transaction'). The
Admission Agreement provides  that TWE will  use its best  efforts to upgrade  a
substantial  portion of its cable systems  to 'Full Service Network'tm' capacity
by the end of  1998. As systems  are designated for such  upgrade and after  any
required  approvals are obtained, U  S WEST and TWE  will share joint control of
those systems through a 50-50  management committee. The 'Full Service  Network'
business  is  expected  to include  substantially  all of  TWE's  cable systems,
subject  to  obtaining   necessary  regulatory  consents   and  approvals.   See
'Entertainment  --  Description of  Certain  Provisions of  the  TWE Partnership
Agreement.'
 
     Following the admission of U  S WEST into TWE,  each of ITOCHU and  Toshiba
owned  a 5.61% pro rata priority capital and residual equity interest in TWE and
a 6.25% residual equity interest  in TW Service Holding  I, L.P. and TW  Service
Holding  II,  L.P. (the  'Time Warner  Service  Partnerships'). The  Time Warner
Service Partnerships owned certain  assets related to  the TWE businesses.  (See
'Entertainment  --  Other  Entertainment  Group Assets  --  Time  Warner Service
Partnerships'). On September 5, 1995, and  October 2, 1995, ITOCHU and  Toshiba,
respectively,  each exchanged  its interest in  TWE and the  Time Warner Service
Partnerships for, in the case of ITOCHU, a total of 8 million shares of two  new
series  of convertible preferred stock ('Series G Preferred Stock' and 'Series H
Preferred Stock') of the Company and, in  the case of Toshiba, 7 million  shares
of  a  new series  of  convertible preferred  stock  of the  Company  ('Series I
Preferred Stock') and $10 million in cash (the 'ITOCHU/Toshiba Transaction').
 
     As a result of the ITOCHU/Toshiba Transaction and the U S WEST Transaction,
the Company and the Time Warner General Partners collectively own 74.49% of  the
pro  rata priority capital and residual equity partnership interests in TWE, and
certain priority capital interests  senior and junior to  the pro rata  priority
capital  interests. The remaining 25.51% pro  rata priority capital and residual
equity limited partnership interests are held by a subsidiary of U S WEST.
 
     On April 1, 1995,  TWE formed the TWE-A/N  Partnership, a cable  television
joint   venture  with   Advance/Newhouse  to  which   Advance/Newhouse  and  TWE
contributed  cable   television   systems   (or   interests   therein)   serving
approximately  4.5  million  subscribers,  as  well  as  certain  foreign  cable
investments and programming investments. TWE  owns a two-thirds equity  interest
in  the TWE-A/N Partnership and is the  managing partner. In accordance with the
partnership agreement, Advance/Newhouse can require  TWE to purchase its  equity
interest  for fair  market value at  specified intervals following  the death of
both of its principal
 
                                      I-2
 
<PAGE>
<PAGE>
shareholders. Beginning  in  the  third  year, either  partner  can  initiate  a
dissolution  in which  TWE would  receive two-thirds  and Advance/Newhouse would
receive one-third of the TWE-A/N Partnership's net assets.
 
     On May  2, 1995,  the Company  acquired Summit  Communications Group,  Inc.
('Summit'),  which owned cable television  systems serving approximately 162,000
subscribers in Winston-Salem, North Carolina and in certain suburbs of  Atlanta,
Georgia.  To acquire Summit, the Company issued approximately 1.6 million shares
of  its  common  stock,  par  value  $1.00  per  share  ('Common  Stock'),   and
approximately  3.3 million shares of a new series of convertible preferred stock
('Series C Preferred Stock') and assumed $140 million of indebtedness.
 
     On July 6,  1995, the  Company acquired KBLCOM  Incorporated ('KBLCOM'),  a
subsidiary  of  Houston Industries  Incorporated,  which owned  cable television
systems serving approximately 700,000 subscribers and a 50% interest in  Paragon
Communications  ('Paragon'),  which  owns cable  television  systems  serving an
additional 972,000 subscribers. The  other 50% interest  in Paragon was  already
owned by TWE. To acquire KBLCOM, the Company issued one million shares of Common
Stock  and 11  million shares  of a  new series  of convertible  preferred stock
('Series D Preferred Stock') and assumed or incurred approximately $1.2  billion
of  indebtedness. KBLCOM's systems serve subscribers  located in San Antonio and
Laredo, Texas, the  Minneapolis metropolitan area,  Portland, Oregon and  Orange
County,  California. Paragon's systems  serve subscribers in  Tampa, Florida and
northern Manhattan, as well as other locations.
 
     On January 4, 1996, the Company acquired Cablevision Industries Corporation
('CVI') and  related  companies  that owned  cable  television  systems  serving
approximately   1.3  million  subscribers,  in  exchange  for  the  issuance  of
approximately 2.9 million shares of  Common Stock and approximately 6.5  million
shares  of  a new  series of  convertible preferred  stock ('Series  E Preferred
Stock' and  'Series F  Preferred Stock')  and the  assumption or  incurrence  of
approximately  $2  billion  of  indebtedness.  CVI's  systems  serve subscribers
principally located  in  New York,  North  Carolina, Florida,  California's  San
Fernando Valley and Columbia, South Carolina.
 
     Along with internal growth, the 1995 Cable Transactions increased the total
number of subscribers under the management of Time Warner Cable to approximately
11.7 million, as compared to 7.5 million subscribers at the end of 1994.
 
     For  additional information regarding the 1995 Cable Transactions, see Note
4 'Cable Transactions' and Note 9 'Capital Stock,' to the Company's consolidated
financial statements at pages F-32 and F-40, respectively herein.
 
     On June 23, 1995, TWE sold 51%  of its interest in Six Flags  Entertainment
Corporation  ('SFEC') to an investment group  led by Boston Ventures Management,
Inc., a private investment management firm,  for $204 million and received  $640
million  in  additional  proceeds  from SFEC,  representing  payment  of certain
intercompany indebtedness and licensing  fees. As a  result of the  transaction,
SFEC  has  been  deconsolidated and  TWE's  remaining  49% interest  in  SFEC is
accounted for under the equity method of accounting.
 
     For  financial  information  about  the  Company's  industry  segments  and
operations  in different geographical areas with respect to each of the years in
the  three-year  period  ended   December  31,  1995,   see  Note  13   'Segment
Information,'  to the Company's consolidated  financial statements at pages F-46
through F-49 herein.
 
                              NEWS AND INFORMATION
 
     The Company's News and Information business currently is conducted by  Time
Inc., a wholly owned subsidiary of the Company. Time Inc. has one of the largest
portfolios  of brand name franchises in  the world. Development and distribution
of its  brands are  accomplished through  the publishing,  direct marketing  and
sales  of magazines, books,  music and videos. Time  Inc. also develops products
for the multimedia and television markets. It conducts these activities  through
wholly owned subsidiaries, joint ventures, equity investments and partnerships.
 
                                      I-3
 
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<PAGE>
MAGAZINES
 
GENERAL
 
     Time Inc. publishes TIME, PEOPLE, SPORTS ILLUSTRATED, FORTUNE, MONEY, LIFE,
SPORTS ILLUSTRATED FOR KIDS, ENTERTAINMENT WEEKLY and IN STYLE. In January 1995,
Time  Inc. launched RETIRE WITH MONEY, a consumer newsletter from the editors of
MONEY magazine  that  provides  guidance  to  individuals  on  their  retirement
investments.  In September 1995, Time Inc. launched TIME For Kids, a weekly news
magazine aimed at elementary school students in grades four through six.
 
     Time Inc., either directly or through subsidiaries, has equity interests in
ASIAWEEK and American Family Publishers. In  1995, Time Inc. acquired an  equity
interest in Emphasis, a provider of in-flight media and entertainment; purchased
Targeted  Media,  an organization  dedicated to  the  creation and  execution of
alternative  media  concepts  and  programs;  and  launched  Independent   Media
Distribution in Australia, a distributor of magazines published by Time Inc. and
certain other publishers.
 
     Time  Inc. Ventures ('TIV'),  and its subsidiary  Time Publishing Ventures,
Inc. ('TPV'), are responsible for  regional and special interest publishing  and
development  activities,  including  Southern  Progress  Corporation  ('Southern
Progress'), Sunset Publishing Corporation ('Sunset Publishing'), PARENTING, BABY
TALK, HEALTH,  HIPPOCRATES, MARTHA  STEWART LIVING,  WHO WEEKLY,  PRESIDENT  and
DANCYU magazines, and various joint ventures. In 1995, TPV purchased HIN Inc., a
publisher  of health information/patient education  booklets and tested THIS OLD
HOUSE magazine, based on the popular home renovation television series. In 1996,
THIS OLD HOUSE magazine was launched  under a licensing arrangement with  public
television station WGBH.
 
     Southern  Progress publishes SOUTHERN  LIVING, PROGRESSIVE FARMER, SOUTHERN
ACCENTS and  COOKING LIGHT  magazines  as well  as occasional  special  interest
publications. Sunset Publishing publishes SUNSET magazine.
 
     Time  Inc., through its  TIV subsidiary, has  management responsibility for
most of  the American  Express  Publishing Corporation's  operations,  including
TRAVEL  &  LEISURE and  FOOD &  WINE  magazines. TIV  also operates  an in-store
advertising and demonstration business, Time Inc. In-Store Marketing.
 
     Each magazine published  by the Company  has an editorial  staff under  the
general  supervision  of  a  managing  editor and  a  business  staff  under the
management of a president or publisher. Magazine manufacturing and  distribution
activities  are generally managed by centralized staffs at Time Inc. Fulfillment
activities  for  Time  Inc.'s  magazines  are  generally  administered  from   a
centralized  facility in Tampa,  Florida. PARENTING, SUNSET,  BABY TALK, HEALTH,
HIPPOCRATES, MARTHA  STEWART  LIVING, THIS  OLD  HOUSE, VIBE,  and  Time  Inc.'s
overseas  operations  generally  employ  independent  fulfillment  services  and
undertake their own manufacturing and distribution.
 
     Magazine  publishing  follows  a  seasonal  pattern  with  revenues   being
generally  higher in the second  and fourth quarters and  lower in the first and
third quarters. Advertising rate base is the guaranteed minimum paid circulation
level on which advertising rates are based.
 
     The individual magazines of the Company are summarized below:
 
     TIME,  a  weekly  magazine,  summarizes   the  news  and  brings   original
interpretation  and insight  to the week's  events. In 1995,  TIME launched Time
Digital, a wide-ranging, user-friendly,  quarterly 'magazine within a  magazine'
about  the digital age. The domestic advertising rate base of TIME as of January
1996 was 4,000,000, which is unchanged from January 1995.
 
     TIME For  Kids,  is a  weekly  news  magazine aimed  at  elementary  school
students  from  fourth through  sixth grades.  The advertising  rate base  as of
January 1996 was 720,000.
 
     TIME Asia, TIME Atlantic,  TIME Canada, TIME Latin  America and TIME  South
Pacific are weekly English-language editions of TIME which circulate outside the
United  States. These editions had an  aggregate worldwide advertising rate base
of 1,490,000 as of January 1996, compared to 1,460,000 in January 1995.
 
                                      I-4
 
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     SPORTS ILLUSTRATED is a weekly magazine which covers the activities of, and
is designed to appeal to, spectators and participants in virtually all forms  of
recreational  and competitive  sports. The advertising  rate base  as of January
1996 was 3,150,000, the same as in January 1995.
 
     SPORTS ILLUSTRATED FOR KIDS is a monthly sports-oriented magazine geared to
children ages eight through  fourteen. Its advertising rate  base as of  January
1996  was  950,000,  the  same  as in  January  1995,  including  225,000 copies
distributed free to over 1,700 schools.
 
     PEOPLE is a weekly magazine which reports on celebrities and other  notable
personalities.  The advertising rate base as  of January 1996 was 3,150,000, the
same as in January 1995.
 
     ENTERTAINMENT WEEKLY  is  a  weekly magazine  which  includes  reviews  and
reports on television, movies, video, music and books. The advertising rate base
as of January 1996 was 1,225,000, compared to 1,125,000 in January 1995.
 
     FORTUNE  is a  biweekly magazine  which reports  on worldwide  economic and
business developments. The worldwide advertising  rate base as of January  1996,
was 860,000, the same as in January 1995.
 
     MONEY  is  a  monthly  magazine  which  reports  on  personal  finance. The
advertising rate base as of January 1996  was 1,900,000, the same as in  January
1995.
 
     LIFE  is  a  monthly  magazine  which  features  photographic  essays.  The
advertising rate base as of January 1996  was 1,500,000, the same as in  January
1995.
 
     IN  STYLE is  a monthly  magazine which  focuses on  celebrities' lives and
lifestyles. The advertising rate base as  of January 1996 was 650,000,  compared
to 550,000 in January 1995.
 
     SOUTHERN  LIVING  is  a  monthly regional  home,  garden,  food  and travel
magazine focused on the South with an  advertising rate base of 2,300,000 as  of
January 1996, the same as in January 1995.
 
     PROGRESSIVE   FARMER  is  a  monthly  regional  farming  magazine  with  an
advertising rate base  of 630,000  as of January  1996, compared  to 640,000  in
January 1995.
 
     SOUTHERN  ACCENTS is published six times a year, and features architecture,
fine homes and gardens, arts and travel and is targeted to affluent Southerners.
Its advertising rate base as of January 1996 was 285,000, compared to 275,000 in
January 1995.
 
     COOKING LIGHT  is published  nine  times a  year  and promotes  health  and
fitness  through active lifestyles and good nutrition. The advertising rate base
as of January 1996 was 1,300,000, compared to 1,200,000 in January 1995.
 
     PARENTING is published ten times a year and is aimed at parents of children
under the  age  of  ten. The  advertising  rate  base as  of  January  1996  was
1,100,000, compared to 1,000,000 in January 1995.
 
     SUNSET,  The Magazine  of Western  Living, is  a monthly  regional magazine
focused on lifestyles in  the West. The advertising  rate base was 1,425,000  in
January 1996, the same as in January 1995.
 
     HEALTH  is a  consumer health  magazine published  seven times  a year, and
HIPPOCRATES is  published  ten  times  a year.  Although  similar  in  editorial
content, HEALTH is targeted at the consumer market, while HIPPOCRATES is a trade
magazine  targeted at physicians and carries primarily trade advertising. HEALTH
had an advertising rate base of 900,000 in January 1996, the same as in  January
1995.   HIPPOCRATES  had  a  controlled  circulation  of  125,000  primary  care
physicians in January 1996, the same as in January 1995.
 
     MARTHA STEWART LIVING  is published ten  times a year  and presents  Martha
Stewart's   personal  perspective  on   entertaining,  cooking,  decorating  and
gardening. Its advertising rate base as of January 1996 was 1,200,000,  compared
to  800,000 in January  1995. Effective with  the February 1996  issue, the rate
base will increase to 1,425,000.
 
     BABY TALK is published ten  times a year and  is targeted at expectant  and
new  mothers. In January 1996 its  advertising rate base was 1,100,000, compared
to 1,000,000 in January 1995. BABY TALK's ancillary publication BABY ON THE  WAY
is published semi-annually.
 
                                      I-5
 
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     VIBE  is published ten times a year by a joint venture between a subsidiary
of TPV and  affiliates of  Quincy Jones  Entertainment Company.  It covers  rap,
rhythm  and blues, reggae and dance music,  as well as politics and fashion. The
advertising rate base  as of January  1996 was 400,000,  compared to 250,000  in
January 1995.
 
     THIS  OLD HOUSE  is published  six times  a year,  pursuant to  a licensing
arrangement with public  television station WGBH,  and is based  on the  popular
home  renovation television series. The advertising rate base as of January 1996
was 300,000.
 
     ASIAWEEK is a  weekly English-language magazine  which summarizes the  news
events  in  the Asian  region. In  January  1996 its  advertising rate  base was
110,000, compared to 100,000 in January 1995.
 
     WHO WEEKLY is an Australian version of PEOPLE which focuses on  celebrities
and  other notable personalities.  The advertising rate base  as of January 1996
was 227,000, compared to 220,000 in January 1995.
 
     PRESIDENT is a monthly Japanese-language business/management magazine.  The
advertising  rate base as  of January 1996  was 258,000, the  same as in January
1995.
 
     DANCYU is a monthly Japanese cooking magazine. The advertising rate base as
of January 1996 was 105,000, the same as in January 1995.
 
ANCILLARY BUSINESSES
 
     Time Inc. has continued to expand  on its core businesses through  numerous
product extensions. Most notably: the publishing of newsstand specials including
LIFE's  single-subject issues on  Elvis Presley and  the Beatles, MARTHA STEWART
LIVING  WEDDINGS,  PEOPLE's  tribute  issues   to  Selena,  and  Jerry   Garcia,
ENTERTAINMENT  WEEKLY's  Academy  Awards  special,  SPORTS  ILLUSTRATED PRESENTS
publications which in 1995  included seven commemorative  issues and four  sport
preview  issues, as well  as, special interest  publications including, Southern
Progress' HOME FOR THE HOLIDAYS, GARDEN GUIDE and SUMMER TIME. Other  activities
include  TIME's special issues on the Cyber  Revolution and V-E Day, and MONEY's
newsletter for  retirees  and  401(k)  plan  participants,  RETIRE  WITH  MONEY;
conferences  and seminars  sponsored by FORTUNE,  PEOPLE and  VIBE, and expanded
merchandising activities via the SPORTS ILLUSTRATED Insider Authentics  catalog,
and  the 1995 launch of ENTERTAINMENT WEEKLY's Studio Store and MARTHA STEWART's
Martha by Mail catalog.
 
CIRCULATION
 
     The Company's publications are sold primarily by subscription. Subscription
copies are delivered to subscribers through the mail. Subscriptions are sold  by
direct-mail  solicitation, subscription sales agencies, television and telephone
solicitation and insert cards in the Company's magazines and other publications.
Single copies of magazines are sold through retail news dealers who are supplied
in turn by regional wholesalers.
 
ADVERTISING
 
     Advertising carried in  the Company's magazines  is predominantly  consumer
advertising.  Many  of  the  Company's  magazines  have  numerous  regional  and
demographic editions which contain the same basic editorial material but  permit
advertisers  to concentrate their  advertising in specific  markets. Through the
use of selective  binding and  ink-jet technology, the  Company creates  special
custom  editions targeted  towards specific groups.  This allows  the Company to
deliver advertisers a  more highly  targeted audience  by segmenting  subscriber
lists  to  identify  those  subscribers  advertisers  desire  most,  as  well as
providing the opportunity to personalize advertising messages.
 
PAPER AND PRINTING
 
     Lightweight coated paper  constitutes a significant  component of  physical
costs  in the production of magazines.  Time Inc. has contractual commitments to
ensure an adequate  supply of  paper, but periodic  shortages may  occur in  the
event  of strikes or other unexpected  disruptions in the paper industry. During
1995,
 
                                      I-6
 
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<PAGE>
Time Inc. purchased  paper principally  from six  independent manufacturers,  in
each  case under  contracts that,  for the most  part, are  either fixed-term or
open-ended at prices determined on a market price or formula price basis.  Paper
costs  were  significantly higher  in 1995  as a  result of  several consecutive
quarterly  price  increases  from  October  1994  through  October  1995.  These
significant  price increases resulted in part from an increased demand for paper
relative to production capacity. Based upon the current marketplace, the Company
expects that paper prices will stabilize in 1996.
 
     Printing and binding for the Company's magazines are accomplished primarily
by  major  domestic  and  international  independent  printing  concerns  in  20
locations.  Magazine printing contracts  are either fixed-term  or open-ended at
fixed prices with, in some cases, adjustments based on certain criteria.
 
BOOKS
 
GENERAL
 
     The Company's direct marketing and book operations include Time Life  Inc.,
Book-of-the-Month  Club, Inc., Warner Books, Inc. and Little, Brown and Company,
each of which is a  wholly owned subsidiary of Time  Inc., and the Oxmoor  House
and   Sunset  Books  divisions  of  Southern  Progress  and  Sunset  Publishing,
respectively.  In  1995,  the  book  operations  distributed  an  aggregate   of
approximately 163 million gross units.
 
TIME LIFE
 
     Time  Life is composed of several divisions including: Books, Music, Video,
Television, Education, Custom Publishing and International. Time Life is one  of
the  nation's largest direct marketers of  books, music and videos. The products
are sold by  direct response,  including mail order,  television and  telephone,
through  retail,  institutional  and  licensing  channels,  and  by door-to-door
independent distributors  in  some  foreign  markets.  Time  Life  products  are
currently  sold in  over 25  languages worldwide  and approximately  40% of Time
Life's revenues are generated outside the  United States. In January 1995,  Time
Life  licensed the name Time Life Medical  to Patient Education Media Inc. to be
used in connection with the creation of patient education videos. Time Life also
holds a minority equity interest in Patient Education Media Inc.
 
     Editorial material is created by in-house staffs as well as through outside
book packagers. A significant product in 1995 was Time Life Music's series 'Dick
Clark's Rock  'n' Roll  Era.'  Time Life's  1995  best sellers  included  'Great
Taste-Low  Fat' and 'Home Repair and Improvement' from Time Life Books, 'Century
of Warfare' and 'Zoo Life' from Time  Life Video. In 1995, Time Life also  aired
the   television  productions   'Lost  Civilizations,'   a  ten-hour  television
documentary series and 'The  History of Rock 'n'  Roll,' co-produced with  TWE's
Telepictures Productions.
 
     Time Life Books products are manufactured by several independent companies.
Manufacturing  contracts are entered into on a series rather than a single title
basis and  are fixed-price  with  provisions for  cost  of labor,  material  and
specification  adjustments. These contracts, subject to certain limitations, may
be terminated  by  Time  Life  or  the  manufacturer.  Time  Life's  fulfillment
activities, excluding international operations, are conducted from a centralized
facility in Richmond, Virginia.
 
BOOK-OF-THE-MONTH CLUB
 
     Book-of-the-Month   Club  currently  operates  eight  book  clubs  and  two
continuity businesses  with  a combined  membership  of more  than  3.5  million
members.  Two of  the clubs, Book-of-the-Month  Club and  Quality Paperback Book
Club, are general interest clubs, and the remaining clubs specialize in history,
cooking and crafts,  business, children's books  and the books  of a  particular
author.  In addition, multimedia,  audio and video  products are offered through
the clubs. Book-of-the-Month Club's international businesses operate in over  50
countries  worldwide. In December 1995, Book-of-the-Month Club acquired Meredith
Book Clubs,  adding  approximately  500,000  members to  its  book  clubs.  This
acquisition  will  significantly expand  its presence  in the  women's lifestyle
franchise. In June 1995,  the ONE SPIRIT book  club was launched, targeting  the
growing consumer interest in spiritual, self-help and health topics.
 
                                      I-7
 
<PAGE>
<PAGE>
     Book-of-the-Month  Club acquires the rights  from publishers to manufacture
and distribute books and then has them printed by independent printing concerns.
Book-of-the-Month Club runs  its own fulfillment  and warehousing operations  in
Mechanicsburg, Pennsylvania.
 
WARNER BOOKS
 
     Warner Books primarily publishes hardcover, mass market and trade paperback
books. Among its best selling hardcover books in 1995 were Robert James Waller's
'The  Bridges of Madison County,' which benefited from the success of the Warner
Bros. movie, and James  Redfield's 'The Celestine  Prophecy.' Best selling  mass
market  paperbacks in  1995 included 'Charade'  by Sandra Brown,  'The Day After
Tomorrow' by Allan Folsom, 'Kiss the  Girls' by James Patterson, 'Nothing  Lasts
Forever' by Sidney Sheldon and 'Spencerville' by Nelson DeMille. Trade paperback
bestsellers  included James Redfield's 'The  Celestine Prophecy: An Experiential
Guide.'
 
     Time Warner AudioBooks  develops and  markets audio versions  of books  and
other  materials published by both Warner  Books and Little, Brown. In addition,
through a joint venture  with Little, Brown, Warner  Books operates Time  Warner
Electronic Publishing, which is engaged in on-line and multimedia publishing.
 
LITTLE, BROWN
 
     Little,  Brown  publishes general  and  children's trade  books,  legal and
medical reference  books and  textbooks and  journals. Through  its  subsidiary,
Little,  Brown and Company (U.K.) Ltd.,  it also publishes general hardcover and
mass market paperback  books in the  United Kingdom. Among  the trade  hardcover
books  published by  Little, Brown in  1995 were: 'I  Want to Tell  You' by O.J.
Simpson, 'A Good  Walk Spoiled'  by John  Feinstein, 'Garcia'  by Rolling  Stone
Magazine and 'Hide and Seek' by James Patterson.
 
     Little, Brown handles book distribution for itself, Warner Books and Sunset
Books, as well as other publishers. The marketing of trade books is primarily to
retail  stores  and wholesalers  throughout the  United  States, Canada  and the
United Kingdom.  Law and  medical  textbooks are  sold primarily  to  university
retail  stores. Professional reference books are sold to practitioners primarily
through direct  marketing  efforts. Through  their  combined United  States  and
United  Kingdom operations, Little,  Brown and Warner Books  have the ability to
acquire English-language  publishing rights  for the  distribution of  hard  and
softcover books throughout the world.
 
OXMOOR HOUSE AND LEISURE ARTS
 
     Oxmoor  House, the book  publishing division of  Southern Progress, markets
how-to books on a wide variety of  topics including food and crafts, as well  as
illustrated  volumes on art and other  subjects. Acquired in 1992 and integrated
into Oxmoor House, Leisure Arts is a well-established publisher and  distributor
of  instructional  leaflets,  continuity  books  series  and  magazines  for the
needlework and crafts market.
 
SUNSET BOOKS
 
     Sunset Books, the  book publishing division  of Sunset Publishing,  markets
books  on  topics  such  as  building  and  decorating,  cooking,  gardening and
landscaping, and  travel. Sunset  Books' unique  marketing formula  includes  an
extensive distribution network of home repair and garden centers.
 
OTHER PUBLISHING OPERATIONS
 
MULTIMEDIA AND TELEVISION
 
     Time  Inc. continues to develop products  for emerging technologies such as
on-line computer networks, the Full Service Network'tm', and the CD-ROM  market.
In  1995,  Time Inc.  New  Media, a  company  dedicated to  the  development and
enhancement of on-line services, launched  two new startup products in  addition
to  its successful launch of Pathfinder in 1994. These launches were LineRunner,
a partnership with Time Warner
 
                                      I-8
 
<PAGE>
<PAGE>
Cable, to distribute  internet content,  local content and  Pathfinder via  high
speed  cable  modems, and  TNX, the  world's first  and only  switched broadband
interactive TV news service,  which is distributed on  Time Warner Cable's  Full
Service  Network. Time Inc.  has also licensed its  editorial content to various
other commercial on-line information services, and has produced CD-ROM  products
internally,  as well as  through licensing arrangements  with third party CD-ROM
developers.
 
     Time  Inc.  has  undertaken  development  efforts  in  various   television
ventures,  both in combination  with other Company  divisions and independently.
Sports Illustrated  Productions Inc.  completed its  second year  of  television
production  in 1995, producing two prime-time  specials, weekly segments on Wide
World of  Sports  and  two  home  video  titles.  The  'Martha  Stewart  Living'
television  program, based on the popular  magazine, entered its third season in
September and aired a one hour special 'Martha Stewart's Home For The  Holidays'
in  December 1995. PEOPLE magazine  took a retrospective look  at the people and
events of 1995  in a prime  time broadcast  aired in December  1995, and  HEALTH
magazine  presented 'Your Mind  and Body,' a weekly  television show focusing on
health, fitness  and  beauty which  began  airing  in September  1995.  TPV  has
arrangements  to syndicate episodes  of the 'This  Old House' television program
after such programs  have run on  public television and  produce books based  on
this popular series.
 
TIME INC. IN-STORE MARKETING
 
     Time   Inc.  In-Store  Marketing,  an  umbrella  organization  which  is  a
subsidiary of  TIV,  operates  all  of  Time  Inc.'s  in-store  advertising  and
demonstration  businesses,  including  Media Holdings,  Inc.  ('Media  One') and
SmartDemo Inc. ('SmartDemo'). Media One's primary product is a two-sided backlit
advertising display  unit  that  is installed  in  supermarket  checkout  lanes.
SmartDemo  is an  in-store demonstration, couponing,  sampling and merchandising
business.
 
AMERICAN EXPRESS PUBLISHING
 
     Time Inc., through  its TIV subsidiary,  has management responsibility  for
most of American Express Publishing Corporation's operations, including its core
lifestyle  magazines, TRAVEL & LEISURE  and FOOD & WINE.  TIV receives a fee for
managing these properties, as well as incentives for improving profitability.
 
AMERICAN FAMILY PUBLISHERS
 
     Time Inc. is a 50% partner in American Family Publishers ('AFP'), a  direct
mail  magazine subscription sales  agency. AFP sells  magazine subscriptions for
approximately 200 major magazines  in the United States,  including many of  the
Company's   publications.  AFP  sells  primarily  through  two  heavily-promoted
nationwide sweepstakes mailings conducted each year.
 
TIME DISTRIBUTION SERVICES
 
     Time Distribution  Services  ('TDS')  is a  national  distribution  company
responsible  for the retail sales,  distribution, marketing and merchandising of
single copies of periodicals for Time Inc. and other publishers. TDS distributes
periodicals through a magazine wholesaler network which services retail  outlets
such as newsstands, supermarkets, convenience and drug stores.
 
WARNER PUBLISHER SERVICES
 
     Warner  Publisher Services ('WPS') is a  major distributor of magazines and
paperback books sold through  wholesalers in the United  States and Canada,  and
internationally.  WPS is  the sole  national distributor  for MAD  magazine, the
publications of DC Comics  and certain publications  owned by other  publishers,
including  TEEN,  VOGUE,  WOMAN'S  DAY,  and the  Dell  Puzzle  Books.  WPS also
distributes the  paperback  books published  by  Warner  Books as  well  as  the
paperback lines of other publishers.
 
                                      I-9
 
<PAGE>
<PAGE>
POSTAL RATES
 
     Postal  costs represent a  significant operating expense  for the Company's
publishing activities. An increase of approximately 10% for first class and  14%
for  second, third  and fourth  classes was  implemented in  January 1995, which
significantly increased Time  Inc.'s postal  costs. However,  a recently  issued
decision  by The Postal Rate Commission has  been accepted by the Postal Service
and will result  in a reduction  of Time  Inc.'s current postage  rates in  July
1996.  The  new  rates reflect  an  increased incentive  for  mailer worksharing
efforts that reduce costs to the Postal Service.
 
     Publishing operations continue to minimize  postal expense through the  use
of  certain cost-saving measures, including the utilization of contract carriers
to transport books  and magazines  to central postal  centers. It  has been  the
Company's  practice in  selling books  and other products  by mail  to include a
charge for  postage  and  handling, which  is  adjusted  from time  to  time  to
partially offset any increased postage or handling costs.
 
COMPETITION
 
     The  Company's magazine  operations compete  for sales  with numerous other
publishers and  retailers,  as well  as  other media.  The  general  circulation
magazine  industry  is  highly competitive  both  within itself  and  with other
advertising media which compete  with the Company's  magazines for audience  and
advertising revenue.
 
     The  Company's book publishing  operations compete for  sales with numerous
other publishers  and  retailers  as  well as  other  media.  In  addition,  the
acquisition   of  publication  rights   to  important  book   titles  is  highly
competitive, and Warner Books and Little, Brown compete with numerous other book
publishers. WPS and  TDS meet  with direct competition  from other  distributors
operating  throughout  the  United  States and  Canada  in  the  distribution of
magazines and paperback books.
 
                                 ENTERTAINMENT
 
     The  Company's  Entertainment  business  is  conducted  through  wholly  or
partially  owned  subsidiaries  and  through  TWE.  The  Company's  wholly owned
worldwide recorded music and music publishing businesses are conducted under the
umbrella name Warner  Music Group  ('WMG'). Substantially all  of the  Company's
interests  in filmed entertainment, broadcasting,  theme parks, cable television
programming and most of its cable television systems are held through TWE.
 
MUSIC
 
GENERAL
 
     The Company's  domestic recorded  music business  is conducted  principally
through  WMG and its constituent companies,  Warner Bros. Records, Inc. ('WBR'),
Atlantic  Recording  Corporation   ('Atlantic'),  Elektra  Entertainment   Group
('Elektra')  and their affiliated labels, and  through WEA Inc. ('WEA Inc.') and
its constituent  companies,  Warner-Elektra-Atlantic  Corporation  ('WEA'),  WEA
Manufacturing  Inc. ('WEA Mfg.') and Ivy  Hill Corporation ('Ivy Hill'). Outside
of the United States, the Company's recorded music business is conducted in more
than 70 countries through WEA International  Inc. and a division of WCI,  Warner
Music  International,  and  their  subsidiaries  and  affiliates  (collectively,
'WMI'), as well as through non-affiliated licensees.
 
     The Company's music  publishing business is  conducted principally  through
wholly owned subsidiaries of WCI (collectively, 'Warner/Chappell').
 
     In  1995, more than 57% of WMG's  recorded music revenues were derived from
sources outside of the United States.
 
     In 1995, WMG  closed Warner Music  Enterprises Inc., one  of the  Company's
direct  marketing businesses, and completed the transaction pursuant to which it
sold its 50% interest in the Interscope Records partnership.
 
                                      I-10
 
<PAGE>
<PAGE>
RECORDED MUSIC AND RELATED ACTIVITIES
 
     WBR, Atlantic, Elektra  and WMI  produce, sell and  license compact  discs,
cassette  tapes and music videos of  the performances of recording artists under
contract to  them or  for  whose recordings  they  have acquired  rights.  WMG's
recorded music and video product is marketed under various labels, including the
proprietary  labels 'Warner Bros.,' 'Reprise,'  'Tommy Boy,' 'Warner Nashville,'
'Elektra,'  'Sire,'  'Asylum,'  'Atlantic,'  'EastWest  America,'  'Big   Beat,'
'Atlantic Nashville,' 'WEA,' 'Nonesuch,' 'EastWest,' 'Teldec,' 'CGD,' 'Carrere,'
'Erato,' 'MMG,' 'DRO,' 'Telegram,' 'D-Day,' 'Muser' and 'Fazer.'
 
     In  addition, WMG  has entered  into joint  venture agreements  pursuant to
which WMG companies manufacture, distribute  and market (both domestically  and,
in  most cases,  internationally) recordings owned  by such  joint ventures. The
terms of such agreements vary widely, but each agreement typically provides  the
WMG  record company with  an equity interest  and a profit  participation in the
venture, with  financing furnished  either solely  by WMG  or by  both  parties.
Included among these arrangements are the labels 'American Recordings,' 'Giant,'
'Mammoth,' 'Maverick,' 'Qwest' and 'Rhino.'
 
     WMG's  record  companies  also  acquire rights  pursuant  to  agreements to
manufacture and  distribute  certain  recordings that  are  marketed  under  the
owner's  proprietary label. Included  among the labels  distributed by WMG under
such arrangements are 'Curb' and 'Scotti Brothers.'
 
     Recording artists  are engaged  under arrangements  that generally  provide
that the artist is to receive a percentage of the suggested retail selling price
of  compact discs,  cassette tapes and  music videos sold.  Most artists receive
non-returnable advance payments against future royalties.
 
     Among the  artists whose  albums resulted  in significant  sales for  WMG's
record companies during 1995 were: AC/DC, Bush, Enya, Jeff Foxworthy, Green Day,
Hootie  &  The Blowfish,  Madonna, Alanis  Morissette, John  Michael Montgomery,
Natalie Merchant,  Red Hot  Chili Peppers,  Simply Red,  Van Halen  and  Tatsuro
Yamashita.  In 1996, WMG's  record companies have released  or expect to release
albums by  the  following artists:  Tori  Amos, Brandy,  Jackson  Browne,  Tevin
Campbell,  Jose Carreras, Collective Soul, Phil  Collins, The Cure, Hootie & The
Blowfish, Aaron  Kwok,  Madonna,  Noriyuri  Makihara,  Metallica,  Luis  Miguel,
Pantera,  Laura Pausini, R.E.M., Linda Ronstadt,  Rush, Keith Sweat, Seal, Stone
Temple Pilots, Travis Tritt, Van Halen and Westernhagen.
 
     WMG's domestic  manufacturing, packaging  and distribution  operations  are
conducted through WEA Inc. and its constituent companies.
 
     WEA  Mfg.  is engaged  in the  domestic manufacturing  of audio  and CD-ROM
compact  discs,  cassette  tapes  and  videocassettes.  WEA  Mfg.  conducts  its
operations from facilities situated in Olyphant, Pennsylvania and in the greater
Los  Angeles area. WEA  Mfg. participated in  the development of  'DVD,' the new
digital configuration developed by  the Company and Toshiba,  and expects to  be
manufacturing  DVDs  in 1996.  For  additional information  regarding  DVDs, see
'Filmed Entertainment Division -- Home Video.'
 
     Ivy Hill  is  engaged in  the  offset lithography  and  packaging  business
through  facilities situated  in four  states. Ivy Hill  is a  major supplier of
packaging to the recorded music industry (including WMG's record companies)  and
also supplies packaging for a wide variety of other consumer products.
 
     WMG's recorded music product is marketed and distributed in the continental
United   States  by  WEA,   which  supplies,  directly   or  indirectly  through
sub-distributors and wholesalers, thousands of record stores, department stores,
discount centers  and  other  retail outlets  across  the  country.  Alternative
Distribution  Alliance, a distribution company  specializing in alternative rock
music, with a focus on new artists,  operates as a joint venture among WMG,  its
labels, Restless Records and Sub Pop.
 
     Warner   Special  Products  Inc.  produces,  primarily  for  telemarketers,
compilations of music for which it has obtained rights from WMG's recorded music
companies, as well as from third parties.
 
     In  foreign  markets,  WMI   produces,  distributes,  promotes  and   sells
recordings  of local artists  and, in most cases,  distributes the recordings of
those artists for  whom WMG's  domestic recording  companies have  international
rights.  In certain countries, WMI licenses  to non-affiliated parties rights to
distribute recordings of  WMG's labels. WMI  strengthened its operations  during
1995, establishing new affiliates in the Czech Republic
 
                                      I-11
 
<PAGE>
<PAGE>
and  in Poland and forming  a new WEA division in  Brazil. WMI also operates two
plants in  Germany that  manufacture  compact discs,  cassette tapes  and  vinyl
records  for  WMI's  European affiliates  and  licensees and  for  WMI companies
outside Europe, as well as for unrelated parties.
 
     Through joint  ventures,  WMG  and Sony  Music  Entertainment  Inc.  ('Sony
Music')  operate  The Columbia  House Company,  the  leading direct  marketer of
compact discs,  cassette  tapes and  videocassettes  in the  United  States  and
Canada.
 
     In March 1995, WMG entered into a joint venture with PolyGram International
Ltd.  ('PolyGram') and Sony Music to market recorded music and videocassettes in
Europe through music clubs and video clubs.
 
     WMG, with other partners, including another subsidiary of the Company,  has
an  equity interest in Music Choice,  an audio programming service that delivers
multiple channels of CD-quality  stereo music via  cable television. In  Europe,
where  the service is  known as Music  Choice Europe, it  is delivered via cable
television and direct-to-home satellite.
 
     WMG, with other partners, has an equity interest in VIVA, a 24-hour  German
language  music  video  channel carried  on  cable television  in  Germany. WMG,
pursuant to separate  joint ventures, has  equity interests in  two other  music
video channels: Channel [V] in Asia and YA TV in Latin America.
 
     WMG's   computer-entertainment  and  video-game   businesses  --  including
investments in  Inscape and  Accolade  in the  United  States and  wholly  owned
operations  in Europe -- are operating in 1996  as part of a new company, Warner
Interactive.
 
MUSIC PUBLISHING
 
     Time Warner's music publishing companies own or control the rights to  over
one  million standard and contemporary  compositions, including numerous popular
hits, folk songs and music from the stage and motion pictures. Certain works  of
the  following artists, authors and  composers are included in Warner/Chappell's
catalogues: John Bettis, Michael Bolton, The Black Crowes, Phil Collins,  Comden
&  Green, Dubin & Warren, Genesis, George and Ira Gershwin, Gin Blossoms, Victor
Herbert, Michael Jackson, Elton John, Leiber & Stoller, Lerner & Lowe,  Madonna,
Henry  Mancini, Johnny  Mercer, George Michael,  Midnight Oil,  Cole Porter, the
artist formerly  known as  Prince, R.E.M.,  Rodgers &  Hart, Soul  Asylum,  Jule
Styne, Bernie Taupin, Van Halen, John Williams and the foreign administration of
the works of Irving Berlin.
 
     Warner/Chappell  also administers the film  music of several television and
motion picture companies, including Lucasfilm, Ltd., Samuel Goldwyn Productions,
Aaron Spelling Productions and New World.
 
     Warner/Chappell's printed  music division  markets publications  throughout
the  world  containing  the works  of  Alabama,  Phil Collins,  The  Eagles, The
Grateful Dead, Michael Jackson, Led Zeppelin, Madonna, the artist formerly known
as  Prince,  Rush,  Bob  Seger  and  many  others.  Warner/Chappell  also   owns
CPP/Belwin, Inc., one of the world's largest publishers of printed music.
 
     Principal  sources of revenues to Warner/Chappell  are license fees for use
of its music copyrights on radio and television, in motion pictures and in other
public performances; royalties for use of its music copyrights on compact discs,
cassette tapes, vinyl  records, music videos  and in commercials;  and sales  of
published  sheet  music and  song books  for the  home musician  as well  as the
professional  and  school  markets,  including  methods  for  teaching   musical
instruments.
 
LEGISLATION
 
     With  the enactment of P.L. 104-39  in late 1995, sound recording copyright
owners and performers are now, for the first time in the United States, able  to
license  and receive  royalties for  the public  performance of  digitized sound
recordings distributed through subscription music and interactive services. This
law was enacted in  response to the advent  of digital technology in  broadcast,
cable  and other means  of distribution. Digitization  creates the potential for
virtually flawless reception and copying, and the consequent displacement of the
sale of  pre-recorded  music  product. Passage  of  this  legislation  favorably
impacts WMG's interests.
 
                                      I-12
 
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<PAGE>
     In  addition, bills introduced in Congress last  year to extend the term of
ownership of copyrights for an additional 20 years (H.R. 989, S. 483) are  still
pending.  Passage of  these bills would  benefit all of  the Company's copyright
businesses, including the businesses of WMG, but no assurance can be given  that
they will become law.
 
COMPETITION
 
     The  recorded music business is highly competitive. The revenues and income
of a company in the recording industry depend upon the public acceptance of  the
company's  recording artists and  the recordings released  in a particular year.
Although WMG is one of  the largest recorded music  companies in the world,  its
competitive  position is  dependent upon its  continuing ability  to attract and
develop  talent  that  can   achieve  a  high   degree  of  public   acceptance.
Overexpansion of retail outlets for music over the past several years led to the
closing  of many such stores during 1995,  which is expected to further increase
competition among recorded music companies  for sales of music related  product.
Competition also intensified during 1995 as a result of the start-up of a number
of new labels. The recorded music business continues to be adversely affected by
counterfeiting,  piracy, parallel imports and, in particular, the home taping of
recorded music.  In  addition,  the  recorded music  business  also  meets  with
competition  from other forms of entertainment, such as television, pre-recorded
videocassettes and video games. Competition in the music publishing business  is
intense.  Although WMG's music publishing business is the largest on a worldwide
basis, it  competes  with every  other  music publishing  company  in  acquiring
musical compositions and in having them recorded and performed.
 
FILMED ENTERTAINMENT
 
GENERAL
 
     The  Company's principal interest  in the filmed  entertainment business is
conducted by Warner Bros.  ('WB'), a division of  TWE. The filmed  entertainment
business  includes the production, financing  and distribution of feature motion
pictures,  television  series,   made-for-television  movies,  mini-series   for
television,  first-run  syndication  programming  and  animated  programming for
theatrical and television exhibition; the ownership and operation of a  national
broadcast  network, The WB; and  the distribution of pre-recorded videocassettes
and videodiscs. WB also  is engaged in product  licensing and the ownership  and
operation   of  retail  stores,  movie  theaters,  theme  parks  (including  the
management of TWE's  interest in  Six Flags  theme parks),  a new  international
cable channel and a new on-line service.
 
     Feature  motion pictures  and television  programs are  produced at various
locations throughout the world,  including The Warner  Bros. Studio in  Burbank,
California  and The Warner  Hollywood Studio in  West Hollywood, California. For
additional information, see Item 2 'Properties.'
 
FEATURE FILMS
 
     WB produces feature films  either solely or  under arrangements with  other
producers, and is generally the principal source of financing for such films. In
addition,  WB purchases outright, or  licenses for distribution, completed films
produced by others.  Acquired distribution  rights may be  limited to  specified
territories,  specified media  and/or particular periods  of time.  The terms of
WB's agreements with  independent motion  picture producers  and other  entities
result  from negotiations and vary depending upon the production, the amount and
type of financing by WB, the media covered, the territories covered, the  period
of  distribution and other factors. In some cases, producers, directors, actors,
writers and others participate in the proceeds generated by the motion  pictures
in which they are involved.
 
     WB  operates a worldwide theatrical distribution organization through which
it distributes its own films, as well as films produced by others. During  1995,
50% of film rentals from WB theatrical distribution were generated in the United
States and Canada and 50% in international territories.
 
     Feature  films are licensed to exhibitors  under contracts that provide for
the length of the engagement, rental fees,  which may be either a percentage  of
box   office  receipts,  with  or  without  a  guarantee  of  a  fixed  minimum,
 
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or a flat  sum, and other  relevant terms. The  number of feature  films that  a
particular  theater exhibits  depends upon  its policy  of program  changes, the
competitive conditions in  its area and  the quality and  appeal of the  feature
films  available to it. WB competes with all other distributors for playing time
in theaters.
 
     WB has entered  into distribution  servicing agreements  with Morgan  Creek
Productions  Inc. and its affiliates ('Morgan  Creek'), pursuant to which, among
other things, WB provides  domestic distribution services  for all Morgan  Creek
pictures  through  June  1998,  and certain  foreign  distribution  services for
selected pictures. In  1995, WB released  'Ace Ventura II:  When Nature  Calls,'
starring  Jim Carrey, under this arrangement. Among the releases anticipated for
1996 is 'Diabolique,' starring Sharon Stone.
 
     An affiliate of  WB is a  party to long-term  distribution agreements  with
Monarchy  Enterprises  C.V.  and  its  affiliate,  Regency  Entertainment U.S.A.
(collectively 'Monarchy/Regency'),  as well  as with  Le Studio  Canal Plus  and
Alcor  Film for the distribution of  major motion pictures involving an expected
total production outlay in  excess of $200 million.  Arnon Milchan produces  the
pictures    for   Monarchy/Regency   with    funding   provided   primarily   by
Monarchy/Regency. The WB affiliate  makes a distribution  advance (which it  has
the  right to recoup, together with its  distribution fee) equal to a portion of
the production budget of each film, and it also advances all necessary marketing
and distribution costs for the films. WB has acquired all distribution rights in
the United States and Canada, and substantially all international theatrical and
home video rights  to these  motion pictures.  In 1995,  WB released  'Copycat,'
starring  Sigourney Weaver and  Holly Hunter, under  this arrangement. Among the
releases anticipated for 1996 is 'Bogus,' starring Whoopi Goldberg and  directed
by Norman Jewison. It is anticipated that four or five pictures per year will be
produced during the approximately five-year production term of the agreements.
 
     During  1995,  David Geffen  and TWE  agreed to  wind-up the  operations of
Geffen Pictures, a joint venture of TWE and The David Geffen Company. The  final
two  pictures  produced by  Geffen  Pictures, 'Michael  Collins,'  starring Liam
Neeson and Julia Roberts, and 'Joe's Apartment,' will be released by WB in 1996.
WB has selected certain of  Geffen Pictures' projects for continued  development
by WB with David Geffen as producer.
 
     During  1995, WB released 26 motion  pictures for theatrical exhibition, of
which 12 were produced by others. Among these 26 motion pictures, the  following
have  produced substantial  gross receipts:  'Batman Forever,'  'Outbreak,' 'The
Bridges of Madison County,' 'Ace Ventura II: When Nature Calls' and 'Under Seige
II: Dark  Territory.'  Significant  revenues  were also  generated  in  1995  by
pictures originally released in 1994, including 'Disclosure' and 'Interview with
the Vampire.'
 
     During  1996,  WB  currently  expects  to  release  domestically  24 motion
pictures, of  which  nine will  be  produced by  others.  In addition  to  those
previously  mentioned, such  motion pictures include:  'Eraser,' starring Arnold
Schwarzenegger, 'Mars Attacks,'  directed by Tim  Burton, 'Space Jam,'  starring
Michael Jordan, 'A Time to Kill,' starring Sandra Bullock and Samuel L. Jackson,
'Tin Cup,' starring Kevin Costner, 'The Glimmer Man,' starring Steven Seagal and
Keenan  Ivory Wayans, 'Sleepers,'  directed by Barry  Levinson and starring Brad
Pitt, Robert DeNiro and Dustin Hoffman, 'Rosewood,' directed by John  Singleton,
'My  Fellow Americans,' starring  Jack Lemmon and James  Garner and 'Twister,' a
co-production with MCA.
 
     Warner Bros.  Feature  Animation operates  two  animation studios,  one  in
Glendale, California, and the other in London, England, and plans to produce its
first  fully animated feature  film for release  in November 1997. Additionally,
the division is providing animation services on 'Space Jam,' a combination  live
action/animated  film scheduled for  release in November  1996. The division has
numerous projects in development for production and release in subsequent years.
 
     Warner Digital  Studios is  a recently  formed division  that oversees  the
creation  and control of Warner Bros.' digital visual effects, which effects are
an integral part of the production of feature films.
 
TELEVISION
 
     WB, through  its  television  production  and  distribution  divisions  and
various   contractual  arrangements,  is  the  leading  supplier  of  television
programming  in  the  world.  These  WB  divisions  and  suppliers  produce  and
distribute  filmed  entertainment  for television  (including  comedy  and drama
series, animation shows,
 
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made-for-television movies, mini-series  and first-run syndication  programming)
for  initial  exhibition  on networks,  local  stations or  cable  systems. They
include the  wholly owned  Warner Bros.  Television Productions  ('Warner  Bros.
Television'), Telepictures Productions ('Telepictures'), Warner Bros. Television
Animation, Warner Bros. Domestic Television Distribution ('WBDTD'), Telepictures
Distribution,  Warner Bros. International  Television Distribution ('WBITD') and
Warner  Bros.  International  Channels   divisions,  the  joint  ventures   Time
Telepictures  Television and  Quincy Jones/David  Salzman Entertainment Company,
and contractual arrangements with the Prime Time Entertainment Network  ('PTEN')
and Witt-Thomas-Harris Productions ('Witt-Thomas').
 
     WB  Television  series  for  the  1995-96  broadcast  season  include:  the
highly-rated 'ER' and 'Friends' (each in its second season), 'Murphy Brown'  (in
its  eighth season), 'Family Matters' (in its seventh season), 'Sisters' (in its
sixth season), 'Step by Step' (in  its fifth season), 'Hangin' with Mr.  Cooper'
(in  its fourth season), 'Kung Fu: The Legend Continues' (in its fourth season),
'Living Single' and 'Lois & Clark: The New Adventures of Superman' (each in  its
third  season), 'Hope & Gloria,' 'The Parent 'Hood' and 'The Wayans Bros.' (each
in its second season)  and 'The Drew Carey  Show,' 'John Grisham's The  Client,'
'Kirk,'  'High Society' and  'Too Something' (each in  its first season). During
1996, Warner Bros. Television will also present numerous movies and  mini-series
including,  'Stephen King's The  Shining' (a 6-hour  mini-series) and 'The Thorn
Birds: The Missing Years,' from the Wolper Organization.
 
     Telepictures specializes in reality  and reality-based series and  specials
for  the  first-run  syndication  market.  For  the  1995-96  television season,
Telepictures returned the nationally syndicated 'Jenny Jones' for a fifth season
and,  on  June  10,   1996,  will  launch  a   talk/variety  series  hosted   by
actress/comedian  Rosie O'Donnell.  Through a  joint venture,  Time Telepictures
Television produced the  second season  of the six-day-a-week  pop culture  news
magazine 'EXTRA.'
 
     Warner   Bros.  Television  Animation  is  responsible  for  the  creation,
development and production of contemporary animation as well as for the creative
use and production of WB's classic animation properties for all television media
worldwide.  Warner  Bros.  Television  Animation  currently  supplies   animated
programming  to the Fox Children's Network, ABC Television Network, Nickelodeon,
as well as providing five series to The WB's new children's programming service,
Kids' WB!, which debuted in September 1995. Commencing in September 1996, Warner
Bros. Television Animation will supply eight series to Kids' WB!.
 
     PTEN,  a  consortium  of  leading  television  stations,  offers  primetime
first-run programs that are exclusively supplied by WBDTD. The 1995-96 season of
PTEN includes the fourth season of 'Kung Fu: The Legend Continues' and the third
season of 'Babylon 5.'
 
     WB and Witt-Thomas have an exclusive, long-term feature film and television
production and distribution agreement. The agreement provides for Witt-Thomas to
exclusively  create, develop and produce all  forms of television for all media.
For the  1995-96  season,  the team  produced  the  third season  of  'The  John
Larroquette Show' and three new comedies 'Minor Adjustments,' 'Local Heroes' and
'My Guys' (the latter two for mid-season debuts).
 
     WBDTD  is one of the industry's leading domestic distributors of television
programming. The division has over 3,800 hours in active domestic syndication; a
substantial portion of this programming is produced by WB's television divisions
and ventures.  The  primary  focus of  WBDTD  is  to launch  and  support  major
off-network series and high profile first-run syndication strips.
 
     Telepictures  Distribution  was  created  in  June  1995  as  a  television
syndication operation that distributes  original, general interest programs  for
the  first-run  syndication market,  as well  as the  second licensing  cycle of
selected off-network product from WBDTD's library.
 
     WBITD is  responsible for  expanding WB's  global presence  in  television,
handling  the  full  breadth  of  distribution  services  to  the  international
television marketplace,  establishing and  managing strategic  global  alliances
that  include co-producing and  distributing programs that  qualify for European
Community (EC) content. WBITD is  the world's largest distributor of  television
programming.  It licenses more  than 25,000 hours  of television programming and
feature films, dubbed or subtitled in more than 40 languages, to telecasters  in
more   than  175  countries.  The  division  handles  the  distribution  to  the
international television marketplace
 
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(including,  broadcast,  pay  cable,   basic  cable,  satellite,   pay-per-view,
video-on-demand  and digital platforms) of all of the product produced by the WB
television divisions and ventures and WB feature films, among others.
 
     Warner Bros. International Channels  oversees the programming,  development
and  operation of branded satellite-delivered cable programming services in both
mature and emerging broadcast markets throughout the world. The first,  WBTV-The
Warner Channel, debuted on September 30, 1995 in Latin America and the Caribbean
Basin  to more than  800,000 subscribers, with  Brazil added in  early 1996. The
24-hour-a-day, family-oriented service  is a  joint venture  of WB  and HBO  Ole
Partners,  and utilizes the  cable distribution expertise  and facilities of HBO
Ole. In alliance with Home Box Office and other major motion picture studios, WB
participates as a  partner in five  other 24-hour pay  television services:  HBO
Asia,  HBO Brasil, HBO Ole, Sony Entertainment Television and the music channel,
YA TV.
 
     WB's backlog, representing the  amount of future  revenue not yet  recorded
from  cash contracts for the licensing  of theatrical and television product for
pay cable, network, basic cable  and syndicated television exhibition,  amounted
to  $1.056 billion at December 31, 1995 compared to $852 million at December 31,
1994 (including  amounts relating  to Programming-HBO  of $175  million at  each
date). The backlog excludes advertising barter contracts.
 
THE WB TELEVISION NETWORK
 
     The  WB  Television  Network completed  its  first full  year  of broadcast
operations in  January  1996. Combining  the  WB's current  broadcast  affiliate
line-up  of 95 stations with the reach of Tribune Broadcasting Company's ('TBC')
WGN Superstation, The  WB's national  coverage is more  than 80%  of all  United
States television households. In addition to a Wednesday night primetime line-up
that  includes four  half-hour comedies:  'Sister, Sister,'  'The Parent 'Hood,'
'The Wayans Bros.'  and 'Unhappily  Ever After,' The  WB launched  a three  hour
Sunday  night slate of  prime time programming in  September 1995 that currently
includes four half-hour comedies: 'Steven Spielberg Presents Pinky & the Brain,'
'Simon,' 'Sister, Sister,' 'Kirk'  and a one hour  drama entitled 'Savannah.'  A
third  night of  prime time  programming is scheduled  to be  added in September
1996, and it is currently planned  that an additional night of programming  will
be  added  each year  thereafter. The  WB  prime time  program philosophy  is to
deliver family-oriented  programming  that appeals  to  the greatest  number  of
household viewers.
 
     Kids'  WB! children's programming premiered in September 1995 with six half
hours on Saturday morning and two half-hour weekday strips. The Saturday morning
program  block  includes  'Freakazoid,'  a  new  animated  series  from   Steven
Spielberg,  and  new  episodes  of 'Steven  Spielberg  Presents  Animaniacs' and
'Steven Spielberg Presents Pinky  & the Brain.' In  addition, the morning  block
includes  new episodes of 'Sylvester & Tweety Mysteries' and 'Earthworm Jim.' On
weekdays, Kids' WB! continues to offer Warner Bros. classic animation as well as
previously produced episodes of 'Animaniacs.'  In September 1996, an  additional
hour  of animated programming will be added  to the weekend line-up. Included in
this new  hour of  programming is  a  new version  of 'Superman,'  currently  in
production with Warner Bros. Television Animation.
 
     In  August 1995, TBC exercised an option to obtain an ownership interest in
The WB. TBC now owns 11.125% of The WB and has options that are exercisable over
the next several years and that could increase TBC's ownership to 22.25% of  the
network. Key employees of The WB hold an 11% interest in the network.
 
HOME VIDEO
 
     Through  its Warner  Home Video division  ('WHV'), WB  distributes for home
video use pre-recorded  videocassettes and laser  optical videodiscs  containing
the  filmed  entertainment  product  of WB.  In  addition,  WHV  distributes (or
services the distribution of) the entertainment product of other companies  from
which  it  has  acquired  home  video  distribution  or  servicing  rights. Such
companies include Metro Goldwyn Mayer/United Artists, TBS, Regency Pictures  and
Morgan  Creek Productions  (in the United  States and  in selected international
markets).  In  1996,  WHV  began  distributing  the  entertainment  product   of
WarnerVision, a WMG company that specializes in children's and fitness videos.
 
     During  1995,  WHV released  seven titles  into  the North  American rental
market whose sales  exceeded 300,000 units  each: 'Disclosure,' 'Interview  with
the Vampire,' 'Outbreak,' 'The Specialist,' 'Species,' 'Just
 
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Cause'  and  'Natural  Born  Killers.'  Internationally,  the  following  titles
generated substantial home video revenue in 1995: 'Interview with the  Vampire,'
'Maverick,'   'Disclosure,'  'The  Specialist,'  'The  Client'  and  'Outbreak.'
Additionally, the Warner Bros. Family  Entertainment label was enhanced  through
the  affordably-priced  North  American video  releases  of 'Free  Willy  2: The
Adventure Home,' 'Richie Rich,' 'Little  Giants,' 'A Little Princess,' 'Born  to
be  Wild' and 'A Troll in  Central Park,' which generated combined videocassette
sales in excess of 17 million  units. Also, WHV released 'Batman Forever,'  and,
under  the  MGM/UA  family  entertainment label,  'Pebble  and  the  Penguin' at
affordable prices, generating combined sales of over 10 million units. Based  on
this  experience, WHV will  continue the video  release of certain 'blockbuster'
theatrical  releases  and  family  entertainment  programming  on  a  direct  to
sell-through basis.
 
     WHV  sells  its product  in the  United States  and in  major international
territories through  its  own  sales force,  with  warehousing  and  fulfillment
handled  by divisions of  WMG and third parties.  In some international markets,
WHV's product  is distributed  through licensees.  All product  is  manufactured
under contract with independent duplicators and replicators.
 
     In   December  1995,  a  consortium  of  nine  major  consumer  electronics
manufacturers,  including  Sony  Corp.  and  Philips  Electronics  NV,  who  had
previously  announced that  they were  developing a  similar product  based on a
separate competing format, announced agreement on a unified standard for a  high
density  digital optical technology that is  capable of storing large volumes of
digitized information --  enough storage  capacity for  two full-length  feature
films  on a double-sided 0.6mm bonded disc.  The unified standard has been named
the 'digital  versatile  disc' or  'DVD'.  Certain members  of  the  consortium,
including Toshiba, have announced their intention to introduce in late summer of
1996  a new  generation of  digital video  disc players  utilizing DVD  for home
viewing by  consumers of  motion  pictures. The  DVD technology  offers  picture
quality  significantly  superior  to  existing technology,  as  well  as premium
features such as multiple language soundtracks.  If the new DVD delivery  medium
is adopted by consumers, and there can be no assurance at this time that it will
be,  WHV anticipates being able to benefit by releasing first-run feature motion
pictures in the new format, as well as re-releasing the extensive WHV  catalogue
of feature motion pictures.
 
CONSUMER PRODUCTS
 
     Warner  Bros.  Consumer  Products,  another  division  of  WB,  through its
licensing division ('WBCP Licensing'), acts as an agent for owners of copyrights
and trademarks in  the consumer  products marketplace.  WBCP Licensing  licenses
rights  to names, photographs, likenesses,  logos and similar representations or
endorsements with  respect  to the  theatrical  motion pictures  and  television
series  produced or  distributed by  WB, including  those featuring  the cartoon
characters owned by  DC Comics.  WBCP Licensing  operates in  both domestic  and
international  markets, and meets  with active competition in  all phases of its
activities. In 1995, WBCP Licensing  continued its major licensing programs  for
'Looney  Tunes,' Steven Spielberg's 'Tiny Toon Adventures,' 'Animaniacs' and the
animated television series 'Adventures of  Batman and Robin.' In addition,  WBCP
Licensing  conducted a  major licensing  program for  the new  theatrical motion
picture 'Batman Forever,' and began a licensing program for the 1996  theatrical
license of the motion picture 'Space Jam.'
 
WARNER BROS. INTERACTIVE ENTERTAINMENT
 
     Warner  Bros.  Interactive Entertainment  ('WBIE') is  a new  division that
licenses,  develops  and  produces  interactive  entertainment  and  educational
programming  based  on  WB-owned  or controlled  properties.  During  1995, WBIE
entered into  a number  of licensing  agreements for  interactive  entertainment
products  (e.g., video games, pinball games and handheld games), and initiated a
major interactive game licensing program for  'Space Jam.' WBIE has also  formed
an  alliance  with Acclaim  Entertainment, Inc.  to jointly  publish interactive
entertainment software based on three WB feature films, including 'Space Jam.'
 
WARNER BROS. STUDIO STORES
 
     In 1995,  the retail  division  of Warner  Bros. Consumer  Products  ('WBCP
Retail')  continued its expansion  with the opening of  22 additional outlets in
the United States. By  the end of 1995,  WBCP Retail had opened  a total of  133
Warner  Bros.  Studio  Stores,  122  of which  are  located  in  select shopping
locations throughout the
 
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United States, 10 of which are located in the United Kingdom and one of which is
located in Germany. In 1996, WBCP  Retail plans to open 10-15 additional  stores
in  the United States. Two franchised Warner  Bros. Studio Stores were opened in
each of Hong Kong and Singapore during 1995. During 1996, WBCP Retail  currently
plans  to open two  franchised stores in  Hong Kong, three  franchised stores in
Japan and two franchised stores in Australia. Additional agreements to franchise
Warner Bros. Studio Stores throughout countries in the Asia Pacific and European
regions are scheduled to be completed during 1996.
 
WARNER BROS. ONLINE
 
     Warner Bros.  Online ('WBOL'),  a new  division created  in 1995,  produces
informational, promotional and entertainment programming for online services and
sites  accessible through the World  Wide Web on the  Internet. In January 1996,
WBOL began providing a new multiplex entertainment center on the World Wide Web,
which  includes  a  wide  variety  of  original,  made-for-online  entertainment
activities   for  children  and  adults.   The  site  offers  entertainment  and
information based  on popular  Warner  Bros. movies  and television  shows,  WMG
recording  artists and Warner  Bros. cartoon and DC  Comics characters. WBOL, in
consultation with WBCP Retail, has created and launched the Warner Bros.  Studio
Store  site on  the World  Wide Web.  Internet shoppers  visiting this  site can
select and purchase Warner Bros. and DC Comics products by placing orders  while
online. WBOL is continuing its affiliation with America Online to provide a wide
range  of programming,  including original online  content specifically designed
for America Online.
 
THEATERS
 
     Through its Warner  Bros. International Theatres  division, WB operates  45
multiplex  cinema  complexes with  363 screens  in  seven foreign  countries. WB
operates 12 theaters in  the United Kingdom, two  in Germany and, through  joint
ventures,  18 theaters in Australia,  two in Denmark, three  in Portugal, one in
Spain and seven in Japan. Directly and through joint ventures, WB plans to  open
18 new multiplex cinemas in 1996: five in the United Kingdom, five in Australia,
two in Italy, two in Germany, three in Japan and one in Spain.
 
WARNER BROS. THEME PARKS
 
     WB,  through joint ventures with certain Australian entities (including one
which is 34.25% owned  by WB), owns  and operates Sea World  of Australia and  a
400-acre  movie studio  and movie-related theme  park named  'Warner Bros. Movie
World' as  well  as a  water  park complex,  all  near Brisbane,  Australia.  In
addition,  WB and a German partner are completing construction of a new regional
theme park  and studio  complex in  the  Rhine/Ruhr area  of Germany,  which  is
scheduled  to open in the summer of 1996. The park and studio complex is modeled
after Warner Bros. Movie  World in Australia. WB  has also recently announced  a
joint  venture with MAI plc.  ('MAI'), a United Kingdom  media company, to study
the feasibility of the development and  construction of a theme park and  studio
complex near London.
 
SIX FLAGS THEME PARKS
 
     In  June  1995,  TWE  sold  51% of  its  ownership  interest  in  Six Flags
Entertainment Corporation  ('SFEC')  to  a  group of  investors  led  by  Boston
Ventures  Management, Inc., a  private investment management  firm. Prior to the
sale, TWE's ownership interest in SFEC was 100%. SFEC indirectly owns all of the
outstanding stock of Six Flags Theme Parks Inc. ('Six Flags').
 
     Six Flags operates 11 theme parks in seven locations, making it the  second
largest operator of theme parks in the United States and the leading operator of
national  system regional  theme parks.  Six Flags's  theme parks  include seven
major ride-based theme parks, as well as three separately-gated water parks  and
one  wildlife safari park. Each of the theme parks is located in or near a major
metropolitan area. All of the theme parks operated by Six Flags are owned by Six
Flags, except Six Flags Over Texas  and Six Flags Over Georgia (the  'Co-Venture
Parks').  The Co-Venture  Parks are owned  by limited  partnerships, the limited
partners of which are unaffiliated limited partnerships and the general partners
of  which  are   wholly  owned   subsidiaries  of  Six   Flags  (the   'Managing
Subsidiaries').  The  Managing  Subsidiaries have  sole  responsibility  for the
operation and  management  of  the  Co-Venture  Parks  pursuant  to  partnership
agreements.  The partnership agreements provide that  Six Flags will operate the
Co-Venture Parks through 1997.
 
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     In March 1996, Six Flags completed arrangements to manage the Fiesta  Texas
theme  park located in  San Antonio, Texas,  commencing in the  1996 season. The
park is owned by an affiliate of United Service Automobile Association  ('USAA')
and  leased to  a partnership owned  by Six  Flags and USAA.  In connection with
these arrangements, Six Flags also acquired  an option to purchase the park  and
USAA's interest in the partnership.
 
REGULATION AND LEGISLATION
 
     On  February 8,  1996, President  Clinton signed  into law  a comprehensive
reform of  the nation's  communications  laws, entitled  the  Telecommunications
Competition  and Deregulation Act  of 1996 (the  '1996 Telecommunications Act'),
which substantially revises the  Communications Act of 1934,  as amended by  the
Cable  Television Consumer  Protection and  Competition Act  of 1992  (the '1992
Cable Act'). The  new law contains  certain provisions relating  to violent  and
sexually  explicit  programming. First,  the  statute requires  manufacturers to
build television sets with the capability of blocking certain coded  programming
(the  so-called 'V-chip').  The effective  date for  any FCC  rule regarding the
manufacture of such sets may not occur before  March 8, 1998 and may occur at  a
later  date  if, after  consultation with  the  manufacturing industry,  the FCC
determines that more  time is  needed. Second, the  1996 Telecommunications  Act
gives  the  cable  and broadcasting  industries  one year  to  develop voluntary
ratings for video programming containing violence, sex and indecent content  and
to  agree  voluntarily to  transmit signals  containing such  ratings. Principal
representatives from both  industries have  announced that they  will meet  this
timetable.  However, if  the industries fail  to reach a  consensus, the statute
gives the FCC the  authority to establish an  advisory committee to recommend  a
ratings  system and to prescribe  rules requiring transmission of  a rating if a
distributor has decided to rate a program.
 
     The 1996 Telecommunications  Act eliminates the  numerical restrictions  on
the number of television stations that one entity may own and increases from 25%
to  35% the percentage  of the national  audience that one  entity is allowed to
reach. In addition, the FCC  is directed to revise  its dual network rule  which
prohibits  a TV station from affiliating with  an entity maintaining two or more
networks of  television  broadcast  stations.  The  FCC  must  now  permit  such
affiliations  unless certain  limited circumstances  pertain. The  FCC must also
amend its rules to permit common ownership or control of a broadcast network and
cable systems.
 
     During 1993, the FCC revised its rules to allow the three major  television
networks  to  acquire financial  interests  and syndication  rights  in programs
produced for a  network by outside  producers such as  WB and to  engage in  the
syndication  of such programs abroad. The FCC continued to prohibit the networks
from actively  syndicating  any  programs  domestically  --  both  'off-network'
(produced initially for network distribution) and 'first-run' (produced directly
for  syndication).  By the  terms  of the  FCC's  1993 decision,  however, those
remaining restrictions expired in 1995.
 
     An FCC  regulation also  limits to  three the  number of  hours of  network
(including  off-network) programs  that television stations  that are affiliated
with the networks and  located in the  top 50 markets  may broadcast during  the
four-hour  prime time  period. In  such markets, the  fourth hour  of prime time
programming currently consists largely of first-run syndication programming.  In
July  1995, the  FCC issued a  decision to  eliminate the rule  after a one-year
transition period, which ends on August 30, 1996. During this transition period,
network affiliates are  permitted to  purchase off-network  programming for  the
fall 1996 television season.
 
     WB  cannot at this time predict the  effect on its television businesses of
the passage of  the 1996  Telecommunications Act  and the  changes, or  proposed
changes, to the FCC rules discussed above.
 
COMPETITION
 
     The  production and distribution of  theatrical motion pictures, television
and animation  product  and  videocassettes/videodiscs  are  highly  competitive
businesses,  as each  competes with the  other, as  well as with  other forms of
entertainment and  leisure time  activities (including  video games  and  online
services  such as the Internet). Furthermore,  there is increased competition in
the television industry evidenced by the increasing number and variety of  basic
cable  and pay  television services now  available. There  is active competition
among
 
                                      I-19
 
<PAGE>
<PAGE>
all production  companies in  these industries  for the  services of  producers,
directors,  actors and  others and for  the acquisition  of literary properties.
With respect to  the distribution  of television product,  there is  significant
competition  from  independent  producers  and  distributors  as  well  as major
studios. Revenues for filmed entertainment  product depend in part upon  general
economic  conditions, but the competitive position  of a producer or distributor
is still  greatly  affected by  the  quality of,  and  public response  to,  the
entertainment  product  it makes  available to  the marketplace.  The television
network industry is extremely competitive  as networks seek to attract  audience
share  and television stations  for affiliation, and  obtain advertising revenue
and distribution rights to television  programming. There is strong  competition
throughout the home video industry, both from home video subsidiaries of several
major  motion picture studios and from independent companies. WB competes in its
character merchandising and  other licensing  and retail  activities with  other
licensors  and retailers of character, brand and celebrity names. WB's operation
of theaters  is  subject to  varying  degrees  of competition  with  respect  to
obtaining new theater sites and attracting patrons, including competition from a
number  of motion picture distribution methods,  such as pay television and home
video systems. Competition within the theme  park industry exists on a  regional
rather  than a national basis. Principal  factors relating to competition within
the theme park industry generally  include the uniqueness and perceived  quality
of  the rides and attractions  in a particular park, ease  of access to the park
from major metropolitan areas, the atmosphere and cleanliness of a park, and the
quality of its food and entertainment.
 
PROGRAMMING -- HBO DIVISION
 
GENERAL
 
     The Company's interest in the programming business is principally conducted
through TWE's  Home  Box Office  division  ('Home Box  Office').  The  principal
businesses  of Home  Box Office  are the  programming and  marketing of  two pay
television programming  services, HBO  and Cinemax.  HBO's programming  includes
commercial-free,   uncut  feature  motion  pictures,  sporting  events,  special
entertainment events  (such as  concerts, comedy  shows and  documentaries)  and
motion  pictures produced by or for HBO.  Cinemax offers a broad range of motion
pictures, including  classic,  family, action-adventure,  foreign  and  recently
released feature films, as well as documentaries.
 
     At  December 31, 1995, there  were approximately 20.8 million subscriptions
to HBO, compared to 19.2  million subscriptions at year-end 1994,  approximately
8.9  million subscriptions to Cinemax, compared  to 7.8 million subscriptions at
year-end 1994.  The  overall gain  of  2.7  million subscriptions  for  the  two
services represents the largest annual increase in Home Box Office subscriptions
since 1983.
 
AFFILIATES
 
     Home  Box  Office's  pay television  services  are  principally distributed
through cable television systems  with which Home Box  Office has a  contractual
relationship.   The  HBO  and  Cinemax   services  are  transmitted  via  C-Band
communications satellites  to these  cable  television systems,  as well  as  to
multi-point microwave systems with which HBO also has a contractual relationship
(both,  'affiliates'). These affiliates are generally charged a monthly fee on a
per subscription basis for each of the services carried. Subscribers to HBO  and
Cinemax  are  then billed  monthly  by their  local  affiliate for  each service
purchased and are free to cancel a  service at any time. Individual dish  owners
wishing  to  subscribe to  HBO  or Cinemax  as delivered  by  one of  the C-Band
satellites must  purchase a  consumer decoder  and arrange  for its  activation.
Subscriptions  for such direct broadcast satellite ('DBS') viewing are available
through cable television system operators, HBO Direct Inc., a subsidiary of TWE,
satellite equipment dealers or unaffiliated program packagers. Home Box  Office,
through  its affiliation  agreements with United  States Satellite Broadcasting,
Inc. ('USSB') and Primestar Partners L.P.  (in which TWE holds a 31%  interest),
also  makes the HBO and Cinemax services  available by means of high-powered and
mid-powered Ku-Band  frequency  satellites,  respectively, to  DBS  viewers  who
obtain  subscriptions from such  distributors. In 1995,  Home Box Office entered
into an affiliation agreement with Echostar Satellite Corp., another provider of
high-powered Ku-Band DBS distribution for HBO and Cinemax.
 
                                      I-20
 
<PAGE>
<PAGE>
     Home Box Office formally introduced in 1993 a new 'multichannel' format for
the delivery  of HBO  and  Cinemax over  multiple channels  providing  differing
schedules  of  HBO  and  Cinemax  programming.  As  of  year-end  1995,  the new
multi-channel format was received by  approximately 8.7 million HBO  subscribers
and 3.4 million Cinemax subscribers, including all DBS subscribers.
 
     As a result of acquisitions and mergers in the cable television industry in
recent  years, the percentage of Home  Box Office's revenue from affiliates that
are large multiple  system cable  operators has  increased and  Home Box  Office
anticipates  that  the  consolidation  among  cable  television  operators  will
continue. As of  December 31,  1995, the  largest single  multiple system  cable
operator  with which  Home Box  Office does business  is TCI.  Home Box Office's
affiliation with TCI accounted for approximately 20% of HBO and Cinemax combined
subscriptions. As of December 31, 1995,  Time Warner Cable (see 'Cable  Division
Video')  accounted for  an additional  14%. Home  Box Office  attempts to assure
itself of continuity in its relationships  with affiliates and has entered  into
multi-year  contracts with  certain of such  operators, including  TCI. Home Box
Office's agreements with its  cable affiliates are typically  for terms of  five
years.  Affiliation  agreements  with  some  larger  multiple  system operators,
including TCI, are for terms in excess  of five years. Although Home Box  Office
believes   the  prospects  of  continued  carriage  and  marketing  of  its  pay
programming services by the large cable operators  are good, the loss of one  or
more  of them as  distributors or effective  marketers of Home  Box Office's pay
cable television  services could  have a  material adverse  effect on  Home  Box
Office's business.
 
PROGRAMMING
 
     A  majority of  HBO's programming  and a large  portion of  that on Cinemax
consists of recently  released, uncut  and uncensored  feature motion  pictures.
Home Box Office's practice has been to negotiate licensing agreements of varying
duration  for such programming with major motion picture studios and independent
producers and  distributors. These  agreements  typically grant  pay  television
exhibition  rights to  recently released  and certain  older films  owned by the
particular studio,  producer or  distributor in  exchange for  a negotiated  fee
which  is a function of, among other things, HBO and Cinemax subscription levels
and the films' box office performances. Home Box Office competes with other  pay
cable,  basic cable and broadcast networks, among others, for the acquisition of
programming product.
 
     Home Box Office attempts to ensure access  to future movies in a number  of
ways.  In addition to its exhibition of movies distributed by WB and its regular
licensing agreements with numerous distributors, it has entered into  agreements
with  Sony Pictures  Entertainment, Inc.  ('Sony Pictures'),  Paramount Pictures
Corporation ('Paramount')  and Twentieth  Century Fox  Film Corporation  ('Fox')
pursuant  to  which Home  Box Office  has  acquired exclusive  and non-exclusive
rights to exhibit on its pay television services all or a substantial portion of
the films produced, acquired and/or released  by these entities during the  term
of  each agreement. Home Box Office  has also entered into non-exclusive license
agreements with  Fox, Paramount,  Sony Pictures  and MGM/UA  for older,  library
films.
 
     In  1995, Home  Box Office  entered into  an agreement  with DreamWorks SKG
pursuant to which Home  Box Office acquired exclusive  rights to exhibit on  its
pay television services films from this new entertainment company, as well as an
agreement with Orion Pictures Corporation for exclusive rights to certain of its
library films.
 
     HBO also exhibits made-for-pay television motion pictures that are produced
by  or for  Home Box  Office or one  of its  divisions or  by outside production
companies from which Home Box  Office licenses certain exclusive pay  television
and  other rights  (frequently including domestic  home video)  for a negotiated
fee. Besides  motion  pictures,  a  significant  portion  of  HBO's  programming
consists  of  dramatic and  comedy  specials, television  series,  family shows,
documentaries and other programs  that are produced  specifically for HBO.  Home
Box  Office  either  negotiates a  license  to  these programs  with  an outside
production company  or produces  the programs  itself, or  through a  production
services  entity, in which case all  rights are generally retained and exploited
by Home  Box Office.  Home Box  Office also  acquires exclusive  pay  television
rights  to  show certain  live and  delayed-broadcast  sporting events,  such as
boxing matches and Wimbledon,  and may also acquire  additional rights to  these
programs.  Cinemax's  programming  composition  has  recently  been  expanded to
include documentaries as  well as motion  pictures. In 1995,  the excellence  of
HBO's original programming was
 
                                      I-21
 
<PAGE>
<PAGE>
recognized  by, among other honors, 19 Emmy Awards, 27 CableACE Awards, 4 Golden
Globe Awards and a Peabody Award.
 
OTHER INTERESTS
 
     Home Box Office  acquires home  videocassette distribution  rights for  the
United  States and Canada for a number of theatrical and made-for-pay television
motion pictures, concerts and comedy shows that it has produced or licensed  for
pay television. HBO Video, a division of Home Box Office, exploits these rights.
Certain  aspects of the distribution of  videocassettes by HBO Video are carried
out pursuant to  a service arrangement  with WHV. In  late 1995, Savoy  Pictures
Entertainment,  Inc., a  major supplier of  theatrical motion  pictures for home
videocassette distribution by HBO Video, announced that it was withdrawing  from
the production and distribution of theatrical motion pictures.
 
     Time  Warner Sports ('TWS'), a division  of Home Box Office, operates TVKO,
an entity  that distributes  pay-per-view prize  fights and  other  pay-per-view
programming.  In  October 1995,  TWS closed  down the  operations of  its sports
licensing division pursuant to the sale  of that division's assets to  DelWilber
Associates, Inc.
 
     In  1995, HBO  Independent Productions  ('HBOIP'), a  division of  Home Box
Office, produced three series for broadcast  by the Fox network, 'Martin,'  'The
Last Frontier' and 'House of Buggin,' and entered into a 'first look' production
agreement for series with CBS. A division of Home Box Office owns a 50% interest
in,  and  is  the  managing  general  partner  of,  a  limited  partnership that
indirectly  acquired  the  assets  of   Citadel  Entertainment,  Inc.  and   its
affiliates.  The  remaining interest  is held  by  MAI. The  limited partnership
produces motion pictures and other programs  for broadcast, basic cable and  pay
television networks, including HBO.
 
     Home  Box  Office and  MAI are  also  co-owners of  both a  U.K. production
company that develops and  produces television programming principally  designed
for  the U.K. market and a joint  venture, ITEL, for the foreign distribution of
programming produced by Home Box Office and MAI.
 
     HBO Enterprises, a division of Home Box Office, distributes certain feature
length theatrical films and made-for-pay  television programming to other  cable
television  or pay-per-view  services. In addition,  HBO Enterprises distributes
Home Box  Office  original  programming  in  domestic  syndication  and  foreign
television   and  home  videocassettes  when  it  controls  such  rights.  WBITD
distributes in foreign markets certain television programming of HBO.
 
     HBO Ole, a partnership comprised of TWE, acting through its Home Box Office
and WB divisions, a Sony Pictures subsidiary and a Venezuelan company,  operates
two  Spanish-language  pay  television  motion  picture  services,  HBO  Ole and
Cinemax, which are currently  distributed in Central  and South America,  Mexico
and  the  Caribbean. HBO  Ole,  in partnership  with  a Brazilian  company, also
distributes a Portuguese-language pay television movie service in Brazil.
 
     Home Box  Office, through  a subsidiary  of TWE,  also operates  HBO  Asia,
together   with  its   partner,  a  subsidiary   of  Paramount.   HBO  Asia,  an
English-language, movie-based pay television service is currently distributed to
countries in  Southeast Asia,  including Singapore,  Thailand, the  Philippines,
Taiwan,  Indonesia, Malaysia,  Hong Kong,  Macau, China,  Bangladesh, Brunei and
Papua New Guinea.
 
     In addition to  its Latin  American and  Asian ventures,  Home Box  Office,
together with a partner, operates a Czech-language pay television motion picture
service  in the  Czech Republic.  Home Box  Office also  either operates  or has
licensing arrangements with pay television services in Hungary and New  Zealand.
See 'Cable Division -- Television -- Other Interests.'
 
     TWE  holds  an  8% interest  in  Crystal  Dynamics, Inc.,  a  developer and
distributor of video games.
 
     TWE holds a 50% interest  in Comedy Central, an advertiser-supported  basic
cable  television  service, which  features  comedy programming.  Comedy Central
launched in April 1991  and was available in  approximately 37 million homes  at
year-end 1995. HBO Downtown Productions, a division of Home Box Office, produces
comedy programming for exhibition on Comedy Central.
 
                                      I-22
 
<PAGE>
<PAGE>
     TWE   holds  a  58%   interest  in  E!   Entertainment  Television,  a  Los
Angeles-based advertiser-supported basic cable channel specializing in promoting
the entertainment industry and serving  approximately 37 million subscribers  as
of year-end 1995.
 
COMPETITION
 
     Home  Box  Office's businesses  face  strong competition.  HBO  and Cinemax
compete both for programming product and for the attention of television viewers
with  commercial  television  networks  and  independent  commercial  television
stations,  pay-per-view services and home video, as  well as other basic and pay
cable television services, some  of which have  exclusive contracts with  motion
picture studios and independent motion picture distributors.
 
     In  1993, an entity affiliated with TCI, the multiple system cable operator
accounting for 20% of HBO and  Cinemax combined subscribers, launched STARZ!,  a
pay  cable  television service  having exclusive  contracts with  several motion
picture studios. In February  1994, Viacom Inc., the  parent company of the  pay
cable  television  movie services  Showtime and  The  Movie Channel,  acquired a
controlling interest in  the parent company  of Paramount, with  which Home  Box
Office   currently  has  an  exclusive   license  agreement  covering  Paramount
theatrical releases through December 31, 1997.
 
     Home Box  Office's production  divisions compete  with other  producers  of
programs for broadcast networks, independent commercial television stations, and
basic  cable and  pay television  networks. Home  Box Office  also competes with
other companies engaged in the distribution or exhibition of motion pictures and
with other communications media and  entertainment and information sources.  See
'Regulation and Legislation.'
 
REGULATION AND LEGISLATION
 
     The  1992  Cable  Act,  among other  things,  imposes  certain requirements
concerning the wholesale rates  that Home Box Office  may charge its  affiliates
and  the  means by  which  Home Box  Office  may make  its  programming services
available for subscription  through distribution technologies  other than  cable
television.  In April 1993,  the FCC released  regulations designed to implement
these provisions  of  the  1992  Cable  Act,  generally  prohibiting  vertically
integrated   programmers  in  which  cable  companies   hold  a  5%  or  greater
attributable interest,  which include  the program  services owned  by Home  Box
Office,  from  offering  different  price,  terms,  or  conditions  to competing
multichannel video programming distributors (which includes, but is not  limited
to,  cable, multichannel  multipoint distribution services  ('MMDS' or 'wireless
cable'), and DBS satellite distributors) in  the geographic areas in which  they
compete, unless the differential is justified by certain permissible factors set
forth in the regulations. These permissible justifications include the different
costs  of  delivering  the  programming  to  the  distributor, creditworthiness,
financial  stability,  character,  technical  factors,  differences  related  to
volume,  penetration, channel  positioning, promotional  advertising, prepayment
discounts, retail pricing, and contract  duration. The rules also place  certain
restrictions  on the ability  of vertically integrated  programmers such as Home
Box  Office  to  enter  into  exclusive  distribution  arrangements  with  cable
operators  (although  exclusive  arrangements  with  non-cable  distributors are
permissible). Although subscriptions to HBO  and Cinemax services are  currently
provided  by means of  a number of different  technologies including cable, MMDS
and DBS, the 1992 Cable Act and the FCC's implementing regulations could have  a
material adverse effect on Home Box Office's business. In December 1994, the FCC
substantially  affirmed these rules  on reconsideration, and  determined that it
has authority to award monetary damages for violations, but that no such  remedy
is necessary at this time. See 'Cable Division Regulation and Legislation.'
 
     The 1996 Telecommunications Act contains provisions concerning manufacturer
insertion  of a 'V-chip'  into television sets and  industry implementation of a
ratings system for  violent, sexually  explicit and  indecent programming.  (See
'Filmed  Entertainment Division -- Television.')  Home Box Office cannot predict
at this time the effect of this legislation on its business.
 
     In November  1994,  the  FCC, in  its  Telephone  Company-Cable  Television
Cross-Ownership  proceeding,  permitted telephone  companies to  own programmers
such as Home Box Office. Thus, telephone companies are free to produce,  package
and  distribute  video  programming  to unaffiliated  cable  operators  or other
multichannel
 
                                      I-23
 
<PAGE>
<PAGE>
video programming  distributors.  Such telephone  company  programming  services
might  compete with  Home Box Office.  Certain telephone  companies have already
formed such ventures  with individuals  or entities with  experience in  program
production.  In  addition,  the 1996  Telecommunications  Act  permits telephone
companies to  provide video  programming services  (whether programmed  by  such
telephone  companies or by third parties such as HBO) directly to customers both
within and outside their telephone service areas. Such distribution may be on  a
common   carrier  basis,  which  would  be  regulated  under  Title  II  of  the
Communications Act;  as a  cable television  service, which  would be  regulated
under Title VI; or under a new hybrid service called an 'Open Video System,' for
which the FCC must develop a regulatory regime by August 8, 1996.
 
     In   November  1994,  the  FCC  also  released  a  decision  in  its  Sixth
Reconsideration,  Fifth  Report  and  Order,  and  Seventh  Notice  of  Proposed
Rulemaking  concluding  that  it  had  jurisdiction  to  regulate  the  rates of
discounted packages of  pay services  that were also  offered on  a per  channel
basis.  The FCC, however, ruled that the rates for such a collective offering of
pay services carried  on cable systems  as of  April 1, 1993  would be  presumed
reasonable  and would not  be regulated by the  FCC. The FCC,  at the same time,
reiterated its longstanding  position that  the 1992 Cable  Act prohibited  rate
regulation  of pay services, such as HBO  and other cable programming, when they
were offered  on a  per channel  basis. Home  Box Office  has asked  the FCC  to
reconsider that portion of its decision that would subject pay services, such as
HBO, to rate regulation when made part of a discounted package.
 
                               TELECOMMUNICATIONS
 
     The Company's Telecommunications business consists principally of interests
in cable television systems that are substantially managed by Time Warner Cable,
a  division of TWE, and wireline telephony operations that are conducted through
Time Warner Communications, a partnership wholly owned and controlled by TWE.
 
CABLE DIVISION -- TELEVISION
 
GENERAL
 
     The cable television operations of the Company, including the operations of
the TWE-A/N Partnership as well as the cable television systems acquired by  the
Company  in 1995 and early 1996, are substantially conducted and managed by Time
Warner Cable, a division of TWE.
 
     In January 1996,  following the  Company's acquisition of  CVI and  related
companies,  the  number  of  cable  subscribers  managed  by  Time  Warner Cable
increased to  approximately  11.7  million, geographically  concentrated  in  35
groupings  of more than 100,000 subscribers each. More than 55% of Time Warner's
Cable's subscribers  are  located  in  five states:  Florida,  New  York,  North
Carolina,  Ohio  and Texas.  Time Warner  Cable  is the  second-largest multiple
system cable operator in  the United States. Of  the approximately 11.7  million
subscribers,  approximately 9.5 million are in  systems owned by or through TWE,
including  approximately   4.5  million   in   the  TWE-A/N   Partnership,   and
approximately  2.2 million in systems owned by subsidiaries of the Company. Time
Warner Cable  manages or  provides certain  services to  substantially all  such
systems  and receives  a fee  from the  Company for  management of,  or services
provided to, such systems owned by subsidiaries of the Company.
 
     Through a network of  coaxial and fiber-optic  cables, the Company's  cable
television  system subscribers  generally receive 36  or more  channels of video
programming, including local broadcast  television signals, locally produced  or
originated  video  programming, distant  broadcast  television signals  (such as
WTBS, WWOR or  WGN), advertiser-supported  video programming (such  as ESPN  and
CNN)  and premium programming  services (such as HBO,  Cinemax, Showtime and The
Movie Channel). In most systems, Time Warner Cable also offers movies and  other
events  on  a  pay-per-view basis,  as  well  as audio  and  other entertainment
services.
 
     In December  1995, Time  Warner  Cable's Full  Service Network'tm'  in  its
suburban  Orlando, Florida  cable system was  connected to  4,000 customers. The
Full Service Network,  which began  servicing customers in  late 1994,  utilizes
fiber optics, digital compression, digital switching and storage devices, and is
currently providing
 
                                      I-24
 
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<PAGE>
video-on-demand  including movies,  interactive games  and interactive shopping.
Additional services continue to be developed and added.
 
     Pursuant to the Admission Agreement  with U S WEST,  TWE has agreed to  use
its  best efforts  to complete  upgrades to a  substantial portion  of its cable
systems by the end of 1998. Such upgrades include the broad deployment of fiber,
electronics and switching equipment. It is anticipated that substantial  capital
expenditures will be required to complete these upgrades.
 
     Time  Warner Cable  has grown  recently primarily as  a result  of the 1995
Cable Transactions, increases in the  number of subscribers to its  pre-existing
cable television systems and the development of geographically-clustered systems
through  the exchange or  purchase of existing  cable television systems. Future
growth in subscribers is expected  to come from the  exchange of certain of  its
unclustered  cable  television  systems  for  geographically  strategic systems,
increased penetration  of  existing  homes  passed  (through  rebuilds  and  the
introduction  of new  services), population  growth, and  extensions of existing
systems. During 1995 and  early 1996, the Company  acquired systems in  Alabama,
California,  Florida, Georgia,  Hawaii, Illinois,  Indiana, Kentucky, Louisiana,
Maryland, Michigan, Minnesota, Nebraska, New York, North Carolina, Ohio, Oregon,
Pennsylvania, South Carolina, Texas,  Wisconsin and Wyoming. These  acquisitions
were  funded  principally  through  the issuance  of  equity  securities  of the
Company, the  proceeds  from  Time  Warner Cable's  disposition  of  systems  in
Arkansas,  Colorado,  Louisiana and  Mississippi and  by  the exchange  of cable
television system  assets. These  transactions  resulted in  a net  increase  of
approximately  3.7 million basic subscribers under the management of Time Warner
Cable. For information  about the  Company's most recent  acquisitions of  cable
television systems in 1995 and early 1996, see pages I-1 through I-3.
 
     Most of the Company's cable television revenue is derived from monthly fees
paid  by subscribers for cable video programming services. Additional revenue is
generated  by  selling   time  on  cable   television  systems  for   commercial
advertisements  to  local, regional  and, in  some cases,  national advertisers.
Advertising time is sold as inserts into certain non-broadcast cable programming
and local  origination  programming  shown on  the  Company's  cable  television
systems.   In  addition,  pay-per-view  service  is  offered  in  certain  cable
television systems, which allows subscribers  to choose to view specific  movies
and  events, such  as concerts and  sporting events,  and to pay  on a per-event
basis. Certain cable  television systems also  sell DBS video  services such  as
Primestar, for a monthly fee.
 
PROGRAMMING
 
     Time  Warner Cable  provides certain  video programming  to its subscribers
pursuant to multi-year contracts with program  suppliers who are paid a  monthly
fee per subscriber. Many of these contracts contain price escalation provisions;
however,  in most cases the cable operator has a right to cancel the contract if
the supplier raises its price beyond agreed limits. The loss of any one supplier
would not have a material adverse effect on Time Warner Cable's operations.
 
SERVICE AND PROGRAMMING CHARGES
 
     Subscribers to the  Company's cable systems  generally are charged  monthly
fees  based on  the level  of service selected.  The monthly  prices for various
levels of cable television services (excluding services offered on a per-channel
or per-program basis) range generally from $5 to $25 for residential  customers.
Other  services  offered include  equipment rentals,  usually for  an additional
monthly fee. Systems  offering pay-per-view movies  generally charge between  $4
and  $6 per  movie, and  systems offering  pay-per-view events  generally charge
between $6  and $50,  depending on  the event.  A one-time  installation fee  is
generally charged for connecting subscribers to the cable television system.
 
     Subscribers  may  purchase  premium programming  services,  and  in certain
systems, other per-channel services, for an additional monthly fee for each such
service, with discounts generally  available for the purchase  of more than  one
service.
 
     Commercial  subscribers are  charged rates  for cable  programming services
that vary depending on the nature of the contract.
 
                                      I-25
 
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<PAGE>
REGULATION AND LEGISLATION
 
     The cable television  industry is  regulated by  the FCC,  some states  and
substantially  all  local  governments.  In  addition,  various  legislative and
regulatory proposals under consideration from time  to time by the Congress  and
various  federal  agencies  may  in  the  future  materially  affect  the  cable
television industry. The following discussion summarizes certain federal,  state
and local laws and regulations affecting cable television.
 
     Federal  Laws.   The Cable Communications  Policy Act of  1984 ('1984 Cable
Act'), the 1992 Cable Act and the 1996 Telecommunications Act are the  principal
federal statutes governing the cable industry. These statutes regulate the cable
industry,  among other things, with respect to:  (i) cable system rates for both
basic and certain  nonbasic services;  (ii) programming  access and  exclusivity
arrangements;  (iii)  access  to  cable  channels  by  unaffiliated  programming
services; (iv) leased access terms  and conditions; (v) horizontal and  vertical
ownership  of  cable  systems;  (vi) consumer  protection  and  customer service
requirements; (vii)  franchise  renewals;  (viii)  television  broadcast  signal
carriage  and retransmission consent;  (ix) technical standards;  (x) privacy of
customer  information;  (xi)  equal   employment  opportunity;  (xii)   consumer
electronics equipment compatibility; (xiii) obscene or indecent programming; and
(xiv)  requiring subscribers to  subscribe to tiers of  service other than basic
service as a  condition of purchasing  premium services. The  provisions of  the
1992  Cable Act  continue to have  an adverse  effect on the  operations of Time
Warner Cable.  The recently  enacted 1996  Telecommunications Act,  however,  is
expected  to  have a  favorable impact  on Time  Warner Cable's  business, e.g.,
through establishment of criteria and  a timetable for the ultimate  elimination
of regulation of certain cable rates. The 1996 Telecommunications Act also opens
up the cable television and telephone markets to additional competition.
 
     Federal Regulations.  The FCC, the principal federal regulatory agency with
jurisdiction  over  cable  television, has  promulgated  regulations  covering a
number of areas. The FCC has the authority to enforce these regulations  through
the  imposition of  substantial fines, the  issuance of cease  and desist orders
and/or the imposition of other administrative sanctions, such as the  revocation
of  FCC licenses needed to operate certain transmission facilities often used in
connection with cable  operations. A brief  summary of the  most significant  of
these federal regulations as adopted to date follows.
 
     Rate  Regulation.   Under the 1992  Cable Act, nearly  all cable television
systems are subject  to local rate  regulation of basic  service, pursuant to  a
formula  established by the  FCC and enforced  by local franchising authorities.
Additionally, the  legislation requires  the FCC  to review  rates for  nonbasic
service  tiers (other than  per-channel or per-program  services) in response to
complaints filed by  franchising authorities and/or  cable customers;  prohibits
cable  television systems from  requiring subscribers to  purchase service tiers
above basic  service in  order to  purchase  premium service  if the  system  is
technically  capable  of doing  so;  requires the  FCC  to adopt  regulations to
establish, on the  basis of actual  costs, the price  for installation of  cable
service and rental of cable equipment; and allows the FCC to impose restrictions
on  the  retiring  and rearrangement  of  basic services  under  certain limited
circumstances.
 
     Under the 1996 Telecommunications Act, regulation of nonbasic tier rates is
scheduled to terminate on March 31,  1999. The 1996 Telecommunications Act  also
expands  the definition of  'effective competition' to  cover situations where a
local telephone company  or its  affiliate, or any  multichannel video  provider
using telephone company facilities, offers comparable video service by any means
except  DBS. Regulation of both  basic and nonbasic tier  cable rates ceases for
any cable system subject to 'effective competition.'
 
     The FCC's  rate regulations  employ a  benchmark system  for measuring  the
reasonableness  of existing  basic and nonbasic  service rates, and  a price cap
formula for calculating  future rate increases.  Alternatively, cable  operators
have  the opportunity to make cost-of-service showings which, in some cases, may
justify rates  above the  applicable  benchmarks. The  rules also  require  that
charges  for cable-related equipment  (e.g., converter boxes  and remote control
devices) and installation be unbundled from  the provision of cable service  and
based  upon actual costs  plus a reasonable  profit. The 1996 Telecommunications
Act allows  cable  operators  to  aggregate most  cable  equipment  costs  on  a
franchise, system, regional or company level.
 
     Local  franchising  authorities and/or  the FCC  are  empowered to  order a
reduction of existing rates which exceed the maximum permitted level for  either
basic    and/or    nonbasic   cable    services   and    associated   equipment,
 
                                      I-26
 
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<PAGE>
and refunds  can be  required. The  regulations also  provide that  future  rate
increases  may not exceed an inflation-indexed amount, plus increases in certain
costs beyond the  cable operator's control,  such as taxes,  franchise fees  and
increased  programming costs. Cost-based  adjustments to these  capped rates can
also be  made  in  the event  a  cable  operator adds  or  deletes  channels  or
significantly upgrades its system. The FCC has continued to modify the processes
by  which these  adjustments can be  made in a  fashion that has  made them more
beneficial for  cable  operators  generally.  In  addition,  new  product  tiers
consisting  of services  new to  the cable  system can  be created  free of rate
regulation as long  as certain  conditions are met,  e.g., services  may not  be
moved from existing tiers to the new product tier.
 
     On  November 30,  1995, the  FCC adopted  a Social  Contract which resolves
cable television rate complaints pending against Time Warner Cable and  requires
Time  Warner Cable to upgrade its  domestic cable television systems. The Social
Contract was negotiated in accordance with  the FCC's authority to consider  and
adopt   'social  contracts'  as  alternatives  to  other  regulatory  approaches
applicable to cable television rates. The Social Contract is intended to  ensure
fair   and  reasonable  rates  for  Time  Warner  Cable  customers,  reduce  the
administrative burden and cost of regulation for local governments, the FCC  and
Time Warner Cable and resolve 946 cable programming service tier rate complaints
on  file  with  the  FCC.  Specifically, the  Social  Contract  provides  for an
estimated $4.7  million plus  interest  in subscriber  refunds  in the  form  of
subscriber  bill  credits to  certain designated  Time  Warner Cable  systems, a
commitment by Time Warner Cable to establish a lifeline basic service priced  at
10%  below Time Warner  Cable's benchmark regulated rates  with an adjustment to
the nonbasic  tier to  recoup the  reduced  basic service  tier revenue;  and  a
commitment  by Time Warner Cable to upgrade its domestic systems to a minimum of
550 MHz, or existing 550  MHz systems to 750 MHz,  over the next five years.  On
January  29, 1996, a Petition for Judicial Review was filed by the cities of New
York, New York; Austin, Texas and the Intercommunity Cable Regulatory Commission
(which represents 28  Cincinnati suburbs  served by Time  Warner Cable)  seeking
review  of the FCC decision adopting the  Social Contract as well as certain FCC
staff decisions implementing the Social  Contract. The Petition contends,  among
other  things, that the terms of the Social Contract and the process by which it
was negotiated  and implemented  are contrary  to the  1992 Cable  Act, and  are
inconsistent  with the  FCC's own rules.  A petition for  reconsideration of the
Social Contract is also pending before the FCC.
 
     One purported class-action brought in a Florida state court and one  action
by  the Wisconsin Attorney General have been brought alleging that the retiering
and a la carte pricing  implementation by Time Warner  Cable in response to  the
FCC's  new  rate  regulation rules  violate  those rules  and/or  state consumer
protection laws. A purported nationwide class action has also been brought in  a
federal court in New York alleging that any charges imposed by Time Warner Cable
for  additional outlet connections violate the 1992 Cable Act and the FCC's rate
regulation rules to the extent those  charges exceed Time Warner Cable's  costs.
Time Warner Cable has opposed each of these claims on the grounds that any state
law  claims regarding cable rates are preempted by the 1992 Cable Act and rules,
that any federal claims regarding cable rates must be brought before the FCC  in
the  first instance and that  rates for premium services  cannot be regulated at
all pursuant to the 1984 Cable Act and the 1992 Cable Act. The underlying  claim
brought  by the Wisconsin Attorney General has been settled and on September 25,
1995 the Court of Appeals reversed the District Court ruling and held that  Time
Warner's  service and rate restructuring complied  with FCC rate regulations and
that such regulations preempted Wisconsin  law. The United States Supreme  Court
recently  rejected  a  request  filed  by  the  Wisconsin  Attorney  General for
certiorari.
 
     Carriage of  Broadcast  Television Signals.    The 1992  Cable  Act  allows
commercial  television broadcast stations which are 'local' to a cable system to
elect every three years either to require the cable system to carry the station,
subject to certain exceptions, or  to negotiate for 'retransmission consent'  to
carry  the station. Broadcast  stations typically seek  monetary compensation or
the carriage of  additional programming  in return  for granting  retransmission
consent.  Local  non-commercial  television stations  are  also  given mandatory
carriage rights,  subject to  certain  exceptions. Unlike  commercial  stations,
noncommercial  stations  are  not given  the  option to  require  negotiation of
retransmission consent. In  addition, cable systems  must obtain  retransmission
consent  for the carriage of all 'distant' commercial broadcast stations, except
for certain  'superstations,' i.e.,  commercial satellite-delivered  independent
stations  such as  WTBS, WGN and  WWOR-TV. As  of February 6,  1996, Time Warner
Cable has  obtained  any necessary  retransmission  consents from  all  stations
currently carried.
 
                                      I-27
 
<PAGE>
<PAGE>
The  next  election between  mandatory carriage  and retransmission  consent for
local commercial  television  stations  will  occur  on  October  1,  1996.  The
mandatory  carriage rule is presently under  review by the United States Supreme
Court.
 
     Time Warner Cable has  been sued in Connecticut  state court by  Bridgeways
Communications  Corporation for, among other things, an alleged violation of the
state antitrust law. Central to the plaintiff's case is its allegation that Time
Warner Cable  illegally failed  to comply  with plaintiff's  mandatory  carriage
request.  The FCC has made  no such finding and Time  Warner Cable has argued to
the court that  the FCC  is the  only body  with the  authority to  make such  a
determination.
 
     Deletion of Certain Programming.  Cable television systems that serve 1,000
or  more  customers  must  delete the  simultaneous  or  nonsimultaneous network
programming of  a  distant station  upon  the  appropriate request  of  a  local
television  station  holding local  exclusive  rights to  such  programming. FCC
regulations  also  enable  television  broadcast  stations  that  have  obtained
exclusive  distribution  rights for  syndicated programming  in their  market to
require a cable  system to  delete or 'black  out' such  programming from  other
television stations which are carried by the cable system.
 
     Cable  Programming  Agreements.   The 1992  Cable  Act and  FCC regulations
adopted in April 1993 require  vertically integrated programmers in which  cable
companies  hold a 5% or greater  attributable interest to make their programming
services available  to  competing video  technologies  such as  MMDS,  satellite
master  antenna television ('SMATV') and DBS on terms and conditions that do not
discriminate against such  competing technologies.  The 1992 Cable  Act and  FCC
regulations  preclude  most exclusive  programming contracts  and limit  to some
degree the 'volume discounts' currently available to larger cable operators such
as Time  Warner Cable.  The 1992  Cable Act  also regulates  certain aspects  of
program  carriage  agreements  between  cable  operators  and  cable programming
networks. Cable operators are prohibited from requiring a financial interest  in
a program service as a condition to carriage of such service, coercing exclusive
rights  in a  programming service, or  favoring affiliated programmers  so as to
unreasonably restrain the ability of unaffiliated programmers to compete.
 
     Public and  Leased Access  Channels.   The  1984  Cable Act  permits  local
franchising  authorities to require operators to  set aside certain channels for
public, educational  and governmental  access programming.  The 1984  Cable  Act
further  requires  cable television  systems with  thirty-six or  more activated
channels to designate a portion of their channel capacity for commercial  leased
access  by unaffiliated third parties. The 1992 Cable Act requires leased access
rates to  be set  according to  a  formula determined  by the  FCC. The  FCC  is
currently  reevaluating its  leased channel  rate formula,  which could  lead to
leased channel rates which are substantially more favorable to channel lessees.
 
     Ownership.  The  1996 Telecommunications Act  repealed the restrictions  on
local  exchange telephone  companies ('LECs')  from providing  video programming
directly to  customers  within their  local  exchange telephone  service  areas,
except  in rural areas or by specific waiver of FCC rules. On February 27, 1996,
the Supreme Court vacated a Fourth Judicial Circuit decision which had held  the
1984  Cable Act's cable  telephone cross-ownership prohibition unconstitutional.
The Supreme Court remanded for the Court of Appeals to consider whether the case
is moot in light of  the repeal of the  statutory cross-ownership ban. The  1996
Telecommunications  Act  also authorized  LECs to  operate 'open  video systems'
without obtaining a local cable franchise, although LECs operating such  systems
can  be required to make payments to  local governmental bodies in lieu of cable
franchise fees. Where demand exceeds channel  capacity, up to two-thirds of  the
channels on an 'open video system' must be available to programmers unaffiliated
with the LEC.
 
     The  1996 Telecommunications Act eliminated the FCC rule prohibiting common
ownership between a cable  system and a  national broadcast television  network.
The  1996  Telecommunications Act  also  eliminated the  statutory  ban covering
certain common ownership  interests, operation or  control between a  television
station  and cable  system within  the station's  Grade B  signal coverage area.
However, the parallel FCC rule against cable/television station  cross-ownership
remains  in place, subject to  review by the FCC  within two years. Finally, the
1992 Cable  Act  prohibits  common  ownership,  control  or  interest  in  cable
television  systems  and MMDS  facilities  or SMATV  systems  having overlapping
service areas, except in limited circumstances. The 1996 Telecommunications  Act
exempts  cable systems  facing 'effective competition'  from the  MMDS and SMATV
cross-ownership restrictions.
 
                                      I-28
 
<PAGE>
<PAGE>
     Pursuant to  the 1992  Cable Act,  the FCC  has adopted  rules which,  with
certain  exceptions, preclude a cable television  system from devoting more than
40% of its first 75 activated channels to national video programming services in
which the cable system owner has an attributable interest. The FCC also has  set
a  limit  of 30%  of total  nationwide cable  homes  that can  be served  by any
multiple cable system  operator. The FCC  has stayed the  effectiveness of  this
rule  pending the outcome  of its appeal  from the U.S.  District Court decision
holding  the  multiple  ownership  limit   provision  of  the  1992  Cable   Act
unconstitutional.
 
     Technical Requirements.  The FCC has imposed technical standards applicable
to  all  channels on  which  downstream video  programming  is carried,  and has
prohibited franchising authorities from  adopting standards which conflict  with
or  are more  restrictive than those  established by  the FCC. The  FCC also has
adopted additional  standards  applicable  to  cable  television  systems  using
frequencies in the 108-137 MHz and 225-400 MHz bands in order to prevent harmful
interference with aeronautical navigation and safety radio services and has also
established  limits on  cable system signal  leakage. Periodic  testing by cable
operators for  compliance  with these  technical  standards and  signal  leakage
limits is required.
 
     The  FCC has continued  to adopt and consider  regulations to implement the
requirements of the  1992 Cable  Act designed  to improve  the compatibility  of
cable  systems and  consumer electronics equipment.  These regulations generally
prohibit cable  operators from  scrambling  their basic  service tier  and  from
changing  the infrared codes used in their existing customer premises equipment.
The 1996 Telecommunications Act directs the FCC to set only minimal standards to
assure compatibility between  television sets,  VCRs and cable  systems, and  to
rely  on the  marketplace. The  FCC must adopt  rules to  assure the competitive
availability to consumers  of customer premises  equipment, such as  converters,
used  to access  the services  offered by  cable systems  and other multichannel
video programming distributors.
 
     Other FCC  Regulations.   Additional  FCC  regulations relate  to  a  cable
system's  carriage of local sports programming; privacy of customer information;
franchise fees; equal employment opportunity; pole attachments; restrictions  on
origination  and  cablecasting by  cable  system operators;  application  of the
fairness doctrine and  rules governing political  broadcasts; customer  service;
home  wiring and limitations on advertising contained in nonbroadcast children's
programming. The  1996  Telecommunications  Act changes  the  formula  for  pole
attachment fees which could result in substantial increases in payments by cable
operators to utilities for pole attachment rights when services other than cable
services are delivered by cable systems.
 
     Copyright.    Cable television  systems  are subject  to  federal copyright
licensing covering  carriage  of  broadcast  signals.  In  exchange  for  making
semi-annual  payments to  a federal copyright  royalty pool  and meeting certain
other obligations,  cable operators  obtain a  statutory license  to  retransmit
broadcast  signals. The amount of this  royalty payment varies, depending on the
amount of system revenues  from certain sources, the  number of distant  signals
carried,  and  the location  of the  cable system  with respect  to over-the-air
television stations.
 
     The Copyright Act of 1976 was  recently amended to extend the  availability
of  the cable statutory copyright license  to microwave video service providers,
such as MMDS. This legislation also extended through 1999 the separate statutory
license provisions  applicable to  DBS and  other satellite  video  distribution
systems.  The compulsory license status of SMATV  systems is not covered by this
legislation.  The  availability  of  compulsory  copyright  licensing  to  other
multichannel   video  service  providers  enhances  their  competitiveness  with
traditional cable systems.
 
     State and Local Regulation.  Because  a cable television system uses  local
streets  and  rights-of-way,  cable  television  systems  are  subject  to local
regulation, typically  imposed  through  the franchising  process,  and  certain
states  have also  adopted cable  television legislation  and regulations. Cable
franchises are nonexclusive, granted for  fixed terms and usually terminable  if
the  cable operator  fails to  comply with  material provisions.  No Time Warner
Cable franchise has been terminated due  to breach. Franchises usually call  for
the  payment of fees  (which are limited under  the 1984 Cable Act  to 5% of the
system's  gross  revenues  from  cable  service)  to  the  granting   authority.
Franchises  generally  contain  provisions  governing  charges  for  basic cable
television services,  channel  capacity,  support for  public,  educational  and
government  access  channels, length  of the  franchise  term, renewal,  sale or
transfer of  the franchise,  territory of  the franchise,  design and  technical
performance  of the system, use  and occupancy of public  streets and number and
types of cable services provided. The terms and
 
                                      I-29
 
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<PAGE>
conditions  of   cable  franchises   vary   materially  from   jurisdiction   to
jurisdiction,  and even  from city to  city within the  same state, historically
ranging from reasonable to highly restrictive or burdensome.
 
     The 1992 Cable  Act prohibits exclusive  franchises and allows  franchising
authorities  to operate their own multichannel video distribution system without
having to obtain  a franchise. Moreover,  franchising authorities are  immunized
from  monetary damage awards arising from regulation of cable television systems
or decisions made on franchise grants, renewals, transfers and amendments.
 
     The 1996 Telecommunications Act provides that local franchising authorities
may not condition the grant or renewal of a cable franchise on the provision  of
telecommunications service or facilities (other than institutional networks) and
clarifies  that  the calculation  of franchise  fees  is to  be based  solely on
revenues derived from the provision of cable services, not revenues derived from
telecommunications services.
 
     Renewal of Franchises.  The  1984 Cable Act established renewal  procedures
and criteria designed to protect incumbent franchisees against arbitrary denials
of  renewal.  While  these formal  procedures  are not  mandatory  unless timely
invoked by either  the cable  operator or  the franchising  authority, they  can
provide  substantial  protection to  incumbent franchisees.  The 1992  Cable Act
makes several changes to the renewal process which could make it easier in  some
cases for a franchising authority to deny renewal.
 
     In  the renewal process, a franchising authority may seek to impose new and
more onerous  requirements,  such  as  upgraded  facilities,  increased  channel
capacity  or enhanced services, although the municipality must take into account
the cost of meeting such requirements. Time Warner Cable may be required to make
significant additional investments in  its cable television  systems as part  of
the  franchise renewal process. Of Time Warner Cable's franchises, as of January
1, 1996,  790  franchises  serving approximately  3,644,000  subscribers  expire
during  the period ending December 31, 1998. Although Time Warner Cable has been
successful in the past in negotiating new franchise agreements, there can be  no
assurance as to the renewal of franchises in the future.
 
     The  United  States  District Court  of  the Western  District  of Kentucky
recently held  that  the 1984  Cable  Act does  not  authorize it  to  review  a
franchising authority's assessment of local community needs to determine if they
are  reasonable  or  supported  by any  evidence.  This  federal  district court
decision is under appeal.  If upheld and adopted  by other federal courts,  this
test   might  allow  local  franchising  authorities  to  establish  unrealistic
franchise renewal demands designed to oust an incumbent cable franchisee.
 
     Franchise Transfers.  The 1992  Cable Act requires franchising  authorities
to  act on any franchise  transfer request within 120  days after receipt of all
required information.  Approval  is deemed  to  be granted  if  the  franchising
authority  fails  to act  within such  period.  The 1996  Telecommunications Act
repeals  the  restriction  against  a   cable  operator  selling  or   otherwise
transferring  ownership  of a  cable television  system  within 36  months after
acquisition or initial construction.
 
     The foregoing  does  not  purport  to describe  all  present  and  proposed
federal,  state  and local  regulations and  legislation  relating to  the cable
television industry.  Other existing  federal regulations,  copyright  licensing
and,  in many jurisdictions,  state and local  franchise requirements, currently
are the subject of a variety  of judicial proceedings, legislative hearings  and
administrative and legislative proposals which could change, in varying degrees,
the  manner in  which cable television  systems operate. Neither  the outcome of
these proceedings nor their  impact upon the cable  television industry or  Time
Warner Cable can be predicted at this time.
 
COMPETITION
 
     Cable  television systems face strong competition for viewer attention from
a wide variety of  established providers and  new entrants, including  broadcast
television,  DBS, MMDS, SMATV systems  and telephone companies. Cable television
systems also compete with these and other media for advertising dollars.
 
     DBS. The  FCC has  awarded  conditional permits  to several  companies  for
orbital  slots from  which high-power Ku-Band  DBS service can  be provided. DBS
services offer pre-packaged programming that can be received by relatively small
and inexpensive receiving  dishes. Two  high-power DBS  services sharing  common
satellites, DirecTV and USSB, were reported to have a total of approximately 1.3
million subscribers nationwide
 
                                      I-30
 
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<PAGE>
as  of December 31, 1995. Primestar,  a medium-power DBS service partially owned
by TWE, was reported  to have approximately 1.0  million subscribers as of  that
date.  In addition  to DBS,  most cable  programming is  available to  owners of
larger, more expensive C-Band satellite  dishes ('TVROs'), either directly  from
the programmers or through third-party packagers.
 
     MMDS/Wireless  Cable. Wireless cable operators  use microwave technology to
distribute video programming. In recent years, wireless cable has grown rapidly,
serving 800,000 subscribers  via 121 systems  as of June  1995 according to  the
FCC.  Wireless cable is  now available in  19 of the  nation's top 20 television
markets. In recent years,  the FCC has  adopted rules to  facilitate the use  of
greater numbers of channels by wireless cable operators.
 
     SMATV.  Additional  competition  may  come  from  private  cable television
systems servicing condominiums, apartment  complexes and certain other  multiple
unit  residential developments. The operators of these private systems, known as
SMATV systems, often  enter into  exclusive agreements  with apartment  building
owners  or homeowners'  associations which preclude  franchised cable television
operators from  serving residents  of  such private  complexes. Under  the  1996
Telecommunications  Act, a SMATV system is not a cable system as long as it uses
no public right-of-way.  SMATV systems  offer both improved  reception of  local
television stations and many of the same satellite-delivered program services as
offered by franchised cable television systems.
 
     Overbuilds.   Under  the  1992  Cable   Act,  franchising  authorities  are
prohibited from unreasonably refusing to award additional franchises. There  are
currently an insignificant number of overlapping cable systems operating in Time
Warner  Cable  franchise  areas.  Municipalities  themselves  are  authorized to
operate cable systems without a franchise. No such municipally-owned systems are
presently in operation in  Time Warner Cable  franchise areas, although  several
municipalities have indicated an interest in doing so.
 
     Telephone   Companies.  The  1996  Telecommunications  Act  eliminated  the
restriction against ownership and operation of cable systems by local  telephone
companies within their local exchange service areas. Telephone companies are now
free  to enter the retail video distribution business through any means, such as
DBS,  MMDS,  SMATV  or  as   traditional  franchised  cable  system   operators.
Alternatively,  the  1996  Telecommunications  Act  authorizes  local  telephone
companies to  operate  'open video  systems'  without obtaining  a  local  cable
franchise,  although telephone companies operating  such systems can be required
to make payments to local governmental  bodies in lieu of cable franchise  fees.
Where  demand  exceeds  available  channel capacity,  up  to  two-thirds  of the
channels on an 'open video system' must be available to programmers unaffiliated
with the local  telephone company. The  open video system  concept replaces  the
FCC's  video  dialtone  rules.  The 1996  Telecommunications  Act  also includes
numerous provisions designed to make it easier for cable operators and others to
compete directly with  local exchange telephone  carriers. With certain  limited
exceptions,  neither a local  exchange carrier nor a  cable operator can acquire
more than a 10%  equity interest in  the other entity  operating within its  own
service area.
 
     Other   Competition.   Cable   television   systems   compete   with  other
communications and entertainment media,  including off-air television  broadcast
signals  which  a viewer  is able  to  receive directly  using the  viewer's own
television set and antenna. Cable systems also face competition from alternative
methods of distributing and receiving television signals and from other  sources
of  entertainment such  as live sporting  events, movie theaters  and home video
products, including videocassette recorders  and, in the  future, DVDs, as  well
as,  the Internet. In recent  years, the FCC has  adopted policies providing for
authorization of new technologies and a more favorable operating environment for
certain  existing  technologies  that  provide,  or  may  provide,   substantial
additional  competition for cable television systems.  The extent to which cable
television service is  competitive depends  in significant part  upon the  cable
system's  ability  to provide  an even  greater variety  of programming  than is
available off-air or through  competitive alternative delivery sources.  Premium
programming provided by cable systems is subject to the same competitive factors
which  exist for other programming  discussed above. The continued profitability
of premium  services  may depend  largely  upon the  continued  availability  of
attractive programming at competitive prices. The cable television industry also
competes with radio, television, print and other media for advertising revenues.
As  the  cable television  industry  continues to  develop  programming designed
specifically for distribution by cable, advertising revenues may increase.
 
                                      I-31
 
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OTHER INTERESTS
 
     TWE has a 54% interest in a joint venture established in 1991 to invest in,
and further develop,  cable television systems  in Hungary. TWE  also has a  20%
interest  in TV-1000, a  pay television service operating  in Scandinavia; a 31%
interest in N-TV, a German language news and information channel distributed  in
Germany  in which  TBS also  has a  33% interest;  and a  25% interest  in IA, a
general-interest  regional  television  broadcaster   serving  the  Berlin   and
Brandenburg  areas of Germany  (all of which interests  are under the management
responsibility of  Home Box  Office). TWE  also  owns indirectly  13% of  a  New
Zealand  over-the-air subscription television service -- Sky Network Television,
as well as 20% of Kablevision, Sweden's second largest cable television company.
 
CABLE DIVISION -- TELEPHONY
 
     Time Warner  Cable's wireline  telephony operations  are conducted  through
Time  Warner Communications, a  partnership wholly owned  and controlled by TWE,
which has formed  separate business  entities to provide  telephony services  in
various  geographic areas. Time Warner Communications seeks to take advantage of
Time Warner  Cable's  geographically  clustered  cable  systems  to  efficiently
develop its telecommunications business.
 
     The  initial focus of Time Warner Communications following its formation in
1993 was  the  development  of  'alternative  access'  telephone  operations  in
metropolitan  areas  where  Time  Warner  Cable  operates  cable  systems. These
operations generally provide connections between large businesses and their long
distance telephone providers,  between multiple  business locations  of a  large
business, and between long distance telephone company locations. The connections
are  marketed primarily to  long distance telephone  carriers and large business
customers, and  are used  for high  volume voice  and data  communications.  The
networks  on which these  connections are made are  comprised of dedicated fiber
optic strands  within the  affiliated cable  systems' backbone  fiber  networks,
together with specially constructed high volume building entrance facilities and
specialized   electronic   equipment  for   transmission  of   digital  signals.
Alternative access services do not require Time Warner Communications to operate
switching equipment.
 
     As of March  1, 1996, Time  Warner Communications had  wholly or  partially
owned   alternative  access  businesses  in  operation  in  21  cities.  Similar
businesses are in development  in several additional  Time Warner Cable  cities.
Revenues  to date  from these  operations have  been insignificant.  Time Warner
Communications also  has an  advanced  network management  center in  Denver  to
monitor and manage operation of its geographically dispersed networks.
 
     One  of the major  business objectives of  TWE is the  entry of Time Warner
Communications into  the  switched  'local exchange'  telephone  business.  This
business would provide telephone service that is presently provided by LECs. The
service  would be  marketed both  to residential  and business  customers. Local
exchange service will require significant upgrades  to, and usage of, the  fiber
optic  and  coaxial cable  networks  of Time  Warner  Cable, together  with high
capacity switching equipment similar to that  employed by the LECs, and  certain
other  specialized equipment. Expenditures  for such upgrades  and equipment are
expected to be significant.
 
     The required qualifications  for providers of  local exchange services  are
generally   regulated  by  each  state.  As   of  March  1,  1996,  Time  Warner
Communications has received certificates to  provide local exchange services  in
Florida,  New York, Ohio  and Tennessee, and is  proceeding with applications to
obtain such certification in  Hawaii, North Carolina,  Texas and Wisconsin.  All
these  states  have already  adopted  legislation that  supports  competition in
telecommunications services. Further,  the 1996 Telecommunications  Act will  in
the   future  preempt  state  and  local  barriers  to  entry  into  competitive
telecommunications service  (although  competitively  neutral  state  and  local
regulations  will  continue to  be permitted).  Time Warner  Communications will
continue to  seek local  exchange  service authorization  in states  where  Time
Warner Cable has major cable systems.
 
     In  order for Time  Warner Communications to actually  enter into the local
exchange service  business, Time  Warner Communications  must obtain  rights  to
connect  its local exchange service customers to the incumbent LECs customers in
an area. Time Warner Communications  has been in active negotiations  throughout
1995  with  incumbent LECs  in  Florida, New  York,  Ohio, Tennessee,  Texas and
Wisconsin. Even where procompetitive state
 
                                      I-32
 
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<PAGE>
legislation has existed or state-level regulatory mediation has been  available,
the  incumbent LECs  have, in Time  Warner Communications'  view, been extremely
reluctant to concede  appropriate terms for  competitive entrants to  facilitate
interconnection.
 
     The  1996  Telecommunications  Act  mandates  that  incumbent  LECs provide
reasonable and nondiscriminatory rates, terms and conditions for interconnection
(including reciprocal compensation for transport and termination of calls),  and
that  incumbent LECs enter into good faith negotiations with requesting carriers
to facilitate such  interconnection. In  addition, incumbent  LECs must  provide
nondiscriminatory  access to unbundled network  elements, functions and services
on reasonable terms.  Number portability  is treated  as a  network element  and
local  dialing parity is addressed. While the 1996 Telecommunications Act should
improve the outlook for Time Warner Communications, the exact timetable for  and
terms   of  mandated  interconnection  arrangements,  and  other  incumbent  LEC
compliance, cannot  be predicted.  The  FCC is  required to  issue  implementing
regulations for interconnection requirements by August 8, 1996.
 
     Currently,  Time Warner Communications is  providing local exchange service
on a limited basis in Rochester, New York.
 
     Time Warner Cable  also offers  (as a 're-seller')  cellular telephone  and
paging services to business and residential customers in Rochester, New York.
 
DESCRIPTION OF CERTAIN PROVISIONS OF THE TWE PARTNERSHIP AGREEMENT
 
     The   following  description  summarizes  certain  provisions  of  the  TWE
Partnership  Agreement  relating  to  the   ongoing  operations  of  TWE.   Such
description  does not purport to be complete and is subject to, and is qualified
in its  entirety  by  reference  to,  the  provisions  of  the  TWE  Partnership
Agreement.
 
MANAGEMENT AND OPERATIONS OF TWE
 
     Board  of Representatives. Subject  to certain authority  of the Management
Committee (as described below) with respect to the Cable division, the  business
and affairs of TWE are managed under the direction of a board of representatives
(the   'Board  of  Representatives'  or  the   'Board')  that  is  comprised  of
representatives appointed  by the  Time Warner  General Partners  (the 'Class  B
Representatives')  and representatives  appointed by  the Class  A Partners (the
'Class A Representatives').
 
     The Class B Representatives control all Board decisions except for  certain
matters including (i) the merger or consolidation of TWE; (ii) the sale or other
disposition  of assets of  TWE generating in  excess of 10%  of the consolidated
revenues of TWE during the previous fiscal year or representing in excess of 10%
of the fair market value of the total assets of TWE (in each case, other than in
connection with certain joint ventures and  'cable asset swaps' as to which  the
thresholds  are  greater);  (iii) any  acquisition  by  TWE, other  than  in the
ordinary course of business, if the consideration paid by TWE in connection with
such acquisition would exceed the greater of (1) $750 million and (2) 10% of the
consolidated revenues of  TWE for the  most recently ended  fiscal year of  TWE;
(iv)  the engagement by TWE in any business other than the businesses then being
conducted by TWE, as they may evolve from time to time and any business  related
to  such businesses (provided that TWE may not engage in the manufacturing, sale
or servicing of hardware, other than as may be incidental to TWE's  businesses);
(v)  the incurrence by TWE  of indebtedness for money  borrowed if, after giving
effect to such incurrence, the ratio of total indebtedness for money borrowed to
cash flow would  exceed the  greater of (x)  5.00 to  1.00 and (y)  .5 over  the
analogous ratio in the TWE credit agreement as in effect from time to time; (vi)
cash  distributions other  than as  provided in  the TWE  Partnership Agreement;
(vii) the dissolution or voluntary bankruptcy  of TWE; and (viii) any  amendment
to the TWE Partnership Agreement.
 
     Each  of  the matters  described in  clauses (i)  through (v)  requires the
approval of a majority vote of the Class A Representatives who were appointed by
partners that have a residual equity interest of at least 5% and a majority vote
of the Class  B Representatives; and  each of the  matters described in  clauses
(vi) through (viii) requires the unanimous approval of all representatives. Each
partner's  representatives collectively have  voting power in  proportion to the
residual equity interest of the partner that designated such representative.
 
                                      I-33
 
<PAGE>
<PAGE>
     The managing general partners, both of which are wholly owned  subsidiaries
of the Company, may take any action without the approval or consent of the Board
if  such action  may be  authorized by the  Class B  Representatives without the
approval of  the Class  A Representatives.  However, see  'Full Service  Network
Management Committee,' below.
 
     Full  Service Network Management Committee. In connection with the U S WEST
Transaction, the Board  established the  Full Service  Network business,  which,
subject  to obtaining necessary  franchise and other  approvals, is comprised of
the businesses and operations of the cable television systems of TWE and TWE-A/N
that have been from time to time designated to become a part thereof. Subject to
obtaining necessary franchise  and other  approvals relating  to the  designated
systems,  the business and affairs of the  Full Service Network business will be
governed by  a  Full  Service  Network  Management  Committee  (the  'Management
Committee').  The Management Committee is comprised of six voting members, three
designated by U S WEST and three designated by TWE. If U S WEST at any time owns
less  than  50%  of  the  partnership  interest  which  it  owned,  directly  or
indirectly,  as of September  15, 1993 or if  a 'change in control'  of U S WEST
occurs, U S WEST's  right to designate any  members of the Management  Committee
will  terminate. The  Full Service Network  business is managed  on a day-to-day
basis by the officers of  Time Warner Cable. The approval  of a majority of  the
members  of  the  Management  Committee  is  required  for  certain  significant
transactions relating to  the Full  Service Network  business, including,  among
other  things, the  sale, pledge  or encumbrance of  assets of  the Full Service
Network business, the acquisition of cable assets, the making of commitments  or
expenditures relating to the Full Service Network business, in each case subject
to   agreed  upon  thresholds,   certain  decisions  with   respect  to  design,
architecture and designation of  cable systems for upgrade  and the adoption  of
the annual business plan.
 
     Non-Voting  Representatives  and  Committee  Members.  Each  of  ITOCHU and
Toshiba have  the  right  to  designate  non-voting  members  to  the  Board  of
Representatives  and the Management Committee. In addition, Advance/Newhouse has
the right to designate a non-voting member to the Management Committee.
 
     Day-to-Day Operations. TWE is managed on a day-to-day basis by the officers
of TWE, and each of TWE's three principal partnership divisions is managed on  a
day-to-day  basis by the officers of such division. Upon the TWE Capitalization,
the officers of Time Warner also became officers of TWE and the officers of  the
Time   Warner  General  Partners  became   the  officers  of  the  corresponding
partnership divisions and the subdivisions thereof.
 
CERTAIN COVENANTS
 
     Covenant Not to Compete. For  so long as any  partner (or affiliate of  any
partner)  owns in excess of 5% of TWE or 15% of TWE Japan and in the case of any
Time Warner General Partner,  for one year  thereafter, such partner  (including
its  affiliates) is generally prohibited from competing or owning an interest in
the three principal  lines of business  of TWE --  cable, cable programming  and
filmed   entertainment  (including   the  ownership   and  operation   of  theme
parks) --  as  such  businesses  may evolve,  subject  to  certain  agreed  upon
exceptions, limited passive investments and inadvertent violations. The covenant
not  to compete does not prohibit (i) U S WEST from conducting cable and certain
regional programming  businesses in  the 14-state  region in  which it  provides
telephone  service, (ii)  any party  from engaging  in the  cable business  in a
region in which TWE is not then engaging in the cable business, subject to TWE's
right of first refusal with respect to  such cable business, or (iii) any  party
from  engaging in  the telephone  or information  services business.  ITOCHU and
Toshiba continue to be bound by and benefit from the non-compete provisions  but
only as they relate to Japan.
 
     Transactions  with  Affiliates.  Subject  to  agreed  upon  exceptions  for
existing arrangements, TWE will not enter into any transaction with any  partner
or any of its affiliates other than on an arm's-length basis.
 
REGISTRATION RIGHTS
 
     Beginning  on  June 30,  2002  (or as  early as  June  30, 1999  if certain
threshold cash distributions are not made to the Class A Partners), the Class  A
Partners  holding,  individually  or  in  the aggregate,  at  least  10%  of the
 
                                      I-34
 
<PAGE>
<PAGE>
residual equity of  TWE will  have the right  to request  that TWE  reconstitute
itself  as a corporation and register for sale in a public offering an amount of
partnership interests held by such Class A Partners determined by an  investment
banking firm so as to maximize trading liquidity and minimize the initial public
offering  discount, if  any. Upon  any such request,  the parties  will cause an
investment banker to  determine the price  at which the  interests sought to  be
registered  could be  sold in  a public  offering (the  'Appraised Value'). Upon
determination of the  Appraised Value,  TWE may  elect either  to register  such
interests  or purchase such interests at the Appraised Value, subject to certain
adjustments. If TWE  elects to register  the interests and  the proposed  public
offering  price (as determined immediately prior to the time the public offering
is to be declared effective) is less than 92.5% of the Appraised Value, TWE will
have a second option  to purchase such interests  immediately prior to the  time
such  public  offering  would  otherwise have  been  declared  effective  by the
Securities and Exchange Commission  at the proposed  public offering price  less
underwriting  fees and discounts. If TWE  exercises its purchase option, it will
be required to pay the fees and  expenses of the underwriters. Upon exercise  of
either  purchase option, TWE  may also elect to  purchase the entire partnership
interests of the Class A Partners requesting registration at the relevant price,
subject to certain adjustments.
 
     In addition to the foregoing, U S  WEST will have the right to exercise  an
additional  demand registration right (in which the other Class A Partners would
be entitled to participate) beginning 18 months following the date on which  TWE
reconstitutes  itself  as a  corporation and  registers  the sale  of securities
pursuant to a previously exercised demand registration right.
 
     Beginning on  June 30,  1995, at  the request  of any  Time Warner  General
Partner,  TWE will effect a public offering  of the partnership interests of the
Time Warner General Partners or reconstitute  TWE as a corporation and  register
the shares held by the Time Warner General Partners. In any such case, the Class
A Partners will have standard 'piggy-back' registration rights.
 
     Upon  any  reconstitution  of TWE  into  a corporation,  each  partner will
acquire preferred and  common equity  in the corporation  corresponding in  both
relative value, rate of return and priority to the partnership interests it held
prior  to such reconstitution, subject to  certain adjustments to compensate the
partners for the effects of converting their partnership interests into  capital
stock.
 
CERTAIN PUT RIGHTS OF THE CLASS A PARTNERS
 
     Change  in Control Put. Upon  the occurrence of a  change in control of the
Company, at the request of  any Class A Partner, TWE  will be required to  elect
either  to liquidate TWE within a two-year period or to purchase the interest of
such partner at fair market value (without any minority discount) as  determined
by  investment bankers. A 'change in control'  of the Company shall be deemed to
have occurred:
 
          (x) whenever, in any three-year period,  a majority of the members  of
     the Board of Directors of the Company elected during such three-year period
     shall  have been so elected against the recommendation of the management of
     the Company or the Board of Directors shall be deemed to have been  elected
     against  the recommendation  of such Board  of Directors of  the Company in
     office immediately  prior to  such election;  provided, however,  that  for
     purposes  of this clause (x)  a member of such  Board of Directors shall be
     deemed to have  been elected against  the recommendation of  such Board  of
     Directors  if his or her  initial election occurs as  a result of either an
     actual or  threatened election  contest (as  such terms  are used  in  Rule
     14a-11  of Regulation 14A promulgated under  the Securities Exchange Act of
     1934, as amended) or other actual or threatened solicitation of proxies  or
     consents by or on behalf of a person other than such Board of Directors; or
 
          (y)   whenever   any  person   shall   acquire  (whether   by  merger,
     consolidation, sale,  assignment,  lease,  transfer or  otherwise,  in  one
     transaction   or  any   related  series  of   transactions),  or  otherwise
     beneficially own voting securities of the Company that represent in  excess
     of  50% of  the voting  power of all  outstanding voting  securities of the
     Company generally entitled to vote for  the election of directors, if  such
     person  acquires or publicly  announces its intention  to initially acquire
     ten percent or more of such voting securities in a transaction that has not
     been approved by  the management of  the Company within  30 days after  the
     date of such acquisition or public announcement.
 
                                      I-35
 
<PAGE>
<PAGE>
     Assignment  of Put Rights, etc. TWE, with the consent of such assignee, may
assign to the Company, any general partner or any third party, the obligation to
pay the applicable  put price in  connection with  the exercise of  a change  in
control  put right by a Class A Partner and the right to receive the partnership
interests in payment therefor.
 
     With respect to any of the put rights of the Class A Partners, TWE may  pay
the  applicable put price in cash or  Marketable Securities (defined as any debt
or equity securities that are listed on a national securities exchange or quoted
on NASDAQ) issued by TWE (or if TWE assigns its obligation to pay the put  price
to  the  Company  by  the  Company). The  amount  of  any  Marketable Securities
comprising the applicable  put price  shall be  determined based  on the  market
price  of such securities during the seven  months following the closing of such
put transaction. In the case of a change in government regulation put, up to 33%
of the applicable  put price  may be  paid in  notes issued  by TWE  (or if  TWE
assigns its obligations to pay the put price to the Company by the Company).
 
U S WEST CHANGE IN GOVERNMENT REGULATION REMEDIES
 
     Upon  a change in law or government  regulation prior to September 15, 1996
that prohibits U S WEST from  owning, or materially adversely affects the  value
(relative  to the value of  the interests of all other  partners) of, U S WEST's
partnership interest, U S WEST  will have the right  to request that TWE  either
remedy such problem (provided such remedy would not have a significant impact on
the business and operation of TWE or any of its divisions) or assist U S WEST in
selling  its interest to a third party. Upon any such sale to a third party, TWE
will share 20% of the loss or gain experienced by U S WEST upon such sale.
 
RESTRICTIONS ON TRANSFER BY TIME WARNER GENERAL PARTNERS
 
     Time Warner General Partners. Any Time Warner General Partner is  permitted
to  dispose of any partnership interest (and any Time Warner General Partner and
any parent of any Time Warner General  Partner may issue or sell equity) at  any
time  so long as, immediately after giving effect thereto, (i) the Company would
not own, directly or indirectly, less than (a) 43.75% of the residual equity  of
TWE,  if such disposition occurs prior to the later of December 31, 1997 and the
date on which  the Class  A Partners have  received cash  distributions of  $500
million  per $1 billion of investment, and (b) 35% of the residual equity of TWE
if such disposition occurs after such date, (ii) no person or entity would  own,
directly or indirectly, a partnership interest greater than that owned, directly
or  indirectly, by the Company, and (iii) a subsidiary of the Company would be a
managing general partner of TWE.
 
     No other dispositions are permitted, except  that the Company may sell  its
entire  partnership interest  subject to the  Class A Partners'  rights of first
refusal and 'tag-along' rights  pursuant to which the  Company must provide  for
the  concurrent sale  of the  partnership interests of  the Class  A Partners so
requesting.
 
OTHER ENTERTAINMENT GROUP ASSETS
 
TIME WARNER SERVICE PARTNERSHIPS
 
     In September  1993, certain  assets of  TWE were  distributed to  the  Time
Warner  General Partners and were owned  and operated by other partnerships (the
'Time Warner  Service Partnerships')  in  order to  ensure compliance  with  the
Modification  of Final Judgment entered on August  24, 1982 by the United States
District Court for  the District  of Columbia  applicable to  U S  WEST and  its
affiliated  companies, which may have included TWE. In 1994, U S WEST received a
judicial order  that TWE  was  no longer  prohibited  from owning  or  operating
substantially all of such assets. Accordingly, in September 1995, TWE reacquired
substantially all of the assets of the Time Warner Service Partnerships, subject
to  the liabilities  relating thereto, in  exchange for  junior priority capital
interests in TWE equal to approximately $400 million.
 
                                      I-36
 
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<PAGE>
COURTROOM TELEVISION NETWORK ('COURT TV')
 
     Each of TWE and affiliates of each of NBC and TCI holds a 33 1/3%  interest
in  Court TV, subject to adjustment in accordance with the terms of the Court TV
partnership agreement. Court TV is a 24-hour basic cable network covering actual
courtroom trials from around the United States and abroad. Since 1991, Court  TV
has  brought daytime viewers  live and taped  coverage of more  than 400 trials,
including: Weeks v. Baker & McKenzie, O.J. Simpson, Rodney King, Dr.  Kevorkian,
Reginald Denny, the Menendez brothers, the Paramount/QVC hearing and Zion v. New
York  Hospital. During prime time, Court TV  features live analyses of the day's
coverage as well as a variety of programs that explore all aspects of the  legal
system.  On  the  weekend, Court  TV  airs  highlights of  the  week's courtroom
coverage and presents Continuing Legal Education (CLE) for lawyers and Cable  in
the Classroom programming for teachers.
 
TWE JAPAN
 
     The  Company owns a 37.25% interest in, U S WEST owns a 12.75% interest in,
and each of Toshiba and ITOCHU owns a 25% interest in, Time Warner Entertainment
Japan Inc. ('TWE Japan'). TWE Japan was organized to conduct TWE's businesses in
Japan,  including  home  video  distribution,  theatrical  film  and  television
distribution  and  merchandising  businesses,  and  to  expand  and  develop new
business opportunities. Pursuant  to distribution  and merchandising  agreements
entered  into between  TWE and TWE  Japan, TWE Japan  receives distribution fees
generally  comparable  to  those  currently  received  by  TWE  for   performing
distribution services for unaffiliated third parties.
 
     In  1995,  the Company,  TWE Japan,  U  S WEST,  Toshiba and  ITOCHU agreed
jointly to establish  TITUS Communications  Corp. ('TITUS'),  a multiple  system
operator  that will develop new CATV operations in selected locations throughout
Japan. The  agreement  also  contemplates that  TITUS  eventually  will  provide
telephone service as well as video services in its operating areas.
 
DC COMICS
 
     TWE  and WCI  each owns  a 50% interest  in DC  Comics, a  New York general
partnership, formed in June 1992  to continue the business previously  conducted
by  DC Comics  Inc., a New  York corporation.  DC Comics publishes  more than 60
regularly  issued  comics  magazines,  among  the  most  popular  of  which  are
'Superman,'  'Batman,'  'Wonder  Woman'  and 'The  Sandman,'  as  well  as story
collections sold as books. DC Comics also derives revenues from motion pictures,
television syndication, product licensing, books for juvenile and adult  markets
and  foreign publishing. Trademarks in DC Comics' principal characters have been
registered in  the United  States Patent  and Trademark  Office and  in  certain
foreign countries.
 
CINAMERICA THEATRES, L.P.
 
     WCI  owns a  50% interest in  Cinamerica Theatres,  L.P., an unconsolidated
joint venture with Paramount  Communications Inc., which  owns and operates  two
theater circuits: Mann Theatres and Festival Cinemas. The joint venture operates
371 screens in 66 theaters, principally located in California and Colorado.
 
E.C. PUBLICATIONS
 
     E.C.  Publications,  Inc. is  the publisher  of  MAD, a  magazine featuring
articles of humorous and satirical  interest, which is regularly published  nine
times  a year and also in periodic special editions. E.C. Publications is wholly
owned by the Company.
 
                                OTHER INTERESTS
 
TURNER BROADCASTING SYSTEM, INC.
 
     In September 1995, the  Company agreed to merge  with TBS by acquiring  the
remaining  approximately 80% interest  in TBS not already  owned by the Company.
For information about the pending merger, see
 
                                      I-37
 
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<PAGE>
page I-1. At December 31, 1995, the Company had economic and voting interests in
TBS of  19.6%and  6.4%,  respectively.  TBS is  a  diversified  information  and
entertainment  company.  Through its  subsidiaries, TBS  owns and  operates four
domestic entertainment networks WTBS (commonly known as the 'TBS SuperStation'),
Turner Network Television ('TNT'), the Cartoon Network and Turner Classic Movies
('TCM'); four international  entertainment networks TNT  Latin America,  Cartoon
Network  Latin America, TNT & Cartoon Network  Europe, and TNT & Cartoon Network
Asia; and four news  networks Cable News Network  ('CNN'), Headline News,  Cable
News  Network International  ('CNNI') and  CNN Financial  Network ('CNNfn'). TBS
produces and  distributes entertainment  and  news programming  worldwide,  with
operations  in motion picture, animation  and television production, home video,
television syndication, licensing and merchandising, and publishing.
 
AMERICAN LAWYER MEDIA
 
     American Lawyer  Media,  L.P.  ('ALM'),  which  is  majority-owned  by  the
Company,  operates  a  chain of  metropolitan  and regional  legal  and business
newspapers and also publishes THE  AMERICAN LAWYER, a national monthly  magazine
with  a subscription-only readership among lawyers across the United States. ALM
also owns and  operates COUNSEL  CONNECT ('CC'), an  on-line service  connecting
lawyers  in law firms and corporate  legal departments worldwide. On February 2,
1996, ALM acquired the minority share of  CC that had been held by  Lexis-Nexis.
Since  February 25, 1994, ALM had run CC as LEXIS Counsel Connect in partnership
with Lexis-Nexis, a division of Reed  Elsevier Inc. At the time the  partnership
was  formed,  Lexis-Nexis  was  the  Mead  Data  Central  division  of  the Mead
Corporation. ALM also publishes four weekly and five daily newspapers, which  in
most  cases enjoy local  official status for the  publication of court opinions,
legal notices and/or  official court  notices; and one  monthly newsletter.  ALM
also provides certain services to Court TV.
 
HASBRO, INC.
 
     The  Company  owns approximately  14% of  the  outstanding common  stock of
Hasbro, Inc.,  one of  the world's  largest  toy companies.  See Note  5  'Other
Investments'  to the  Company's consolidated  financial statements  at page F-34
herein for a  description of  the issuance  by the  Company of  (i) zero  coupon
exchangeable  notes  due 2012  that are  exchangeable for  the shares  of Hasbro
common stock owned  by the Company  (the 'Hasbro Stock'),  and (ii)  mandatorily
redeemable  preferred securities  of a subsidiary  of the  Company redeemable in
1997 for  cash  or  Hasbro  Stock.  Because  the  issuance  of  the  mandatorily
redeemable preferred securities provides the Company with protection against the
risk  of depreciation of  the market price  of Hasbro Stock  and the zero coupon
exchangeable notes limit the Company's ability  to share in the appreciation  of
the  market  price  of Hasbro  Stock,  the combination  thereof  has effectively
monetized the Company's investment in Hasbro.
 
ATARI CORPORATION
 
     The Company owns approximately 13.5% of Atari Corporation, which is engaged
in the  design, manufacture  and sale  of interactive  multimedia  entertainment
systems.  In February 1996, Atari Corporation entered into an agreement to merge
with JTS Corp., a disk-drive manufacturer based in San Jose, California.
 
ATARI GAMES CORPORATION
 
     The Company owns 100% of Atari Games Corporation ('Atari Games'), which  is
engaged  in  the design,  manufacture and  sale of  interactive video  games for
arcades and  home  systems. On  February  23, 1996,  WCI  entered into  a  Stock
Purchase  Agreement with Williams Interactive  Inc. ('Williams'), a wholly owned
subsidiary of WMS Industries, Inc., pursuant to which WCI will sell to Williams,
all of the issued and outstanding capital stock of Atari Games. The  transaction
is expected to close in April 1996.
 
                                      I-38
 
<PAGE>
<PAGE>
                         CURRENCY RATES AND REGULATIONS
 
     The  Company's foreign operations are subject to the risk of fluctuation in
currency exchange rates and to exchange controls. The Company cannot predict the
extent to which such  controls and fluctuations in  currency exchange rates  may
affect its operations in the future or its ability to remit dollars from abroad.
See  Note 1 'Organization and Summary of Significant Accounting Policies Foreign
Currency' and Note 12 'Financial  Instruments Foreign Exchange Risk  Management'
to  the consolidated financial  statements set forth at  pages F-24 through F-28
and F-44 through F-45, respectively, herein. For the revenues, operating  income
from  and  identifiable  assets  of foreign  operations,  see  Note  13 'Segment
Information' to the consolidated  financial statements set  forth at pages  F-46
through F-49 herein.
 
                                   EMPLOYEES
 
     At  December 31, 1995, the Company employed a total of approximately 65,500
persons. This number includes approximately 29,700 persons employed by TWE.
 
                                      I-39

<PAGE>
<PAGE>
ITEM 2. PROPERTIES
 
PUBLISHING, MUSIC AND CORPORATE
 
     The  following table sets forth certain information as of December 31, 1995
with respect to the Company's principal properties (over 250,000 square feet  in
area)  that are used primarily by its publishing and music divisions or occupied
for corporate  offices, all  of which  the Company  considers adequate  for  its
present  needs, and all of which were  substantially used by the Company or were
leased to outside tenants:
 
<TABLE>
<CAPTION>
                                                                  APPROXIMATE
                                                                  SQUARE FEET           TYPE OF OWNERSHIP
         LOCATION                      PRINCIPAL USE              FLOOR SPACE       EXPIRATION DATE OF LEASE
--------------------------  ------------------------------------  -----------   ---------------------------------
<S>                         <C>                                   <C>           <C>
New York, New York          Executive and administrative offices      560,000   Leased by the Company. Lease
  75 Rockefeller Plaza      (Corporate, Music and Filmed                        expires in 2014. Approximately
  Rockefeller Center        Entertainment)                                      109,000 sq. ft. are sublet to
                                                                                outside tenants.
New York, New York          Business and editorial offices          1,457,000   Leased by the Company. Most
  Time & Life Bldg.         (Publishing and Corporate)                          leases expire in 2007.
  Rockefeller Center                                                            Approximately 36,000 sq. ft. are
                                                                                sublet to outside tenants.
Mechanicsburg,              Office and warehouse space                358,000   Owned and occupied by the
  Pennsylvania              (Publishing)                                        Company.
  1225 S. Market St.
Olyphant,                   Manufacturing, warehouses,              1,058,000   Owned and occupied by the
  Pennsylvania              distribution and office space                       Company.
  1400 and 1444 East        (Music)
  Lackawanna Avenue
Indianapolis, Indiana       Warehouse space (Publishing)              252,000   Owned by the Company.
  4200 N. Industrial                                                            Approximately 142,000 sq. ft. are
  Street                                                                        leased to outside tenants.
Nortorf,                    Manufacturing, distribution and           334,000   Owned and occupied by the
  Germany                   office space (Music)                                Company.
  Niedernstrasse 3-7
Alsdorf,                    Manufacturing, distribution and           269,000   Owned and occupied by the
  Germany                   office space (Music)                                Company.
  Max-Planck Strasse 1-9
Terre Haute,                Manufacturing and office space            269,000   Leased by the Company. Lease
  Indiana                   (Music)                                             expires in 2001.
  Bldg. 102, Fort Harrison
  Industrial Park
Other:
  U.S. and abroad,          Office bldgs., plants and warehouses    2,097,000   Owned by the Company.
     including locations    (Publishing, Music and Corporate)
     in
     Europe, Asia, Latin
     America, Australia
     and
     New Zealand.
                                                                    5,084,000   Leased by the Company.
                                                                                Approximately 297,000 sq. ft. are
                                                                                sublet to outside tenants.
                                                                  -----------
Total                                                              11,738,000
                                                                  -----------
                                                                  -----------
</TABLE>
 
                                      I-40
 
<PAGE>
<PAGE>
FILMED ENTERTAINMENT, PROGRAMMING -- HBO AND CABLE
 
     The following table sets forth certain information as of December 31,  1995
with respect to principal properties (over 125,000 square feet in area) owned or
leased  by  the Company's  Filmed Entertainment,  Programming  -- HBO  and cable
television businesses  (including the  properties of  the Company,  TWE and  the
TWE/AN Partnership), all of which the Company considers adequate for its present
needs, and all of which were substantially used by the Company or were leased to
outside tenants.
 
<TABLE>
<CAPTION>
                                                         APPROXIMATE
                                                         SQUARE FEET
                                                         FLOOR                        TYPE OF OWNERSHIP;
        LOCATION          PRINCIPAL USE                  SPACE/ACRES               EXPIRATION DATE OF LEASE
------------------------  -----------------------------  ------------------     -----------------------------
<S>                       <C>                            <C>                         <C>
New York, New York        Business offices               335,000 sq. ft.             Leased by TWE.
  HBO Building, 1100      (Programming HBO)                                          Lease expires in 2004.
  Avenue of the
  Americas
New York, New York        Business offices               139,000 sq. ft.             Leased by TWE.
  1325 Avenue of the      (Filmed Entertainment)                                     Lease expires in 2010.
  Americas
Baltimore, Maryland       Warehouse (Filmed              387,000 sq. ft.             Owned by TWE.
  White Marsh             Entertainment)
Los Angeles, California   Warehouse                      182,000 sq. ft.             Leased by TWE.
  9210 San Fernando       (Filmed Entertainment)                                     Lease expires in 1997.
Burbank, California       Sound stages,                  3,422,000         (a)       Owned by TWE.
  The Warner Bros.        administrative, technical and  sq. ft. of
  Studio                  dressing room structures,      improved
                          screening theaters, machinery  space on 158
                          and equipment facilities,      acres
                          back lot and parking lot and
                          other Burbank properties
                          (Filmed Entertainment)
West Hollywood,           Sound stages,                  350,000                     Owned by TWE.
  California              administrative,                sq. ft. of                  Approx. 20,000 sq. ft. are
  The Warner              technical and dressing         improved                    leased to outside tenants.
  Hollywood Studio        room                           space on 11
                          structures, screening          acres
                          theaters, machinery and
                          equipment facilities (Filmed
                          Entertainment)
Valencia, California      Location filming (Filmed       225 acres                   Owned by TWE.
  Undeveloped Land        Entertainment)
Raleigh, North Carolina   Office/Warehouse facility      150,000 sq. ft.             Leased by TWE. Lease expires
  2505 Atlantic Avenue    (Cable)                                                    1999.
Other, in the U.S. and    Office buildings, retail       3,799,000 sq. ft. (b)       Owned by TWE.
  abroad, including       stores, theatres, plants and                               Approx. 62,000 sq. ft. are
  locations in Europe,    warehouses (Filmed                                         leased to outside tenants.
  Asia, Latin America,    Entertainment,                 7,070,000 sq. ft. (b)(c)    Leased by TWE.
  Australia and New       Programming -- HBO, Cable)                                 Approx. 57,000 sq. ft. are
  Zealand                                                                            sublet to outside tenants.
                                                         ------------------
Totals                                                   15,834,000 sq. ft.
                                                         394 acres
                                                         ------------------
                                                         ------------------
</TABLE>
 
------------
 
(a)  Ten  acres consist  of various parcels  adjoining The  Warner Bros. Studio,
     with mixed commercial, office and residential uses.
 
                                              (footnotes continued on next page)
 
                                      I-41
 
<PAGE>
<PAGE>
(footnotes continued from previous page)
 
(b)  Excludes 436,847 sq. ft. of owned and 229,345 sq. ft. of leased  properties
     used  by  Time Warner  Cable for  headend,  hub, and  tower sites  that are
     located on 672 owned and 162 acres of leased land.
 
(c)  Includes 108,000 sq. ft. of office space occupied by Time Warner  corporate
     staff who provide services to TWE pursuant to arrangements set forth in the
     TWE Partnership Agreement.
 
ITEM 3. LEGAL PROCEEDINGS
 
     The  Company and  its subsidiaries are  parties, in the  ordinary course of
business, to  litigations  involving  property,  personal  injury  and  contract
claims.  The  amounts that  the  Company believes  may  be recoverable  in these
matters are either covered by insurance or are not material.
 
     In November 1992,  TWE filed a  federal lawsuit seeking  to overturn  major
provisions  of  the 1992  Cable Act  primarily on  First Amendment  grounds. The
complaint, filed in the U.S. District Court for the District of Columbia against
the FCC and the United States of America, challenges the provisions of the  1992
Cable Act relating to rate regulation, must carry, retransmission consent, terms
of  dealing by vertically integrated  programmers, uniform pricing and operation
of cable systems  by municipal  authorities, the  number of  subscribers that  a
cable operator could serve nationwide, free previews of certain premium channels
and  educational channel  set-aside requirements for  direct broadcast satellite
service. In addition, the complaint seeks to overturn several parts of the  1984
Cable Act relating to public, educational and government access requirements and
commercial   leased  channels.  The  complaint  seeks  injunctions  against  the
enforcement or implementation  of these provisions.  Several other parties  have
also  filed  similar lawsuits  and these  actions have  been at  least partially
consolidated with the action filed by TWE. On April 8, 1993, in a 2-1  decision,
the  District Court upheld the constitutionality of the must carry provisions of
the 1992 Cable  Act. On  May 3,  1993, TWE filed  an appeal  from this  decision
directly  to the  U.S. Supreme Court.  The U.S.  Supreme Court on  June 27, 1994
vacated the judgment of the  District Court regarding the must-carry  provisions
and  remanded the case to  that court for further  factual findings after ruling
that cable systems were entitled  to significant First Amendment protection.  In
December  1995, that panel upheld the 'must-carry' requirements by 2-1 vote. The
Supreme Court has now decided to review that decision. On September 16, 1993,  a
one-judge District Court upheld the constitutionality on First Amendment grounds
of  all the  other challenged  provisions except  restrictions on  the number of
subscribers that a cable operator could  serve nationwide, free pay TV  previews
and direct broadcast channel usage. TWE appealed this decision to the U.S. Court
of  Appeals for the D.C.  Circuit on November 12,  1993. Briefing on the appeal,
and argument took place,  on November 20,  1995. For a  description of the  1984
Cable   Act  and   the  1992   Cable  Act,  see   Item  1   'Business  --  Cable
Division -- Regulation and Legislation.'
 
     By letters  dated  July  15,  1993 and  September  21,  1993  (the  'Access
Letters'),  the  Dallas Regional  Office of  the  Federal Trade  Commission (the
'FTC') informed  WEA  that  it  is conducting  a  preliminary  investigation  to
determine  whether  WEA is  'unreasonably restricting  the resale  of previously
owned compact  discs' and  'unreasonably  restricting the  sale of  new  compact
discs.'  The Access Letters allege  that WEA's conduct may  violate Section 5 of
the Federal Trade Commission Act, but  also say that neither the Access  Letters
nor the existence of the investigation 'should be viewed as an accusation by the
FTC  or its staff of  any wrongdoing by [WEA].'  The Access Letters request that
WEA voluntarily submit the documents and information requested therein. The  FTC
investigation  also includes other major distributors  of recorded music. In the
course of the investigation, the FTC issued  a subpoena for the deposition of  a
former  WEA executive. WEA has complied with the Access Letters and subpoena. In
early October  1994,  WEA  (and  other major  distributors  of  recorded  music)
received  a follow-up subpoena for the production of documents, stating that the
FTC is  investigating whether  members of  the pre-recorded  music  distributing
industry may be engaging in unfair methods of competition by fixing prices or by
engaging  in  concerted  activities  to limit  the  availability  of cooperative
advertising or promotional funds to retailers who distribute used compact  discs
or  advertise  prices  of compact  discs  below specified  levels.  WEA produced
documents in late December 1994 and early 1995 in response to the subpoena.
 
                                      I-42
 
<PAGE>
<PAGE>
     In October 1993, a  purported class action was  filed in the United  States
District Court for the Northern District of Georgia entitled Samuel D. Moore, et
al.  v.  American  Federation  of  Television and  Radio  Artists,  et  al., No.
93-Civ-2358. The  action  was  brought  by fifteen  named  music  performers  or
representatives  of  deceased  performers  on  behalf  of  an  alleged  class of
performers  who  participated  in  the  creation  or  production  of  phonograph
recordings  for  one or  more of  the defendant  recording companies.  The named
defendants included  the American  Federation of  Television and  Radio  Artists
('AFTRA'),  the AFTRA Health and Retirement  Fund ('Fund'), each present trustee
of  the  Fund  and   fifty  named  recording   companies,  including  four   WCI
subsidiaries.  The named  defendant recording  companies comprised substantially
all of the domestic recording industry  and the complaint sought to establish  a
defendant  class for purposes  of the litigation.  The complaint sought recovery
against the recording  companies for,  among other things,  breach of  contract,
breach  of fiduciary duty, fraud, embezzlement  and RICO violations, all growing
out of alleged failure by the  recording companies to make proper  contributions
to the Fund pursuant to the Phono Code, which is negotiated by AFTRA and most of
the  domestic recording companies, and other  alleged failures to meet the terms
of the Phono Code and individual contracts. Plaintiffs sought from the defendant
record companies substantial monetary  damages, treble damages, attorneys'  fees
and  costs and the imposition of a constructive trust over the master recordings
created from recorded performances of the plaintiffs. In March 1994,  plaintiffs
filed an amended complaint. In March and April 1994, AFTRA, the Fund, the Fund's
trustees  and certain of  the defendant recording  companies, including the four
WCI subsidiaries, moved to dismiss  plaintiffs' amended complaint. On August  2,
1994,  the court, among other things, dismissed  the claims against the Fund and
the Fund's trustees, converted AFTRA's motion  to one for summary judgment  (and
allowed  re-briefing) and dismissed  all claims against  the defendant recording
companies except  the RICO  claim.  The record  company  defendants in  the  one
remaining  RICO  claim answered  the amended  complaint and  filed a  motion for
summary judgment seeking dismissal of the claim. The court subsequently  granted
AFTRA's   motion,  and  denied  the  recording  company  defendants'  motion  as
premature. Plaintiffs  have  filed  a  motion  to  certify  various  classes  of
plaintiffs. The parties are in limited discovery.
 
     On  February 21, 1995, counsel for plaintiffs filed a new lawsuit, entitled
Samuel D.  Moore,  et  al.  v.  Sony Music  Entertainment  Group,  et  al.,  No.
95-Civ-1221,  in the United  States District Court for  the Southern District of
New York. The action was brought by all  but one of the named plaintiffs in  the
Georgia federal suit, with one new plaintiff. The plaintiffs are suing on behalf
of  an alleged class of performers and derivatively on behalf of the AFTRA Fund.
The named defendants include  the Fund's trustees, the  Fund, and the  recording
companies  that  were  named as  defendants  in  the Georgia  federal  suit. The
complaint is based on substantially the same allegations as the complaint in the
Georgia federal  suit,  and  seeks  to  recover  substantial  monetary  damages,
liquidated damages, and attorney's fees from the recording companies. The record
company defendants simultaneously moved in the Southern District of New York for
an  order transferring  the new  case to the  Northern District  of Georgia, and
moved in the Northern District of  Georgia for an order staying plaintiffs  from
proceeding  with  the New  York  federal action.  On  April 19,  1995,  the U.S.
District Court for the Northern District  of Georgia granted the record  company
defendants'  motion with respect to the New York federal action and enjoined the
plaintiffs from proceeding any further with such action. On April 30, 1995,  the
U.S.  District Court for the Southern District of New York directed that the New
York federal action be transferred to the Northern District of Georgia in  order
that the Georgia court may determine whether the claims asserted in the New York
action  should be  dismissed or  pursued in the  Georgia court.  On February 26,
1996, the  Georgia  Court, finding  the  parties, issues  and  available  relief
substantially  the  same as  in the  initial matter,  dismissed the  action. The
Georgia court further indicated that should plaintiffs wish to pursue the claims
of the second suit, the appropriate vehicle  would be to seek leave of Court  to
amend the complaint in the original action.
 
     On  July 14, 1994,  the Company received a  civil investigative demand from
the United States Department of Justice in furtherance of an investigation  into
certain  worldwide activities  of the  WMG and  other companies  in the recorded
music industry principally related to cable, wire and satellite-delivered  music
and   music  video  programmers.  The  Company   has  complied  with  the  civil
investigative demand to the extent that it sought information and documents with
respect to domestic  activities of the  Warner Music Group  and has objected  to
responding  with respect to foreign activities on the ground that the Department
of Justice lacks jurisdiction  to inquire into such  activities. On November  3,
1994,  the  Department  of  Justice  filed  a  petition  in  the  United  States
 
                                      I-43
 
<PAGE>
<PAGE>
District Court for the  District of Columbia seeking  to compel the Company  and
the  other companies to provide documents from  their files in the United States
that deal with overseas activities. That motion remains pending.
 
     On May 30, 1995, a  purported class action was  filed in the United  States
District  Court  for  the  Central  District  of  California,  entitled  Digital
Distribution Inc. d/b/a Compact Disc Warehouse v. CEMA Distribution, Sony  Music
Entertainment,  Inc.,  Warner  Elektra  Atlantic  Corporation,  UNI Distribution
Corporation, Bertelsmann  Music Group,  Inc.  and Polygram  Group  Distribution,
Inc.,  No. 95-3596 (JSL) (the 'California Federal  Action'). On July 19, 1995, a
purported class action  was filed in  the Superior Court  of California for  the
County  of Los Angeles, entitled Brenden  Barry v. CEMA Distribution, Sony Music
Entertainment, Inc.,  Warner  Elektra  Atlantic  Corporation,  UNI  Distribution
Corporation,  Bertelsmann  Music Group,  Inc.  and Polygram  Group Distribution,
Inc., No.  BC 131748  (the 'California  State Action').  The California  Federal
Action  is brought on behalf  of direct purchasers of  compact discs ('CDs') and
the California State Action is brought on behalf of indirect purchasers of  CDs.
In  both actions, the plaintiffs allege that Warner Elektra Atlantic Corporation
('WEA'), along with five other distributors of recorded music CDs, violated  the
federal  and/or state antitrust laws and unfair competition laws, by engaging in
a conspiracy to fix prices of CDs, and seek an injunction and treble damages. In
the California  Federal Action  the defendants'  motion to  dismiss the  amended
complaint  was granted and the action  was dismissed, with prejudice, on January
9, 1996.  Plaintiffs have  filed a  notice of  appeal. In  the California  State
Action, plaintiffs voluntarily dismissed the amended complaint without prejudice
on March 6, 1995.
 
     Litigation   relating  to  the   1990  merger  of   Time  Inc.  and  Warner
Communications Inc. has either  been dismissed, or has  been dormant for  years.
The  litigation  is described  in previous  reports  on Form  10-K filed  by the
Company.
 
     On September 22,  1995, U S  WEST and U  S WEST Multimedia  Communications,
Inc.  ('USWMC'), a wholly owned subsidiary of U S WEST, filed a complaint in the
Court of  Chancery of  the State  of Delaware  (the 'Delaware  Chancery  Court')
individually and allegedly in a derivative capacity on behalf of TWE against the
Company  and four of  TWE's general partners, ATC,  Time Warner Operations Inc.,
WCI and Warner Cable Communications, Inc. ('WCCI'), as well as TWE (as a nominal
defendant), alleging that the TBS Transaction would breach certain provisions of
the TWE Partnership Agreement  and the Admission Agreement.  U S WEST, Inc.,  et
al.  v. Time  Warner Inc.,  et al.,  Case No.  14555. U  S WEST  seeks equitable
relief, including an injunction against consummation of the TBS Transaction  and
declarations  that  the  defendants  have  breached  fiduciary  duties  and such
agreements.
 
     On October 11, 1995, the Company  and the other defendants filed an  answer
and  counterclaims  denying the  material allegations  contained  in U  S WEST's
complaint and  alleging, among  other things,  (a) that  U S  WEST breached  its
agreements with TWE, (b) that U S WEST fraudulently misrepresented and failed to
disclose  the  standards  of  regulatory  compliance  that  would  apply  to the
partnership after  the admission  of U  S WEST  as a  partner and  (c) that  the
Admission  Agreement would not have been entered into as presently structured if
the misrepresentations had not  been made. The  counterclaim seeks, among  other
things,   (i)  reformation  of  the  Admission  Agreement,  (ii)  an  injunction
prohibiting U  S  WEST from  preventing  TWE  from entering  into  contracts  or
pursuing  business opportunities that are in the best interests of TWE and (iii)
damages. On October 31, 1995, U  S WEST replied to the Company's  counterclaims,
essentially  (A)  denying the  Company's material  allegations and  asserting as
affirmative defenses that the counterclaims fail to state a claim and are barred
by laches, acquiescence, unclean hands, waiver and/or estoppel and (B) asserting
that the proposed transactions which the Company alleges U S WEST obstructed are
businesses that  the TWE  Partnership  Agreement prohibits  TWE from  owning  or
conducting,  and that the TWE Partnership Agreement  provides that U S WEST may,
but need not, waive such restrictions on TWE in its sole discretion.
 
     On December 12, 1995, U S WEST filed an amended and supplemental complaint,
reasserting the allegations  contained in its  original complaint and  asserting
new  allegations regarding (a)  the Company's alleged  failure to make  U S WEST
aware during the  negotiation of  the Admission  Agreement of  the existence  of
certain documents and (b) the Company's November 16, 1995 announcement regarding
a  new strategic operating structure and  management team. On December 27, 1995,
the Company  and  the  other defendants  filed  an  answer to  the  amended  and
supplemental  complaint  and  counterclaims  denying  the  material  allegations
contained in
 
                                      I-44
 
<PAGE>
<PAGE>
U S WEST's amended and supplemental complaint and reasserting the counterclaims.
On February 8, 1996, the Company moved  to dismiss the action on the  pleadings.
On March 11, 1996, the Court announced that it would not rule on the motion, but
instead proceeded with the trial on March 13, 1996.
 
     Two  complaints have been  filed against the  Company, certain officers and
directors of the Company, and other  defendants, by certain stockholders of  the
Company,  purportedly derivatively  on behalf  of the  Company, relating  to the
pending TBS Transaction and related transactions. The two complaints were  filed
in the Delaware Chancery Court on October 30, 1995 (Bernard v. Time Warner Inc.,
et  al., Case No.  14651; Parnes v. Time  Warner Inc., et  al., Case No. 14660).
These two  complaints  allege, among  other  things, that  some  or all  of  the
defendants   have  violated  fiduciary  duties  owed  to  the  Company  and  its
stockholders by, among other things, (a) seeking to entrench themselves in board
and management positions and to eliminate the threat of a hostile takeover,  (b)
securing  economic benefits for themselves or conferring special benefits on TCI
and others  at  the  expense  of  the  Company's  public  stockholders  and  (c)
structuring  the TBS  Transaction so as  to place the  Company's chief executive
officer in  a position  which  allegedly will  involve  a conflict  between  the
interests  of TCI and the Company.  Among other relief demanded, both complaints
seek an injunction  against consummation  of the  TBS Transaction  and an  order
directing  the individual defendants to account to the Company for their alleged
profits and plaintiffs' alleged damages. On  November 22, 1995, the Company  and
the  other  defendants named  in  the Bernard  complaint  moved to  dismiss such
complaint.
 
     On March 12, 1996, a complaint was filed in the Delaware Chancery Court  by
a  stockholder of the Company, purportedly derivatively on behalf of the Company
(Trust for the Benefit  of Paula C. Rand  v. Gerald M. Levin,  et al., Case  No.
14890).  The complaint  alleges, among  other things,  that some  or all  of the
defendants  have  breached  fiduciary  duties  owed  to  the  Company  and   its
stockholders by, among other things, (a) seeking to entrench themselves in board
and  management  positions,  (b) conferring  special  benefits upon  TCI  at the
expense  of   the   Company's   public  stockholders   and   (c)   wasting   and
misappropriating  corporate assets by causing the  Company to enter into certain
agreements, including  those  with  TCI,  R.E.  Turner  and  Michael  Milken  in
connection  with the TBS  Transaction. The complaint  seeks, among other things,
(i)  to  enjoin,  preliminarily  and   permanently,  consummation  of  the   TBS
Transaction  and certain related  arrangements, (ii) to  void the Liberty Voting
Trust, (iii) to  enjoin, preliminarily  and permanently, any  settlement of  the
litigation  between the Company and  U S WEST, unless  and until approved by the
Court of Chancery, (iv)  a declaratory judgment  that defendants breached  their
fiduciary  duties  to  the  Company and  its  stockholders  and  (v) unspecified
damages.
 
     Seventeen complaints  have been  filed against  TBS, the  Company,  certain
officers  and  directors  of TBS,  the  Company  or TWE,  and  other defendants,
purportedly on behalf of  a class of  TBS shareholders, two  of which have  been
voluntarily  dismissed.  Sixteen of  the 17  complaints  were filed  in Superior
Court, Fulton County, Georgia; the other was  filed in the Court of Chancery  of
the  State of Delaware in and for New  Castle County. Of the complaints filed in
Georgia, 14 were filed prior to the approval of the TBS Transaction on September
22, 1995 by the Company's Board of  Directors and the Board of Directors of  TBS
(Shingala  v. Turner Broadcasting Sys., Inc.,  et al., Case No. E-41502; Schrank
v. R.E. Turner, et al., Case No.  E-41501; Lewis, et al. v. Turner  Broadcasting
Sys.,  Inc., et  al., Case  No. E-41500;  Silverstein and  Silverstein v. Turner
Broadcasting  Sys.,  Inc.,  et  al.,   Case  No.  E-41526;  Strauss  v.   Turner
Broadcasting  Sys., Inc., et  al., Case No.  E-41538; Hoffman v.  Ted Turner, et
al., Case No. E-41544;  Barry v. Turner Broadcasting  Sys., Inc., et. al.,  Case
No.  E-41545;  Mersel and  Mersel v.  R.E.  Turner, et.  al., Case  No. E-41554;
Friedland and Friedland  v. Turner  Broadcasting Sys.,  Inc., et  al., Case  No.
E-41562;  Schwarzchild  v.  Turner Broadcasting  Sys.,  Inc., et  al.,  Case No.
E-41586; Turner and Hanson v. Turner  Broadcasting Sys., Inc., et al., Case  No.
E-41637;  H. Mark Solomon  v. Turner Broadcasting  Sys., Inc., et  al., Case No.
E-41685; Shores v. Turner Broadcasting Sys., Inc., et al., Case No. E-41749; and
Krim and Davidson v. Turner Broadcasting  Sys., Inc. et al., Case No.  E-41779).
Two  of the complaints filed in Georgia were filed after the TBS Transaction was
approved by the Company's Board of Directors  and the Board of Directors of  TBS
(Altman  v. Turner Broadcasting Sys.,  Inc., et al., Case  No. E-43205; Joyce v.
Tele-Communications, Inc., et al.,  Case No. E-43321).  The plaintiff in  Altman
filed  a voluntary  dismissal of  the action  without prejudice  on November 10,
1995. On September  27, 1995,  an amended complaint  was filed  in Shingala.  On
October  24, 1995, an amended complaint was filed in Lewis, apparently on behalf
of the named plaintiffs in 12 of the 16 actions filed in Georgia. On November 1,
1995, a second amended complaint was filed
 
                                      I-45
 
<PAGE>
<PAGE>
in Lewis  which is  virtually identical  to the  first amended  Lewis  complaint
except  that the plaintiff in the Joyce action was no longer included as a named
plaintiff. The purported class action filed by a TBS shareholder in Delaware was
filed on October 2, 1995 (Joyce v. John  C. Malone, et al., Case No. 14592)  and
subsequently  dismissed  voluntarily  without  prejudice  by  the  plaintiff  on
November 15, 1995. As noted above,  a substantially similar action on behalf  of
the  same plaintiff  was filed in  Georgia on  October 23, 1995  (Joyce v. Tele-
Communications, Inc., et  al., Case No.  E-43321). On November  13, 1995,  Judge
Elizabeth  Long, to whom  all remaining actions  had been assigned, consolidated
the actions. On November 20, 1995,  subject to court approval, the plaintiff  in
Joyce  proposed to file an amended and consolidated class action complaint which
also includes a derivative claim. Also  on November 20, 1995, plaintiffs in  the
actions  other than Joyce  filed a motion  for the recusal  of Judge Long, which
motion was denied on January 22, 1996. The defendants filed answers in  response
to the second amended complaint in Lewis on December 20, 1995.
 
     The  17 purported class action complaints filed by TBS shareholders allege,
among other things,  that the terms  of the  TBS Transaction are  unfair to  TBS
shareholders  and that some or all of  the defendants have breached or aided and
abetted the breach of fiduciary, common law and/or statutory duties owed to  TBS
shareholders.  Among  the breaches  alleged in  many of  the complaints  are (a)
payment of  unfair consideration  for class  members' shares,  (b) conferral  of
benefits  on controlling shareholders at the  expense of other shareholders, (c)
corporate waste,  (d)  failure  to  seek competitive  bids  and  an  independent
appraisal  of  TBS  and (e)  entrenchment  of  TBS Board  members.  Some  of the
complaints allege that some or all of the defendants have committed fraud and/or
have used deceptive and coercive practices to being about the Transaction. Among
other relief  demanded, all  of  these complaints  seek  damages, most  seek  an
injunction  against consummation of the TBS Transaction and many seek an auction
of TBS.
 
     On January  19,  1996, defendants  in  these  actions filed  a  motion  for
judgment on the pleadings on all claims asserted in the second amended complaint
filed  in  Lewis on  the grounds  that, under  Georgia law,  the valid  grant of
dissenters' rights  to TBS  shareholders  with respect  to the  TBS  Transaction
prohibits  plaintiffs from maintaining the claims asserted in the second amended
complaint. Plaintiffs are not yet required to file a response to this motion.
 
     By letter dated  October 20,  1995, plaintiffs  in certain  of the  Georgia
suits  made a demand upon TBS to repudiate  (a) an agreement entered into by TBS
and a subsidiary of TCI to sell TBS's interest in SportsSouth, a regional sports
cable network, and  (b) the  fee authorized to  be paid  by TBS to  MC Group  in
connection  with the TBS Transaction, as corporate waste or, absent repudiation,
to seek indemnification from any officers or directors of TBS who authorized the
challenged matters. These plaintiffs  indicated that a shareholders'  derivative
suit  seeking  injunctive relief  would be  filed  in less  than 90  days. These
derivative claims were asserted four days  later in the amended Lewis  complaint
referred  to above. The  TBS Board of  Directors has established  a committee to
investigate such claims.
 
     The  Company   and  its   subsidiaries  are   also  subject   to   industry
investigations  by  certain  government agencies  and/or  proceedings  under the
antitrust laws that have been filed by private parties in which, in some  cases,
other  companies  in the  same or  related industries  are also  defendants. The
Company and its subsidiaries have denied or will deny liability in all of  these
actions.  In all but a few similar  past actions, the damages, if any, recovered
from the Company or the amounts, if any, for which the actions were settled were
small or nominal in relation to the damages sought; and it is the opinion of the
management of  the Company  that any  settlements or  adverse judgments  in  the
similar  actions currently  pending will not  involve the payment  of amounts or
have other results that  would have a material  adverse effect on the  financial
condition of the Company.
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
     Not Applicable.
 
                                      I-46
 
<PAGE>
<PAGE>
                       EXECUTIVE OFFICERS OF THE COMPANY
 
     Pursuant  to  General  Instruction  G (3),  the  information  regarding the
Company's executive officers required by Item 401(b) of Regulation S-K is hereby
included in Part I of this report.
 
     The following table sets  forth the name of  each executive officer of  the
Company,  the office held by such officer and  the age, as of March 17, 1996, of
such officer:
 
<TABLE>
<CAPTION>
                    NAME                        AGE                              OFFICE
---------------------------------------------   ---   ------------------------------------------------------------
<S>                                             <C>   <C>
Gerald M. Levin..............................   56    Chairman of the Board and Chief Executive Officer
Richard D. Parsons...........................   47    President
Peter R. Haje................................   61    Executive Vice President, General Counsel and Secretary
Timothy A. Boggs.............................   45    Senior Vice President
Richard J. Bressler..........................   38    Senior Vice President and Chief Financial Officer
Tod R. Hullin................................   52    Senior Vice President
Philip R. Lochner, Jr. ......................   53    Senior Vice President
</TABLE>
 
     Set forth below are the principal  positions held by each of the  executive
officers named above since March 1, 1991:
 
<TABLE>
<S>                                      <C>
Mr. Levin..............................  Chairman  of the  Board of Directors  and Chief  Executive Officer since
                                         January 21, 1993.  Prior to  that he  served as  President and  Co-Chief
                                         Executive  Officer  from  February  20, 1992;  Vice  Chairman  and Chief
                                         Operating Officer from May 1991; and Vice Chairman of the Board prior to
                                         that.
 
Mr. Parsons............................  President since February 1,  1995. Prior to that  he served as  Chairman
                                         and  Chief Executive Officer of  The Dime Savings Bank  of New York, FSB
                                         from January 1991.
 
Mr. Haje...............................  Executive Vice President and General  Counsel since October 1, 1990  and
                                         Secretary since May 20, 1993.
 
Mr. Boggs..............................  Senior  Vice President since November 19,  1992. Prior to that he served
                                         as Vice President of Public Affairs.
 
Mr. Bressler...........................  Senior Vice President and Chief Financial Officer since March 16,  1995.
                                         Prior  to that he served as  Senior Vice President, Finance from January
                                         2, 1995; and as a Vice President prior to that.
 
Mr. Hullin.............................  Senior Vice President since February 7, 1991.
 
Mr. Lochner............................  Senior Vice  President since  July 18,  1991. Prior  to that,  he was  a
                                         Commissioner  of the Securities and  Exchange Commission from March 1990
                                         to June 1991.
</TABLE>
 
                                      I-47

<PAGE>
<PAGE>
                                    PART II
 
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
 
     The  principal market for the Company's Common  Stock is the New York Stock
Exchange. The Common Stock is also listed on the Pacific Stock Exchange and  the
London  Stock  Exchange. For  quarterly price  information  with respect  to the
Company's Common Stock for the two years ended December 31, 1995, see 'Quarterly
Financial Information' at  page F-55 herein,  which information is  incorporated
herein by reference.
 
     The  approximate number of holders of  record of the Company's Common Stock
as of January 31, 1996 was 25,000.
 
     For information on the frequency and amount of dividends paid with  respect
to  the Company's Common Stock during the two years ended December 31, 1995, see
'Quarterly Financial  Information' at  page F-55  herein, which  information  is
incorporated herein by reference.
 
ITEM 6. SELECTED FINANCIAL DATA
 
     The  selected financial information of the Company for the five years ended
December 31, 1995 is set forth at page F-53 herein and is incorporated herein by
reference.
 
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
 
     The information set  forth under the  caption 'Management's Discussion  and
Analysis' at pages F-2 through F-19 herein is incorporated herein by reference.
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
     The consolidated financial statements and supplementary data of the Company
and  the report of independent auditors thereon  set forth at pages F-20 through
F-50 and F-52 herein are incorporated herein by reference.
 
     Quarterly  Financial  Information  set  forth   at  page  F-55  herein   is
incorporated herein by reference.
 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
 
     Not Applicable.
 
                                      II-1

<PAGE>
<PAGE>
                                    PART III
 
<TABLE>
<S>                                <C>
Items 10, 11, 12 and 13.           DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT; EXECUTIVE COMPENSATION;
                                   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT; CERTAIN
                                   RELATIONSHIPS AND RELATED TRANSACTIONS
</TABLE>
 
     Information  called  for  by  PART  III  (Items  10,  11,  12  and  13)  is
incorporated by reference from  the Company's definitive  Proxy Statement to  be
filed  in connection  with its 1996  Annual Meeting of  Stockholders pursuant to
Regulation 14A, except  that the information  regarding the Company's  executive
officers called for by Item 401(b) of Regulation S-K has been included in PART I
of  this report  and the information  called for  by Items 402(k)  and 402(l) of
Regulation S-K is not incorporated by reference.
 
                                     III-1

<PAGE>
<PAGE>
                                    PART IV
 
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
 
     (a) (1)-(2) Financial Statements and Schedules:
 
          (i)  The list of  consolidated financial statements  and schedules set
     forth in the  accompanying Index to  Consolidated Financial Statements  and
     Other  Financial Information at  page F-1 herein  is incorporated herein by
     reference. Such consolidated financial  statements and schedules are  filed
     as part of this report.
 
          (ii)  The unaudited  financial statements  of the  Time Warner Service
     Partnerships for the quarterly period ended September 30, 1995 included  in
     the  Current Report on Form 8-K  of Time Warner Entertainment Company, L.P.
     (Reg. No. 33-53742)  dated November 28,  1995 ('TWE's 1995  Form 8-K')  are
     incorporated  herein  by reference  and  are filed  as  an exhibit  to this
     report.
 
          (iii) The financial statements of the Time Warner Service Partnerships
     and the report  of independent auditors  thereon, set forth  at pages  F-64
     through  F-73  in  the 1994  Annual  Report  on Form  10-K  of  Time Warner
     Entertainment Company,  L.P.  ('TWE's  1994 Form  10-K')  are  incorporated
     herein by reference and are filed as an exhibit to this report.
 
          (iv)  The unaudited financial statements of Paragon Communications for
     the quarterly period ended  June 30, 1995 included  in TWE's 1995 Form  8-K
     are  incorporated herein by reference  and are filed as  an exhibit to this
     report.
 
          (v) The  financial  statements  and financial  statement  schedule  of
     Paragon  Communications and the report  of independent accountants thereon,
     set forth  at  pages  F-74  through  F-83 in  TWE's  1994  Form  10-K,  are
     incorporated  herein  by reference  and  are filed  as  an exhibit  to this
     report.
 
     All other financial  statement schedules are  omitted because the  required
information  is not applicable, or because  the information required is included
in the consolidated financial statements and notes thereto.
 
     (3) Exhibits:
 
     The exhibits  listed  on  the  accompanying  Exhibit  Index  are  filed  or
incorporated  by reference  as part  of this  report and  such Exhibit  Index is
incorporated herein  by reference.  Exhibits 10.1  through 10.22  listed on  the
accompanying  Exhibit Index identify management  contracts or compensatory plans
or arrangements  required to  be filed  as  exhibits to  this report,  and  such
listing is incorporated herein by reference.
 
     (b) Reports on Form 8-K.
 
          (i)  The Company filed a Current Report on Form 8-K dated November 14,
     1995, in which it reported in  Item 5 certain transactions entered into  or
     proposed  to be entered into by the Company  and TWE and which set forth in
     Item 7 certain pro forma financial  statements of the Company at  September
     30, 1995 which give effect to such transactions.
 
          (ii)  The Company filed a Current Report on Form 8-K dated December 1,
     1995, in which it reported in Item 5 that it had entered into an  Agreement
     and  Plan of Merger, dated  as of September 22,  1995, providing for TBS to
     become a wholly  owned subsidiary of  the Company through  a merger with  a
     subsidiary of the Company.
 
          (iii)  The Company filed a Current Report on Form 8-K dated January 4,
     1996, in which it  reported in Item  2 its acquisition  of CVI and  certain
     related companies, and related transactions.
 
          (iv)  The Company filed a  Current Report on Form  8-K dated March 22,
     1996 which set forth  in Item 7 certain  pro forma financial statements  of
     the Company at December 31, 1995.
 
                                      IV-1
 
<PAGE>
<PAGE>
                                   SIGNATURES
 
     PURSUANT  TO  THE REQUIREMENTS  OF SECTION  13 OR  15(D) OF  THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
 
                                                 TIME WARNER INC.
 
                                            By         /s/ PETER R. HAJE
                                               .................................
                                                        PETER R. HAJE
                                                  EXECUTIVE VICE PRESIDENT,
                                                GENERAL COUNSEL AND SECRETARY
 
Date: March 22, 1996
 
     Pursuant to the requirements of the  Securities Exchange Act of 1934,  this
report  has  been  signed  below  by the  following  persons  on  behalf  of the
registrant and in the capacities and on the dates indicated.
 
<TABLE>
<CAPTION>
                SIGNATURE                                       TITLE                              DATE
------------------------------------------  ---------------------------------------------   -------------------
<C>                                         <S>                                             <C>
           /s/ GERALD M. LEVIN              Director, Chairman of the Board and Chief         March 22, 1996
 .........................................    Executive Officer (principal executive
            (GERALD M. LEVIN)                 officer)
 
         /s/ RICHARD J. BRESSLER            Senior Vice President and Chief Financial         March 22, 1996
 .........................................    Officer (principal financial officer)
          (RICHARD J. BRESSLER)
 
           /s/ JOHN A. LABARCA              Vice President and Controller (principal          March 22, 1996
 .........................................    accounting officer)
            (JOHN A. LABARCA)
 
                    *                       Director                                          March 22, 1996
 .........................................
              (MERV ADELSON)
 
                    *                       Director                                          March 22, 1996
 .........................................
        (LAWRENCE B. BUTTENWIESER)
 
                    *                       Director                                          March 22, 1996
 .........................................
         (EDWARD S. FINKELSTEIN)
 
                    *                       Director                                          March 22, 1996
 .........................................
        (BEVERLY SILLS GREENOUGH)
 
                    *                       Director                                          March 22, 1996
 .........................................
             (CARLA A. HILLS)
 
                    *                       Director                                          March 22, 1996
 .........................................
            (DAVID T. KEARNS)
</TABLE>
 
                                      IV-2
 
<PAGE>
<PAGE>
 
<TABLE>
<CAPTION>
                SIGNATURE                                       TITLE                              DATE
------------------------------------------  ---------------------------------------------   -------------------
<C>                                         <S>                                             <C>
                    *                                         Director                        March 22, 1996
 .........................................
             (HENRY LUCE III)
 
                    *                                         Director                        March 22, 1996
 .........................................
              (REUBEN MARK)
 
                    *                                         Director                        March 22, 1996
 .........................................
            (MICHAEL A. MILES)
 
                    *                                         Director                        March 22, 1996
 .........................................
            (J. RICHARD MUNRO)
 
                    *                                         Director                        March 22, 1996
 .........................................
           (RICHARD D. PARSONS)
 
                    *                                         Director                        March 22, 1996
 .........................................
           (DONALD S. PERKINS)
 
                    *                                         Director                        March 22, 1996
 .........................................
           (RAYMOND S. TROUBH)
 
                    *                                         Director                        March 22, 1996
 .........................................
        (FRANCIS T. VINCENT, JR.)
 
      *By         /s/ PETER R. HAJE
 .........................................
            (ATTORNEY-IN-FACT)
</TABLE>
 
                                      IV-3



                              STATEMENT OF DIFFERENCES
                              ------------------------

                     The trademark symbol shall be expressed as 'tm'
                     The section symbol shall be expressed as SS

<PAGE>
 
<PAGE>
          TIME WARNER INC. AND TIME WARNER ENTERTAINMENT COMPANY, L.P.
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
                        AND OTHER FINANCIAL INFORMATION
 
<TABLE>
<CAPTION>
                                                                                                         PAGE
                                                                                                    --------------
                                                                                                     TIME
                                                                                                    WARNER    TWE
                                                                                                    ------    ----
<S>                                                                                                 <C>       <C>
Management's Discussion and Analysis of Results of Operations and Financial Condition............    F-2      F-61
Consolidated Financial Statements:
     Balance Sheet...............................................................................    F-20     F-71
     Statement of Operations.....................................................................    F-21     F-72
     Statement of Cash Flows.....................................................................    F-22     F-73
     Statement of Shareholders' Equity and Partnership Capital...................................    F-23     F-74
     Notes to Consolidated Financial Statements..................................................    F-24     F-75
Report of Management.............................................................................    F-51
Report of Independent Auditors...................................................................    F-52     F-94
Selected Financial Information...................................................................    F-53     F-95
Quarterly Financial Information..................................................................    F-55     F-96
Financial Statement Schedules:
     Schedule I -- Condensed Financial Information of Registrant.................................    F-56
     Schedule II -- Valuation and Qualifying Accounts............................................    F-60     F-97
</TABLE>
 
All  other financial statements  and schedules are  omitted because the required
information is not present, or is  not present in amounts sufficient to  require
submission  of the financial statements or schedules, or because the information
required is included in the consolidated financial statements and notes thereto.
 
                                      F-1


<PAGE>
 
<PAGE>
                                TIME WARNER INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
 
     Time   Warner  has  interests  in  three  fundamental  areas  of  business:
Entertainment, consisting principally of interests  in recorded music and  music
publishing, filmed entertainment, broadcasting, theme parks and cable television
programming;  News  and  Information,  consisting  principally  of  interests in
magazine   publishing,    book   publishing    and   direct    marketing;    and
Telecommunications,  consisting  principally  of interests  in  cable television
systems. Substantially all of Time  Warner's interests in filmed  entertainment,
broadcasting,  theme parks, cable  television programming and  most of its cable
television  systems  are  held  through  the  Entertainment  Group,   consisting
principally  of TWE, which is not consolidated for financial reporting purposes.
TWE manages  the telecommunications  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.
 
STRATEGIC INITIATIVES
 
SIGNIFICANT TRANSACTIONS
 
     During 1995, Time Warner and the Entertainment Group embarked on a  program
to  improve  their  financial  condition and  increase  their  overall financial
flexibility through the  initiation of  an asset sales  program and  significant
debt  refinancings.  Time  Warner  and  the  Entertainment  Group  also  pursued
significant, strategic initiatives  during 1995 through  their cable  television
operations  and  through  a  proposed  merger  of  Time  Warner  and  TBS. These
initiatives are part of a continuing strategy to further enhance the strength of
Time Warner's  interests  in entertainment  and  news and  information,  and  to
attempt  to use existing  and acquired cable television  systems to establish an
enterprise that will be responsible for the overall management and financing  of
its  cable  and  telecommunications  interests. In  pursuit  of  these strategic
initiatives, Time Warner and  the Entertainment Group  announced or completed  a
number  of transactions in 1995 and early 1996  that have had or are expected to
have  a  significant  effect  on  their  results  of  operations  and  financial
condition. Such transactions include:
 
      The  September 1995 announcement of Time  Warner's agreement to merge with
      TBS by  acquiring the  remaining 80%  interest  in TBS  that it  does  not
      already own;
 
      The  acquisitions by  Time Warner  of Summit,  KBLCOM and  CVI and related
      companies,  and  the   formation  by  TWE   of  the   TWE-Advance/Newhouse
      Partnership,  which together  strengthened the geographic  clusters of the
      cable television systems and substantially  increased the number of  cable
      subscribers  managed  by  Time  Warner  Cable  (collectively,  the  'Cable
      Transactions');
 
      The exchange  of  ITOCHU's  and  Toshiba's interests  in  TWE  for  equity
      interests in Time Warner (the 'ITOCHU/Toshiba Transaction');
 
      The  refinancing of approximately $4 billion of public debt by Time Warner
      and the execution  of a  new $8.3  billion credit  agreement, under  which
      approximately  $2.7 billion of debt assumed  in the Cable Transactions was
      refinanced by subsidiaries of Time Warner and $2.6 billion of pre-existing
      bank debt was refinanced by TWE (the 'Debt Refinancings'); and
 
      The sale by  Time Warner  and the  Entertainment Group  of certain  assets
      under an asset sales program, which raised approximately $1.6 billion on a
      combined  basis for  debt reduction,  including the  sale of  51% of TWE's
      interest in  Six Flags  (the  'Six Flags  Transaction')  and the  sale  or
      expected  sale or transfer of certain unclustered cable television systems
      owned by TWE (the 'Unclustered Cable Transactions').
 
                                      F-2
 

<PAGE>
 
<PAGE>
                                TIME WARNER INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
        OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
 
The nature of these transactions and  their impact on the results of  operations
and  financial condition of Time Warner  and the Entertainment Group are further
discussed below.
 
TELECOMMUNICATIONS STRATEGY
 
     In 1994, Time Warner embarked on a strategy to expand its cable  television
business,  leading to  agreements to  combine with  or acquire  cable television
systems serving approximately 3.7 million  subscribers. This strategy was  based
on  management's expectation  that there would  be a signficant  increase in the
value of cable television systems related,  in part, to a future convergence  of
the  cable and telephone industries which  would provide cable companies with an
opportunity to operate large geographic clusters of cable television systems for
purposes of  maximizing the  development and  distribution of  new and  improved
services  on a  cost efficient basis,  such as increased  channel capacity, high
speed data transmission and telephony services.
 
     During 1995  and with  the  acquisition of  CVI  and related  companies  in
January  1996, Time Warner  completed its plans  for the expansion  of its cable
television business,  thereby strengthening  its  geographic clusters  of  cable
television  systems as  previously envisioned.  Along with  internal growth, the
acquisitions of Summit,  KBLCOM and CVI  and related companies,  as well as  the
formation of the TWE-Advance/Newhouse Partnership, increased the total number of
subscribers  under  the management  of  Time Warner  Cable  to 11.7  million, as
compared to 7.5 million subscribers  at the end of  1994. Time Warner Cable  has
also  extended its reach of cable television systems to neighborhoods passing 18
million homes or close to 20% of television homes in the U.S. In addition, there
are now 35 geographic clusters of cable television systems serving over  100,000
subscribers each, including key markets such as New York City and State, central
Florida and North Carolina. Time Warner does not currently plan to make any more
significant  acquisitions of  cable television  systems, but  instead intends to
continue to refine  its geographic  clusters by  exchanging certain  unclustered
cable  television  systems  for  geographically-strategic  ones  or  by  selling
non-strategic cable television systems as part of the Company's continuing asset
sales program.  Management continues  to  believe that  the increased  size  and
concentration  of its subscriber base will  provide for sustained revenue growth
from new and improved services, and provide certain economies of scale  relating
to  the upgrade of  the technological capabilities of  Time Warner Cable's cable
television systems.
 
     Management believes that the future convergence of the cable and  telephone
industries  has been substantially  confirmed through various  events within the
industry,  including  the   February  1996  enactment   into  law  of   sweeping
telecommunications industry reform. Among other features, the Telecommunications
Act of 1996 effectively removes regulatory barriers that historically prohibited
cable  television companies and local and long-distance telephone companies from
competing in each  other's business. In  addition, the new  law eliminates  most
cable   rate   pricing  restrictions   in  1999,   and  earlier   under  certain
circumstances. Time Warner expects that the relaxation of cable rate  regulation
in  1999, along with permitted cable  rate price increases for certain regulated
services that went into effect on January  1, 1996 under a separate Time  Warner
agreement  with the Federal Communications  Commission (the 'FCC'), will provide
enhanced pricing  flexibility that  will help  finance its  cable and  telephony
expansion plans.
 
     The  next phase of Time Warner's telecommunications strategy is to simplify
the structure of its  cable and telecommunications  properties by bringing  such
properties together, so far as practicable and on a tax-efficient basis, into an
enterprise  that will be responsible for the overall management and financing of
these interests.  The first  step of  this process  was completed  in 1995  when
ITOCHU and Toshiba exchanged their interests in TWE for equity interests in Time
Warner.  The restructuring process depends,  among other things, upon successful
negotiations with U S WEST and  certain creditors, and the receipt of  franchise
and  other regulatory approvals. Accordingly, there can be no assurance that the
effort  will   succeed.  In   the   interim,  as   contemplated  by   the   TWE-
 
                                      F-3
 

<PAGE>
 
<PAGE>
                                TIME WARNER INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
        OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
 
Advance/Newhouse  Partnership agreement, Time Warner may transfer certain of its
newly-acquired cable  systems  to  the  TWE-Advance/Newhouse  Partnership  on  a
tax-efficient  basis.  Such transfers,  if  they are  made,  are expected  to be
structured so that the systems will be transferred subject to a portion of  Time
Warner's  debt,  thereby  reducing the  financial  leverage of  Time  Warner and
increasing  the  under-leveraged  capitalization  of  the   TWE-Advance/Newhouse
Partnership and consequently, TWE.
 
TBS TRANSACTION
 
     With the announcement in September 1995 of Time Warner's plan to merge with
TBS,  Time Warner  has taken  a strategic step  that would  further enhance Time
Warner's interests  in  entertainment  and news  and  information  assets  while
improving   the  balance  between  such  interests  and  its  interests  in  the
telecommunications  business.  The  addition  of  TBS'  news  and  entertainment
programming  networks, film and cartoon libraries, film production companies and
sports franchises  is expected  to  complement virtually  all of  Time  Warner's
business  interests  and expand  the emphasis  on  growth through  Time Warner's
interests in its entertainment and news and information businesses.
 
     The TBS Transaction provides for the merger of each of Time Warner and  TBS
with  separate subsidiaries of  a holding company ('New  Time Warner') that will
combine, for  financial  reporting purposes,  the  consolidated net  assets  and
operating  results of Time Warner and TBS.  Based on TBS' financial position and
results of operations as of and for the year ended December 31, 1995, and giving
pro forma effect to the  TBS Transaction as if it  had occurred on December  31,
1995  for balance sheet purposes and at  the beginning of the year for statement
of operations purposes, the incremental effect  on Time Warner reflected in  the
combined  pro forma financial statements of New  Time Warner would have been (i)
an increase in shareholder's equity  of approximately $7.3 billion,  principally
due  to the issuance by New Time Warner of approximately 177.8 million shares of
common stock, (ii) an increase in  long-term debt of approximately $2.5  billion
due  to  the  assumption  of  TBS'  debt,  (iii)  an  increase  in  goodwill  of
approximately $7.9 billion as a result of a preliminary allocation of the excess
cost over the net book value of assets acquired, (iv) an increase in revenues of
$3.4 billion, (v) an increase in EBITDA (as defined below) of $524 million, (vi)
an  increase  in  depreciation  and  amortization  of  $377  million,  including
approximately  $200  million  of  noncash  amortization  of  goodwill,  (vii) an
increase in operating income of $147 million, (viii) an increase in net loss  of
$111  million and  (ix) a  reduction in net  loss per  common share  of $.12 per
common share resulting from the dilutive effect of issuing 177.8 million  shares
of common stock.
 
     The  TBS Transaction is subject  to customary closing conditions, including
the approval  of the  shareholders of  TBS  and of  Time Warner,  all  necessary
approvals  of  the FCC  and  appropriate antitrust  approvals.  There can  be no
assurance that  all  these  approvals  can  be  obtained  or,  in  the  case  of
governmental approvals, if obtained, will not be conditioned upon changes to the
terms of the merger agreement or related agreements.
 
USE OF EBITDA
 
     The  following  comparative discussion  of  the results  of  operations and
financial condition of Time Warner  and the Entertainment Group includes,  among
other  factors, an analysis of  changes in the operating  income of the business
segments before depreciation and amortization  ('EBITDA') in order to  eliminate
the  effect on the operating performance  of the music, filmed entertainment and
cable businesses of  significant amounts  of amortization  of intangible  assets
recognized  in the  $14 billion  acquisition of  WCI in  1989, the  $1.3 billion
acquisition of the ATC minority interest in 1992, the $1.4 billion  acquisitions
of  KBLCOM and Summit in  1995 and other business  combinations accounted for by
the purchase method, including the $904 million acquisition
 
                                      F-4
 

<PAGE>
 
<PAGE>
                                TIME WARNER INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
        OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
 
of CVI and related companies  in January 1996 and  the proposed TBS merger  with
respect  to  certain  discussions  on  a  pro  forma  basis.  Financial analysts
generally consider EBITDA to  be an important  measure of comparative  operating
performance  for the businesses of Time  Warner and the Entertainment Group, and
when used in comparison to debt levels or the coverage of interest expense, as a
measure of liquidity. However, EBITDA should  be considered in addition to,  not
as  a substitute for, operating income, net income, cash flow and other measures
of financial performance  and liquidity  reported in  accordance with  generally
accepted accounting principles.
 
RESULTS OF OPERATIONS
 
1995 VS. 1994
 
     Time  Warner had revenues of  $8.067 billion, a loss  of $124 million ($.46
per common share) before an extraordinary loss  on the retirement of debt and  a
net  loss of $166 million ($.57 per  common share) in 1995, compared to revenues
of $7.396 billion and a net loss of $91 million ($.27 per common share) in 1994.
 
     The increase in Time Warner's net loss in 1995 was principally related to a
$42 million extraordinary loss on the retirement of debt ($.11 per common share)
and $85 million in pretax  losses ($52 million after  taxes and $.13 per  common
share)  related  to certain  businesses and  joint ventures  owned by  the Music
Division which were restructured or closed.  As discussed more fully below,  the
increase  in Time  Warner's net  loss in 1995  from such  losses was principally
mitigated by an  overall increase in  the fundamental operating  income of  Time
Warner's  business segments and  increased income from its  equity in the pretax
income  of  the  Entertainment   Group,  offset  in  part   by  a  decrease   in
investment-related  income  and higher  interest  expense on  approximately $1.3
billion of debt assumed in the cable acquisitions. The increase in Time Warner's
net loss per  common share  in 1995  also related  to an  increase in  preferred
dividend requirements to $52 million from $13 million in 1994 as a result of the
preferred  stock issued in  connection with the 1995  cable acquisitions and the
ITOCHU/Toshiba Transaction.
 
     Time Warner's equity in  the pretax income of  the Entertainment Group  was
$256  million in 1995, compared to $176 million in 1994. As discussed more fully
below, the Entertainment Group's  operating results in  1995 reflect an  overall
increase  in operating income generated by  its business segments (including the
contribution  by  the  TWE-Advance/Newhouse  Partnership)  and  an  increase  in
investment-related   income  resulting  from  gains   on  the  sale  of  certain
unclustered cable  systems and  other investments,  offset in  part by  minority
interest  expense related to  the consolidation of the  operating results of the
TWE-Advance/Newhouse Partnership effective as of April 1, 1995.
 
     On a pro forma basis, giving effect to (i) the Cable Transactions, (ii) the
ITOCHU/Toshiba Transaction,  (iii) the  Debt Refinancings,  (iv) the  Six  Flags
Transaction  and  (v) the  Unclustered Cable  Transactions, as  if each  of such
transactions had occurred  at the beginning  of the periods,  Time Warner  would
have reported for the years ended December 31, 1995 and 1994, revenues of $8.742
billion  and $8.217 billion,  depreciation and amortization  of $935 million and
$906 million, operating income of $656  million and $653 million, equity in  the
pretax  income of the  Entertainment Group of  $286 million and  $205 million, a
loss before extraordinary item of $255 million and $266 million ($1.02 and $1.07
per common share) and  a net loss  of $297 million and  $266 million ($1.13  and
$1.07  per common share), respectively. The 1995 to 1994 comparison of pro forma
results are  similarly affected  by any  underlying historical  trends that  are
unrelated to the transactions given pro forma effect to therein, such as the $85
million  in pretax  Music Division losses  discussed above. The  increase in pro
forma over  historical losses  before  extraordinary items  for each  period  is
principally  the  result of  approximately  $230 million  in  annualized noncash
amortization of certain intangible assets recognized in the
 
                                      F-5
 

<PAGE>
 
<PAGE>
                                TIME WARNER INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
        OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
 
cable acquisitions which is not fully offset  by the pro forma effects of  other
improved  net operating results, a  component of which is  the pro forma benefit
from the net addition of over $400 million in annualized EBITDA.
 
     On  a  pro  forma  basis,  giving  effect  to  (i)  the  formation  of  the
TWE-Advance/Newhouse  Partnership,  (ii) the  refinancing of  approximately $2.6
billion of pre-existing bank debt, (iii) the consolidation of Paragon, (iv)  the
Six  Flags Transaction and (v) the Unclustered Cable Transactions, as if each of
such  transactions  had  occurred   at  the  beginning   of  the  periods,   the
Entertainment  Group would have  reported for the years  ended December 31, 1995
and 1994,  revenues  of $9.686  billion  and $8.778  billion,  depreciation  and
amortization  of $1.078  billion and  $1.038 billion,  operating income  of $994
million and $923 million, income before  extraordinary item of $203 million  and
$171  million and net income of $179 million and $171 million, respectively. The
1995 to  1994 comparison  of pro  forma results  are similarly  affected by  any
underlying  historical trends that  are unrelated to  the transactions given pro
forma effect to therein.  The increase in pro  forma over historical net  income
for  each period principally results  from the pro forma  effects of a full year
contribution by  the  TWE-Advance/Newhouse  Partnership,  and  interest  savings
associated  with  the  refinancing of  TWE's  bank  debt and  lower  debt levels
resulting from asset sales.
 
     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.
 
     EBITDA  and operating income for Time Warner and the Entertainment Group in
1995 and 1994 are as follows:
 
<TABLE>
<CAPTION>
                                                                                    YEARS ENDED DECEMBER 31,
                                                                            ----------------------------------------
                                                                                 EBITDA           OPERATING INCOME
                                                                            ----------------    --------------------
                                                                             1995      1994       1995        1994
                                                                            ------    ------    --------    --------
                                                                                           (MILLIONS)
<S>                                                                         <C>       <C>       <C>         <C>
Time Warner:
Publishing...............................................................   $  476    $  430      $381        $347
Music(1).................................................................      690       720       321         366
Cable....................................................................       90        --        (5)         --
                                                                            ------    ------    --------    --------
Total....................................................................   $1,256    $1,150      $697        $713
                                                                            ------    ------    --------    --------
                                                                            ------    ------    --------    --------
Entertainment Group:
Filmed Entertainment.....................................................   $  490    $  430      $253        $219
Six Flags Theme Parks....................................................       60       135        29          56
Broadcasting-The WB Network..............................................      (66)       --       (66)         --
Programming-HBO..........................................................      293       257       274         237
Cable....................................................................    1,275       989       502         340
                                                                            ------    ------    --------    --------
Total....................................................................   $2,052    $1,811      $992        $852
                                                                            ------    ------    --------    --------
                                                                            ------    ------    --------    --------
</TABLE>
 
------------
 
(1) Includes pretax losses of  $85 million recorded in  1995 related to  certain
    businesses  and  joint  ventures  owned by  the  Music  Division  which were
    restructured or closed.
 
                                      F-6
 

<PAGE>
 
<PAGE>
                                TIME WARNER INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
        OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
 
TIME WARNER
 
     Publishing.   Revenues  increased to  $3.722  billion, compared  to  $3.433
billion   in  1994.  EBITDA  increased  to   $476  million  from  $430  million.
Depreciation and amortization amounted to $95 million in 1995 and $83 million in
1994. Operating income  increased to  $381 million from  $347 million.  Revenues
benefited from increases in magazine circulation, advertising and book revenues.
Contributing  to  the revenue  gain were  increases  achieved by  People, Sports
Illustrated, Fortune  and  book publisher  Oxmoor  House. EBITDA  and  operating
income  increased  as  a  result  of  the  revenue  gains,  offset  in  part  by
significantly higher postal and paper costs as a result of price increases.
 
     Music.  Revenues increased to $4.196 billion, compared to $3.986 billion in
1994. EBITDA  decreased to  $690  million from  $720 million.  Depreciation  and
amortization, including amortization related to the purchase of WCI, amounted to
$369  million in 1995  and $354 million  in 1994. Operating  income decreased to
$321 million from $366 million. Operating results were adversely affected by $85
million in losses recorded in 1995 that related to certain businesses and  joint
ventures owned by the Music Division which were restructured or closed. Revenues
for 1995 were negatively affected by certain reclassifications relating to third
party,   pressing  and  distribution  arrangements  and  changes  in  the  Music
Division's ownership  interests in  certain  investments and  subsidiaries  that
resulted  in changes from the consolidation  to the equity method of accounting.
Excluding the effects from such reclassifications and changes, revenues from the
fundamental business increased by approximately  6%, principally as a result  of
increases  in  both  domestic  and  international  recorded  music  revenues and
increased music publishing revenues.  Domestic and international recorded  music
revenues  benefited from  a number  of popular releases  and an  increase in the
percentage of compact  disc to total  unit sales. Excluding  the $85 million  in
losses,  EBITDA increased, and operating  income benefited, principally from the
revenue gains and  interest income  on the resolution  of a  recorded music  tax
matter, offset in part by expenses incurred in connection with the settlement of
certain  employment contracts and lower results from direct marketing activities
attributable to higher amortization of member acquisition costs.
 
     The losses  relating to  certain businesses  and joint  ventures that  were
restructured or closed are primarily related to Warner Music Enterprises, one of
the  Company's direct marketing efforts, and the write off of its related direct
mail order assets that were not recoverable due to the closure of this business.
Such closure  was substantially  completed  in 1995  and  will not  require  any
significant, future cash outlays. The activities that will not be continued have
not  been  material to  historical  operating results  and  are not  expected to
significantly affect the results of future operations.
 
     Cable.  As a result of Time  Warner's acquisitions of KBLCOM and Summit  in
1995, cable operating results for 1995 included revenues of $172 million, EBITDA
of  $90 million, depreciation  and amortization of $95  million and an operating
loss of $5 million. Moderate operating  losses are expected to continue in  1996
because  of  the  full year  effect  of  approximately $230  million  of noncash
amortization  of  certain   intangible  assets  recognized   in  Time   Warner's
acquisitions  of KBLCOM  and Summit  in 1995, and  CVI and  related companies in
1996.
 
     Interest and  Other, Net.    Interest and  other,  net, increased  to  $877
million in 1995, compared to $724 million in 1994. Interest expense increased to
$877 million, compared to $769 million, principally as a result of approximately
$1.3  billion of debt  assumed in the cable  acquisitions and higher short-term,
floating-rates of interest paid on $2.6 billion notional amount of interest rate
swap contracts.  Other income,  net, was  immaterial in  1995, compared  to  $45
million in 1994, principally because of a decrease in investment-related income.
Investment-related  income in  both periods  consisted of  gains on  the sale of
certain assets, including the sale  of an interest in  QVC, Inc. in 1995,  which
were  offset  by  losses  from  reductions  in  the  carrying  value  of certain
investments taken in each period.
 
                                      F-7
 

<PAGE>
 
<PAGE>
                                TIME WARNER INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
        OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
 
ENTERTAINMENT GROUP
 
     Filmed Entertainment.   Revenues increased to  $5.078 billion, compared  to
$4.484  billion in  1994. EBITDA  increased to  $490 million  from $430 million.
Depreciation and amortization, including amortization related to the purchase of
WCI, amounted to $237 million in 1995 and $211 million in 1994. Operating income
increased to $253 million from  $219 million. Revenues benefited from  increases
in   worldwide  theatrical,   home  video,  consumer   products  and  television
distribution operations. Worldwide theatrical  and domestic home video  revenues
in  1995 were led by the success  of Batman Forever. EBITDA and operating income
benefited from the revenue gains and increased income from licensing operations.
 
     Six Flags Theme Parks.  As a result of TWE's sale of 51% of its interest in
Six Flags, the operating results of Six Flags have been deconsolidated effective
as of June 23, 1995 and TWE's  remaining 49% interest in Six Flags is  accounted
for  under the equity  method of accounting.  Accordingly, revenues decreased to
$227 million, compared to $557 million in 1994. EBITDA decreased to $60  million
from $135 million. Depreciation and amortization amounted to $31 million in 1995
and  $79 million  in 1994.  Operating income decreased  to $29  million from $56
million.
 
     Broadcasting-The WB Network.  The WB Network was launched in January  1995,
and  generated $66 million of  operating losses on $33  million of revenues. The
operating loss was  mitigated by  a favorable legal  settlement, as  well as  by
funding  from a limited partner admitted as  of August 1995. Due to the start-up
nature of  this  new  national  broadcast  operation,  losses  are  expected  to
continue.
 
     Programming-HBO.   Revenues increased to $1.607 billion, compared to $1.513
billion  in  1994.  EBITDA  increased   to  $293  million  from  $257   million.
Depreciation and amortization amounted to $19 million in 1995 and $20 million in
1994.  Operating income  increased to $274  million from  $237 million. Revenues
benefited primarily from an  increase in subscriptions to  29.7 million from  27
million  at the  end of 1994,  as well as  from higher pay-TV  rates. EBITDA and
operating income improved principally as a result of the revenue gains.
 
     Cable.  Revenues increased to $3.094 billion, compared to $2.242 billion in
1994. EBITDA increased  to $1.275  billion from $989  million. Depreciation  and
amortization,  including amortization  related to  the purchase  of WCI  and the
acquisition of the ATC minority interest,  amounted to $773 million in 1995  and
$649  million  in 1994.  Operating income  increased to  $502 million  from $340
million. Revenues  and operating  results benefited  from the  formation of  the
TWE-Advance/Newhouse  Partnership  on April  1,  1995 and  the  consolidation of
Paragon effective as of July 6, 1995. Excluding such effects, revenues benefited
from  an  aggregate  increase  in  basic  cable  and  Primestar-related,  direct
broadcast satellite subscribers that approached 6% and increases in nonregulated
revenues, including pay-TV, pay-per-view and advertising. Excluding the positive
contributions from the TWE-Advance/Newhouse Partnership and the consolidation of
Paragon, EBITDA and operating income increased as a result of the revenue gains,
offset  in  part by  the full  year impact  of  the second  round of  cable rate
regulations that  went into  effect  in July  1994,  higher start-up  costs  for
telephony  operations  and,  with  respect  to  operating  income  only,  higher
depreciation and amortization relating to increased capital spending.
 
     Interest and  Other, Net.    Interest and  other,  net, decreased  to  $539
million in 1995, compared to $616 million in 1994. Interest expense increased to
$579  million, compared  to $567  million in  1994, principally  as a  result of
higher short-term, floating-rates  of interest  paid on  borrowings under  TWE's
former  and existing bank credit agreements,  offset in part by interest savings
in the last quarter of 1995 on  lower debt levels related to management's  asset
sales  program. There was other income, net, of $40 million in 1995, compared to
other expense, net, of $49 million  in 1994, principally because of an  increase
in investment-related income related to gains on the sale of certain unclustered
cable systems and other investments.
 
                                      F-8
 

<PAGE>
 
<PAGE>
                                TIME WARNER INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
        OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
 
1994 VS. 1993
 
     Time  Warner had revenues of  $7.396 billion and a  net loss of $91 million
($.27 per common share) in  1994, compared to revenues  of $6.581 billion and  a
net  loss of $221 million ($.90 per common  share) in 1993. Included in the 1993
results is an extraordinary loss on the retirement of debt of $57 million  ($.15
per  common share)  and a one-time  tax charge  of $70 million  ($.19 per common
share) that  resulted from  the  effect on  the  Company's deferred  income  tax
liability  of the increase  in the corporate  income tax rate  enacted in August
1993.
 
     As discussed more fully below, the improvement in Time Warner's net loss in
1994 reflected an overall increase in operating income generated by its business
segments and an increase in investment related income, offset in part by  higher
interest expense and lower income from Time Warner's equity in the pretax income
of  the Entertainment Group. The improvement in Time Warner's 1994 net loss also
related to the absence  of the extraordinary loss  and one-time tax charge  that
were  recorded in  1993. The  improvement in Time  Warner's net  loss per common
share in  1994 further  resulted  from a  $105  million reduction  in  preferred
dividend  requirements relating to Time Warner's  1993 redemption or exchange of
$5.6 billion of preferred stock for debt.
 
     Time Warner's equity in  the pretax income of  the Entertainment Group  was
$176  million in 1994, compared to $281 million in 1993. As discussed more fully
below, the Entertainment Group's operating results in 1994 reflected an  overall
decrease  in operating  income generated  by its  business segments, principally
relating to lower Cable results due to cable rate regulation, and an increase in
investment-related and foreign currency  contract losses, offset  in part by  an
increase in interest income.
 
     EBITDA  and operating income for Time Warner and the Entertainment Group in
1994 and 1993 are as follows:
 
<TABLE>
<CAPTION>
                                                                                      YEARS ENDED DECEMBER 31,
                                                                                  --------------------------------
                                                                                                       OPERATING
                                                                                       EBITDA            INCOME
                                                                                  ----------------    ------------
                                                                                   1994      1993     1994    1993
                                                                                  ------    ------    ----    ----
                                                                                             (MILLIONS)
<S>                                                                               <C>       <C>       <C>     <C>
Time Warner:
Publishing.....................................................................   $  430    $  372    $347    $295
Music..........................................................................      720       643     366     296
                                                                                  ------    ------    ----    ----
Total..........................................................................   $1,150    $1,015    $713    $591
                                                                                  ------    ------    ----    ----
                                                                                  ------    ------    ----    ----
Entertainment Group:
Filmed Entertainment...........................................................   $  430    $  427    $219    $233
Six Flags Theme Parks..........................................................      135       122      56      53
Programming-HBO................................................................      257       230     237     213
Cable..........................................................................      989     1,035     340     406
                                                                                  ------    ------    ----    ----
Total..........................................................................   $1,811    $1,814    $852    $905
                                                                                  ------    ------    ----    ----
                                                                                  ------    ------    ----    ----
</TABLE>
 
TIME WARNER
 
     Publishing.   Revenues  increased to  $3.433  billion, compared  to  $3.270
billion   in  1993.  EBITDA  increased  to   $430  million  from  $372  million.
Depreciation and amortization amounted to $83 million in 1994 and $77 million in
1993. Operating income  increased to  $347 million from  $295 million.  Revenues
benefited  principally from  increases in  magazine advertising  and circulation
revenues, which were aided in part by several special
 
                                      F-9
 

<PAGE>
 
<PAGE>
                                TIME WARNER INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
        OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
 
issues during 1994. Significant  revenue gains were  achieved by People,  Sports
Illustrated  and Southern Living. EBITDA, operating income and operating margins
improved principally  as  a result  of  the  revenue gains  and  continued  cost
containment.
 
     Music.  Revenues increased to $3.986 billion, compared to $3.334 billion in
1993.  EBITDA  increased to  $720 million  from  $643 million.  Depreciation and
amortization, including amortization related to the purchase of WCI, amounted to
$354 million in  1994 and $347  million in 1993.  Operating income increased  to
$366  million from $296  million. The revenue growth  resulted from increases in
both domestic and international recorded music revenues, which benefited from  a
number  of popular releases during the year and an increase in the percentage of
compact disc  to total  unit  sales, and  increased music  publishing  revenues.
EBITDA  and operating  income benefited from  these revenue  gains and increased
results from direct marketing activities  attributable to new members and  lower
amortization  of member  acquisition costs, offset  in part  by costs associated
with  the  reorganization  of  the  domestic  music  companies  and   continuing
investment in new business ventures.
 
     Interest  and  Other, Net.    Interest and  other,  net, increased  to $724
million in 1994, compared to $718 million in 1993. Interest expense increased to
$769 million from $698 million as a  result of a full twelve months of  interest
on  the debt issued during the first three  months of 1993 to redeem or exchange
preferred stock, offset in part by savings from lower-cost debt used to fund the
redemption of certain notes and debentures in 1993. There was other income, net,
of $45 million in 1994, compared to other expense, net, of $20 million in  1993,
principally  because of an  increase in investment-related  income, including an
increase in the amortization of the excess of the Time Warner General  Partners'
interest in the net assets of TWE over the net book value of their investment in
TWE  to reflect U S WEST as a partner for a full year. Investment-related income
was reduced  in part  in both  years by  adjustments to  the carrying  value  of
certain  investments,  expenses in  connection  with the  settlement  of certain
employment contracts  and losses  on foreign  exchange contracts  used to  hedge
foreign exchange risk.
 
ENTERTAINMENT GROUP
 
     Filmed  Entertainment.  Revenues  increased to $4.484  billion, compared to
$4.032 billion in  1993. EBITDA  increased to  $430 million  from $427  million.
Depreciation and amortization, including amortization related to the purchase of
WCI, amounted to $211 million in 1994 and $194 million in 1993. Operating income
decreased  to $219 million from $233  million. Worldwide home video, syndication
and consumer products  revenues increased  at Warner  Bros., offset  in part  by
lower  worldwide  theatrical  revenues.  EBITDA  and  operating  income  margins
decreased principally as a result of  lower theatrical results in comparison  to
the exceptionally strong theatrical results in 1993.
 
     Six  Flags Theme  Parks.  Revenues  increased to $557  million, compared to
$533 million  in 1993.  EBITDA  increased to  $135  million from  $122  million.
Depreciation and amortization amounted to $79 million in 1994 and $69 million in
1993.  Operating  income increased  to $56  million  from $53  million. Revenues
increased as  a result  of overall  attendance growth  and higher  revenues  per
visitor.  EBITDA and  operating income improved  principally as a  result of the
revenue gains.
 
     Programming-HBO.  Revenues increased to $1.513 billion, compared to  $1.441
billion   in  1993.  EBITDA  increased  to   $257  million  from  $230  million.
Depreciation and amortization amounted to $20 million in 1994 and $17 million in
1993. Operating income  increased to  $237 million from  $213 million.  Revenues
benefited  from an  increase in subscriptions  and higher  pay-TV rates. EBITDA,
operating income and operating margins improved  principally as a result of  the
revenue gains.
 
                                      F-10
 

<PAGE>
 
<PAGE>
                                TIME WARNER INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
        OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
 
     Cable.  Revenues increased to $2.242 billion, compared to $2.208 billion in
1993.  EBITDA decreased  to $989 million  from $1.035  billion. Depreciation and
amortization, including  amortization related  to the  purchase of  WCI and  the
acquisition  of the ATC minority interest, amounted  to $649 million in 1994 and
$629 million  in 1993.  Operating income  decreased to  $340 million  from  $406
million.  Revenues and operating results in  1994 were adversely affected by two
rounds of  cable  rate  regulation  that in  general  reduced  the  rates  cable
operators  are allowed to charge for regulated services, the first of which went
into effect in September 1993 and the  second of which went into effect in  July
1994.  The unfavorable  effects of  rate regulation  were offset  in part  by an
increase in subscribers and nonregulated revenues. Actions that were  undertaken
to  mitigate the impact of rate regulation included a number of cost containment
measures and a continued emphasis on  near and long-term strategies to  increase
revenues from unregulated services.
 
     Interest  and  Other, Net.    Interest and  other,  net, increased  to $616
million in 1994, compared to $564 million in 1993. Interest expense decreased to
$567 million, compared with $580 million in 1993. There was other expense,  net,
of  $49 million in 1994, compared to other  income, net, of $16 million in 1993.
Investment-related and  foreign currency  contract losses  in 1994  exceeded  an
increase  in interest  income on higher  cash balances  and the interest-bearing
note receivable from U S WEST. In 1993, other income, net, benefited from a gain
on the sale of  certain assets and other  investment-related income, which  more
than offset investment losses.
 
FINANCIAL CONDITION AND LIQUIDITY

DECEMBER 31, 1995

TIME WARNER

1995 FINANCIAL CONDITION
 
     Time  Warner  had  $9.9  billion  of  debt,  $949  million  of  mandatorily
redeemable preferred  securities  of  subsidiaries, $1.2  billion  of  cash  and
equivalents (net debt of $8.7 billion), and $3.7 billion of shareholders' equity
at December 31, 1995, compared to $9.2 billion of debt, $282 million of cash and
equivalents (net debt of $8.9 billion), and $1.1 billion of shareholders' equity
at  December 31, 1994. The increase  in debt principally reflects the assumption
of approximately $1.3 billion of debt related to the Cable Transactions,  offset
in  part by debt reductions using proceeds  raised from the asset sales program,
including proceeds from the issuance of the PERCS which monetized Time  Warner's
14%  investment  in Hasbro.  The  increase in  mandatorily  redeemable preferred
securities of  subsidiaries reflects  the  issuance in  1995  of the  PERCS  and
Preferred  Trust Securities, the  proceeds of which were  used to reduce certain
indebtedness of Time Warner. The noncurrent cash and equivalents consist of  the
net  proceeds received  from the issuance  of the Preferred  Trust Securities in
December 1995,  which were  used  in the  redemption  of the  8.75%  Convertible
Debentures  in early  1996. The  increase in  shareholders' equity  reflects the
issuance in  1995  of approximately  2.5  million  shares of  common  stock  and
approximately  29.3 million  shares of  preferred stock  in connection  with the
ITOCHU/Toshiba Transaction  and the  acquisitions  of KBLCOM  and Summit.  On  a
combined  basis (Time  Warner and the  Entertainment Group  together), there was
$14.7 billion of net debt at December  31, 1995, compared to $15 billion of  net
debt at the beginning of the year.
 
INVESTMENT IN TWE
 
     Time  Warner's investment in TWE at December 31, 1995 consists of 74.49% of
TWE's pro rata priority capital and  residual equity capital, and 100% of  TWE's
senior  priority  capital and  junior  priority capital.  Such  priority capital
interests provide Time Warner, and with respect to the pro rata priority capital
only, U S WEST, with  certain priority claims to  the net partnership income  of
TWE and distributions of TWE partnership capital,
 
                                      F-11
 

<PAGE>
 
<PAGE>
                                TIME WARNER INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
        OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
 
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 junior priority  capital interest, which
represents Cumulative Priority  Capital of  $4.6 billion at  December 31,  1995.
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, Time Warner's
$1.4  billion senior priority capital interest and, to the extent not previously
distributed, partnership income allocated thereto (based on an 8% annual rate of
return)  is  required  to  be  distributed  to  Time  Warner  in  three   annual
installments  beginning on July  1, 1997. In  1995, Time Warner  received a $366
million cash  distribution from  TWE representing  the priority  capital  return
allocated to its senior priority capital interest through June 30, 1995.
 
CREDIT AGREEMENT REFINANCINGS
 
     In  connection  with  the  Cable  Transactions,  TWI  Cable,  TWE  and  the
TWE-Advance/Newhouse Partnership executed a five-year revolving credit  facility
in  June  1995. The  New  Credit Agreement  enabled  such entities  to refinance
certain indebtedness  assumed  in the  Cable  Transactions, to  refinance  TWE's
indebtedness  under  a pre-existing  bank credit  agreement  and to  finance the
ongoing working capital, capital expenditure  and other corporate needs of  each
borrower.
 
     The New Credit Agreement permits borrowings in an aggregate amount of up to
$8.3  billion,  with no  scheduled reductions  in  credit availability  prior to
maturity. Borrowings are  limited to $4  billion in  the case of  TWI Cable,  $5
billion  in the case of the TWE-Advance/Newhouse Partnership and $8.3 billion in
the case of TWE,  subject in each case  to certain limitations and  adjustments.
Such borrowings bear interest at specific rates for each of the three borrowers,
generally  equal to LIBOR plus a margin  initially ranging from 50 to 87.5 basis
points, which margin will vary based on the credit rating or financial  leverage
of  the applicable  borrower. Unused  credit is  available for  general business
purposes and  to  support any  commercial  paper borrowings.  Each  borrower  is
required to pay a commitment fee initially ranging from .2% to .35% per annum on
the  unused portion of its commitment. TWI Cable  may also be required to pay an
annual facility fee  equal to  .1875% of the  entire amount  of its  commitment,
depending  on the  level of its  financial leverage  in any given  year. The New
Credit Agreement contains certain covenants for each borrower relating to, among
other things, additional indebtedness; liens  on assets; cash flow coverage  and
leverage  ratios; and loans, advances, distributions  and other cash payments or
transfers  of  assets  from  the  borrowers  to  their  respective  partners  or
affiliates.
 
     In  July 1995, TWI Cable borrowed  approximately $1.2 billion under the New
Credit Agreement to refinance  certain indebtedness assumed  or incurred in  the
acquisition  of KBLCOM, and TWE borrowed approximately $2.6 billion to repay and
terminate its pre-existing bank credit agreement. An additional $1.5 billion was
borrowed by  TWI  Cable  under the  New  Credit  Agreement in  January  1996  to
refinance certain indebtedness assumed or incurred in the acquisition of CVI and
related companies.
 
PUBLIC DEBT REFINANCINGS
 
     In  1995 and early 1996, Time Warner refinanced approximately $4 billion of
its public debt, thereby increasing  its financial flexibility through  lowering
interest  rates, extending  debt maturities  and eliminating  potential dilution
from the conversion of its 8.75% Convertible Debentures into 46.6 million shares
of common stock. The outstanding  8.75% Convertible Debentures were redeemed  in
two  tranches: $1 billion  principal amount in September  1995 for $1.06 billion
(including   redemption    premiums    and    accrued    interest)    and    the
 
                                      F-12
 

<PAGE>
 
<PAGE>
                                TIME WARNER INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
        OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
 
remaining  $1.2  billion principal  amount in  February  1996 for  $1.28 billion
(including  redemption  premiums  and  accrued  interest).  The  September  1995
redemption  was financed  with proceeds  from a  $500 million  issuance of 7.75%
ten-year notes in June 1995, proceeds from a $374 million issuance of the  PERCS
in  August 1995 and available cash and equivalents. The February 1996 redemption
was financed with proceeds from a  $575 million issuance of the Preferred  Trust
Securities in December 1995 and proceeds from a $750 million issuance of certain
debentures  in January 1996. In connection  therewith, Time Warner recognized an
extraordinary loss of $26 million in February 1996.
 
     In August 1995,  Time Warner  redeemed all  of its  $1.8 billion  principal
amount  of outstanding Reset Notes in exchange for new securities, consisting of
approximately $454 million aggregate principal amount of Floating Rate Notes due
August 15, 2000, approximately $272 million aggregate principal amount of 7.975%
Notes due August 15, 2004, approximately $545 million aggregate principal amount
of 8.11%  Debentures  due  August  15,  2006,  and  approximately  $545  million
aggregate principal amount of 8.18% Debentures due August 15, 2007.
 
ASSET SALES
 
     As  part of  a continuing  strategy to  enhance the  financial position and
credit statistics of  Time Warner and  the Entertainment Group,  an asset  sales
program  was initiated in 1995.  Including the sale of  51% of TWE's interest in
Six Flags in June 1995, the sale of  an interest in QVC, Inc. in February  1995,
the  sale or expected sale of certain unclustered cable systems and the proceeds
raised from the  monetization of Time  Warner's investment in  Hasbro in  August
1995, Time Warner and the Entertainment Group on a combined basis have completed
or  entered into  transactions that raised  approximately $1.6  billion for debt
reduction, all of which were completed  in 1995 except for certain  transactions
aggregating approximately $170 million which are expected to close in 1996.
 
CREDIT STATISTICS
 
     The  combination  of  asset  sales and  debt  refinancings  is  intended to
strengthen the financial  position of  Time Warner and  the Entertainment  Group
and,  when  taken  together with  EBITDA  growth,  is expected  to  continue the
improvement of Time Warner's overall credit statistics. These credit  statistics
consist  of  commonly-used  liquidity  measures such  as  leverage  and coverage
ratios. The leverage ratio represents the  ratio of total debt, less cash  ('Net
debt')  to  total business  segment EBITDA,  less corporate  expenses ('Adjusted
EBITDA'). The coverage ratio  represents the ratio of  Adjusted EBITDA to  total
interest  expense and/or preferred dividends. Those ratios, on a pro forma basis
for 1995 and on an  historical basis for 1994 and  1993, are as set forth  below
for  each of Time Warner  and Time Warner and  the Entertainment Group combined.
Certain rating agencies  and other credit  analysts place more  emphasis on  the
combined  ratios while others place more emphasis on the Time Warner stand-alone
ratios. It should be understood, however,  that the assets of the  Entertainment
Group are not freely available to fund the cash needs of Time Warner.
 
<TABLE>
<CAPTION>
                                                                                                       HISTORICAL
                                                                                         PRO FORMA    ------------
                                                                                          1995(A)     1994    1993
                                                                                         ---------    ----    ----
<S>                                                                                      <C>          <C>     <C>
Time Warner:
Net debt/Adjusted EBITDA..............................................................      7.0x      8.3x    9.8x
Adjusted EBITDA/Interest (b)..........................................................      1.6x      1.4x    1.3x
Adjusted EBITDA/Interest and preferred dividends (b)(c)...............................      1.3x      1.4x    1.2x
 
Time Warner and Entertainment Group combined:
Net debt/Adjusted EBITDA..............................................................      4.7x      5.3x    5.6x
Adjusted EBITDA/Interest (b)..........................................................      2.4x      2.1x    2.1x
Adjusted EBITDA/Interest and preferred dividends (b)(c)...............................      2.1x      2.1x    1.9x
</TABLE>
 
                                                        (footnotes on next page)
 
                                      F-13
 

<PAGE>
 
<PAGE>
                                TIME WARNER INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
        OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
 
(footnotes from previous page)
 
(a) Pro  forma  ratios  for 1995  give  effect  to the  Cable  Transactions, the
    ITOCHU/Toshiba Transaction, the Debt Refinancings, the Six Flags Transaction
    and the Unclustered Cable Transactions, and with respect to Time Warner  and
    the  Entertainment Group combined only, the  consolidation of Paragon, as if
    each of such transactions  occurred at the beginning  of 1995. Although  not
    reflected  therein,  the TBS  Transaction is  not expected  to significantly
    affect the pro forma ratios presented above. Historical ratios for 1995  are
    not  meaningful  and  have  not  been  presented  because  they  reflect the
    operating results of acquired or disposed entities for only a portion of the
    year in comparison to year-end net debt levels.
 
(b) Excludes interest of $28 million in 1995  and $12 million in 1994 which  was
    paid  to TWE in connection with  borrowings under Time Warner's $400 million
    credit agreement with TWE.
 
(c) Includes preferred  dividends of  $11  million in  1995 in  connection  with
    Company-obligated    mandatorily   redeemable    preferred   securities   of
    subsidiaries and  on  a pro  forma  basis,  an incremental  $91  million  of
    preferred  dividends  related to  the preferred  stock  issued in  the Cable
    Transactions and the ITOCHU/Toshiba Transaction.
 
CASH FLOWS
 
     During 1995, Time Warner's cash  provided by operations amounted to  $1.051
billion  and reflected $1.256  billion of EBITDA from  its Publishing, Music and
Cable businesses, $1.063 billion of net  distributions from TWE and $35  million
from  the securitization of receivables, less $659 million of interest payments,
$278 million of income taxes, $74 million of corporate expenses and $292 million
related to  an increase  in other  working capital  requirements, balance  sheet
accounts  and noncash items. Cash provided by operations of $473 million in 1994
reflected $1.150 billion  of EBITDA  from the Publishing  and Music  businesses,
$120 million of net distributions from TWE, $179 million from the securitization
of  receivables, less $539 million of  interest payments, $339 million of income
taxes, $76 million of corporate expenses and $22 million related to an  increase
in other working capital requirements, balance sheet accounts and noncash items.
 
     Cash used by investing activities, excluding investment proceeds, increased
to  $647 million  in 1995, compared  to $351  million in 1994,  principally as a
result of higher investment  spending by Time Warner's  business segments. As  a
result  of management's  asset sales  program, investment  proceeds increased to
$376 million in 1995, compared to $118 million in 1994.
 
     Cash provided by financing activities was $123 million in 1995, compared to
cash used by  financing activities  of $158 million  in 1994,  principally as  a
result  of the  receipt of  proceeds from  the issuance  of the  Preferred Trust
Securities in December 1995,  offset in part  by the use  of available cash  and
equivalents to redeem a portion of the 8.75% Convertible Debentures in September
1995.  In  addition, cash  dividends  paid increased  to  $171 million  in 1995,
compared to $142 million in 1994.
 
     The assets and  cash flows  of TWE are  restricted by  the TWE  partnership
agreement  and  are unavailable  to Time  Warner except  through the  payment of
certain fees, reimbursements, cash distributions and loans, which are subject to
limitations. Under the New Credit Agreement, TWE and TWI Cable are permitted  to
incur  additional indebtedness to make  loans, advances, distributions and other
cash payments to Time  Warner, subject to their  respective compliance with  the
cash flow coverage and leverage ratio covenants contained therein.
 
     Management  believes  that  Time  Warner's operating  cash  flow,  cash and
marketable securities 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.
 
                                      F-14
 

<PAGE>
 
<PAGE>
                                TIME WARNER INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
        OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
 
ENTERTAINMENT GROUP
 
1995 FINANCIAL CONDITION
 
     The  financial condition  of the  Entertainment Group,  principally TWE, at
December 31,  1995 was  affected by  the formation  of the  TWE-Advance/Newhouse
Partnership,  the Six  Flags Transaction and  the consolidation  of Paragon. The
Entertainment Group  had $6.2  billion  of debt,  $1.4  billion of  Time  Warner
General  Partners' senior priority capital and $6.6 billion of partners' capital
(net of the $169  million uncollected portion  of the note  receivable from U  S
WEST)  at December 31, 1995,  compared to $7.2 billion  of debt, $1.7 billion of
Time Warner  General  Partners' senior  priority  capital and  $6.5  billion  of
partners'  capital  at  December 31,  1994.  The  $1 billion  reduction  in debt
resulted principally from the Six Flags Transaction. In addition, principally as
a result of the payment  of over $1 billion of  distributions to Time Warner  in
1995,  cash  and equivalents  decreased to  $209 million  at December  31, 1995,
compared to $1.1  billion at  December 31, 1994,  reducing the  debt-net-of-cash
amounts   for  the  Entertainment   Group  to  $6   billion  and  $6.1  billion,
respectively.
 
CREDIT STATISTICS
 
     Principally as  a  result  of the  formation  of  the  TWE-Advance/Newhouse
Partnership  and the Six  Flags Transaction, the  Entertainment Group's leverage
and coverage ratios improved in 1995 on a pro forma basis, as set forth below:
 
<TABLE>
<CAPTION>
                                                                                                       HISTORICAL
                                                                                         PRO FORMA    ------------
                                                                                          1995(A)     1994    1993
                                                                                         ---------    ----    ----
<S>                                                                                      <C>          <C>     <C>
Net debt/Adjusted EBITDA..............................................................      3.0x      3.5x    3.3x
Adjusted EBITDA/Interest..............................................................      3.8x      3.1x    3.0x
</TABLE>
 
------------
 
(a) Pro  forma  ratios   for  1995  give   effect  to  the   formation  of   the
    TWE-Advance/Newhouse  Partnership,  the  refinancing  of  approximately $2.6
    billion of pre-existing  bank debt,  the consolidation of  Paragon, the  Six
    Flags Transaction and the Unclustered Cable Transactions, as if each of such
    transactions  had occurred at  the beginning of  1995. Historical ratios for
    1995 are not meaningful and have not been presented because they reflect the
    operating results of acquired or disposed entities for only a portion of the
    year in comparison to year-end net debt levels.
 
     Such ratios may be adversely affected upon the transfer of certain of  Time
Warner's  newly-acquired cable systems  to the TWE-Advance/Newhouse Partnership,
which, if completed, is expected  to be structured so  that the systems will  be
transferred  subject to  a portion of  Time Warner's debt,  thereby reducing the
financial  leverage   of  Time   Warner  and   increasing  the   under-leveraged
capitalization of the TWE-Advance/Newhouse Partnership and consequently, TWE.
 
CASH FLOWS
 
     In  1995, the Entertainment Group's cash provided by operations amounted to
$1.495  billion  and  reflected  $2.052  billion  of  EBITDA  from  the   Filmed
Entertainment,   Six   Flags   Theme   Parks,   Broadcasting-The   WB   Network,
Programming-HBO and Cable businesses and $159 million related to a reduction  in
working  capital requirements, other  balance sheet accounts  and noncash items,
less $577 million  of interest  payments, $75 million  of income  taxes and  $64
million  of corporate expenses. Cash provided by operations of $1.341 billion in
1994 reflected  $1.811  billion of  business  segment EBITDA  and  $180  million
related  to a  reduction in  working capital  requirements, other  balance sheet
accounts and noncash items, less $521 million of interest payments, $69  million
of income taxes and $60 million of corporate expenses.
 
                                      F-15
 

<PAGE>
 
<PAGE>
                                TIME WARNER INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
        OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
 
     Cash  used  by  investing activities  decreased  to $750  million  in 1995,
compared to $1.770 billion in  1994, principally as a  result of a $1.1  billion
increase  in investment proceeds  relating to management's  asset sales program.
Capital expenditures increased  to $1.653  billion in 1995,  compared to  $1.235
billion in 1994, principally as a result of higher capital spending by the Cable
Division.
 
     Cash  used by financing activities was  $1.607 billion in 1995, compared to
cash provided by financing activities of $162 million in 1994, principally as  a
result of an approximate $1 billion reduction in debt in 1995 and a $943 million
increase  in distributions paid to Time Warner, offset in part by a $368 million
increase in collections on the note receivable  from U S WEST that were used  to
partially finance the capital spending requirements of the Cable Division.
 
     Management  believes that TWE's operating  cash flow, cash and equivalents,
collections on  the  U  S  WEST  Note  and  additional  borrowing  capacity  are
sufficient to fund its capital and liquidity needs for the foreseeable future.
 
CABLE CAPITAL SPENDING
 
     Since  the beginning of 1994, Time Warner  Cable has been engaged in a plan
to upgrade the technological capability and reliability of its cable  television
systems  and develop new services, which  it believes will position the business
for  sustained,  long-term  growth.  Capital  spending  by  Time  Warner  Cable,
including  the cable operations of both Time  Warner and TWE, amounted to $1.349
billion in 1995,  compared to $778  million in  1994, and was  financed in  part
through collections on the note receivable from U S WEST of $602 million in 1995
and  $234 million  in 1994. Cable  capital spending  for 1996 is  budgeted to be
approximately $1.6 billion  and is expected  to be funded  principally by  cable
operating  cash flow and $169 million of collections on the remaining portion of
the note  receivable from  U S  WEST.  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 has 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 the  next
five  years. 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 the TWE-Advance/Newhouse Partnership. Management expects to
continue  to finance such level of  investment principally through the growth in
cable operating cash flow derived from increases in subscribers and cable rates,
borrowings under the  New Credit Agreement  and the development  of new  revenue
streams  from  expanded  programming  options,  high  speed  data  transmission,
telephony and other services.
 
OFF-BALANCE SHEET ASSETS
 
     As discussed  below,  Time  Warner  believes  that  the  value  of  certain
off-balance  sheet  assets  should  be  considered,  along  with  other  factors
discussed elsewhere herein, in evaluating the Company's financial condition  and
prospects  for future results  of operations, including its  ability to fund its
capital and liquidity needs.
 
INTANGIBLE ASSETS
 
     As a  creator  and distributor  of  branded information  and  entertainment
copyrights, Time Warner and the Entertainment Group have a significant amount of
internally-generated  intangible assets  whose value  is not  fully reflected in
their respective  consolidated balance  sheets.  Such intangible  assets  extend
across  Time Warner's principal business interests,  but are best exemplified by
Time Warner's collection of copyrighted music product,
 
                                      F-16
 

<PAGE>
 
<PAGE>
                                TIME WARNER INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
        OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
 
its interests in Warner Bros.' and HBO's copyrighted film and television product
libraries, and the  creation or  extension of  brands, as  in the  case of  Time
Inc.'s  new magazine  titles or  The WB  Network. Generally  accepted accounting
principles do not recognize the  value of such assets,  except at the time  they
may  be acquired in a business combination  accounted for by the purchase method
of accounting.
 
     Because Time  Warner owns  the  copyrights to  such creative  material,  it
continually generates revenue through the sale of such products across different
media  and in new and existing markets. The value of film and television-related
copyrighted product and trademarks is  continually realized by the licensing  of
films   and  television  series  to  secondary  markets  and  the  licensing  of
trademarks, such  as the  Looney  Tunes characters  and  Batman, to  the  retail
industry  and other  markets. In addition,  technological advances,  such as the
introduction of  the compact  disc  and home  videocassette  in the  1980's  and
potentially  the  digital  versatile  disc  in  the  future,  have  historically
generated significant revenue opportunities through the repackaging and sale  of
such  copyrighted products under the new technological format. Accordingly, such
intangible assets have  significant off-balance  sheet asset value  that is  not
fully  reflected  in  the consolidated  balance  sheets  of Time  Warner  or the
Entertainment Group.
 
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,  network,   basic  cable  and  syndicated   television
exhibition,  amounted to $1.056  billion at December 31,  1995, compared to $852
million at December 31, 1994 (including amounts relating to HBO of $175  million
at  each date). Because such  contracts are for the  licensing of theatrical and
television product which have already been produced, the recognition of  revenue
is  principally only dependent upon the  commencement of the availability period
for telecast under the  terms of the related  licensing agreement. In  addition,
cash  licensing fees  are collected  periodically over  the term  of the related
licensing agreements.  Accordingly,  the  portion  of  backlog  for  which  cash
advances  have 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 cash
through the sale of advertising spots received under such contracts.
 
INTEREST RATE AND FOREIGN CURRENCY RISK MANAGEMENT
 
INTEREST RATE SWAP CONTRACTS
 
     Time Warner uses interest rate swap  contracts to adjust the proportion  of
total debt that is subject to variable and fixed interest rates. At December 31,
1995,  Time Warner  had interest  rate swap  contracts to  pay floating-rates of
interest (average  six-month LIBOR  rate  of 5.9%)  and receive  fixed-rates  of
interest (average rate of 5.4%) on $2.6 billion notional amount of indebtedness,
which resulted in approximately 43% of Time Warner's underlying debt, and 41% of
the  debt of Time Warner and the  Entertainment Group combined, being subject to
variable interest  rates.  The  notional  amount  of  outstanding  contracts  at
December  31,  1995  by  year  of  maturity,  along  with  the  related  average
fixed-rates of  interest  to  be  received and  the  average  floating-rates  of
interest to be paid, are as follows: 1996-$300 million (receive-4.6%; pay-5.9%);
1998-$700  million  (receive-5.5%; pay-5.8%);  1999-$1.2  billion (receive-5.5%;
pay-5.9%); and 2000-$400 million (receive-5.5%; pay-5.9%). At December 31, 1994,
Time Warner had interest rate swap contracts on $2.9 billion notional amount  of
indebtedness.
 
                                      F-17
 

<PAGE>
 
<PAGE>
                                TIME WARNER INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
        OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
 
     Based  on the level of interest rates  prevailing at December 31, 1995, the
fair value of Time Warner's fixed-rate debt exceeded its carrying value by  $407
million and it would have cost $9 million to terminate the related interest rate
swap  contracts, which combined is the equivalent  of an unrealized loss of $416
million. Based on Time Warner's fixed-rate  debt and related interest rate  swap
contracts  outstanding at  December 31,  1995, each  25 basis  point increase or
decrease in the level  of interest rates prevailing  at December 31, 1995  would
result  in  a net  reduction  or increase  in  the combined  unrealized  loss of
approximately $185 million, respectively, including respective costs or  savings
of  $16 million to terminate the related  interest rate swap contracts. Based on
the level of interest rates prevailing at  December 31, 1994, the fair value  of
Time  Warner's fixed-rate debt was $572 million less than its carrying value and
it would have cost $236 million  to terminate its interest rate swap  contracts,
which  combined  was  the equivalent  of  an  unrealized gain  of  $336 million.
Unrealized gains  or losses  on debt  or interest  rate swap  contracts are  not
recognized  unless the debt is retired or  the contracts are terminated prior to
their maturity.
 
     Although changes in the  unrealized gains or losses  on interest rate  swap
contracts  and debt  do not  result in  the realization  or expenditure  of cash
unless the contracts are terminated or the debt is retired, each 25 basis  point
increase  or decrease in  the level of  interest rates related  to Time Warner's
variable-rate debt and interest rate swap contracts would respectively  increase
or  decrease Time Warner's annual interest  expense and related cash payments by
approximately $12 million, including  $7 million related  to interest rate  swap
contracts.
 
FOREIGN EXCHANGE CONTRACTS
 
     Time  Warner uses  foreign exchange contracts  primarily to  hedge the risk
that unremitted or future royalties and license fees owed to Time Warner or  TWE
domestic companies for the sale or anticipated sale of U.S. copyrighted products
abroad  may be adversely affected by changes in foreign currency exchange rates.
As part of its overall strategy to manage  the level of exposure to the risk  of
foreign currency exchange rate fluctuations, Time Warner hedges a portion of its
and  TWE's  combined foreign  currency  exposures anticipated  over  the ensuing
twelve month period. At  December 31, 1995, Time  Warner has effectively  hedged
approximately  half of  the combined  estimated foreign  currency exposures that
principally relate to anticipated cash flows to be remitted to the U.S. over the
ensuing twelve month  period, using  foreign exchange  contracts that  generally
have  maturities of  three months  or less, which  are generally  rolled over to
provide continuing  coverage  throughout  the year.  Time  Warner  often  closes
foreign  exchange sale contracts by  purchasing an offsetting purchase contract.
At December 31, 1995, Time Warner had contracts for the sale of $504 million and
the purchase of  $140 million of  foreign currencies at  fixed rates,  primarily
English pounds (29% of net contract value), German marks (19%), Canadian dollars
(16%),  French francs (16%) and Japanese yen (5%), compared to contracts for the
sale of $551 million and the purchase  of $109 million of foreign currencies  at
December 31, 1994.
 
     Unrealized  gains  or  losses  related to  foreign  exchange  contracts are
recorded in income as  the market value of  such contracts change;  accordingly,
the  carrying value of foreign exchange contracts approximates market value. The
carrying value of foreign  exchange contracts was not  material at December  31,
1995  and 1994. No cash is  required to be received or  paid with respect to the
realization of  such  gains  and  losses  until  the  related  foreign  exchange
contracts are settled, generally at their respective maturity dates. In 1995 and
1994, Time Warner had $20 million and $33 million, respectively, and TWE had $11
million  and  $20  million,  respectively, of  net  losses  on  foreign exchange
contracts, which were or are expected to be offset by corresponding increases in
the dollar value  of foreign currency  royalties and license  fee payments  that
have  been or  are anticipated  to be  received in  cash from  the sale  of U.S.
copyrighted products abroad. Time Warner reimburses or is reimbursed by TWE  for
contract  gains and losses  related to TWE's  foreign currency exposure. Foreign
currency contracts are placed with a  number of major financial institutions  in
order to minimize credit risk.
 
                                      F-18
 

<PAGE>
 
<PAGE>
                                TIME WARNER INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
        OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
 
     Based  on the foreign exchange contracts  outstanding at December 31, 1995,
each 5% devaluation  of the  U.S. dollar  as compared  to the  level of  foreign
exchange  rates for currencies under contract  at December 31, 1995 would result
in approximately $25 million of unrealized  losses and $7 million of  unrealized
gains  on  foreign  exchange  contracts  involving  foreign  currency  sales and
purchases, respectively. Conversely, a 5% appreciation of the U.S. dollar  would
result  in $25 million of unrealized gains  and $7 million of unrealized losses,
respectively. At  December 31,  1995,  none of  Time Warner's  foreign  exchange
purchase  contracts relates  to TWE's  foreign currency  exposure. However, with
regard to the $25 million of unrealized losses or gains on foreign exchange sale
contracts, Time  Warner would  be reimbursed  by TWE,  or would  reimburse  TWE,
respectively,  for approximately  $6 million  related to  TWE's foreign currency
exposure. Consistent with  the nature  of the  economic hedge  provided by  such
foreign  exchange contracts, such unrealized gains  or losses would be offset by
corresponding decreases  or  increases, respectively,  in  the dollar  value  of
future  foreign currency royalty and license fee payments that would be received
in cash within the ensuing twelve month period from the sale of U.S. copyrighted
products abroad.
 
                                      F-19


<PAGE>
 
<PAGE>
                                TIME WARNER INC.
                           CONSOLIDATED BALANCE SHEET
                                  DECEMBER 31,
                      (MILLIONS, EXCEPT PER SHARE AMOUNTS)
 
<TABLE>
<CAPTION>
                                                                                                  1995         1994
                                                                                                 -------      -------
 
<S>                                                                                              <C>          <C>
ASSETS
CURRENT ASSETS
Cash and equivalents..........................................................................   $   628      $   282
Receivables, less allowances of $786 and $768.................................................     1,755        1,439
Inventories...................................................................................       443          370
Prepaid expenses..............................................................................       894          726
                                                                                                 -------      -------
Total current assets..........................................................................     3,720        2,817
 
Cash and equivalents segregated for redemption of long-term debt..............................       557           --
Investments in and amounts due to and from Entertainment Group................................     5,734        5,350
Other investments.............................................................................     2,389        1,555
 
Land and buildings............................................................................       431          412
Cable television equipment....................................................................       361           --
Furniture, fixtures and other equipment.......................................................     1,196          998
                                                                                                 -------      -------
                                                                                                   1,988        1,410
Less accumulated depreciation.................................................................      (869)        (657)
                                                                                                 -------      -------
Property, plant and equipment.................................................................     1,119          753
 
Music catalogues, contracts and copyrights....................................................     1,140        1,207
Cable television franchises...................................................................     1,696           --
Goodwill......................................................................................     5,213        4,630
Other assets..................................................................................       564          404
                                                                                                 -------      -------
Total assets..................................................................................   $22,132      $16,716
                                                                                                 -------      -------
                                                                                                 -------      -------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable..............................................................................   $   672      $   648
Royalties payable.............................................................................       755          731
Debt due within one year......................................................................        34          355
Other current liabilities.....................................................................     1,566        1,238
                                                                                                 -------      -------
Total current liabilities.....................................................................     3,027        2,972
 
Long-term debt................................................................................     9,907        8,839
Deferred income taxes.........................................................................     3,420        2,700
Unearned portion of paid subscriptions........................................................       654          631
Other liabilities.............................................................................       508          426
Company-obligated mandatorily redeemable preferred securities of subsidiaries
  holding solely subordinated notes and debentures of the Company (a).........................       949           --
 
SHAREHOLDERS' EQUITY
Preferred stock, $1 par value, 250 million shares authorized, 29.7 million and 962 thousand
  shares
  outstanding, $2.994 billion and $140 million liquidation preference.........................        30            1
Common stock, $1 par value, 750 million shares authorized, 387.7 million and 379.3 million
  shares outstanding..........................................................................       388          379
Paid-in capital...............................................................................     5,422        2,588
Unrealized gains on certain marketable securities.............................................       116          130
Accumulated deficit...........................................................................    (2,289)      (1,950)
                                                                                                 -------      -------
Total shareholders' equity....................................................................     3,667        1,148
                                                                                                 -------      -------
Total liabilities and shareholders' equity....................................................   $22,132      $16,716
                                                                                                 -------      -------
                                                                                                 -------      -------
</TABLE>
 
------------
(a) Includes  $374 million of preferred securities  that are redeemable for cash
    or, at Time Warner's  option, approximately 12.1  million shares of  Hasbro,
    Inc. common stock owned by Time Warner (Note 8).
 
See accompanying notes.
 
                                      F-20
 

<PAGE>
 
<PAGE>
                                TIME WARNER INC.
                      CONSOLIDATED STATEMENT OF OPERATIONS
                            YEARS ENDED DECEMBER 31,
                      (MILLIONS, EXCEPT PER SHARE AMOUNTS)
 
<TABLE>
<CAPTION>
                                                                                          1995        1994        1993
                                                                                         ------      ------      ------
<S>                                                                                      <C>         <C>         <C>
Revenues (a)..........................................................................   $8,067      $7,396      $6,581
                                                                                         ------      ------      ------
 
Cost of revenues (a)(b)...............................................................    4,682       4,307       3,780
Selling, general and administrative (a)(b)............................................    2,688       2,376       2,210
                                                                                         ------      ------      ------
 
Operating expenses....................................................................    7,370       6,683       5,990
                                                                                         ------      ------      ------
 
Business segment operating income.....................................................      697         713         591
Equity in pretax income of Entertainment Group(a).....................................      256         176         281
Interest and other, net (a)...........................................................     (877)       (724)       (718)
Corporate expenses (a)................................................................      (74)        (76)        (73)
                                                                                         ------      ------      ------
 
Income before income taxes............................................................        2          89          81
Income taxes..........................................................................     (126)       (180)       (245)
                                                                                         ------      ------      ------
Loss before extraordinary item........................................................     (124)        (91)       (164)
Extraordinary loss on retirement of debt, net of $26 million and $37 million
  income tax benefit in 1995 and 1993, respectively...................................      (42)         --         (57)
                                                                                         ------      ------      ------
Net loss..............................................................................     (166)        (91)       (221)
Preferred dividend requirements.......................................................      (52)        (13)       (118)
                                                                                         ------      ------      ------
 
Net loss applicable to common shares..................................................   $ (218)     $ (104)     $ (339)
                                                                                         ------      ------      ------
                                                                                         ------      ------      ------
Loss per common share:
Loss before extraordinary item........................................................   $ (.46)     $ (.27)     $ (.75)
                                                                                         ------      ------      ------
                                                                                         ------      ------      ------
 
Net loss..............................................................................   $ (.57)     $ (.27)     $ (.90)
                                                                                         ------      ------      ------
                                                                                         ------      ------      ------
 
Average common shares.................................................................    383.8       378.9       374.7
                                                                                         ------      ------      ------
                                                                                         ------      ------      ------
</TABLE>
 
------------
(a) Includes  the following  income (expenses) resulting  from transactions with
    the Entertainment  Group and  other related  companies for  the years  ended
    December  31, 1995, 1994 and 1993, respectively: revenues-$211 million, $203
    million and $170  million; cost of  revenues-$(108) million, $(109)  million
    and  $(87)  million; selling,  general  and administrative-$46  million, $47
    million  and  $59  million;  equity   in  pretax  income  of   Entertainment
    Group-$(95)  million, $(120) million and $(115) million; interest and other,
    net-$(27) million, $13 million and $(4) million; and corporate  expenses-$64
    million, $60 million and $60 million.
 
<TABLE>
<S>                                                                                      <C>         <C>         <C>
(b) Includes depreciation and amortization expense of:................................   $  559      $  437      $  424
                                                                                         ------      ------      ------
                                                                                         ------      ------      ------
</TABLE>
 
See accompanying notes.
 
                                      F-21
 

<PAGE>
 
<PAGE>
                                TIME WARNER INC.
                      CONSOLIDATED STATEMENT OF CASH FLOWS
                            YEARS ENDED DECEMBER 31,
                                   (MILLIONS)
 
<TABLE>
<CAPTION>
                                                                                          1995        1994        1993
                                                                                         -------      -----      -------
<S>                                                                                      <C>          <C>        <C>
OPERATIONS
Net loss..............................................................................   $  (166)     $ (91)     $  (221)
Adjustments for noncash and nonoperating items:
Extraordinary loss on retirement of debt..............................................        42         --           57
One-time tax charge (a)...............................................................        --         --           70
Depreciation and amortization.........................................................       559        437          424
Noncash interest expense..............................................................       176        219          185
Excess (deficiency) of distributions over equity in pretax income of Entertainment
  Group...............................................................................       807        (56)        (261)
Equity in income of other investee companies, net of distributions....................       (16)       (17)          --
Changes in operating assets and liabilities:
    Receivables.......................................................................       (68)       (47)         (71)
    Inventories.......................................................................       (52)       (38)          20
    Accounts payable and other liabilities............................................       160        324          206
    Other balance sheet changes.......................................................      (391)      (258)        (152)
                                                                                         -------      -----      -------
 
Cash provided by operations...........................................................     1,051        473          257
                                                                                         -------      -----      -------
 
INVESTING ACTIVITIES
Investments and acquisitions..........................................................      (381)      (187)        (175)
Capital expenditures..................................................................      (266)      (164)        (198)
Investment proceeds...................................................................       376        118          103
                                                                                         -------      -----      -------
 
Cash used by investing activities.....................................................      (271)      (233)        (270)
                                                                                         -------      -----      -------
 
FINANCING ACTIVITIES
Borrowings............................................................................     2,023        582        4,714
Debt repayments.......................................................................    (2,693)      (626)      (1,599)
Issuance of Company-obligated mandatorily redeemable preferred securities of
  subsidiaries........................................................................       949         --           --
Redemption of old Series D preferred stock............................................        --         --       (3,494)
Dividends paid........................................................................      (171)      (142)        (299)
Stock option and dividend reinvestment plans..........................................       106         34           92
Other, principally financing costs....................................................       (91)        (6)        (143)
                                                                                         -------      -----      -------
 
Cash provided (used) by financing activities..........................................       123       (158)        (729)
                                                                                         -------      -----      -------
 
INCREASE (DECREASE) IN CASH AND EQUIVALENTS...........................................       903         82         (742)
 
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD...........................................       282        200          942
                                                                                         -------      -----      -------
 
CASH AND EQUIVALENTS AT END OF PERIOD (B).............................................   $ 1,185      $ 282      $   200
                                                                                         -------      -----      -------
                                                                                         -------      -----      -------
</TABLE>
 
------------
(a) Reflects  a  $70  million  increase in  Time  Warner's  deferred  income tax
    liability as a result of new tax law enacted in 1993.
 
(b) Includes current and noncurrent cash and equivalents at December 31, 1995.
 
See accompanying notes.
 
                                      F-22
 

<PAGE>
 
<PAGE>
                                TIME WARNER INC.
                 CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
                      (MILLIONS, EXCEPT PER SHARE AMOUNTS)
 
<TABLE>
<CAPTION>
                                                  PREFERRED    COMMON    PAID-IN    UNREALIZED    ACCUMULATED
                                                    STOCK      STOCK     CAPITAL      GAINS         DEFICIT       TOTAL
                                                  ---------    ------    -------    ----------    -----------    -------
<S>                                               <C>          <C>       <C>        <C>           <C>            <C>
BALANCE AT DECEMBER 31, 1992...................     $ 129       $372     $8,606        $ --         $  (940)     $ 8,167
 
Net loss.......................................                                                        (221)        (221)
Dividends on common stock-$.31 per share.......                                                        (116)        (116)
Dividends on Series B preferred stock-$9.28 per
  share........................................                               4                         (13)          (9)
Dividends on old Series C and D preferred stock
  to dates of redemption or exchange...........                                                        (106)        (106)
Exchange of old Series C preferred stock and
  redemption of old Series D preferred stock...      (128)               (6,240)                       (311)      (6,679)
Unrealized gains on certain marketable equity
  investments at adoption of FAS 115...........                                         205                          205
Shares issued pursuant to stock option and
  dividend reinvestment plans..................                    4        116                                      120
Other..........................................                    2         51                         (44)           9
                                                  ---------    ------    -------      -----       -----------    -------
 
BALANCE AT DECEMBER 31, 1993...................         1        378      2,537         205          (1,751)       1,370
 
Net loss.......................................                                                         (91)         (91)
Dividends on common stock-$.35 per share ($.09
  per share per quarter effective for the
  second quarter of 1994)......................                                                        (133)        (133)
Dividends on Series B preferred stock-$9.28 per
  share........................................                               4                         (13)          (9)
Unrealized losses on certain marketable equity
  investments..................................                                         (75)                         (75)
Shares issued pursuant to stock option and
  dividend reinvestment plans..................                    1         53                                       54
Other..........................................                              (6)                         38           32
                                                  ---------    ------    -------      -----       -----------    -------
 
BALANCE AT DECEMBER 31, 1994...................         1        379      2,588         130          (1,950)       1,148
 
Net loss.......................................                                                        (166)        (166)
Dividends on common stock-$.36 per share.......                                                        (138)        (138)
Dividends on Series B preferred stock-$6.40 per
  share........................................                               3                          (8)          (5)
Dividends on new Series C, D, G, H and I
  preferred stock-$3.75 per share per year
  effective from the respective dates of
  issuance.....................................                                                         (44)         (44)
Issuance of common and preferred stock in the
  KBLCOM and Summit acquisitions...............        14          3      1,367                                    1,384
Issuance of preferred stock in the
  ITOCHU/Toshiba Transaction...................        15                 1,335                                    1,350
Unrealized losses on certain marketable equity
  investments..................................                                         (14)                         (14)
Shares issued pursuant to stock option and
  dividend reinvestment plans..................                    4        122                                      126
Other..........................................                    2          7                          17           26
                                                  ---------    ------    -------      -----       -----------    -------
 
BALANCE AT DECEMBER 31, 1995...................     $  30       $388     $5,422        $116         $(2,289)     $ 3,667
                                                  ---------    ------    -------      -----       -----------    -------
                                                  ---------    ------    -------      -----       -----------    -------
</TABLE>
 
See accompanying notes.
 
                                      F-23


<PAGE>
 
<PAGE>
                                TIME WARNER INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
DESCRIPTION OF BUSINESS
 
     Time  Warner Inc. ('Time  Warner' or the 'Company')  is the world's leading
media company, whose principal  business objective is  to create and  distribute
branded  information  and entertainment  copyrights  throughout the  world. Time
Warner has  interests in  three fundamental  areas of  business:  Entertainment,
consisting  principally  of interests  in recorded  music and  music publishing,
filmed  entertainment,   broadcasting,   theme  parks   and   cable   television
programming;  News  and  Information,  consisting  principally  of  interests in
magazine   publishing,    book   publishing    and   direct    marketing;    and
Telecommunications,  consisting  principally  of interests  in  cable television
systems. Substantially all of Time  Warner's interests in filmed  entertainment,
broadcasting,  theme parks, cable  television programming and  most of its cable
television systems  are held  through Time  Warner Entertainment  Company,  L.P.
('TWE'),  a  partnership in  which  Time Warner  owns  a 74.49%  residual equity
interest and certain priority capital interests senior thereto. Time Warner does
not consolidate TWE  and certain related  companies (the 'Entertainment  Group')
for financial reporting purposes because of certain limited partnership approval
rights related to TWE's interest in certain cable television systems.
 
     Each  of the business interests  within Entertainment, News and Information
and Telecommunications  is important  to  management's objective  of  increasing
shareholder   value  through   the  creation,  extension   and  distribution  of
recognizable brands  and  copyrights  throughout  the  world.  Such  brands  and
copyrights  include  (1)  copyrighted music  from  many of  the  world's leading
recording artists that is  produced and distributed by  a family of  established
record   labels  such  as  Warner  Bros.   Records,  the  Atlantic  and  Elektra
Entertainment  Groups  and  Warner  Music  International,  (2)  the  unique  and
extensive  film and television libraries of  Warner Bros. and trademarks such as
the Looney  Tunes characters  and Batman,  (3) The  WB Network,  a new  national
broadcasting  network launched in 1995 as an extension of the Warner Bros. brand
and as  an  additional  distribution  outlet for  Warner  Bros.'  collection  of
children  cartoons  and  television  programming,  (4)  Six  Flags,  the largest
regional theme park  operator in  the United  States, in  which TWE  owns a  49%
interest, (5) HBO and Cinemax, the leading pay television services, (6) magazine
franchises  such as  Time, People  and Sports  Illustrated and  direct marketing
brands such as  Time Life Inc.  and Book-of-the-Month Club  and (7) Time  Warner
Cable, the second largest operator of cable television systems in the U.S.
 
     The  operating  results of  Time  Warner's various  business  interests are
presented herein as an indication of financial performance (Note 13). Except for
start-up losses incurred  in an  effort to create  value in  a branded  national
broadcasting  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  significantly 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 $822 million in 1995,
$782 million in 1994 and $768 million in 1993.
 
BASIS OF CONSOLIDATION AND
ACCOUNTING FOR INVESTMENTS
 
     The  consolidated  financial  statements   include  100%  of  the   assets,
liabilities,  revenues, expenses, income, loss and cash flows of Time Warner and
all  companies  in  which  Time   Warner  has  a  controlling  voting   interest
('subsidiaries'),  as if Time Warner and its subsidiaries were a single company.
Significant intercompany  accounts  and transactions  between  the  consolidated
companies have been eliminated.
 
     The Entertainment Group and investments in certain other companies in which
Time  Warner  has  significant  influence but  less  than  a  controlling voting
interest,  are  accounted  for  using  the  equity  method.  Under  the   equity
 
                                      F-24
 

<PAGE>
 
<PAGE>
                                TIME WARNER INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
method,  only Time Warner's investment in and amounts due to and from the equity
investee are  included in  the consolidated  balance sheet,  only Time  Warner's
share  of  the investee's  earnings is  included  in the  consolidated operating
results, and  only  the  dividends,  cash distributions,  loans  or  other  cash
received from the investee, less any additional cash investment, loan repayments
or other cash paid to the investee are included in the consolidated cash flows.
 
     In  accordance with Financial Accounting Standards Board ('FASB') Statement
No. 115, 'Accounting  For Certain  Investments in Debt  and Equity  Securities,'
('FAS  115') investments  in companies  in which Time  Warner does  not have the
controlling interest or an  ownership and voting interest  so large as to  exert
significant  influence are accounted for at  market value if the investments are
publicly traded and there are no resale restrictions, or at cost, if the sale of
a publicly-traded investment is restricted or if the investment is not  publicly
traded. Unrealized gains and losses on investments accounted for at market value
are  reported net-of-tax in  a separate component  of shareholders' equity until
the investment is sold, at which time  the realized gain or loss is included  in
income. Dividends and other distributions of earnings from both market value and
cost method investments are included in income when declared.
 
     The  effect of any  changes in Time  Warner's ownership interests resulting
from the  issuance of  equity  capital by  consolidated subsidiaries  or  equity
investees to unaffiliated parties is included in income.
 
FOREIGN CURRENCY
 
     The  financial position and operating  results of substantially all foreign
operations are consolidated using the local currency as the functional currency.
Local currency assets and liabilities are translated at the rates of exchange on
the balance sheet date, and local currency revenues and expenses are  translated
at  average rates of exchange during  the period. Resulting translation gains or
losses, which  have not  been  material, are  included in  accumulated  deficit.
Foreign currency transaction gains and losses, which have not been material, are
included in operating results.
 
USE OF ESTIMATES
 
     The  preparation  of  financial  statements  in  conformity  with generally
accepted  accounting  principles  requires  management  to  make  estimates  and
assumptions  that affect  the amounts reported  in the  financial statements and
footnotes thereto. Actual results could differ from those estimates.
 
     Significant estimates  inherent  in  the preparation  of  the  accompanying
consolidated  financial statements include  management's forecast of anticipated
revenues from  the sale  of  future and  existing music  and  publishing-related
products   in  order  to  evaluate   the  ultimate  recoverability  of  accounts
receivables  and  artist  and  author   advances  recorded  as  assets  in   the
consolidated  balance sheet.  Accounts receivables  and sales  in the  music and
publishing industries are subject to  customers' rights to return unsold  items.
Management  periodically reviews  such estimates  and it  is reasonably possible
that management's  assessment  of  recoverability of  accounts  receivables  and
individual  artist and  author advances may  change based on  actual results and
other factors.
 
REVENUES AND COSTS
 
     The unearned portion of paid subscriptions is deferred until magazines  are
delivered to subscribers. Upon each delivery, a proportionate share of the gross
subscription price is included in revenues.
 
     Inventories  of magazines, books, cassettes and compact discs are stated at
the lower  of cost  or  estimated realizable  value.  Cost is  determined  using
first-in, first-out; last-in, first-out; and average cost methods. In accordance
with  industry  practice, certain  products (such  as magazines,  books, compact
discs and  cassettes) are  sold to  customers with  the right  to return  unsold
items.    Revenues   from   such   sales    represent   gross   sales   less   a
 
                                      F-25
 

<PAGE>
 
<PAGE>
                                TIME WARNER INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
provision for future returns. Returned goods included in inventory are valued at
estimated realizable value but not in excess of cost.
 
     A significant portion of cable system revenues are derived from  subscriber
fees, which are recorded as revenue in the period the service is provided.
 
ADVERTISING
 
     Advertising   costs  are  expensed   upon  the  first   exhibition  of  the
advertisement, except  for certain  direct-response advertising,  for which  the
costs are capitalized and amortized over the expected period of future benefits.
Direct-response   advertising  principally   consists  of   product  promotional
mailings, broadcast advertising, catalogs  and other promotional costs  incurred
in  the Company's  direct-marketing businesses.  Deferred advertising  costs are
generally amortized  over  periods  of  up to  three  years  subsequent  to  the
promotional event using straight-line or accelerated methods, with a significant
portion  of such costs amortized in  twelve months or less. Deferred advertising
costs for Time Warner amounted to $195 million and $175 million at December  31,
1995  and 1994,  respectively. Advertising expense  for Time  Warner amounted to
$1.045 billion in 1995, $931 million in 1994 and $831 million in 1993.
 
CASH AND EQUIVALENTS
 
     Cash equivalents consist of commercial paper and other investments that are
readily convertible into cash, and have  original maturities of three months  or
less.  Noncurrent  cash and  equivalents  at December  31,  1995 consist  of net
proceeds received from the  issuance of Preferred  Trust Securities in  December
1995,  which  were  segregated  for  the  redemption  of  the  8.75% Convertible
Debentures in February 1996 (Notes 6 and 8).
 
PROPERTY, PLANT AND EQUIPMENT
 
     Property, plant  and  equipment are  stated  at cost.  Additions  to  cable
property,  plant and equipment  generally include material,  labor, overhead and
interest. Depreciation is  provided generally on  the straight-line method  over
useful  lives ranging up to twenty-five years for buildings and improvements and
up to  fifteen years  for furniture,  fixtures, cable  television equipment  and
other equipment.
 
     In  March 1995, the FASB issued Statement of Financial Accounting Standards
No. 121, 'Accounting for the Impairment of Long-Lived Assets and for  Long-Lived
Assets  to Be  Disposed Of,'  ('FAS 121')  effective for  fiscal years beginning
after December 15, 1995. The new  rules establish standards for the  recognition
and measurement of impairment losses on long-lived assets and certain intangible
assets.  Time  Warner expects  that  the adoption  of FAS  121  will not  have a
material effect on its financial statements.
 
INTANGIBLE ASSETS
 
     As a  creator  and distributor  of  branded information  and  entertainment
copyrights,  Time  Warner has  a significant  and  growing amount  of intangible
assets, including goodwill,  cable television franchises  and music  catalogues,
contracts  and  copyrights.  In accordance  with  generally  accepted accounting
principles,   Time   Warner   does   not    recognize   the   fair   value    of
internally-generated  intangible assets.  Costs incurred  to create  and produce
copyrighted product, such as compact  discs and cassettes, are generally  either
expensed  as incurred, or capitalized as tangible  assets as in the case of cash
advances and inventoriable product costs. However, accounting recognition is not
given to any increasing asset value  that may be associated with the  collection
of  the underlying copyrighted material.  Additionally, costs incurred to create
or extend brands, such  as magazine titles, generally  result in losses over  an
extended  development  period and  are recognized  as a  reduction of  income as
incurred, while any corresponding  brand value created is  not recognized as  an
intangible  asset  in  the  consolidated  balance  sheet.  On  the  other  hand,
intangible   assets   acquired   in   business   combinations   accounted    for
 
                                      F-26
 

<PAGE>
 
<PAGE>
                                TIME WARNER INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
by  the purchase method  of accounting are capitalized  and amortized over their
expected useful life as a noncash  charge against future results of  operations.
Accordingly, the intangible assets reported in the consolidated balance sheet do
not  reflect  the fair  value of  Time Warner's  internally-generated intangible
assets, but  rather are  limited  to intangible  assets resulting  from  certain
acquisitions in which the cost of the acquired companies exceeded the fair value
of their tangible assets at the time of acquisition.
 
     Time  Warner amortizes  goodwill over periods  up to forty  years using the
straight-line method. Cable television  franchises, music catalogues,  contracts
and  copyrights, and  other intangible assets  are amortized over  periods up to
twenty  years  using  the  straight-line   method.  In  1995,  1994  and   1993,
amortization  of  goodwill  amounted  to $175  million,  $158  million  and $148
million, respectively; amortization of music copyrights, artists' contracts  and
record  catalogues  amounted to  $118 million,  $115  million and  $113 million,
respectively; amortization of other intangible  assets amounted to $43  million,
$31  million and $31 million, respectively; and amortization of cable television
franchises  amounted  to  $42  million  in  1995.  Accumulated  amortization  of
intangible  assets at December 31, 1995 and  1994 amounted to $1.845 billion and
$1.505 billion, respectively.
 
     Time Warner separately  reviews the carrying  value of acquired  intangible
assets  for each acquired  entity on a  quarterly basis to  determine whether an
impairment may exist. Time Warner considers relevant cash flow and profitability
information, including  estimated future  operating  results, trends  and  other
available  information, in  assessing whether  the carrying  value of intangible
assets can  be  recovered. Upon  a  determination  that the  carrying  value  of
intangible  assets will not be recovered from the undiscounted future cash flows
of the acquired business, the carrying value of such intangible assets would  be
considered  impaired and will be reduced by a charge to operations in the amount
of the  impairment.  Impairment  is  measured as  any  deficiency  in  estimated
undiscounted  future cash flows of the acquired business to recover the carrying
value related to the intangible assets.
 
INCOME TAXES
 
     Income taxes are  provided using  the liability method  prescribed by  FASB
Statement  No. 109, 'Accounting  for Income Taxes.'  Under the liability method,
deferred income  taxes reflect  tax carryforwards  and the  net tax  effects  of
temporary  differences between the carrying amount of assets and liabilities for
financial statement and  income tax  purposes, as determined  under enacted  tax
laws  and  rates.  The financial  effect  of changes  in  tax laws  or  rates is
accounted for in the period of enactment.
 
     Realization  of  the   net  operating  loss   and  investment  tax   credit
carryforwards,  which  were acquired  in acquisitions,  are  accounted for  as a
reduction of goodwill.
 
     The principal  operations  of  the Entertainment  Group  are  conducted  by
partnerships.  Income  tax expense  includes all  income  taxes related  to Time
Warner's allocable share of partnership income and its equity in the income  tax
expense of corporate subsidiaries of the partnerships.
 
STOCK OPTIONS
 
     In  accordance with Accounting Principles Board Opinion No. 25, 'Accounting
for  Stock  Issued  to  Employees,'  compensation  cost  for  stock  options  is
recognized  in income based on the excess, if any, of the quoted market price of
the stock at  the grant date  of the award  or other measurement  date over  the
amount  an employee must pay to acquire  the stock. The exercise price for stock
options granted to  employees equals or  exceeds the fair  market value of  Time
Warner common stock at the date of grant, thereby resulting in no recognition of
compensation expense by Time Warner.
 
                                      F-27
 

<PAGE>
 
<PAGE>
                                TIME WARNER INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
LOSS PER COMMON SHARE
 
     Loss  per common  share is  based upon  the net  loss applicable  to common
shares after preferred dividend  requirements and upon  the weighted average  of
common  shares  outstanding  during  the period.  The  conversion  of securities
convertible into common stock and the exercise of stock options were not assumed
in the calculations of loss per common share because the effect would have  been
antidilutive.
 
RECLASSIFICATIONS
 
     Certain  reclassifications  have been  made to  the prior  years' financial
statements to conform to the 1995 presentation.
 
2. ENTERTAINMENT GROUP
 
     Time Warner's investment in and amounts  due to and from the  Entertainment
Group at December 31, 1995 and 1994 consist of the following:
 
<TABLE>
<CAPTION>
                                                                                                    DECEMBER 31,
                                                                                                  ----------------
                                                                                                   1995      1994
                                                                                                  ------    ------
                                                                                                     (MILLIONS)
 
<S>                                                                                               <C>       <C>
Investment in TWE..............................................................................   $6,179    $5,284
Income tax and stock option related distributions due from TWE.................................      122       423
Credit agreement debt due to TWE...............................................................     (400)     (400)
Other liabilities due to TWE, principally related to home video distribution...................     (354)     (266)
Other receivables due from TWE.................................................................       76        --
                                                                                                  ------    ------
Investment in and amounts due to and from TWE..................................................    5,623     5,041
Investment in other Entertainment Group companies..............................................      111       309
                                                                                                  ------    ------
Total..........................................................................................   $5,734    $5,350
                                                                                                  ------    ------
                                                                                                  ------    ------
</TABLE>
 
     TWE is a Delaware limited partnership that was capitalized on June 30, 1992
to   own   and  operate   substantially   all  of   the   Filmed  Entertainment,
Programming-HBO and Cable  businesses previously owned  by subsidiaries of  Time
Warner.  Certain Time Warner subsidiaries are the general partners of TWE ('Time
Warner General Partners').  Time Warner  acquired the  aggregate 11.22%  limited
partnership  interests  previously  held  by  subsidiaries  of  each  of  ITOCHU
Corporation ('ITOCHU')  and  Toshiba  Corporation ('Toshiba')  in  1995  for  an
aggregate  cost of $1.36 billion, consisting of 15 million shares of convertible
preferred stock (Series G Preferred Stock, Series H Preferred Stock and Series I
Preferred Stock) and $10 million in cash (the 'ITOCHU/Toshiba Transaction'). The
ITOCHU/Toshiba  Transaction  was  accounted  for  by  the  purchase  method   of
accounting for business combinations.
 
     After  the  ITOCHU/Toshiba  Transaction,  Time Warner  and  certain  of its
wholly-owned subsidiaries  collectively  own 74.49%  of  the pro  rata  priority
capital  and residual equity interests in TWE, and certain additional senior and
junior priority  capital  interests.  The remaining  25.51%  pro  rata  priority
capital  and  residual  equity  limited  partnership  interests  are  held  by a
subsidiary of U S WEST, Inc. ('U S WEST'), which acquired such interests in 1993
for $1.532 billion of cash and a $1.021 billion 4.4% note (the 'U S WEST Note').
 
     Each partner's interest in TWE consists of the initial priority capital and
residual equity amounts that  were assigned to that  partner or its  predecessor
based  on the  estimated fair value  of the  net assets each  contributed to the
partnership, as adjusted for the fair value of certain assets distributed by TWE
to the  Time  Warner  General  Partners in  1993  which  were  not  subsequently
reacquired  by TWE  in 1995 ('Contributed  Capital'), plus, with  respect to the
priority capital interests only, any undistributed priority capital return.  The
priority  capital return consists of net partnership income allocated to date in
accordance with the provisions of the TWE partnership
 
                                      F-28
 

<PAGE>
 
<PAGE>
                                TIME WARNER INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
agreement and the  right to  be allocated additional  partnership income  which,
together  with any previously allocated net partnership income, provides for the
various priority capital rates of return  specified in the table below. The  sum
of Contributed Capital and the undistributed priority capital return is referred
to  as  'Cumulative  Priority  Capital.'  Cumulative  Priority  Capital  is  not
necessarily indicative  of the  fair value  of the  underlying priority  capital
interests  principally due to  above-market rates of  return on certain priority
capital interests  as  compared to  securities  of comparable  credit  risk  and
maturity,  such as  the 13.25%  rate of  return on  the junior  priority capital
interest owned  by  subsidiaries  of  Time  Warner.  Furthermore,  the  ultimate
realization  of Cumulative Priority Capital could  be affected by the fair value
of TWE, which is subject to fluctuation.
 
     A summary of the priority  of Contributed Capital, Time Warner's  ownership
of  Contributed Capital and Cumulative Priority Capital at December 31, 1995 and
priority capital rates of return thereon is set forth below:
 
<TABLE>
<CAPTION>
                                                                         CUMULATIVE
                                                         CONTRIBUTED      PRIORITY     PRIORITY CAPITAL RATES      % OWNED BY
PRIORITY OF CONTRIBUTED CAPITAL                          CAPITAL(A)       CAPITAL           OF RETURN(B)           TIME WARNER
                                                         -----------     ----------    -----------------------     -----------
                                                                                            (% PER ANNUM
                                                                                             COMPOUNDED
                                                                 (BILLIONS)                  QUARTERLY)
 
<S>                                                      <C>             <C>           <C>                         <C>
Senior priority capital...............................      $ 1.4           $1.4(c)              8.00%                100.00%
Pro rata priority capital.............................        5.6            8.7                13.00%(d)              74.49%
Junior priority capital...............................        2.9            4.6                13.25%(e)             100.00%
Residual equity capital...............................        3.3            3.3(f)               --  (f)              74.49%
</TABLE>
 
------------
 
(a) Excludes partnership income or loss allocated thereto.
 
(b) Income allocations related to priority capital rates of return are based  on
    partnership income after any special tax allocations.
 
(c) Net  of $366 million of partnership  income distributed in 1995 representing
    the priority capital return thereon through June 30, 1995.
 
(d) 11.00% to the extent concurrently distributed.
 
(e) 11.25% to the extent concurrently distributed.
 
(f) Residual equity capital is not entitled  to stated priority rates of  return
    and,  as such, its  Cumulative Priority Capital is  equal to its Contributed
    Capital. However, in the case of  certain events such as the liquidation  or
    dissolution of TWE, residual equity capital is entitled to any excess of the
    fair  value of the net assets of TWE over the aggregate amount of Cumulative
    Priority  Capital  and   special  tax  allocations.   The  residual   equity
    Contributed Capital has priority over the priority returns on junior and pro
    rata priority capital.
 
     Because  Contributed Capital is based  on the fair value  of the net assets
that each partner contributed to the partnership, the aggregate of such  amounts
is  significantly  higher  than  TWE's partners'  capital  as  reflected  in the
consolidated financial statements, which is based on the historical cost of  the
contributed net assets. For purposes of allocating partnership income or loss to
the  partners, partnership income or loss is based  on the fair value of the net
assets  contributed  to  the  partnership  and  results  in  significantly  less
partnership  income, or  results in partnership  losses, in contrast  to the net
income reported by TWE for financial statement purposes, which is also based  on
the historical cost of contributed net assets.
 
     Under  the  TWE partnership  agreement, partnership  income, to  the extent
earned, is first allocated to  the partners so that  the economic burden of  the
income  tax  consequences  of  partnership operations  is  borne  as  though the
partnership were taxed as a corporation ('special tax allocations'), then to the
senior priority, pro  rata priority  and junior priority  capital interests,  in
order  of priority, at rates of return ranging  from 8% to 13.25% per annum, and
finally to  the  residual equity  interests.  Partnership losses  generally  are
allocated  first to  eliminate prior allocations  of partnership  income to, and
then to reduce the Contributed Capital of, the residual equity, junior  priority
capital  and pro rata priority capital interests,  in that order, then to reduce
the Time Warner General Partners' senior priority capital, including partnership
income allocated thereto, and finally to reduce any special tax allocations.  To
the extent partnership income is insufficient to satisfy all special allocations
in  a particular accounting period, the  right to receive additional partnership
income necessary to provide for the various priority capital rates of return  is
carried  forward until satisfied out of future partnership income, including any
partnership income that may result from any liquidation or dissolution of TWE.
 
                                      F-29
 

<PAGE>
 
<PAGE>
                                TIME WARNER INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     The TWE partnership  agreement provides, under  certain circumstances,  for
the  distribution of partnership income allocated to the senior priority capital
owned by the  Time Warner  General Partners.  Pursuant to  such provision,  $366
million  of  partnership  income  was distributed  to  the  Time  Warner General
Partners in 1995. The senior priority capital and, to the extent not  previously
distributed,  partnership income allocated thereto is required to be distributed
in three annual  installments beginning  on July  1, 1997.  The junior  priority
capital  owned  by  subsidiaries of  Time  Warner  may be  increased  if certain
operating performance targets  are achieved  over a five-year  period ending  on
December  31, 1996 and a  ten-year period ending on  December 31, 2001. Although
satisfaction of the ten-year operating  performance target is indeterminable  at
this time, it is not expected that the five-year target will be attained.
 
     TWE  reported net income of  $73 million, $161 million  and $198 million in
1995, 1994 and  1993, respectively,  no portion of  which was  allocated to  the
limited partners. Time Warner did not recognize a gain when TWE was capitalized.
TWE  recorded the assets contributed by the Time Warner General Partners at Time
Warner's historical  cost.  The excess  of  the Time  Warner  General  Partners'
interest in the net assets of TWE over the net book value of their investment in
TWE is being amortized to income over a twenty year period.
 
     U  S WEST has  an option to  obtain up to  an additional 6.33%  of pro rata
priority capital and  residual equity  interests, depending  on cable  operating
performance.  The option is exercisable between January  1, 1999 and on or about
May 31, 2005  at a  maximum exercise  price of  $1.25 billion  to $1.8  billion,
depending  on the year  of exercise. Either U  S WEST or TWE  may elect that the
exercise price be paid with partnership interests rather than cash.
 
     Each Time  Warner General  Partner has  guaranteed a  pro rata  portion  of
approximately  $6 billion  of TWE's  debt and  accrued interest  at December 31,
1995, based  on the  relative fair  value of  the net  assets each  Time  Warner
General  Partner contributed to TWE. Such  indebtedness is recourse to each Time
Warner General Partner only to the extent of its guarantee. In addition to their
interests in TWE and the other Entertainment Group companies, the assets of  the
Time  Warner  General Partners  include the  equivalent  of 29.6  million common
shares of  Turner  Broadcasting System,  Inc.,  12.1 million  common  shares  of
Hasbro,  Inc., 43.7 million common shares  of Time Warner, and substantially all
the assets of  Time Warner's music  business. There are  no restrictions on  the
ability  of the Time Warner General Partner guarantors to transfer assets, other
than TWE assets, to parties that are not guarantors.
 
     Set forth below  is summarized financial  information of the  Entertainment
Group,  which  reflects the  consolidation  by TWE  of  the TWE-Advance/Newhouse
Partnership effective as of April 1,  1995 (Note 4), the deconsolidation of  Six
Flags  Entertainment Corporation ('Six Flags') effective as of June 23, 1995 and
the consolidation of Paragon Communications ('Paragon') effective as of July  6,
1995.
 
TIME WARNER ENTERTAINMENT GROUP
 
<TABLE>
<CAPTION>
                                                                                       YEARS ENDED DECEMBER 31,
                                                                                     -----------------------------
                                                                                      1995       1994       1993
                                                                                     -------    -------    -------
                                                                                              (MILLIONS)
<S>                                                                                  <C>        <C>        <C>
OPERATING STATEMENT INFORMATION
Revenues..........................................................................   $ 9,629    $ 8,509    $ 7,963
Depreciation and amortization.....................................................     1,060        959        909
Business segment operating income.................................................       992        852        905
Interest and other, net...........................................................       539        616        564
Minority interest.................................................................       133         --         --
Income before income taxes........................................................       256        176        281
Income before extraordinary item..................................................       170        136        217
Net income........................................................................       146        136        207
</TABLE>
 
                                      F-30
 

<PAGE>
 
<PAGE>
                                TIME WARNER INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
<TABLE>
<CAPTION>
                                                                                       YEARS ENDED DECEMBER 31,
                                                                                     -----------------------------
                                                                                      1995       1994       1993
                                                                                     -------    -------    -------
                                                                                              (MILLIONS)
<S>                                                                                  <C>        <C>        <C>
CASH FLOW INFORMATION
Cash provided by operations.......................................................   $ 1,495    $ 1,341    $ 1,276
Capital expenditures..............................................................    (1,653)    (1,235)      (613)
Investments and acquisitions......................................................      (217)      (186)      (368)
Investment proceeds...............................................................     1,120         51        184
Loan to Time Warner...............................................................        --       (400)        --
Borrowings........................................................................     2,484      1,001      3,075
Debt repayments...................................................................    (3,596)      (953)    (3,734)
Collections on note receivable from U S WEST......................................       602        234         16
Capital contributions.............................................................        --         --      1,532
Capital distributions.............................................................    (1,063)      (120)       (20)
Increase (decrease) in cash and equivalents.......................................      (862)      (267)     1,302
</TABLE>
 
<TABLE>
<CAPTION>
                                                                                                 DECEMBER 31,
                                                                                              -------------------
                                                                                               1995        1994
                                                                                              -------     -------
                                                                                                  (MILLIONS)
<S>                                                                                           <C>         <C>
BALANCE SHEET INFORMATION
Cash and equivalents.......................................................................   $   209     $ 1,071
Total current assets.......................................................................     2,909       3,571
Total assets...............................................................................    18,960      18,992
Total current liabilities..................................................................     3,230       2,953
Long-term debt.............................................................................     6,137       7,160
Minority interests.........................................................................       726          --
Time Warner General Partners' senior priority capital, consisting of $1.364 billion
  Contributed Capital plus an undistributed priority return................................     1,426       1,663
Partners' capital, before deduction of the U S WEST Note...................................     6,745       7,262
U S WEST Note..............................................................................       169         771
</TABLE>
 
     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 December 31,  1995 and 1994, the Time Warner  General
Partners  had  recorded $122  million and  $89  million, respectively,  of stock
option related  distributions due  from TWE,  based on  closing prices  of  Time
Warner  common stock of  $37.875 and $35.125, respectively.  Time Warner is paid
when the options are  exercised. The Time Warner  General Partners also  receive
tax-related  distributions  from  TWE.  The payment  of  such  distributions was
previously subject to restrictions until July 1995  and is now made to the  Time
Warner  General Partners  on a  current basis.  At December  31, 1994,  the Time
Warner General Partners  had accrued $334  million of tax-related  distributions
due  from  TWE.  During 1995,  the  Time  Warner General  Partners  received net
distributions from  TWE in  the amount  of $1.063  billion, consisting  of  $366
million of TWE partnership income allocated to the Time Warner General Partners'
senior  priority capital interest, $680 million of tax-related distributions and
$17 million of  stock option related  distributions. During 1994  and 1993,  the
Time  Warner General Partners received net  distributions from TWE in the amount
of $120 million  and $20 million,  respectively, consisting of  $115 million  of
tax-related  distributions and $5 million  of stock option related distributions
in 1994,  and $20  million of  stock option  related distributions  in 1993.  In
addition  to  the tax,  stock option  and Time  Warner General  Partners' senior
priority capital  distributions, TWE  may  make other  distributions,  generally
depending  on  excess cash  and credit  agreement  limitations. The  Time Warner
General Partners'  full share  of  such distributions  may  be deferred  if  the
limited partners do not receive certain threshold amounts by certain dates.
 
                                      F-31
 

<PAGE>
 
<PAGE>
                                TIME WARNER INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     On  June  23,  1995, TWE  sold  51% of  its  interest  in Six  Flags  to an
investment group  led by  Boston Ventures  for $204  million and  received  $640
million  in additional proceeds from Six  Flags, representing payment of certain
intercompany indebtedness and licensing  fees. As a  result of the  transaction,
Six  Flags has been deconsolidated and TWE's remaining 49% interest in Six Flags
is accounted for  under the  equity method of  accounting. TWE  reduced debt  by
approximately  $850 million in connection with the transaction, and a portion of
the income on the transaction has been  deferred by TWE principally as a  result
of  its guarantee of certain third-party,  zero-coupon indebtedness of Six Flags
due in 1999.
 
     In the normal course  of conducting their businesses,  Time Warner and  its
subsidiaries  and affiliates  have had various  transactions with  TWE and other
Entertainment Group companies, generally on  terms resulting from a  negotiation
between  the  affected units  that in  management's  view results  in reasonable
allocations. In 1995, TWE and certain  subsidiaries of Time Warner entered  into
management  services agreements,  pursuant to  which TWE  receives fees  for the
management of all cable television systems owned by Time Warner. Management fees
paid to TWE in  1995 were not  material. In addition,  Time Warner provides  TWE
with  certain corporate  support services  for which  it received  a fee  in the
amount of $64  million, $60  million and  $60 million  in 1995,  1994 and  1993,
respectively.
 
3. TBS TRANSACTION
 
     Time  Warner has entered into an Amended and Restated Agreement and Plan of
Merger dated as of September 22,  1995 (the 'Merger Agreement'), which  provides
for  the merger  of each  of Time  Warner and  Turner Broadcasting  System, Inc.
('TBS') with separate subsidiaries of a  holding company ('New Time Warner'  and
collectively,  the 'TBS Transaction').  In connection therewith,  the issued and
outstanding shares of each  class of the  capital stock of  Time Warner will  be
converted into shares of a substantially identical class of capital stock of New
Time  Warner.  In  addition,  Time  Warner  has  agreed  to  enter  into certain
agreements and related transactions with certain shareholders of TBS,  including
R.  E. Turner  and Liberty Media  Corporation ('LMC'). The  Merger Agreement and
certain related  agreements provide  for  the issuance  by  New Time  Warner  of
approximately  172.8 million  shares of common  stock, par value  $.01 per share
(including 50.6 million shares of a special class of non-redeemable common stock
to be  issued  to LMC,  the  'LMC Class  Common  Stock'), in  exchange  for  the
outstanding  TBS capital stock,  the issuance of  approximately 13 million stock
options to  replace all  outstanding  TBS options  and  the assumption  of  TBS'
indebtedness  (which approximated $2.5 billion at December 31, 1995). As part of
the TBS Transaction, LMC will receive  an additional five million shares of  LMC
Class  Common Stock pursuant to a separate option agreement which, together with
the 50.6 million shares received pursuant to the TBS Transaction, will be placed
in a voting trust or, in certain circumstances, exchanged for shares of  another
special class of non-voting, non-redeemable common stock of New Time Warner. The
TBS  Transaction will be accounted for by  the purchase method of accounting for
business combinations.
 
     The TBS Transaction is subject  to customary closing conditions,  including
the  approval  of the  shareholders of  TBS  and of  Time Warner,  all necessary
approvals of  the Federal  Communications Commission  and appropriate  antitrust
approvals.  There can be no  assurance that all these  approvals can be obtained
or, in the case of governmental approvals, if obtained, will not be  conditioned
upon changes to the terms of the Merger Agreement or the related agreements.
 
4. CABLE TRANSACTIONS
 
     On  April 1,  1995, TWE  formed a cable  television joint  venture with the
Advance/Newhouse Partnership ('Advance/Newhouse') to which Advance/Newhouse  and
TWE   contributed  cable  television  systems  (or  interests  therein)  serving
approximately  4.5  million  subscribers,  as  well  as  certain  foreign  cable
investments  and  programming investments  that included  Advance/Newhouse's 10%
interest in Primestar Partners, L.P.
 
                                      F-32
 

<PAGE>
 
<PAGE>
                                TIME WARNER INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
('Primestar'). TWE owns a two-thirds equity interest in the TWE-Advance/Newhouse
Partnership and is the  managing partner. TWE  consolidates the partnership  and
the  one-third equity interest  owned by Advance/Newhouse  is reflected in TWE's
consolidated financial statements as minority  interest. In accordance with  the
partnership  agreement, Advance/Newhouse can require  TWE to purchase its equity
interest for fair  market value at  specified intervals following  the death  of
both  of its principal shareholders. Beginning in the third year, either partner
can  initiate  a  dissolution  in   which  TWE  would  receive  two-thirds   and
Advance/Newhouse  would receive one-third  of the partnership's  net assets. The
assets contributed by TWE and Advance/Newhouse to the partnership were  recorded
at  their predecessor's historical cost. No gain  was recognized by TWE upon the
capitalization of the partnership.
 
     On May  2, 1995,  Time Warner  acquired Summit  Communications Group,  Inc.
('Summit'),  which owned cable television  systems serving approximately 162,000
subscribers, in exchange for the issuance of approximately 1.6 million shares of
common stock and approximately 3.3 million shares of a new convertible preferred
stock ('Series  C  Preferred Stock')  and  the  assumption of  $140  million  of
indebtedness.  The  acquisition  was accounted  for  by the  purchase  method of
accounting for business combinations; accordingly, the cost to acquire Summit of
approximately  $351  million  was  allocated  to  the  net  assets  acquired  in
proportion  to  estimates of  their respective  fair  values, as  follows: cable
television franchises-$372  million; goodwill-$146  million; other  current  and
noncurrent  assets-$144  million; long-term  debt-$140 million;  deferred income
taxes-$166 million; and other current liabilities-$5 million.
 
     On July 6, 1995, Time Warner acquired KBLCOM Incorporated ('KBLCOM'), which
owned cable television systems serving  approximately 700,000 subscribers and  a
50%  interest  in  Paragon,  which owned  cable  television  systems  serving an
additional 972,000 subscribers. The  other 50% interest  in Paragon was  already
owned  by TWE. To acquire KBLCOM, Time  Warner issued 1 million shares of common
stock and 11  million shares  of a new  convertible preferred  stock ('Series  D
Preferred  Stock')  and  assumed  or  incurred  approximately  $1.2  billion  of
indebtedness. The  acquisition  was accounted  for  by the  purchase  method  of
accounting for business combinations; accordingly, the cost to acquire KBLCOM of
approximately  $1.033  billion  was  allocated to  the  net  assets  acquired in
proportion  to  their  respective  fair  values,  as  follows:  investments-$950
million;  cable  television  franchises-$1.366  billion;  goodwill-$586 million;
other current and noncurrent assets-$289 million; long-term debt-$1.213 billion;
deferred income taxes-$895 million; and other current liabilities-$50 million.
 
     On January 4, 1996, Time Warner acquired Cablevision Industries Corporation
('CVI') and  related  companies  that owned  cable  television  systems  serving
approximately   1.3  million  subscribers,  in  exchange  for  the  issuance  of
approximately 2.9 million shares of  common stock and approximately 6.5  million
shares  of  new  convertible preferred  stock  ('Series E  Preferred  Stock' and
'Series F Preferred Stock') and the assumption or incurrence of approximately $2
billion of indebtedness. The  acquisition is not  reflected in the  accompanying
consolidated  financial statements. The acquisition will be accounted for by the
purchase method of accounting for  business combinations; accordingly, the  cost
to  acquire  CVI  and  related  companies of  $904  million  is  expected  to be
preliminarily allocated to the net assets acquired in proportion to estimates of
their respective  fair values,  as follows:  cable television  franchises-$2.390
billion;   goodwill-$688  million;  other  current  and  noncurrent  assets-$481
million; long-term debt-$1.766 billion; deferred income taxes-$731 million;  and
other current and noncurrent liabilities-$158 million.
 
     The   accompanying  consolidated  statement   of  operations  includes  the
operating results of  each business  from the  respective closing  date of  each
transaction.   On  a  pro  forma  basis,  giving   effect  to  (i)  all  of  the
aforementioned cable transactions,  (ii) the  ITOCHU/Toshiba Transaction,  (iii)
Time  Warner's and  TWE's debt refinancings  and (iv)  the sale of  51% of TWE's
interest in Six  Flags and  the sale  or expected  sale or  transfer of  certain
unclustered  cable  television  systems  owned  by  TWE,  as  if  each  of  such
transactions had occurred  at the beginning  of the periods,  Time Warner  would
have reported for the years ended December 31, 1995 and 1994, revenues of $8.742
billion  and $8.217 billion,  depreciation and amortization  of $935 million and
$906 million,
 
                                      F-33
 

<PAGE>
 
<PAGE>
                                TIME WARNER INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
operating income of $656 million and  $653 million, equity in the pretax  income
of  the Entertainment  Group of  $286 million  and $205  million, a  loss before
extraordinary item of $255 million and $266 million ($1.02 and $1.07 per  common
share)  and a  net loss of  $297 million and  $266 million ($1.13  and $1.07 per
common share), respectively.
 
5. OTHER INVESTMENTS
 
   Time Warner's other investments consist of:
 
<TABLE>
<CAPTION>
                                                                                                    DECEMBER 31,
                                                                                                  ----------------
                                                                                                   1995      1994
                                                                                                  ------    ------
                                                                                                     (MILLIONS)
<S>                                                                                               <C>       <C>
Equity method investments(1)...................................................................   $1,898    $  985
Market value method investments................................................................      375       435
Cost method investments........................................................................      116       135
                                                                                                  ------    ------
Total..........................................................................................   $2,389    $1,555
                                                                                                  ------    ------
                                                                                                  ------    ------
</TABLE>
 
------------
 
(1) Equity method investments include Time Warner's investment in TBS which  was
    carried  at $541  million at  December 31, 1995.  Time Warner  has agreed to
    acquire the remaining interest in TBS that it does not already own (Note 3).
 
     Market value  method investments  include the  fair value  of 12.1  million
shares  of common stock  of Hasbro, Inc.  ('Hasbro'). Notwithstanding the market
value per share,  such shares can  be used,  at Time Warner's  option, to  fully
satisfy  either its  obligations with  respect to  the zero  coupon exchangeable
notes  due  2012  (Note  6)  or  the  Company-obligated  mandatorily  redeemable
preferred  securities of a subsidiary due 1997 (Note 8). Because the issuance of
the mandatorily  redeemable  preferred  securities  provides  Time  Warner  with
protection against the risk of depreciation of the market price of Hasbro common
stock  and the  zero coupon  exchangeable notes  limit Time  Warner's ability to
share in  the appreciation  of the  market  price of  Hasbro common  stock,  the
combination  thereof  has  effectively  monetized  Time  Warner's  investment in
Hasbro.
 
     In addition to TWE and its equity investees, companies accounted for  using
the equity method include TBS (currently 19.6% owned); Cinamerica Theatres, L.P.
(50%  owned) and The  Columbia House Company partnerships  (50% owned) and other
music joint  ventures (generally  50% owned).  A summary  of combined  financial
information  as reported  by the  equity investees of  Time Warner  is set forth
below:
 
<TABLE>
<CAPTION>
                                                                                       YEARS ENDED DECEMBER 31,
                                                                                     ----------------------------
                                                                                      1995       1994       1993
                                                                                     ------     ------     ------
                                                                                              (MILLIONS)
<S>                                                                                  <C>        <C>        <C>
Revenues..........................................................................   $5,123     $4,444     $3,363
Depreciation and amortization.....................................................      219        182        140
Operating income..................................................................      547        584        450
Income before extraordinary items and cumulative effect of a change in accounting
  principle.......................................................................      188        281        201
Net income (loss).................................................................      188        256       (135)
Current assets....................................................................    2,272      2,113      1,586
Total assets......................................................................    5,851      5,194      4,111
Current liabilities...............................................................    1,318      1,136        755
Long-term debt....................................................................    3,826      3,730      2,606
Total liabilities.................................................................    5,886      5,423      3,992
Total shareholders' equity or partners' capital...................................      (35)      (229)       119
</TABLE>
 
                                      F-34
 

<PAGE>
 
<PAGE>
                                TIME WARNER INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
6. LONG-TERM DEBT
 
   Long-term debt consists of:
 
<TABLE>
<CAPTION>
                                                                                                  DECEMBER 31,
                                                                                               ------------------
                                                                                                1995        1994
                                                                                               -------     ------
                                                                                                   (MILLIONS)
<S>                                                                                            <C>         <C>
Time Warner:
7.45% Notes due February 1, 1998............................................................   $   500     $  500
7.95% Notes due February 1, 2000............................................................       500        500
Floating rate notes due August 15, 2000 (6.8% interest rate)................................       454         --
Redeemable reset notes due August 15, 2002 (8.7% yield).....................................        --      1,719
7.975% Notes due August 15, 2004............................................................       272         --
7.75% Notes due June 15, 2005...............................................................       497         --
8.11% Debentures due August 15, 2006........................................................       545         --
8.18% Debentures due August 15, 2007........................................................       545         --
Zero coupon exchangeable notes due December 17, 2012 (6.25% yield)..........................       581        547
Zero coupon convertible notes due June 22, 2013 (5% yield)..................................     1,019        970
9.125% Debentures due January 15, 2013......................................................     1,000      1,000
8.75% Convertible subordinated debentures due January 10, 2015..............................     1,226      2,226
8.75% Debentures due April 1, 2017..........................................................       248        248
9.15% Debentures due February 1, 2023.......................................................     1,000      1,000
Credit agreement debt due to TWE (6.8% and 6.7% interest rates).............................       400        400
Time Warner Cable Subsidiaries:
New Credit Agreement (6.8% interest rate)...................................................     1,265         --
Summit 10.5% Debentures due April 15, 2005..................................................       140         --
 
Other.......................................................................................       115        129
                                                                                               -------     ------
Subtotal....................................................................................    10,307      9,239
Reclassification of debt due to TWE to amounts due to the Entertainment Group...............      (400)      (400)
                                                                                               -------     ------
Total.......................................................................................   $ 9,907     $8,839
                                                                                               -------     ------
                                                                                               -------     ------
</TABLE>
 
DEBT REFINANCINGS
 
     During 1995 and  early 1996,  in response to  favorable market  conditions,
Time  Warner  refinanced approximately  $4 billion  of its  public debt  and, in
conjunction with  the cable  acquisitions entered  into a  new credit  agreement
under  which it  refinanced approximately  $2.7 billion  of debt  assumed in the
acquisitions, as more fully described below.
 
     In June 1995, a wholly-owned subsidiary  of Time Warner ('TWI Cable'),  TWE
and  the TWE-Advance/Newhouse Partnership executed  a five-year revolving credit
facility (the 'New  Credit Agreement').  The New Credit  Agreement enabled  such
entities to refinance certain indebtedness assumed in the cable acquisitions, to
refinance  TWE's indebtedness under a pre-existing  bank credit agreement and to
finance the ongoing  working capital,  capital expenditure  and other  corporate
needs of each borrower.
 
     The New Credit Agreement permits borrowings in an aggregate amount of up to
$8.3  billion,  with no  scheduled reductions  in  credit availability  prior to
maturity. Borrowings are  limited to $4  billion in  the case of  TWI Cable,  $5
billion  in the case of the TWE-Advance/Newhouse Partnership and $8.3 billion in
the case of TWE,  subject in each case  to certain limitations and  adjustments.
Such borrowings bear interest at specific rates for each of the three borrowers,
generally  equal to LIBOR plus a margin  initially ranging from 50 to 87.5 basis
 
                                      F-35
 

<PAGE>
 
<PAGE>
                                TIME WARNER INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
points, which margin will vary based on the credit rating or financial  leverage
of  the applicable  borrower. Unused  credit is  available for  general business
purposes and  to  support any  commercial  paper borrowings.  Each  borrower  is
required to pay a commitment fee initially ranging from .2% to .35% per annum on
the  unused portion of its commitment. TWI Cable  may also be required to pay an
annual facility fee  equal to  .1875% of the  entire amount  of its  commitment,
depending  on the  level of its  financial leverage  in any given  year. The New
Credit Agreement contains certain covenants for each borrower relating to, among
other things, additional indebtedness; liens  on assets; cash flow coverage  and
leverage  ratios; and loans, advances, distributions  and other cash payments or
transfers  of  assets  from  the  borrowers  to  their  respective  partners  or
affiliates.  Principally as a result of such restrictions, restricted net assets
of consolidated  subsidiaries  of Time  Warner  amounted to  approximately  $950
million at December 31, 1995.
 
     In  July 1995, TWI Cable borrowed  approximately $1.2 billion under the New
Credit Agreement to refinance  certain indebtedness assumed  or incurred in  the
acquisition  of KBLCOM.  An additional  $1.5 billion  was borrowed  by TWI Cable
under the New Credit Agreement in January 1996 to refinance certain indebtedness
assumed or incurred in the acquisition of CVI and related companies.
 
     In August 1995,  Time Warner  redeemed all  of its  $1.8 billion  principal
amount  of outstanding  Redeemable Reset Notes  due August 15,  2002 (the 'Reset
Notes') in exchange for new securities, consisting of approximately $454 million
aggregate  principal  amount  of  Floating  Rate  Notes  due  August  15,  2000,
approximately $272 million aggregate principal amount of 7.975% Notes due August
15,  2004,  approximately  $545  million  aggregate  principal  amount  of 8.11%
Debentures due  August  15,  2006,  and  approximately  $545  million  aggregate
principal amount of 8.18% Debentures due August 15, 2007.
 
     Through  periodic  redemptions, Time  Warner  has fully  redeemed  its $3.1
billion principal amount of 8.75%  Convertible Subordinated Debentures due  2015
(the  '8.75%  Convertible  Debentures'),  which were  issued  in  April  1993 in
exchange for the old Series C preferred  stock that was issued in Time  Warner's
1989  acquisition of  Warner Communications Inc.  ('WCI') (Note  9). Time Warner
first redeemed $900 million principal amount of 8.75% Convertible Debentures  in
July  1993. In  September 1995,  Time Warner  redeemed approximately  $1 billion
principal amount  of such  debentures for  $1.06 billion  (including  redemption
premiums  and accrued interest) and, in  February 1996, Time Warner redeemed the
remaining $1.2  billion principal  amount of  8.75% Convertible  Debentures  for
$1.28   billion  (including  redemption  premiums  and  accrued  interest).  The
September 1995  redemption  was  financed  with proceeds  from  a  $500  million
issuance  of 7.75%  ten-year notes  in June 1995,  proceeds from  a $374 million
issuance of Company-obligated mandatorily  redeemable preferred securities of  a
subsidiary  in August 1995 and available cash and equivalents. The February 1996
redemption was financed  with proceeds raised  from a $575  million issuance  of
Company-obligated mandatorily redeemable preferred securities of a subsidiary in
December  1995 and proceeds from a $750  million issuance in January 1996 of (i)
$400 million principal amount of 6.85% thirty-year debentures, which are putable
by the holders thereof in year seven, (ii) $200 million principal amount of 8.3%
forty-year discount debentures,  which do not  pay cash interest  for the  first
twenty   years,  (iii)  $166  million  principal  amount  of  7.48%  twelve-year
debentures  and  (iv)  $150  million  principal  amount  of  8.05%   twenty-year
debentures. See Note 8 for a description of the mandatorily redeemable preferred
securities issued in connection with such redemptions.
 
     An  extraordinary loss of $57 million  was incurred in 1993, principally in
connection with the redemption of  $900 million of 8.75% Convertible  Debentures
and  $529 million  of WCI senior  and subordinated  debentures. An extraordinary
loss of $42 million was recognized in 1995 in connection with the September 1995
redemption of  the 8.75%  Convertible Debentures  and the  write-off by  TWE  of
deferred  financing  costs  related  to its  former  bank  credit  agreement. In
addition, Time  Warner  recognized  an  extraordinary loss  of  $26  million  in
February  1996 in  connection with the  redemption of  the remaining outstanding
portion of the 8.75% Convertible Debentures.
 
                                      F-36
 

<PAGE>
 
<PAGE>
                                TIME WARNER INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
ZERO COUPON NOTES
 
     Time Warner's zero  coupon notes do  not pay interest  until maturity.  The
zero  coupon exchangeable  notes due December  17, 2012 are  exchangeable at any
time by the holders into an aggregate of 12.1 million shares of common stock  of
Hasbro,  Inc. ('Hasbro') at the  rate of 7.301 shares  for each $1,000 principal
amount of notes, subject to Time Warner's right to pay in whole or in part  with
cash  instead of Hasbro common stock. Time  Warner can elect to redeem the notes
any time  after December  17, 1997,  and holders  can elect  to have  the  notes
redeemed  prior thereto in the event of a  change of control, at the issue price
plus accrued interest. Holders also can elect to have the notes redeemed at  the
issue  price plus accrued interest on December  17, 1997, 2002 and 2007, subject
to Time Warner's  right to  pay in  whole or in  part with  Hasbro common  stock
instead  of cash. The equivalent conversion price  of Hasbro common stock at the
first date of redemption is $54.41 per share, and will be adjusted thereafter in
proportion to changes in the accrued  original issue discount of each note.  The
12.1  million shares of Hasbro common stock owned  by Time Warner can be used by
the Company, at its election, to satisfy its obligations under such notes or its
obligations under  certain  mandatorily  redeemable preferred  securities  of  a
subsidiary  (Note 8).  Unamortized original  issue discount  on the  zero coupon
exchangeable notes due 2012  was $1.070 billion and  $1.104 billion at  December
31, 1995 and 1994, respectively.
 
     The  zero coupon convertible notes due June 22, 2013 are convertible at any
time by the  holders into an  aggregate of  18.7 million shares  of Time  Warner
common  stock at the  rate of 7.759  shares for each  $1,000 principal amount of
notes. Time Warner can elect to redeem  the notes any time after June 22,  1998,
and holders can elect to have the notes redeemed prior thereto in the event of a
change  in control, at the  issue price plus accrued  interest. Holders also can
elect to have the  notes redeemed at  the issue price  plus accrued interest  on
June  22, 1998, 2003 and 2008, subject to Time Warner's right to pay in whole or
in part with Time Warner common stock instead of cash. The equivalent conversion
price of Time Warner common stock at the first date of redemption is $61.44  per
share,  and will be adjusted thereafter in  proportion to changes in the accrued
original issue discount of each note. Unamortized original issue discount on the
zero coupon convertible notes due 2013 was $1.396 billion and $1.445 billion  at
December 31, 1995 and 1994, respectively.
 
TWE-RELATED OBLIGATIONS
 
     Time  Warner and TWE  entered into a  credit agreement in  1994 that allows
Time Warner to borrow up  to $400 million from  TWE through September 15,  2000.
Outstanding  borrowings from TWE bear interest at  LIBOR plus 1% per annum. Time
Warner borrowed $400 million  in 1994 under the  credit agreement, and used  the
proceeds  therefrom principally to repay certain of its notes at their maturity.
In addition, each Time Warner General Partner has guaranteed a pro rata  portion
of  approximately $6 billion of TWE's debt  and accrued interest at December 31,
1995, as more fully described in Note 2.
 
INTEREST EXPENSE AND MATURITIES
 
     At December 31, 1995, Time Warner  had interest rate swap contracts to  pay
floating-rates  of interest and receive fixed-rates  of interest on $2.6 billion
notional amount of  indebtedness, which  resulted in approximately  43% of  Time
Warner's underlying debt being subject to variable interest rates (Note 12).
 
     Interest expense amounted to $877 million in 1995, $769 million in 1994 and
$698  million in  1993, including $28  million in  1995 and $12  million in 1994
which was paid  to TWE in  connection with borrowings  under Time Warner's  $400
million  credit agreement with  TWE. The weighted average  interest rate on Time
Warner's total debt, including the effect  of interest rate swap contracts,  was
7.9% and 8.1% at December 31, 1995 and 1994, respectively.
 
                                      F-37
 

<PAGE>
 
<PAGE>
                                TIME WARNER INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     Annual  repayments  of  long-term debt  for  the five  years  subsequent to
December 31, 1995 consist of $500 million due in 1998 and $2.219 billion due  in
2000.  Such repayments exclude the aggregate  repurchase or redemption prices of
$656 million in  1997 and $1.151  billion in  1998 relating to  the zero  coupon
exchangeable notes and zero coupon convertible notes, respectively, in the years
in which the holders of such debt may first exercise their redemption options.
 
7. INCOME TAXES
 
   Domestic and foreign pretax income (loss) are as follows:
 
<TABLE>
<CAPTION>
                                                                                           YEARS ENDED DECEMBER 31,
                                                                                           -----------------------
                                                                                           1995      1994     1993
                                                                                           -----     ----     ----
                                                                                                 (MILLIONS)
<S>                                                                                        <C>       <C>      <C>
Domestic................................................................................   $(203)    $(78)    $(57)
Foreign.................................................................................     205      167      138
                                                                                           -----     ----     ----
Total...................................................................................   $   2     $ 89     $ 81
                                                                                           -----     ----     ----
                                                                                           -----     ----     ----
</TABLE>
 
     Current and deferred income taxes (tax benefits) provided are as follows:
 
<TABLE>
<CAPTION>
                                                                                          YEARS ENDED DECEMBER 31,
                                                                                          -----------------------
                                                                                          1995      1994     1993
                                                                                          -----     ----     ----
                                                                                                (MILLIONS)
<S>                                                                                       <C>       <C>      <C>
Federal:
     Current(1)........................................................................   $  42     $ 66     $ 45
     Deferred(2).......................................................................    (167)     (81)      11
Foreign:
     Current(3)........................................................................     215      194      168
     Deferred..........................................................................       8      (45)     (11)
State and Local:
     Current...........................................................................      78       79       86
     Deferred..........................................................................     (50)     (33)     (54)
                                                                                          -----     ----     ----
Total..................................................................................   $ 126     $180     $245
                                                                                          -----     ----     ----
                                                                                          -----     ----     ----
</TABLE>
 
------------
 
(1) Includes  utilization  of tax  carryforwards of  $101  million in  1995, $48
    million in 1994 and $136 million  in 1993. Excludes current tax benefits  of
    $9  million in 1995, $11  million in 1994 and  $14 million in 1993 resulting
    from the exercise of stock options  and vesting of restricted stock  awards,
    which were credited directly to paid-in-capital, and current tax benefits of
    $3  million in 1995 and $6 million  in 1993 resulting from the retirement of
    debt, which reduced the extraordinary losses in such years.
 
(2) Includes $70  million  unusual  charge  in 1993  to  increase  deferred  tax
    liability for increase in tax rate.
 
(3) Includes  foreign withholding taxes of $102  million in 1995, $74 million in
    1994 and $79 million in 1993.
 
                                      F-38
 

<PAGE>
 
<PAGE>
                                TIME WARNER INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     The differences between income taxes expected at the U.S. federal statutory
income tax  rate  and  income  taxes  provided  are  as  set  forth  below.  The
relationship  between income before income taxes  and income tax expense is most
affected by the amortization of  goodwill and certain other financial  statement
expenses  that are not deductible  for income tax purposes  and by a $70 million
charge in 1993 to adjust the deferred  income tax liability for the increase  in
the U.S. federal statutory rate from 34% to 35% enacted into law that year.
 
<TABLE>
<CAPTION>
                                                                                        YEARS ENDED DECEMBER 31,
                                                                                       --------------------------
                                                                                       1995      1994       1993
                                                                                       ----     ------     ------
                                                                                               (MILLIONS)
<S>                                                                                    <C>      <C>        <C>
Taxes on income at U.S. federal statutory rate......................................   $  1     $   31     $   28
State and local taxes, net..........................................................     18         30         21
Nondeductible goodwill amortization.................................................    100         97         96
Other nondeductible expenses........................................................     10         10         11
Charge to increase deferred tax liability for increase in tax rate..................     --         --         70
Foreign income taxed at different rates, net of U.S. foreign tax credits............      3          1         13
Other...............................................................................     (6)        11          6
                                                                                       ----     ------     ------
Total...............................................................................   $126     $  180     $  245
                                                                                       ----     ------     ------
                                                                                       ----     ------     ------
</TABLE>
 
     Significant components of Time Warner's net deferred tax liabilities are as
follows:
 
<TABLE>
<CAPTION>
                                                                                                  DECEMBER 31,
                                                                                                -----------------
                                                                                                 1995       1994
                                                                                                ------     ------
                                                                                                   (MILLIONS)
<S>                                                                                             <C>        <C>
Assets acquired in business combinations.....................................................   $2,963     $2,276
Depreciation and amortization................................................................      829        619
Unrealized appreciation of certain marketable securities.....................................       81         91
Other........................................................................................      390        460
                                                                                                ------     ------
Deferred tax liabilities.....................................................................    4,263      3,446
                                                                                                ------     ------
Tax carryforwards............................................................................      296        264
Accrued liabilities..........................................................................      228        206
Receivable allowances and return reserves....................................................      211        200
Other........................................................................................      108         76
                                                                                                ------     ------
Deferred tax assets..........................................................................      843        746
                                                                                                ------     ------
Net deferred tax liabilities.................................................................   $3,420     $2,700
                                                                                                ------     ------
                                                                                                ------     ------
</TABLE>
 
     U.S.  income  and  foreign  withholding taxes  have  not  been  recorded on
permanently   reinvested   earnings   of   foreign   subsidiaries    aggregating
approximately  $760 million at December 31, 1995. Determination of the amount of
unrecognized deferred U.S. income tax liability with respect to such earnings is
not practicable. If such  earnings are repatriated,  additional U.S. income  and
foreign  withholding  taxes  are  substantially expected  to  be  offset  by the
accompanying foreign tax credits.
 
     U.S. federal  tax carryforwards  at  December 31,  1995 consisted  of  $328
million  of net operating losses, $152 million of investment tax credits and $30
million  of  alternative  minimum  tax  credits.  The  utilization  of   certain
carryforwards  is subject  to limitations  under U.S.  federal income  tax laws.
Except for the alternative
 
                                      F-39
 

<PAGE>
 
<PAGE>
                                TIME WARNER INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
minimum  tax  credits  which  do  not   expire,  the  other  U.S.  federal   tax
carryforwards  expire in  varying amounts  as follows  for income  tax reporting
purposes:
 
<TABLE>
<CAPTION>
                                                                                                  CARRYFORWARDS
                                                                                             -----------------------
                                                                                                NET       INVESTMENT
                                                                                             OPERATING       TAX
                                                                                              LOSSES       CREDITS
                                                                                             ---------    ----------
                                                                                                   (MILLIONS)
<S>                                                                                          <C>          <C>
1997......................................................................................     $  --         $  2
1998......................................................................................        --            7
1999......................................................................................        14           19
2000......................................................................................        --           25
Thereafter up to 2008.....................................................................       314           99
                                                                                             ---------    ----------
                                                                                               $ 328         $152
                                                                                             ---------    ----------
                                                                                             ---------    ----------
</TABLE>
 
8. MANDATORILY REDEEMABLE PREFERRED SECURITIES
 
     In  August   1995,   Time   Warner  issued   approximately   12.1   million
Company-obligated  mandatorily redeemable preferred securities of a wholly-owned
subsidiary ('PERCS')  for aggregate  gross proceeds  of $374  million. The  sole
assets  of the  subsidiary that  is the  obligor on  the PERCS  are $385 million
principal amount of 4% subordinated notes of Time Warner due December 23,  1997.
Cumulative  cash distributions are payable on the PERCS at an annual rate of 4%.
The PERCS are  mandatorily redeemable on  December 23, 1997,  for an amount  per
PERCS  equal to the lesser of $54.41, and  the market value of a share of common
stock of Hasbro  on December  17, 1997,  payable in  cash or,  at Time  Warner's
option,  Hasbro common stock. Time  Warner has the right  to redeem the PERCS at
any time prior to December 23, 1997, at an amount per PERCS equal to $54.41  (or
in  certain limited circumstances the lesser of such amount and the market value
of a share of Hasbro  common stock at the time  of redemption) plus accrued  and
unpaid  distributions thereon  and a declining  premium, payable in  cash or, at
Time Warner's option, Hasbro common stock.
 
     In  December   1995,   Time   Warner  issued   approximately   23   million
Company-obligated  mandatorily redeemable preferred securities of a wholly-owned
subsidiary ('Preferred Trust Securities') for  aggregate gross proceeds of  $575
million.  The sole assets of the subsidiary that is the obligor on the Preferred
Trust Securities  are  $592 million  principal  amount of  8  7/8%  subordinated
debentures  of Time Warner due December  31, 2025. Cumulative cash distributions
are payable on the Preferred Trust Securities at an annual rate of 8 7/8%.  Cash
distributions  may be deferred at the election of Time Warner for any period not
exceeding  20  consecutive   quarters.  The  Preferred   Trust  Securities   are
mandatorily  redeemable for cash on  December 31, 2025, and  Time Warner 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 PERCS and the Preferred
Trust Securities  which amount  to a  full and  unconditional guaranty  of  each
subsidiary's obligations with respect thereto.
 
9. CAPITAL STOCK
 
     The outstanding capital stock of Time Warner at December 31, 1995 consisted
of  29.7 million shares  of preferred stock  and 387.7 million  shares of common
stock (net of 45.7 million shares of common stock in treasury, as to which  43.7
million  were held by  the Time Warner  General Partners). At  January 31, 1996,
including each brokerage house that holds shares of Time Warner common stock  as
one  shareholder  but  excluding the  number  of shareholders  whose  shares are
beneficially held  by such  brokerage houses,  there were  approximately  25,000
holders of record of Time Warner common stock.
 
                                      F-40
 

<PAGE>
 
<PAGE>
                                TIME WARNER INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     During  1995,  Time  Warner  issued approximately  29.3  million  shares of
convertible preferred stock  in connection with  the ITOCHU/Toshiba  Transaction
and  its acquisitions  of KBLCOM  and Summit, and  in January  1996, Time Warner
issued an  additional  6.5 million  shares  of convertible  preferred  stock  in
connection  with its acquisiton of CVI and related companies. Set forth below is
a summary  of  the  principal  terms of  Time  Warner's  outstanding  issues  of
preferred stock:
 
<TABLE>
<CAPTION>
                                                                         NUMBER OF SHARES
                                                                         OF COMMON STOCK     EARLIEST      EARLIEST
                                                                          ISSUABLE UPON      EXCHANGE     REDEMPTION
DESCRIPTION                                                                 CONVERSION         DATE          DATE
-------------------------------------------------------     SHARES       ----------------    --------    ------------
                                                          OUTSTANDING       (MILLIONS)
                                                          -----------
                                                          (MILLIONS)
<S>                                                       <C>            <C>                 <C>         <C>
Series B Preferred Stock...............................         .4           --                --        At any time
Series C Preferred Stock...............................        3.3              6.8           5/2/98        5/2/00
Series D Preferred Stock...............................       11.0             22.9           7/6/99        7/6/00
Series G Preferred Stock...............................        6.2             12.9           9/5/99        9/5/99
Series H Preferred Stock...............................        1.8              3.7           9/5/00        9/5/99
Series I Preferred Stock...............................        7.0             14.6          10/2/99       10/2/99
                                                             -----            -----
Shares outstanding at December 31, 1995................       29.7             60.9
Series E Preferred Stock issued in January 1996........        3.3              6.8           1/4/01        1/4/01
Series F Preferred Stock issued in January 1996........        3.2              6.7           1/4/00        1/4/01
                                                             -----            -----
Total shares outstanding at January 31, 1996...........       36.2             74.4
                                                             -----            -----
                                                             -----            -----
</TABLE>
 
     Each  share of Series B  Preferred Stock: (1) is  entitled to a liquidation
preference of $145 per  share, (2) is not  convertible, (3) entitles the  holder
thereof to receive an annual dividend equal to $4.35 per share beginning in June
1995,  and $9.28  per share  prior thereto, (4)  does not  generally entitle the
holder thereof to  vote, except  in certain  limited circumstances,  and (5)  is
redeemable,  in whole  or in  part, by  Time Warner  and the  holders thereof in
exchange for  cash or  shares of  any class  or series  of publicly-traded  Time
Warner  stock, at Time Warner's option, equal  in value to the liquidation value
of the Series B Preferred  Stock plus a premium of  2% of liquidation value  for
each year after May 31, 1995 to the redemption date.
 
     The principal terms of each series of convertible preferred stock issued in
1995  and 1996 (the Series C Preferred  Stock, the Series D Preferred Stock, the
Series E Preferred Stock, the Series  F Preferred Stock, the Series G  Preferred
Stock,  the  Series H  Preferred Stock  and  the Series  I Preferred  Stock, and
collectively, the 'Convertible Preferred Stock')  are similar in nature,  unless
otherwise  noted  below.  Each  share of  Convertible  Preferred  Stock:  (1) is
entitled to  a liquidation  preference of  $100 per  share, (2)  is  immediately
convertible  into 2.08264  shares of  Time Warner  common stock  at a conversion
price of $48 per share (based on  its liquidation value), except that shares  of
the  Series H Preferred  Stock are generally not  convertible until September 5,
2000, (3) entitles the holder thereof (i) to receive for a four year period from
the date of issuance  (or a five year  period with respect to  the Series C  and
Series  E Preferred Stock) an annual dividend  per share equal to the greater of
$3.75 and an amount equal to the dividends paid on the Time Warner common  stock
into  which each share may be converted and  (ii) to the extent that any of such
shares of preferred stock remain outstanding at  the end of the period in  which
the  minimum $3.75 per share dividend is to be paid, the holders thereafter will
receive dividends equal to  the dividends paid on  shares of Time Warner  common
stock  multiplied by the number  of shares into which  their shares of preferred
stock are convertible and (4) except for  the Series H Preferred Stock which  is
generally  not entitled to  vote, entitles the  holder thereof to  vote with the
common stockholders on all matters on which the common stockholders are entitled
to vote, and each share of such  Convertible Preferred Stock is entitled to  two
votes on any such matter.
 
     Time  Warner has the right to exchange each series of Convertible Preferred
Stock for Time Warner common stock at the stated conversion price at any time on
or after  the  respective  exchange  date.  The  Series  C  Preferred  Stock  is
exchangeable  by the  holder beginning  after the  third year  from its  date of
issuance and by
 
                                      F-41
 

<PAGE>
 
<PAGE>
                                TIME WARNER INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
Time Warner  after  the  fourth year  at  the  stated conversion  price  plus  a
declining premium in years four and five and no premium thereafter. In addition,
Time  Warner has the right to redeem each series of Convertible Preferred Stock,
in whole or in part, for cash  at the liquidation value plus accrued  dividends,
at any time on or after the respective redemption date.
 
     Pursuant  to a shareholder rights plan adopted in January 1994, Time Warner
distributed one right per  common share which  currently becomes exercisable  in
certain events involving the acquisition of 15% or more of the then ouststanding
common  stock of Time Warner.  Upon the occurrence of  such an event, each right
entitles its holder to purchase for $150 the economic equivalent of common stock
of Time Warner,  or in certain  circumstances, of the  acquiror, worth twice  as
much.  In connection  with the  plan, 4 million  shares of  preferred stock were
reserved. The rights  expire on  January 20, 2004.  In connection  with the  TBS
Transaction,   Time  Warner  expects  to   amend  the  shareholder  rights  plan
principally to change the basis for determining if an acquisition of 15% or more
of Time Warner common stock has occurred to a fully-diluted basis.
 
     In 1993, Time  Warner redeemed or  exchanged $6.4 billion  of Series C  and
Series D preferred stock ('old Series C and Series D preferred stock') that were
issued  in Time Warner's 1989 acquisition of WCI. The cash redemption of the old
Series D  preferred stock  was financed  principally by  the proceeds  from  the
issuance of long-term notes and debentures. The old Series C preferred stock was
exchanged for the 8.75% Convertible Debentures.
 
     At  December 31,  1995, Time  Warner had  reserved 172.6  million shares of
common stock for the conversion of its Convertible Preferred Stock, zero  coupon
convertible  notes and  other convertible  securities, and  for the  exercise of
outstanding options to purchase shares  of common stock, excluding 25.7  million
shares  related  to  the 8.75%  Convertible  Debentures which  were  redeemed in
February 1996 (Note 6).
 
10. STOCK OPTION PLANS
 
     Options to purchase  Time Warner  common stock under  various stock  option
plans have been granted to employees of Time Warner and TWE at, or in excess of,
fair  market  value  at  the  date  of  grant.  Generally,  the  options  become
exercisable over a three-year vesting period and expire ten years from the  date
of grant. A summary of stock option activity under all plans is as follows:
 
<TABLE>
<CAPTION>
                                                                                          THOUSANDS    EXERCISE PRICE
                                                                                          OF SHARES      PER SHARE
                                                                                          ---------    --------------
<S>                                                                                       <C>          <C>
Balance at January 1, 1995.............................................................     77,611          $ 8-48
Granted................................................................................      5,096           34-45
Exercised..............................................................................     (3,721)           8-40
Cancelled..............................................................................       (367)          17-45
                                                                                          ---------
Balance at December 31, 1995...........................................................     78,619          $17-48
                                                                                          ---------
                                                                                          ---------
</TABLE>
 
<TABLE>
<CAPTION>
                                                                                                 DECEMBER 31,
                                                                                          ---------------------------
                                                                                            1995            1994
                                                                                          ---------    --------------
                                                                                                  (THOUSANDS)
<S>                                                                                       <C>          <C>
Exercisable............................................................................     66,242          63,106
Available for future grants............................................................      7,884           8,849
</TABLE>
 
     For  options exercised by  employees of TWE, Time  Warner is reimbursed for
the amount by which the market value of Time Warner common stock on the exercise
date exceeds the exercise price, or the greater of the exercise price or  $27.75
for options granted prior to the TWE capitalization on June 30, 1992. There were
28.5 million options held by employees of TWE at December 31, 1995, 21.8 million
of  which were exercisable. There were 1.3 million options exercised in 1994 and
4.8 million options exercised in 1993,  at prices ranging from $8-$36 per  share
in each year.
 
                                      F-42
 

<PAGE>
 
<PAGE>
                                TIME WARNER INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
11. BENEFIT PLANS
 
     Time  Warner  and  its  subsidiaries  have  defined  benefit  pension plans
covering substantially all  domestic employees.  Pension benefits  are based  on
formulas  that reflect the  employees' years of  service and compensation levels
during their employment period. Qualifying  plans are funded in accordance  with
government  pension  and income  tax regulations.  Plan  assets are  invested in
equity and fixed income securities.
 
     Pension expense included the following:
 
<TABLE>
<CAPTION>
                                                                                         YEARS ENDED DECEMBER 31,
                                                                                         -------------------------
                                                                                         1995       1994      1993
                                                                                         -----      ----      ----
                                                                                                (MILLIONS)
<S>                                                                                      <C>        <C>       <C>
Service cost..........................................................................   $  29      $ 34      $ 25
Interest cost.........................................................................      53        50        45
Actual return on plan assets..........................................................    (137)       (2)      (52)
Net amortization and deferral.........................................................      89       (45)       10
                                                                                         -----      ----      ----
Total.................................................................................   $  34      $ 37      $ 28
                                                                                         -----      ----      ----
                                                                                         -----      ----      ----
</TABLE>
 
     The status of funded pension plans is as follows:
 
<TABLE>
<CAPTION>
                                                                                                    DECEMBER 31,
                                                                                                   --------------
                                                                                                   1995      1994
                                                                                                   ----      ----
                                                                                                     (MILLIONS)
<S>                                                                                                <C>       <C>
Accumulated benefit obligation (89% vested).....................................................   $544      $394
Effect of future salary increase................................................................    192       132
                                                                                                   ----      ----
Projected benefit obligation....................................................................    736       526
Plan assets at fair value.......................................................................    643       495
                                                                                                   ----      ----
Projected benefit obligation in excess of plan assets...........................................    (93)      (31)
Unamortized actuarial losses....................................................................     94        49
Unamortized plan changes........................................................................      2        (7)
Other...........................................................................................    (10)       (8)
                                                                                                   ----      ----
Prepaid (accrued) pension expense...............................................................   $ (7)     $  3
                                                                                                   ----      ----
                                                                                                   ----      ----
</TABLE>
 
     The following assumptions were used in accounting for pension plans:
 
<TABLE>
<CAPTION>
                                                                                             1995     1994     1993
                                                                                             ----     ----     ----
<S>                                                                                          <C>      <C>      <C>
Weighted average discount rate............................................................   7.25%    8.5 %    7.5 %
Return on plan assets.....................................................................      9%      9 %      9 %
Rate of increase in compensation..........................................................      6%      6 %      6 %
</TABLE>
 
     Employees of Time Warner's operations  in foreign countries participate  to
varying  degrees  in  local  pension  plans,  which  in  the  aggregate  are not
significant.
 
     Time Warner also has an employee stock ownership plan, 401(k) savings plans
and other savings and profit sharing plans, as to which the expense amounted  to
$51  million in 1995, $51 million in 1994 and $46 million in 1993. Contributions
to the  401(k) and  other  savings plans  are based  upon  a percentage  of  the
employees'  elected contributions. Contributions to the employee stock ownership
and profit sharing plans are generally determined by management and approved  by
the board of directors of the participating companies.
 
                                      F-43
 

<PAGE>
 
<PAGE>
                                TIME WARNER INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
12. FINANCIAL INSTRUMENTS
 
     The carrying value of Time Warner's financial instruments approximates fair
value,  except for  differences with respect  to long-term,  fixed-rate debt and
related interest rate  swap contracts  and certain differences  related to  cost
method  investments and other  financial instruments which  are not significant.
The fair value of financial instruments, such as long-term debt and investments,
is generally determined by reference to market values resulting from trading  on
a  national securities exchange or in an over-the-counter market. In cases where
quoted market  prices  are  not  available, such  as  for  derivative  financial
instruments,  fair  value is  based on  estimates using  present value  or other
valuation techniques.
 
INTEREST RATE RISK MANAGEMENT
 
     Interest rate swap  contracts are used  to adjust the  proportion of  total
debt  that is subject to variable and  fixed interest rates. Under interest rate
swap contracts, the Company either agrees to pay an amount equal to a  specified
floating-rate  of interest times a notional  principal amount, and to receive in
return an amount  equal to  a specified fixed-rate  of interest  times the  same
notional  principal amount or, vice versa, to receive a floating-rate amount and
to pay  a fixed-rate  amount. The  notional  amounts of  the contracts  are  not
exchanged.  No other  cash payments are  made unless the  contract is terminated
prior to maturity, in which  case the amount paid  or received in settlement  is
established  by agreement at the time of termination, and usually represents the
net present value, at current rates of interest, of the remaining obligations to
exchange payments under the terms of the contract. Interest rate swap  contracts
are  entered into  with a  number of  major financial  institutions in  order to
minimize credit risk.
 
     The net amounts paid or payable, or received or receivable, through the end
of the accounting period are included in interest expense. Because interest rate
swap contracts are used to modify the interest characteristics of Time  Warner's
outstanding  debt  from  a  fixed  to  a  floating-rate  basis  or,  vice versa,
unrealized gains or losses on interest rate swap contracts are not recognized in
income unless the  contracts are terminated  prior to their  maturity. Gains  or
losses  on any contracts  terminated early are deferred  and amortized to income
over the remaining average life of the terminated contracts.
 
     At December 31, 1995, Time Warner  had interest rate swap contracts to  pay
floating-rates  of interest (average  six-month LIBOR rate  of 5.9%) and receive
fixed-rates of interest (average rate of  5.4%) on $2.6 billion notional  amount
of indebtedness, which resulted in approximately 43% of Time Warner's underlying
debt   being  subject  to  variable  interest  rates.  The  notional  amount  of
outstanding contracts by year  of maturity at December  31, 1995 is as  follows:
1996-$300  million; 1998-$700 million; 1999-$1.2 billion; and 2000-$400 million.
At December  31, 1994,  Time Warner  had interest  rate swap  contracts on  $2.9
billion notional amount of indebtedness.
 
     Based  on the level of interest rates  prevailing at December 31, 1995, the
fair value of Time Warner's fixed-rate debt exceeded its carrying value by  $407
million and it would have cost $9 million to terminate the related interest rate
swap  contracts, which combined is the equivalent  of an unrealized loss of $416
million. Based on Time Warner's fixed-rate  debt and related interest rate  swap
contracts  outstanding at  December 31,  1995, each  25 basis  point increase or
decrease in the level  of interest rates prevailing  at December 31, 1995  would
result  in  a net  reduction  or increase  in  the combined  unrealized  loss of
approximately $185 million, respectively, including respective costs or  savings
of  $16 million to terminate the related  interest rate swap contracts. Based on
the level of interest rates prevailing at  December 31, 1994, the fair value  of
Time  Warner's fixed-rate debt was $572 million less than its carrying value and
it would have cost $236 million  to terminate its interest rate swap  contracts,
which combined was the equivalent of an unrealized gain of $336 million.
 
     Although  changes in the  unrealized gains or losses  on interest rate swap
contracts and  debt do  not result  in the  realization or  expenditure of  cash
unless  the contracts are terminated or the debt is retired, each 25 basis point
increase or decrease  in the level  of interest rates  related to Time  Warner's
variable-rate debt and interest
 
                                      F-44
 

<PAGE>
 
<PAGE>
                                TIME WARNER INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
rate swap contracts would respectively increase or decrease Time Warner's annual
interest  expense  and  related  cash  payments  by  approximately  $12 million,
including $7 million related to interest rate swap contracts.
 
FOREIGN EXCHANGE RISK MANAGEMENT
 
     Foreign exchange contracts are used primarily  by Time Warner to hedge  the
risk that unremitted or future royalties and license fees owed to Time Warner or
TWE  domestic companies  for the  sale or  anticipated sale  of U.S. copyrighted
products abroad  may  be  adversely  affected by  changes  in  foreign  currency
exchange  rates. As part of its overall strategy to manage the level of exposure
to the risk of foreign currency exchange rate fluctuations, Time Warner hedges a
portion of its and  TWE's combined foreign  currency exposures anticipated  over
the  ensuing  twelve  month  period.  At  December  31,  1995,  Time  Warner has
effectively hedged approximately half of the combined estimated foreign currency
exposures that principally relate  to anticipated cash flows  to be remitted  to
the  U.S. over the ensuing twelve month period, using foreign exchange contracts
that generally have  maturities of  three months  or less,  which are  generally
rolled  over to  provide continuing  coverage throughout  the year.  Time Warner
often closes  foreign  exchange  sale  contracts  by  purchasing  an  offsetting
purchase  contract. At December 31, 1995, Time Warner had contracts for the sale
of $504 million and the purchase of $140 million of foreign currencies at  fixed
rates, primarily English pounds (29% of net contract value), German marks (19%),
Canadian  dollars (16%), French francs (16%)  and Japanese yen (5%), compared to
contracts for the  sale of  $551 million  and the  purchase of  $109 million  of
foreign currencies at December 31, 1994.
 
     Unrealized  gains  or  losses  related to  foreign  exchange  contracts are
recorded in income as  the market value of  such contracts change;  accordingly,
the  carrying value of foreign exchange contracts approximates market value. The
carrying value of foreign  exchange contracts was not  material at December  31,
1995  and 1994 and is included in other current liabilities. No cash is required
to be received or paid with respect to the realization of such gains and  losses
until  the related  foreign exchange contracts  are settled,  generally at their
respective maturity dates. In 1995 and 1994, Time Warner had $20 million and $33
million, respectively, and TWE had $11 million and $20 million, respectively, of
net losses  on foreign  exchange contracts,  which were  or are  expected to  be
offset  by  corresponding  increases in  the  dollar value  of  foreign currency
royalties and  license fee  payments that  have been  or are  anticipated to  be
received  in cash from the sale of U.S. copyrighted products abroad. Time Warner
reimburses or is  reimbursed by  TWE for contract  gains and  losses related  to
TWE's  foreign currency exposure.  Foreign currency contracts  are placed with a
number of major financial institutions in order to minimize credit risk.
 
     Based on the foreign exchange  contracts outstanding at December 31,  1995,
each  5% devaluation  of the  U.S. dollar  as compared  to the  level of foreign
exchange rates for currencies under contract  at December 31, 1995 would  result
in  approximately $25 million of unrealized  losses and $7 million of unrealized
gains on  foreign  exchange  contracts  involving  foreign  currency  sales  and
purchases,  respectively. Conversely, a 5% appreciation of the U.S. dollar would
result in $25 million of unrealized  gains and $7 million of unrealized  losses,
respectively.  At  December 31,  1995, none  of  Time Warner's  foreign exchange
purchase contracts relates  to TWE's  foreign currency  exposure. However,  with
regard to the $25 million of unrealized losses or gains on foreign exchange sale
contracts,  Time  Warner would  be reimbursed  by TWE,  or would  reimburse TWE,
respectively, for approximately  $6 million  related to  TWE's foreign  currency
exposure.  Consistent with  the nature  of the  economic hedge  provided by such
foreign exchange contracts, such unrealized gains  or losses would be offset  by
corresponding  decreases  or increases,  respectively,  in the  dollar  value of
future foreign currency royalty and license fee payments that would be  received
in cash within the ensuing twelve month period from the sale of U.S. copyrighted
products abroad.
 
                                      F-45
 

<PAGE>
 
<PAGE>
                                TIME WARNER INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
13. SEGMENT INFORMATION
 
     Time   Warner's  businesses  are  conducted  in  three  fundamental  areas:
Entertainment, consisting principally of interests  in recorded music and  music
publishing, filmed entertainment, broadcasting, theme parks and cable television
programming;  News  and  Information,  consisting  principally  of  interests in
magazine   publishing,    book   publishing    and   direct    marketing;    and
Telecommunications,  consisting  principally  of interests  in  cable television
systems. Time Warner's  interests in filmed  entertainment, broadcasting,  theme
parks,  cable television programming and most of its telecommunications business
are held by  the Entertainment Group,  which 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.  Cable  business segment
information for Time Warner reflects the 1995 acquisitions of KBLCOM and Summit.
Cable business  segment information  for the  Entertainment Group  reflects  the
consolidation  by TWE  of the  TWE-Advance/Newhouse Partnership  effective as of
April 1, 1995 and Paragon effective as of July 6, 1995. The operating results of
Six Flags have  been deconsolidated effective  as of June  23, 1995 and  results
prior to that date are reported separately to facilitate comparability.
 
<TABLE>
<CAPTION>
                                                                                       YEARS ENDED DECEMBER 31,
                                                                                     ----------------------------
                                                                                      1995       1994       1993
                                                                                     ------     ------     ------
                                                                                              (MILLIONS)
<S>                                                                                  <C>        <C>        <C>
REVENUES
Time Warner:
Publishing........................................................................   $3,722     $3,433     $3,270
Music.............................................................................    4,196      3,986      3,334
Cable.............................................................................      172         --         --
Intersegment elimination..........................................................      (23)       (23)       (23)
                                                                                     ------     ------     ------
Total.............................................................................   $8,067     $7,396     $6,581
                                                                                     ------     ------     ------
                                                                                     ------     ------     ------
Entertainment Group:
Filmed Entertainment..............................................................   $5,078     $4,484     $4,032
Six Flags Theme Parks.............................................................      227        557        533
Broadcasting-The WB Network.......................................................       33         --         --
Programming-HBO...................................................................    1,607      1,513      1,441
Cable.............................................................................    3,094      2,242      2,208
Intersegment elimination..........................................................     (410)      (287)      (251)
                                                                                     ------     ------     ------
Total.............................................................................   $9,629     $8,509     $7,963
                                                                                     ------     ------     ------
                                                                                     ------     ------     ------
</TABLE>
 
                                      F-46
 

<PAGE>
 
<PAGE>
                                TIME WARNER INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
<TABLE>
<CAPTION>
                                                                                          YEARS ENDED DECEMBER 31,
                                                                                          ----------------------
                                                                                          1995     1994     1993
                                                                                          ----     ----     ----
                                                                                                (MILLIONS)
<S>                                                                                       <C>      <C>      <C>
OPERATING INCOME
Time Warner:
Publishing.............................................................................   $381     $347     $295
Music(1)...............................................................................    321      366      296
Cable..................................................................................     (5)      --       --
                                                                                          ----     ----     ----
Total..................................................................................   $697     $713     $591
                                                                                          ----     ----     ----
                                                                                          ----     ----     ----
Entertainment Group:
Filmed Entertainment...................................................................   $253     $219     $233
Six Flags Theme Parks..................................................................     29       56       53
Broadcasting-The WB Network............................................................    (66)      --       --
Programming-HBO........................................................................    274      237      213
Cable..................................................................................    502      340      406
                                                                                          ----     ----     ----
Total..................................................................................   $992     $852     $905
                                                                                          ----     ----     ----
                                                                                          ----     ----     ----
</TABLE>
 
------------
 
(1) Includes  pretax losses of  $85 million recorded in  1995 related to certain
    businesses and  joint  ventures  owned  by the  Music  Division  which  were
    restructured  or closed.  The losses are  primarily related  to Warner Music
    Enterprises, one of the  Company's direct marketing  efforts, and the  write
    off of its related direct mail order assets that were not recoverable due to
    the  closure of this  business. Such closure  was substantially completed in
    1995 and  will  not  require  any  significant,  future  cash  outlays.  The
    activities  that will  not be  continued are  not material  to the Company's
    results of operations, having resulted in insignificant operating losses  in
    prior periods.
 
<TABLE>
<CAPTION>
                                                                                         YEARS ENDED DECEMBER 31,
                                                                                          ----------------------
                                                                                          1995     1994     1993
                                                                                          ----     ----     ----
                                                                                                (MILLIONS)
<S>                                                                                       <C>      <C>      <C>
DEPRECIATION OF PROPERTY, PLANT AND EQUIPMENT
Time Warner:
Publishing.............................................................................   $ 59     $ 47     $ 45
Music..................................................................................     95       86       87
Cable..................................................................................     27       --       --
                                                                                          ----     ----     ----
Total..................................................................................   $181     $133     $132
                                                                                          ----     ----     ----
                                                                                          ----     ----     ----
Entertainment Group:
Filmed Entertainment...................................................................   $113     $ 76     $ 51
Six Flags Theme Parks..................................................................     20       51       41
Broadcasting-The WB Network............................................................     --       --       --
Programming-HBO........................................................................     18       14       14
Cable..................................................................................    465      340      327
                                                                                          ----     ----     ----
Total..................................................................................   $616     $481     $433
                                                                                          ----     ----     ----
                                                                                          ----     ----     ----
</TABLE>
 
                                      F-47
 

<PAGE>
 
<PAGE>
                                TIME WARNER INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
<TABLE>
<CAPTION>
                                                                                    YEARS ENDED DECEMBER 31,
                                                                                 -------------------------------
                                                                                  1995        1994        1993
                                                                                 -------     -------     -------
                                                                                           (MILLIONS)
<S>                                                                              <C>         <C>         <C>
AMORTIZATION OF INTANGIBLE ASSETS(1)
Time Warner:
Publishing....................................................................   $    36     $    36     $    32
Music.........................................................................       274         268         260
Cable.........................................................................        68          --          --
                                                                                 -------     -------     -------
Total.........................................................................   $   378     $   304     $   292
                                                                                 -------     -------     -------
                                                                                 -------     -------     -------
Entertainment Group:
Filmed Entertainment..........................................................   $   124     $   135     $   143
Six Flags Theme Parks.........................................................        11          28          28
Broadcasting-The WB Network...................................................        --          --          --
Programming-HBO...............................................................         1           6           3
Cable.........................................................................       308         309         302
                                                                                 -------     -------     -------
Total.........................................................................   $   444     $   478     $   476
                                                                                 -------     -------     -------
                                                                                 -------     -------     -------
</TABLE>
 
------------
 
(1) Amortization includes all amortization relating to the acquisition of WCI in
    1989,  the  acquisition  of  the  minority  interest  in  ATC  in  1992, the
    acquisitions of KBLCOM and  Summit in 1995  and other business  combinations
    accounted for by the purchase method.
 
     Information  as to the  assets and capital expenditures  of Time Warner and
the Entertainment Group is as follows:
 
<TABLE>
<CAPTION>
                                                                                          DECEMBER 31,
                                                                                 -------------------------------
                                                                                  1995        1994        1993
                                                                                 -------     -------     -------
                                                                                           (MILLIONS)
<S>                                                                              <C>         <C>         <C>
ASSETS
Time Warner:
Publishing....................................................................   $ 2,175     $ 2,013     $ 1,897
Music.........................................................................     7,828       7,672       7,401
Cable.........................................................................     3,875          --          --
Entertainment Group(1)........................................................     5,734       5,350       5,627
Corporate(2)..................................................................     2,520       1,681       1,967
                                                                                 -------     -------     -------
Total.........................................................................   $22,132     $16,716     $16,892
                                                                                 -------     -------     -------
                                                                                 -------     -------     -------
Entertainment Group:
Filmed Entertainment..........................................................   $ 7,389     $ 7,184     $ 6,719
Six Flags Theme Parks.........................................................        --         814         848
Broadcasting-The WB Network...................................................        63          --          --
Programming-HBO...............................................................       935         911         875
Cable.........................................................................     9,842       8,303       8,102
Corporate(2)..................................................................       731       1,780       1,658
                                                                                 -------     -------     -------
Total.........................................................................   $18,960     $18,992     $18,202
                                                                                 -------     -------     -------
                                                                                 -------     -------     -------
</TABLE>
 
------------
 
(1) Entertainment Group assets represent Time Warner's investment in and amounts
    due to and from the Entertainment Group.
(2) Consists principally of cash, cash equivalents and other investments.
 
                                      F-48
 

<PAGE>
 
<PAGE>
                                TIME WARNER INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
<TABLE>
<CAPTION>
                                                                                    YEARS ENDED DECEMBER 31,
                                                                                 -------------------------------
                                                                                  1995        1994        1993
                                                                                 -------     -------     -------
                                                                                           (MILLIONS)
<S>                                                                              <C>         <C>         <C>
CAPITAL EXPENDITURES
Time Warner:
Publishing....................................................................   $    70     $    50     $    41
Music.........................................................................       121         108          91
Cable.........................................................................        56          --          --
Corporate.....................................................................        19           6          66
                                                                                 -------     -------     -------
Total.........................................................................   $   266     $   164     $   198
                                                                                 -------     -------     -------
                                                                                 -------     -------     -------
Entertainment Group:
Filmed Entertainment..........................................................   $   294     $   395     $   210
Six Flags Theme Parks.........................................................        43          46          34
Broadcasting-The WB Network...................................................        --          --          --
Programming-HBO...............................................................        20          14          16
Cable(1)......................................................................     1,293         778         353
Corporate.....................................................................         3           2          --
                                                                                 -------     -------     -------
Total.........................................................................   $ 1,653     $ 1,235     $   613
                                                                                 -------     -------     -------
                                                                                 -------     -------     -------
</TABLE>
 
------------
 
(1) Cable capital expenditures were funded in part  through  collections  on the
    U S WEST Note in the amount of $602 million  in 1995,  $234 million  in 1994
    and $16 million in 1993 (Note 2).
     Information as to Time Warner's operations in different geographical  areas
is as follows:
 
<TABLE>
<CAPTION>
                                                                                    YEARS ENDED DECEMBER 31,
                                                                                 -------------------------------
                                                                                  1995        1994        1993
                                                                                 -------     -------     -------
                                                                                           (MILLIONS)
<S>                                                                              <C>         <C>         <C>
REVENUES
United States(1)..............................................................   $ 5,447     $ 4,944     $ 4,414
Europe........................................................................     1,552       1,445       1,296
Pacific Rim...................................................................       775         724         583
Rest of World.................................................................       293         283         288
                                                                                 -------     -------     -------
Total.........................................................................   $ 8,067     $ 7,396     $ 6,581
                                                                                 -------     -------     -------
                                                                                 -------     -------     -------
OPERATING INCOME
United States.................................................................   $   457     $   494     $   436
Europe........................................................................       158         108         102
Pacific Rim...................................................................        57          74          28
Rest of World.................................................................        25          37          25
                                                                                 -------     -------     -------
Total.........................................................................   $   697     $   713     $   591
                                                                                 -------     -------     -------
                                                                                 -------     -------     -------
ASSETS
United States.................................................................   $19,301     $13,961     $14,328
Europe........................................................................     1,797       1,717       1,635
Pacific Rim...................................................................       628         636         514
Rest of World.................................................................       406         402         415
                                                                                 -------     -------     -------
Total.........................................................................   $22,132     $16,716     $16,892
                                                                                 -------     -------     -------
                                                                                 -------     -------     -------
</TABLE>
 
------------
 
(1) Time  Warner's revenues  do not  include the  revenues of  the Entertainment
    Group, which had export revenues of  $1.982 billion in 1995, $1.693  billion
    in  1994 and  $1.650 billion  in 1993, principally  from the  sale of Filmed
    Entertainment products abroad.
 
                                      F-49
 

<PAGE>
 
<PAGE>
                                TIME WARNER INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
14. COMMITMENTS AND CONTINGENCIES
     Total rent expense amounted to $174  million in 1995, $157 million in  1994
and  $163 million in  1993. The minimum  rental commitments under noncancellable
long-term operating leases are: 1996-$147 million; 1997-$133 million;  1998-$139
million; 1999-$130 million; 2000-$123 million and after 2000-$923 million.
     Minimum  commitments and  guarantees under  certain licensing,  artists and
other agreements aggregated  approximately $2.9  billion at  December 31,  1995,
which  are  payable principally  over a  five-year period.  Such amounts  do not
include the Time Warner General  Partner guarantees of approximately $6  billion
of TWE debt.
     Pending   legal  proceedings   are  substantially   limited  to  litigation
incidental to the businesses of Time Warner, alleged damages in connection  with
class  action lawsuits and pending  litigation with U S  WEST. In the opinion of
counsel and management, the ultimate resolution of these matters will not have a
material effect on the financial statements of Time Warner.
 
15. ADDITIONAL FINANCIAL INFORMATION
     Additional financial information with respect to cash flows is as follows:
 
<TABLE>
<CAPTION>
                                                                                        YEARS ENDED DECEMBER 31,
                                                                                       --------------------------
                                                                                       1995      1994       1993
                                                                                       ----     ------     ------
                                                                                               (MILLIONS)
<S>                                                                                    <C>      <C>        <C>
Cash payments made for interest.....................................................   $659     $  539     $  330
Cash payments made for income taxes.................................................    302        389        234
Tax-related distributions received from TWE.........................................    680        115         --
Income tax refunds received.........................................................     24         50         52
</TABLE>
 
     During the years ended December 31, 1995 and 1994, Time Warner realized $35
million and $179 million, respectively, from the securitization of  receivables.
Noncash  investing and  financing activities in  1995 included  the $1.4 billion
acquisitions of KBLCOM and  Summit in exchange for  capital stock (Note 4),  the
$1.36 billion acquisition of ITOCHU's and Toshiba's interests in TWE in exchange
for  capital  stock  and $10  million  in cash  (Note  2) and  the  $1.8 billion
redemption of Time Warner's  Reset Notes in exchange  for other debt  securities
(Note  6).  Noncash  financing  activities  in  1993  included  the  issuance of
approximately $3.1  billion of  debentures  in exchange  for  the old  Series  C
preferred stock (Note 9).
 
     Other current liabilities consist of:
 
<TABLE>
<CAPTION>
                                                                                                  DECEMBER 31,
                                                                                                -----------------
                                                                                                 1995       1994
                                                                                                ------     ------
                                                                                                   (MILLIONS)
 
<S>                                                                                             <C>        <C>
Accrued expenses.............................................................................   $  972     $  794
Accrued compensation.........................................................................      337        308
Accrued income taxes.........................................................................      173         81
Deferred revenues............................................................................       84         55
                                                                                                ------     ------
Total........................................................................................   $1,566     $1,238
                                                                                                ------     ------
                                                                                                ------     ------
</TABLE>
 
                                      F-50


<PAGE>
 
<PAGE>
                              REPORT OF MANAGEMENT
 
     The  accompanying consolidated  financial statements have  been prepared by
management in  conformity with  generally  accepted accounting  principles,  and
necessarily  include some amounts that are  based on management's best estimates
and judgments.
 
     Time Warner maintains a system of internal accounting controls designed  to
provide management with reasonable assurance that assets are safeguarded against
loss from unauthorized use or disposition, and that transactions are executed in
accordance with management's authorization and recorded properly. The concept of
reasonable  assurance is based on  the recognition that the  cost of a system of
internal control should not exceed the benefits derived and that the  evaluation
of  those  factors  requires  estimates and  judgments  by  management. Further,
because of inherent limitations  in any system  of internal accounting  control,
errors or irregularities may occur and not be detected. Nevertheless, management
believes  that a  high level  of internal control  is maintained  by Time Warner
through the selection and training of qualified personnel, the establishment and
communication of  accounting  and  business policies,  and  its  internal  audit
program.
 
     The Audit Committee of the Board of Directors, composed solely of directors
who  are not  employees of Time  Warner, meets periodically  with management and
with Time Warner's internal auditors and independent auditors to review  matters
relating  to the quality of financial reporting and internal accounting control,
and the  nature, extent  and results  of their  audits. Time  Warner's  internal
auditors and independent auditors have free access to the Audit Committee.
 
<TABLE>
<S>                               <C>                               <C>
Gerald M. Levin                   Richard D. Parsons                Richard J. Bressler
Chairman and                      President                         Senior Vice President
Chief Executive Officer                                             and Chief Financial Officer
</TABLE>
 
                                      F-51
 

<PAGE>
 
<PAGE>
                         REPORT OF INDEPENDENT AUDITORS
 
THE BOARD OF DIRECTORS AND SHAREHOLDERS
TIME WARNER INC.
 
We  have audited the accompanying consolidated balance sheet of Time Warner Inc.
('Time Warner') as of December 31,  1995 and 1994, and the related  consolidated
statements  of operations, cash  flows and shareholders' equity  for each of the
three years in the period ended December 31, 1995. Our audits also included  the
financial statement schedules listed in the Index at Item 14(a). These financial
statements and schedules are the responsibility of Time Warner's management. Our
responsibility  is  to  express an  opinion  on these  financial  statements and
schedules based on our audits.
 
We  conducted  our  audits  in  accordance  with  generally  accepted   auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence  supporting
the  amounts and disclosures in the financial statements. An audit also includes
assessing the  accounting  principles used  and  significant estimates  made  by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the  financial statements referred to  above present fairly,  in
all  material respects,  the consolidated financial  position of  Time Warner at
December 31, 1995 and 1994, and  the consolidated results of its operations  and
its  cash flows  for each of  the three years  in the period  ended December 31,
1995, in conformity with generally accepted accounting principles. Also, in  our
opinion,  the related financial statement schedules, when considered in relation
to the  basic financial  statements taken  as  a whole,  present fairly  in  all
material respects the information set forth therein.
 
                                          ERNST & YOUNG LLP
 
New York, New York
February 6, 1996
 
                                      F-52


<PAGE>
 
<PAGE>
                                TIME WARNER INC.
                         SELECTED FINANCIAL INFORMATION
 
     The selected financial information for each of the five years in the period
ended December 31, 1995 set forth below has been derived from and should be read
in  conjunction with  the financial  statements and  other financial information
presented elsewhere herein. Capitalized  terms are as  defined and described  in
such  consolidated  financial  statements,  or  elsewhere  herein.  The selected
historical financial  information  for  all  periods  after  1992  reflects  the
deconsolidation  of the Entertainment Group,  principally TWE, effective January
1, 1993.
 
     The  selected  historical  financial  information  for  1995  reflects  the
issuance  of  29.3  million  shares of  convertible  preferred  stock  having an
aggregate liquidation preference of  $2.926 billion in  connection with (i)  the
acquisitions of KBLCOM and Summit and (ii) the exchange by Toshiba and ITOCHU of
their  direct and indirect  interests in TWE.  The selected historical financial
information for 1993 reflects the issuance of $6.1 billion of long-term debt and
the use of $.5 billion of cash and equivalents for the exchange or redemption of
preferred stock having an aggregate liquidation preference of $6.4 billion.  The
selected  historical financial information for  1992 reflects the capitalization
of TWE on June 30, 1992 and associated refinancings, and the acquisition of  the
18.7% minority interest in ATC as of June 30, 1992, using the purchase method of
accounting for business combinations.
 
     Per  common share amounts  and average common shares  have been restated to
give effect to the  four-for-one common stock split  that occurred on  September
10, 1992.
 
<TABLE>
<CAPTION>
                                                                           YEARS ENDED DECEMBER 31,
                                                              ---------------------------------------------------
SELECTED OPERATING STATEMENT INFORMATION                       1995       1994       1993       1992       1991
                                                              -------    -------    -------    -------    -------
                                                                     (MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S>                                                           <C>        <C>        <C>        <C>        <C>
Revenues...................................................   $ 8,067    $ 7,396    $ 6,581    $13,070    $12,021
Depreciation and amortization..............................       559        437        424      1,172      1,109
Business segment operating income (a)......................       697        713        591      1,343      1,154
Equity in pretax income of Entertainment Group.............       256        176        281         --         --
Interest and other, net....................................       877        724        718        882        966
Net income (loss) (b)(c)...................................      (166)       (91)      (221)        86        (99)
Net loss applicable to common shares (after preferred
  dividends)...............................................      (218)      (104)      (339)      (542)      (692)
Per share of common stock:
  Net loss (b)(c)..........................................   $ (0.57)   $ (0.27)   $ (0.90)   $ (1.46)   $ (2.40)
  Dividends................................................   $  0.36    $  0.35    $  0.31    $ 0.265    $  0.25
Average common shares (c)..................................     383.8      378.9      374.7      371.0      288.2
</TABLE>
 
------------
 (a)  Business  segment operating  income for the  year ended  December 31, 1995
      includes $85 million in  losses relating to  certain businesses and  joint
      ventures  owned by the  Music Division which  were restructured or closed.
      Business segment operating  income for  the year ended  December 31,  1991
      includes  a  $60  million  charge relating  to  the  restructuring  of the
      Publishing Division.
 
 (b)  The  net  loss  for  the  year   ended  December  31,  1995  includes   an
      extraordinary  loss on  the retirement  of debt  of $42  million ($.11 per
      common share). The net loss for the year ended December 31, 1993  includes
      an  extraordinary loss on the retirement of  debt of $57 million ($.15 per
      common share) and an unusual charge of $70 million ($.19 per common share)
      from the effect of the new income tax law on Time Warner's deferred income
      tax liability.
 
 (c)  In August 1991, Time Warner completed the sale of 137.9 million shares  of
      common stock pursuant to a rights offering. Net proceeds of $2.558 billion
      from  the  rights offering  were used  to  reduce indebtedness  under Time
      Warner's bank credit agreement. If the rights offering had been  completed
      at the beginning of 1991, net loss for the year would have been reduced to
      $33  million, or $1.70 per  common share, and there  would have been 369.3
      million shares of common stock outstanding during the year.
 
                                      F-53
 

<PAGE>
 
<PAGE>
 
<TABLE>
<CAPTION>
                                                                           YEARS ENDED DECEMBER 31,
                                                              ---------------------------------------------------
SELECTED BALANCE SHEET INFORMATION                             1995       1994       1993       1992       1991
                                                              -------    -------    -------    -------    -------
                                                                     (MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S>                                                           <C>        <C>        <C>        <C>        <C>
Investments in and amounts due to and from Entertainment
  Group....................................................   $ 5,734    $ 5,350    $ 5,627    $    --    $    --
Total assets...............................................    22,132     16,716     16,892     27,366     24,889
Long-term debt.............................................     9,907      8,839      9,291     10,068      8,716
Company-obligated mandatorily redeemable preferred
  securities of subsidiaries holding solely subordinated
  notes and debentures of the Company (a)..................       949         --         --         --         --
Shareholders' equity:
  Preferred stock liquidation preference...................     2,994        140        140      6,532      6,256
  Equity applicable to common stock........................       673      1,008      1,230      1,635      2,242
  Total shareholders' equity...............................     3,667      1,148      1,370      8,167      8,498
Total capitalization.......................................    14,523      9,987     10,661     18,235     17,214
</TABLE>
 
------------
 
 (a) Includes $374 million of preferred securities that are redeemable for  cash
     or,  at Time Warner's option, approximately  12.1 million shares of Hasbro,
     Inc. common stock owned by Time Warner.
 
                                      F-54
 

<PAGE>
 
<PAGE>
                                TIME WARNER INC.
                  QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
                                          EQUITY IN
                                           PRETAX                         NET          NET INCOME
                          OPERATING        INCOME                    INCOME (LOSS)     (LOSS) PER     DIVIDENDS
                          INCOME OF       (LOSS) OF        NET        APPLICABLE         COMMON          PER
                          BUSINESS      ENTERTAINMENT     INCOME       TO COMMON         SHARE         COMMON
QUARTER      REVENUES     SEGMENTS          GROUP         (LOSS)       SHARES(B)         (B)(C)         SHARE
--------     --------     ---------     -------------     ------     -------------     ----------     ---------
                                     (MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S>          <C>          <C>           <C>               <C>        <C>               <C>            <C>
1995
1st           $1,817        $ 138           $  22         $ (47)         $ (50)          $(0.13)        $0.09
2nd            1,907          184              84            (8)           (13)           (0.03)         0.09
3rd (a)        1,981           21             129          (144)          (160)           (0.41)         0.09
4th            2,362          354              21            33              5             0.01          0.09
Year (a)       8,067          697             256          (166)          (218)           (0.57)         0.36
 
1994
1st           $1,558        $ 112           $  45         $ (51)         $ (54)          $(0.14)        $0.08
2nd            1,667          170              66           (20)           (23)           (0.06)         0.09
3rd            1,884          141              66           (32)           (35)           (0.09)         0.09
4th            2,287          290              (1)           12              8             0.02          0.09
Year           7,396          713             176           (91)          (104)           (0.27)         0.35
 
<CAPTION>
 
           AVERAGE     COMMON STOCK
           COMMON      ------------
QUARTER    SHARES     HIGH        LOW
--------   ------     ----        ---
 
<S>         <C>      <C>         <C>
1995
1st        379.5     $39 1/4     $33 5/8
2nd        381.4      43 1/2      34 1/4
3rd (a)    386.5      45 5/8      38 7/8
4th        387.5      41 1/4      35 3/4
Year (a)   383.8      45 5/8      33 5/8

1994
1st        378.6     $44 1/4     $36 5/8
2nd        378.8      40 5/8      34 1/2
3rd        379.1      38 3/4      34
4th        379.2      37 3/4      31 1/2
Year       378.9      44 1/4      31 1/2
</TABLE>
 
------------
 (a)  Business segment operating income for  the third quarter of 1995  includes
      $85  million in losses  relating to certain  businesses and joint ventures
      owned by the  Music Division which  were restructured or  closed. The  net
      loss  for the third quarter of 1995  includes an extraordinary loss on the
      retirement of debt of $42 million ($.11 per common share).
 
 (b)  After preferred dividend requirements.
 
 (c)  Per common  share  amounts for  the  quarters  and full  years  have  been
      calculated  separately. Accordingly, quarterly amounts  may not add to the
      annual  amount  because  of  differences  in  the  average  common  shares
      outstanding during each period.
 
                                      F-55
 

<PAGE>
 
<PAGE>
                                TIME WARNER INC.
          SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
              UNCONSOLIDATED (PARENT-ONLY) CONDENSED BALANCE SHEET
                                  DECEMBER 31,
                                   (MILLIONS)
 
<TABLE>
<CAPTION>
                                                                                              1995        1994
                                                                                             -------     -------
<S>                                                                                          <C>         <C>
ASSETS
Cash and equivalents (a).................................................................    $   922     $    68
Investments in and amounts due to and from unconsolidated subsidiaries and equity method
  investees..............................................................................     16,040      13,122
Other assets.............................................................................        436         358
                                                                                             -------     -------
Total assets.............................................................................    $17,398     $13,548
                                                                                             -------     -------
                                                                                             -------     -------
 
LIABILITIES AND SHAREHOLDERS' EQUITY
Long-term debt...........................................................................    $ 8,467     $ 8,811
Deferred income taxes....................................................................      3,420       2,700
Other liabilities........................................................................        867         889
Subordinated notes and debentures in support of mandatorily redeemable preferred
  securities of subsidiaries.............................................................        977          --
 
Shareholders' equity:
Preferred stock..........................................................................         30           1
Common stock.............................................................................        388         379
Paid-in capital..........................................................................      5,422       2,588
Unrealized gains on certain marketable securities........................................        116         130
Accumulated deficit......................................................................     (2,289)     (1,950)
                                                                                             -------     -------
Total shareholders' equity...............................................................      3,667       1,148
                                                                                             -------     -------
Total liabilities and shareholders' equity...............................................    $17,398     $13,548
                                                                                             -------     -------
                                                                                             -------     -------
</TABLE>
 
------------
 
 (a) Includes  $557  million  of  cash  and  equivalents  at  December  31, 1995
     segregated for the redemption of long-term debt.
 
See accompanying notes.
 
                                      F-56
 

<PAGE>
 
<PAGE>
                                TIME WARNER INC.
          SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
         UNCONSOLIDATED (PARENT-ONLY) CONDENSED STATEMENT OF OPERATIONS
                            YEARS ENDED DECEMBER 31,
                                   (MILLIONS)
 
<TABLE>
<CAPTION>
                                                                                        1995      1994      1993
                                                                                        -----     -----     -----
<S>                                                                                     <C>       <C>       <C>
Equity in the income of unconsolidated subsidiaries and equity method investees
  before federal and state income and foreign withholding taxes.....................    $ 815     $ 731     $ 794
Interest and other, net.............................................................     (860)     (641)     (718)
Corporate expenses..................................................................      (74)      (76)      (73)
                                                                                        -----     -----     -----
Income (loss) before federal and state income and foreign withholding taxes.........     (119)       14         3
Provision for federal and state income and foreign withholding taxes................       (5)     (105)     (167)
                                                                                        -----     -----     -----
Loss before extraordinary item......................................................     (124)      (91)     (164)
Extraordinary loss on debt, net of $26 million and $37 million income tax benefit in
  1995 and 1993, respectively.......................................................      (42)       --       (57)
                                                                                        -----     -----     -----
Net loss............................................................................    $(166)    $ (91)    $(221)
                                                                                        -----     -----     -----
                                                                                        -----     -----     -----
</TABLE>
 
See accompanying notes.
 
                                      F-57
 

<PAGE>
 
<PAGE>
                                TIME WARNER INC.
          SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
         UNCONSOLIDATED (PARENT-ONLY) CONDENSED STATEMENT OF CASH FLOWS
                            YEARS ENDED DECEMBER 31,
                                   (MILLIONS)
 
<TABLE>
<CAPTION>
                                                                                    1995        1994       1993
                                                                                   -------     ------     -------
<S>                                                                                <C>         <C>        <C>
OPERATIONS
Net loss.......................................................................    $  (166)    $  (91)    $  (221)
Extraordinary loss on retirement of debt.......................................         42         --          57
One-time tax charge (a)........................................................         --         --          70
Noncash interest expense.......................................................        176        219         185
Deficiency of distributions over equity in pretax income of unconsolidated
  subsidiaries and equity method investees (b).................................        (89)      (396)       (462)
Other, principally changes in operating assets and liabilities.................        (72)       149         435
                                                                                   -------     ------     -------
Cash provided (used) by operations (c).........................................       (109)      (119)         64
                                                                                   -------     ------     -------
 
INVESTING ACTIVITIES
Investments and acquisitions, principally loans and advances to unconsolidated
  subsidiaries.................................................................       (353)      (815)       (737)
Investment proceeds, principally repayments of loans and advances by
  unconsolidated subsidiaries..................................................      1,154      1,087         114
                                                                                   -------     ------     -------
Cash provided (used) by investing activities (d)...............................        801        272        (623)
                                                                                   -------     ------     -------
 
FINANCING ACTIVITIES
Borrowings.....................................................................        748        550       4,730
Debt repayments................................................................     (1,455)      (617)     (1,003)
Issuance of subordinated notes and debentures in support of mandatorily
  redeemable preferred securities of subsidiaries..............................        977         --          --
Redemption of old Series D preferred stock.....................................         --         --      (3,494)
Dividends paid.................................................................       (171)      (142)       (299)
Stock option and dividend reinvestment plans...................................        106         34          92
Other, principally financing costs.............................................        (43)        (6)       (133)
                                                                                   -------     ------     -------
Cash provided (used) by financing activities (d)...............................        162       (181)       (107)
                                                                                   -------     ------     -------
 
INCREASE (DECREASE) IN CASH AND EQUIVALENTS....................................        854        (28)       (666)
 
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD....................................         68         96         762
                                                                                   -------     ------     -------
 
CASH AND EQUIVALENTS AT END OF PERIOD..........................................    $   922     $   68     $    96
                                                                                   -------     ------     -------
                                                                                   -------     ------     -------
</TABLE>
 
------------
(a) Reflects a  $70  million  increase  in Time  Warner's  deferred  income  tax
    liability as a result of new tax law enacted in 1993.
 
(b) Distributions  from unconsolidated subsidiaries  and equity method investees
    were $726 million,  $335 million and  $332 million in  1995, 1994 and  1993,
    respectively.
 
(c) Cash  payments made for interest amounted  to $628 million, $539 million and
    $268 million in 1995,  1994 and 1993, respectively.  U.S. federal and  state
    income  and foreign withholding tax payments were $195 million, $299 million
    and $137  million in  1995, 1994  and 1993,  respectively, and  related  tax
    refunds were $19 million, $44 million and $44 million, respectively.
 
(d) For  information  with respect  to certain  noncash investing  and financing
    activities of  Time Warner,  see Note  15 to  the Time  Warner  consolidated
    financial  statements.  In addition,  noncash  investing activities  of Time
    Warner  with  its  unconsolidated  subsidiaries  included  noncash   capital
    distributions  (contributions), net,  of $2.450 billion,  ($176) million and
    $3.049 billion in 1995, 1994 and  1993, respectively, and a $3 billion  loan
    to an unconsolidated subsidiary in 1993.
 
See accompanying notes.
 
                                      F-58
 

<PAGE>
 
<PAGE>
                                TIME WARNER INC.
          SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
     NOTES TO UNCONSOLIDATED (PARENT-ONLY) CONDENSED FINANCIAL INFORMATION
 
1. BASIS OF PRESENTATION
 
     Time  Warner's investments  in and amounts  due to  and from unconsolidated
subsidiaries and equity method investees are  stated at cost plus equity in  the
undistributed  income (loss) of subsidiaries and equity method investees, before
U.S. federal and  state income  and foreign  withholding taxes,  since dates  of
acquisition.  Time  Warner's  share  of  the  income  (loss)  of  unconsolidated
subsidiaries and equity method  investees, before federal  and state income  and
foreign  withholding taxes, is included in the statement of operations using the
equity method. The unconsolidated  (parent-only) financial statements should  be
read  in conjunction with the  accompanying consolidated financial statements of
Time Warner. Capitalized terms  are as defined in  the Time Warner  consolidated
financial statements.
 
2. LONG-TERM DEBT
 
     The  principal  terms and  amounts  of the  long-term  debt of  Time Warner
(parent-only) are set forth in Note 6 to the Time Warner consolidated  financial
statements.  Time  Warner (parent-only)  long-term debt  excludes unconsolidated
subsidiary debt of $1.440 billion and $28 million at December 31, 1995 and 1994,
respectively, of which $1.265 billion is due in 2000.
 
3. SUBORDINATED NOTES AND DEBENTURES
 
     In August 1995,  Time Warner  issued $385  million principal  amount of  4%
subordinated  notes due  December 23,  1997 (the  '4% Notes')  to a wholly-owned
subsidiary in support  of such subsidiary's  issuance of the  PERCS. The  amount
payable  by Time Warner upon the maturity of each 4% Note is equal to the lesser
of $54.41, and the market value of a share of common stock of Hasbro on December
17, 1997, payable in cash or, at Time Warner's option, Hasbro common stock  held
by a subsidiary of Time Warner. Time Warner has the right to redeem the 4% Notes
at any time prior to December 23, 1997, at an amount per 4% Note equal to $54.41
(or  in certain limited circumstances  the lesser of such  amount and the market
value of a share of Hasbro common stock at the time of redemption) plus  accrued
and unpaid interest thereon and a declining premium, payable in cash or, at Time
Warner's option, Hasbro common stock.
 
     In  December  1995, Time  Warner issued  $592  million principal  amount of
8 7/8% subordinated debentures due December  31, 2025 (the '8 7/8%  Debentures')
to  a wholly-owned  subsidiary in support  of such subsidiary's  issuance of the
Preferred Trust Securities. Interest  payments on the 8  7/8% Debentures may  be
deferred  at  the  election of  Time  Warner  for any  period  not  exceeding 20
consecutive quarters. Time Warner has the right to redeem the 8 7/8% Debentures,
in whole  or in  part,  on or  after  December 31,  2000,  or in  other  certain
circumstances, in each case at an amount equal to the principal amount of 8 7/8%
Debentures to be redeemed plus accrued and unpaid interest thereon.
 
                                      F-59
 

<PAGE>
 
<PAGE>
                                TIME WARNER INC.
                SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
                  YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
                                   (MILLIONS)
 
<TABLE>
<CAPTION>
                                                                             ADDITIONS
                                                               BALANCE AT    CHARGED TO                       BALANCE
                                                               BEGINNING     COSTS AND                        AT END
                        DESCRIPTION                            OF PERIOD      EXPENSES     DEDUCTIONS        OF PERIOD
------------------------------------------------------------   ----------    ----------    ----------        ---------
<S>                                                            <C>           <C>           <C>               <C>
1995:
Reserves deducted from accounts receivable:
     Allowance for doubtful accounts........................     $  157       $    230      $   (199)(a)       $ 188
     Reserves for sales returns and allowances..............        611          2,217        (2,230)(b)(c)      598
                                                               ----------    ----------    ----------        ---------
          Total.............................................     $  768       $  2,447      $ (2,429)          $ 786
                                                               ----------    ----------    ----------        ---------
                                                               ----------    ----------    ----------        ---------
Reserves deducted from amounts due to publishers
     (accounts payable)
     Allowance for magazine and book returns................     $ (159)      $ (1,015)     $  1,011(c)        $(163)
                                                               ----------    ----------    ----------        ---------
                                                               ----------    ----------    ----------        ---------
1994:
Reserves deducted from accounts receivable:
     Allowance for doubtful accounts........................     $  131       $    197      $   (171)(a)       $ 157
     Reserves for sales returns and allowances..............        545          1,822        (1,756)(b)(c)      611
                                                               ----------    ----------    ----------        ---------
          Total.............................................     $  676       $  2,019      $ (1,927)          $ 768
                                                               ----------    ----------    ----------        ---------
                                                               ----------    ----------    ----------        ---------
Reserves deducted from amounts due to publishers (accounts
     payable)
     Allowance for magazine and book returns................     $ (154)      $   (905)     $    900(c)        $(159)
                                                               ----------    ----------    ----------        ---------
                                                               ----------    ----------    ----------        ---------
1993:
Reserves deducted from accounts receivable:
     Allowance for doubtful accounts........................     $  122       $    194      $   (185)(a)       $ 131
     Reserves for sales returns and allowances..............        522          1,631        (1,608)(b)(c)      545
                                                               ----------    ----------    ----------        ---------
          Total.............................................     $  644       $  1,825      $ (1,793)          $ 676
                                                               ----------    ----------    ----------        ---------
                                                               ----------    ----------    ----------        ---------
Reserves deducted from amounts due to publishers (accounts
     payable)
     Allowance for magazine and book returns................     $ (146)      $   (855)     $    847(c)        $(154)
                                                               ----------    ----------    ----------        ---------
                                                               ----------    ----------    ----------        ---------
</TABLE>
 
------------
 
 (a)  Represents uncollectible receivables charged against reserve.
 
 (b)  Represents returns or allowances applied against reserve.
 
 (c)  The  distribution  of magazines  not  owned by  Time  Warner results  in a
      receivable recorded at the  sales price and  a corresponding liability  to
      the publisher recorded at the sales price less the distribution commission
      recognized  by Time Warner as revenue.  Therefore, changes in reserves for
      magazine returns  also  result in  corresponding  changes to  the  reserve
      against the liability due to the publishers.
 
                                      F-60


<PAGE>
 
<PAGE>
                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
 
     TWE   is  engaged  principally  in   two  fundamental  areas  of  business:
Entertainment, consisting  principally  of interests  in  filmed  entertainment,
broadcasting,    theme   parks    and   cable    television   programming;   and
Telecommunications, consisting  principally  of interests  in  cable  television
systems. TWE also manages the telecommunications 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.
 
STRATEGIC INITIATIVES
 
SIGNIFICANT TRANSACTIONS
 
     During  1995, TWE embarked on a  program to improve its financial condition
and increase  its overall  financial  flexibility through  asset sales  and  the
refinancing  of its bank debt. In conjunction with Time Warner, TWE also pursued
significant, strategic  objectives  during  1995 through  its  cable  television
operations.  These  objectives  are part  of  a continuing  strategy  to further
enhance the strength of TWE's interests  in entertainment and to attempt to  use
existing  and acquired cable television systems  to establish an enterprise that
will be responsible  for the overall  management and financing  of its and  Time
Warner's  cable and telecommunications interests.  In pursuit of these strategic
objectives, TWE  completed a  number of  transactions in  1995 that  have had  a
significant  effect on its  results of operations  and financial condition. Such
transactions include:
 
      The formation  by  TWE  of  the  TWE-Advance/Newhouse  Partnership  which,
      together  with certain cable acquisitions by Time Warner, strengthened the
      geographic clusters  of the  cable  television systems  and  substantially
      increased the number of cable subscribers managed by Time Warner Cable.
 
      The  execution of  a new $8.3  billion credit agreement,  under which $2.6
      billion of pre-existing bank debt was refinanced by TWE; and
 
      The sale by  TWE of  certain assets under  an asset  sales program,  which
      raised  approximately $1.1 billion for  debt reduction, including the sale
      of 51% of TWE's  interest in Six Flags  (the 'Six Flags Transaction')  and
      the  sale  or  expected  sale or  transfer  of  certain  unclustered cable
      television systems owned by TWE (the 'Unclustered Cable Transactions').
 
The nature of these transactions and  their impact on the results of  operations
and financial condition of TWE are further discussed below.
 
TELECOMMUNICATIONS STRATEGY
 
     In  1994, TWE and Time Warner embarked  on a strategy to expand their cable
television business,  leading  to  the  formation  of  the  TWE-Advance/Newhouse
Partnership  and  the acquisition  by Time  Warner  of certain  cable television
systems, which increased  the number  of subscribers under  TWE's management  by
approximately  3.7 million. This strategy  was based on management's expectation
that there  would be  a signficant  increase in  the value  of cable  television
systems  related, in part,  to a future  convergence of the  cable and telephone
industries, which would provide cable  companies with an opportunity to  operate
large geographic clusters of cable television systems for purposes of maximizing
the  development  and  distribution  of  new and  improved  services  on  a cost
efficient  basis,  such   as  increased  channel   capacity,  high  speed   data
transmission and telephony services.
 
     In  early 1996, TWE and Time Warner completed their plans for the expansion
of their  cable  television  business, thereby  strengthening  their  geographic
clusters  of  cable  television  systems as  previously  envisioned.  Along with
internal growth, the formation of the TWE-Advance/Newhouse Partnership, and Time
Warner's acquisitions of  Summit Communications Group,  Inc. ('Summit'),  KBLCOM
Incorporated  ('KBLCOM')  and  Cablevision  Industries  Corporation  ('CVI') and
related  companies,  increased  the  total  number  of  subscribers  under   the
management of Time Warner Cable to over 11.7 million, as compared to 7.5 million
subscribers at the
 
                                      F-61
 

<PAGE>
 
<PAGE>
                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
        OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
 
end  of 1994. Time Warner Cable has  also extended its reach of cable television
systems to neighborhoods passing 18 million homes or close to 20% of  television
homes  in the U.S.  In addition, there  are now 35  geographic clusters of cable
television systems managed by Time Warner Cable serving over 100,000 subscribers
each, including key markets such as New York City and State, central Florida and
North Carolina.  Excluding Time  Warner's  systems, TWE  owns or  manages  cable
television  systems serving 9.5 million subscribers, with 31 geographic clusters
serving over 100,000 subscribers each. TWE and Time Warner do not currently plan
to make  any more  significant  acquisitions of  cable television  systems,  but
instead  intends to continue  to refine their  geographic clusters by exchanging
certain unclustered cable television  systems for geographically-strategic  ones
or by selling non-strategic cable television systems as part of their continuing
asset sales program. Management continues to believe that the increased size and
concentration  of its subscriber base will  provide for sustained revenue growth
from new and improved services, and provide certain economies of scale  relating
to  the upgrade of  the technological capabilities of  Time Warner Cable's cable
television systems.
 
     Management believes that the future convergence of the cable and  telephone
industries  has been substantially  confirmed through various  events within the
industry,  including  the   February  1996  enactment   into  law  of   sweeping
telecommunications industry reform. Among other features, the Telecommunications
Act of 1996 effectively removes regulatory barriers that historically prohibited
cable  television companies and local and long-distance telephone companies from
competing in each  other's business. In  addition, the new  law eliminates  most
cable   rate   pricing  restrictions   in  1999,   and  earlier   under  certain
circumstances. TWE expects that the relaxation of cable rate regulation in 1999,
along with permitted cable rate  price increases for certain regulated  services
that  went into  effect on January  1, 1996  under a separate  Time Warner Cable
agreement with the Federal Communications  Commission (the 'FCC'), will  provide
enhanced  pricing flexibility  that will  help finance  its cable  and telephony
expansion plans.
 
     The next phase of TWE and  Time Warner's telecommunications strategy is  to
simplify  the  structure  of  its  cable  and  telecommunications  properties by
bringing such properties together, so far as practicable and on a  tax-efficient
basis,  into an enterprise  that will be responsible  for the overall management
and financing of these interests. The  first step of this process was  completed
in  1995 when  ITOCHU and  Toshiba exchanged their  interests in  TWE for equity
interests in Time Warner. The restructuring process depends, among other things,
upon successful  negotiations with  U  S WEST  and  certain creditors,  and  the
receipt  of franchise and other regulatory  approvals. Accordingly, there can be
no assurance that the  effort will succeed. In  the interim, as contemplated  by
the TWE-Advance/Newhouse Partnership agreement, Time Warner may transfer certain
of its newly-acquired cable systems to the TWE-Advance/Newhouse Partnership on a
tax-efficient  basis.  Such transfers,  if  they are  made,  are expected  to be
structured so that the systems will be transferred subject to a portion of  Time
Warner's debt, thereby increasing the under-leveraged capitalization of the TWE-
Advance/Newhouse Partnership and consequently, TWE.
 
USE OF EBITDA
 
     The  following  comparative discussion  of  the results  of  operations and
financial condition of TWE includes, among other factors, an analysis of changes
in the  operating  income  of  the business  segments  before  depreciation  and
amortization  ('EBITDA')  in  order to  eliminate  the effect  on  the operating
performance of  the filmed  entertainment and  cable businesses  of  significant
amounts  of amortization  of intangible assets  recognized in  Time Warner's $14
billion acquisition of  WCI in  1989, the $1.3  billion acquisition  of the  ATC
minority  interest in 1992 and other  business combinations accounted for by the
purchase method. Financial analysts generally consider EBITDA to be an important
measure of comparative operating performance for the businesses of TWE, and when
used in comparison  to debt levels  or the  coverage of interest  expense, as  a
measure  of liquidity. However, EBITDA should  be considered in addition to, not
as a substitute for, operating
 
                                      F-62
 

<PAGE>
 
<PAGE>
                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
        OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
 
income, net income, cash  flow and other measures  of financial performance  and
liquidity reported in accordance with generally accepted accounting principles.
 
RESULTS OF OPERATIONS
 
1995 VS. 1994
 
     TWE  had  revenues  of $9.517  billion,  income  of $97  million  before an
extraordinary loss on the retirement of debt  and net income of $73 million  for
the year ended December 31, 1995, compared to revenues of $8.460 billion and net
income of $161 million for the year ended December 31, 1994. The decrease in net
income  in 1995 was principally  related to a $24  million extraordinary loss on
the retirement  of debt  and higher  depreciation and  amortization relating  to
increased capital spending.
 
     As  discussed more fully below, TWE's  operating results in 1995 reflect an
overall  increase  in  operating  income  generated  by  its  business  segments
(including  the  contribution by  the  TWE-Advance/Newhouse Partnership)  and an
increase in  investment-related  income resulting  from  gains on  the  sale  of
certain  unclustered  cable systems  and other  investments,  offset in  part by
minority interest expense related to the consolidation of the operating  results
of the TWE-Advance/Newhouse Partnership effective as of April 1, 1995.
 
     On  a  pro  forma  basis,  giving  effect  to  (i)  the  formation  of  the
TWE-Advance/Newhouse Partnership,  (ii) the  refinancing of  approximately  $2.6
billion  of pre-existing bank debt, (iii) the consolidation of Paragon, (iv) the
Six Flags  Transaction, (v)  the  Unclustered Cable  Transactions and  (vi)  the
reacquisition  of the Time Warner Service Partnership Assets, as if each of such
transactions had  occurred at  the  beginning of  the  periods, TWE  would  have
reported  for the  years ended  December 31, 1995  and 1994,  revenues of $9.682
billion and $8.779 billion, depreciation and amortization of $1.069 billion  and
$1.035 billion, operating income of $962 million and $884 million, income before
extraordinary  item of  $172 million  and $143  million and  net income  of $148
million and $143 million, respectively. The 1995 to 1994 comparison of pro forma
results are similarly affected by any underlying historical trends unrelated  to
the  transactions given pro forma  effect to therein. The  increase in pro forma
over historical  net income  for 1995  principally results  from the  pro  forma
effects of a full year contribution by the TWE-Advance/Newhouse Partnership, the
contribution  of  net  income related  to  the Time  Warner  Service Partnership
Assets, and interest savings associated with the refinancing of TWE's bank  debt
and lower debt levels resulting from asset sales. The decrease in pro forma over
historical net income for 1994 principally results from the pro forma effects of
the  contribution of net  losses related to the  Time Warner Service Partnership
Assets,  which  exceeded  the  positive  pro  forma  effects  of  a  full   year
contribution  by  the  TWE-Advance/Newhouse  Partnership,  and  interest savings
associated with  the  refinancing of  TWE's  bank  debt and  lower  debt  levels
resulting from asset sales.
 
     As  a U.S. partnership, TWE is not subject to U.S. federal and state income
taxation. Income and withholding taxes of $86 million in the year ended December
31, 1995,  and $40  million  in the  year ended  December  31, 1994,  have  been
provided  in respect of the operations  of TWE's domestic and foreign subsidiary
corporations.
 
                                      F-63
 

<PAGE>
 
<PAGE>
                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
        OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
 
     EBITDA and operating income for TWE in 1995 and 1994 are as follows:
 
<TABLE>
<CAPTION>
                                                                                  YEARS ENDED DECEMBER 31,
                                                                             -----------------------------------
                                                                                                     OPERATING
                                                                                  EBITDA              INCOME
                                                                             -----------------     -------------
                                                                              1995       1994      1995     1994
                                                                             ------     ------     ----     ----
                                                                                         (MILLIONS)
<S>                                                                          <C>        <C>        <C>      <C>
Filmed Entertainment......................................................   $  459     $  407     $228     $201
Six Flags Theme Parks.....................................................       60        135       29       56
Broadcasting-The WB Network...............................................      (66)        --      (66)      --
Programming-HBO...........................................................      291        255      274      236
Cable.....................................................................    1,255        994      495      355
                                                                             ------     ------     ----     ----
Total.....................................................................   $1,999     $1,791     $960     $848
                                                                             ------     ------     ----     ----
                                                                             ------     ------     ----     ----
</TABLE>
 
     Filmed Entertainment.   Revenues increased to  $5.069 billion, compared  to
$4.476  billion in  1994. EBITDA  increased to  $459 million  from $407 million.
Depreciation and amortization, including amortization related to the purchase of
WCI, amounted to $231 million in 1995 and $206 million in 1994. Operating income
increased to $228 million from  $201 million. Revenues benefited from  increases
in   worldwide  theatrical,   home  video,  consumer   products  and  television
distribution operations. Worldwide theatrical  and domestic home video  revenues
in  1995 were led by the success  of Batman Forever. EBITDA and operating income
benefited from the revenue gains and increased income from licensing operations.
 
     Six Flags Theme Parks.  As a result of TWE's sale of 51% of its interest in
Six Flags, the operating results of Six Flags have been deconsolidated effective
as of June 23, 1995 and TWE's  remaining 49% interest in Six Flags is  accounted
for  under the equity  method of accounting.  Accordingly, revenues decreased to
$227 million, compared to $557 million in 1994. EBITDA decreased to $60  million
from $135 million. Depreciation and amortization amounted to $31 million in 1995
and  $79 million  in 1994.  Operating income decreased  to $29  million from $56
million.
 
     Broadcasting-The WB Network.  The WB Network was launched in January  1995,
and  generated $66 million of  operating losses on $33  million of revenues. The
operating loss was  mitigated by  a favorable legal  settlement, as  well as  by
funding  from a limited partner admitted as  of August 1995. Due to the start-up
nature of  this  new  national  broadcast  operation,  losses  are  expected  to
continue.
 
     Programming-HBO.   Revenues increased to $1.593 billion, compared to $1.494
billion  in  1994.  EBITDA  increased   to  $291  million  from  $255   million.
Depreciation and amortization amounted to $17 million in 1995 and $19 million in
1994.  Operating income  increased to $274  million from  $236 million. Revenues
benefited primarily from an  increase in subscriptions to  29.7 million from  27
million  at the  end of 1994,  as well as  from higher pay-TV  rates. EBITDA and
operating income improved principally as a result of the revenue gains.
 
     Cable.  Revenues increased to $3.005 billion, compared to $2.220 billion in
1994. EBITDA increased  to $1.255  billion from $994  million. Depreciation  and
amortization,  including amortization  related to  the purchase  of WCI  and the
acquisition of the ATC minority interest,  amounted to $760 million in 1995  and
$639  million  in 1994.  Operating income  increased to  $495 million  from $355
million. Revenues  and operating  results benefited  from the  formation of  the
TWE-Advance/Newhouse  Partnership  on April  1,  1995 and  the  consolidation of
Paragon effective as of July 6, 1995. Excluding such effects, revenues benefited
from a 3%  increase in  basic cable  subscribers and  increases in  nonregulated
revenues, including pay-TV, pay-per-view and advertising. Excluding the positive
contributions from the TWE-Advance/Newhouse Partnership and the consolidation of
Paragon, EBITDA and operating income increased as a result of the revenue gains,
offset  in  part by  the full  year impact  of  the second  round of  cable rate
regulations that  went into  effect  in July  1994,  higher start-up  costs  for
 
                                      F-64
 

<PAGE>
 
<PAGE>
                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
        OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
 
telephony  operations  and,  with  respect  to  operating  income  only,  higher
depreciation and amortization relating to increased capital spending.
 
     Interest and  Other, Net.    Interest and  other,  net, decreased  to  $580
million in 1995, compared to $587 million in 1994. Interest expense increased to
$571  million, compared  to $563  million in  1994, principally  as a  result of
higher short-term, floating-rates  of interest  paid on  borrowings under  TWE's
former  and existing bank credit agreements,  offset in part by interest savings
in the last quarter of 1995 on  lower debt levels related to management's  asset
sales  program. Other  expense, net,  decreased to $9  million in  1995 from $24
million in 1994, principally because of an increase in investment-related income
related to gains  on the  sale of certain  unclustered cable  systems and  other
investments.
 
1994 VS. 1993
 
     TWE  had revenues of $8.460 billion and net income of $161 million in 1994,
compared to revenues of $7.946 billion and  net income of $198 million in  1993.
The  decrease in  net income  principally relates to  the effects  of cable rate
regulation, offset  in part  by the  absence  of an  extraordinary loss  on  the
retirement  of debt  of $10  million recorded in  1993. As  discussed more fully
below, the Entertainment Group's operating results in 1994 reflected an  overall
decrease  in operating  income generated  by its  business segments, principally
relating to lower Cable results due to cable rate regulation, and an increase in
investment-related and foreign currency  contract losses, offset  in part by  an
increase in interest income.
 
     EBITDA and operating income for TWE in 1994 and 1993 are as follows:
 
<TABLE>
<CAPTION>
                                                                                  YEARS ENDED DECEMBER 31,
                                                                             -----------------------------------
                                                                                                     OPERATING
                                                                                  EBITDA              INCOME
                                                                             -----------------     -------------
                                                                              1994       1993      1994     1993
                                                                             ------     ------     ----     ----
                                                                                         (MILLIONS)
<S>                                                                          <C>        <C>        <C>      <C>
Filmed Entertainment......................................................   $  407     $  399     $201     $210
Six Flags Theme Parks.....................................................      135        122       56       53
Programming-HBO...........................................................      255        230      236      213
Cable.....................................................................      994      1,034      355      407
                                                                             ------     ------     ----     ----
Total.....................................................................   $1,791     $1,785     $848     $883
                                                                             ------     ------     ----     ----
                                                                             ------     ------     ----     ----
</TABLE>
 
     Filmed  Entertainment.  Revenues  increased to $4.476  billion, compared to
$4.024 billion in  1993. EBITDA  increased to  $407 million  from $399  million.
Depreciation and amortization, including amortization related to the purchase of
WCI, amounted to $206 million in 1994 and $189 million in 1993. Operating income
decreased  to $201 million from $210  million. Worldwide home video, syndication
and consumer products  revenues increased  at Warner  Bros., offset  in part  by
lower  worldwide  theatrical  revenues.  EBITDA  and  operating  income  margins
decreased principally as a result of  lower theatrical results in comparison  to
the exceptionally strong theatrical results in 1993.
 
     Six  Flags Theme  Parks.  Revenues  increased to $557  million, compared to
$533 million  in 1993.  EBITDA  increased to  $135  million from  $122  million.
Depreciation and amortization amounted to $79 million in 1994 and $69 million in
1993.  Operating  income increased  to $56  million  from $53  million. Revenues
increased as  a result  of overall  attendance growth  and higher  revenues  per
visitor.  EBITDA and  operating income improved  principally as a  result of the
revenues gains.
 
     Programming-HBO.  Revenues increased to $1.494 billion, compared to  $1.435
billion   in  1993.  EBITDA  increased  to   $255  million  from  $230  million.
Depreciation and amortization amounted to $19 million in 1994 and $17 million in
1993. Operating income  increased to  $236 million from  $213 million.  Revenues
benefited
 
                                      F-65
 

<PAGE>
 
<PAGE>
                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
        OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
 
from  an increase  in subscriptions and  higher pay-TV  rates. EBITDA, operating
income and operating  margins improved principally  as a result  of the  revenue
gains.
 
     Cable.  Revenues increased to $2.220 billion, compared to $2.205 billion in
1993.  EBITDA decreased  to $994 million  from $1.034  billion. Depreciation and
amortization, including  amortization related  to the  purchase of  WCI and  the
acquisition  of the ATC minority interest, amounted  to $639 million in 1994 and
$627 million  in 1993.  Operating income  decreased to  $355 million  from  $407
million.  Revenues and operating results in  1994 were adversely affected by two
rounds of  cable  rate  regulation  that in  general  reduced  the  rates  cable
operators  are allowed to charge for regulated services, the first of which went
into effect in September 1993 and the  second of which went into effect in  July
1994.  The unfavorable  effects of  rate regulation  were offset  in part  by an
increase in subscribers and nonregulated revenues. Actions that were  undertaken
to  mitigate the impact of rate regulation included a number of cost containment
measures and a continued emphasis on  near and long-term strategies to  increase
revenues from unregulated services.
 
     Interest  and  Other, Net.    Interest and  other,  net, increased  to $587
million in 1994, compared to $551 million in 1993. Interest expense decreased to
$563 million, compared with $573 million in 1993. There was other expense,  net,
of  $24 million in 1994, compared to other  income, net, of $22 million in 1993.
Investment-related and  foreign currency  contract losses  in 1994  exceeded  an
increase  in interest  income on higher  cash balances  and the interest-bearing
note receivable from U S WEST. In 1993, other income, net benefited from a  gain
on  the sale of  certain assets and other  investment-related income, which more
than offset investment losses.
 
FINANCIAL CONDITION AND LIQUIDITY

DECEMBER 31, 1995

1995 FINANCIAL CONDITION
 
     The financial condition  of TWE at  December 31, 1995  was affected by  the
formation of the TWE-Advance/Newhouse Partnership, the Six Flags Transaction and
the consolidation of Paragon. TWE had $6.2 billion of debt, $1.4 billion of Time
Warner  General Partners' senior priority capital  and $6.5 billion of partners'
capital (net of the $169 million uncollected portion of the note receivable from
U S WEST) at December 31, 1995,  compared to $7.2 billion of debt, $1.7  billion
of  Time Warner  General Partners' senior  priority capital and  $6.2 billion of
partners' capital  at  December 31,  1994.  The  $1 billion  reduction  in  debt
resulted principally from the Six Flags Transaction. In addition, principally as
a  result of the payment  of over $1 billion of  distributions to Time Warner in
1995, cash  and equivalents  decreased to  $209 million  at December  31,  1995,
compared  to $1.1  billion at December  31, 1994,  reducing the debt-net-of-cash
amounts for TWE to $6 billion and $6.1 billion, respectively.
 
CREDIT AGREEMENT REFINANCING
 
     In connection with  the cable transactions,  TWE, the  TWE-Advance/Newhouse
Partnership and TWI Cable executed a five-year revolving credit facility in June
1995.  The  New  Credit Agreement  enabled  such entities  to  refinance certain
indebtedness assumed in the cable acquisitions, to refinance TWE's  indebtedness
under  a pre-existing bank  credit agreement and to  finance the ongoing working
capital, capital expenditure and other corporate needs of each borrower.
 
     The New Credit Agreement permits borrowings in an aggregate amount of up to
$8.3 billion,  with no  scheduled  reductions in  credit availability  prior  to
maturity.  Borrowings are  limited to $4  billion in  the case of  TWI Cable, $5
billion in the case of the TWE-Advance/Newhouse Partnership and $8.3 billion  in
the  case of TWE, subject  in each case to  certain limitations and adjustments.
Such borrowings bear interest at specific rates for each of the three borrowers,
generally equal to LIBOR plus a margin  initially ranging from 50 to 87.5  basis
points,  which margin will vary based on the credit rating or financial leverage
of the applicable borrower.
 
                                      F-66
 

<PAGE>
 
<PAGE>
                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
        OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
 
Unused credit is  available for  general business  purposes and  to support  any
commercial  paper borrowings. Each borrower is  required to pay a commitment fee
initially ranging  from .2%  to .35%  per annum  on the  unused portion  of  its
commitment.  The  New  Credit  Agreement  contains  certain  covenants  for each
borrower relating  to, among  other things,  additional indebtedness;  liens  on
assets;   cash  flow  coverage   and  leverage  ratios;   and  loans,  advances,
distributions and other cash payments or transfers of assets from the  borrowers
to their respective partners or affiliates.
 
     In  July 1995, TWE borrowed approximately $2.6 billion under the New Credit
Agreement to repay and terminate its pre-existing bank credit agreement.
 
ASSET SALES
 
     In conjunction with  Time Warner and  as part of  a continuing strategy  to
enhance  the financial  position and  credit statistics  of TWE,  an asset sales
program was initiated by Time Warner and TWE in 1995. Including the sale of  51%
of  TWE's interest in  Six Flags in June  1995 and the sale  or expected sale of
certain  unclustered  cable   systems,  TWE  has   completed  or  entered   into
transactions  that raised approximately $1.1 billion  for debt reduction, all of
which were  completed  in  1995  except  for  certain  transactions  aggregating
approximately $170 million which are expected to close in 1996.
 
CREDIT STATISTICS
 
     The  combination of  asset sales  and the  debt refinancing  is intended to
strengthen the financial position  of TWE and, when  taken together with  EBITDA
growth,  is  expected  to  continue  the  improvement  of  TWE's  overall credit
statistics. These credit statistics consist of commonly-used liquidity  measures
such as leverage and coverage ratios. The leverage ratio represents the ratio of
total  debt,  less cash  ('Net  debt') to  total  business segment  EBITDA, less
corporate expenses ('Adjusted EBITDA'). The coverage ratio represents the  ratio
of Adjusted EBITDA to total interest expense. Those ratios, on a pro forma basis
for 1995 and on an historical basis for 1994 and 1993, are as set forth below.
 
<TABLE>
<CAPTION>
                                                                                                       HISTORICAL
                                                                                         PRO FORMA    -------------
                                                                                          1995(A)     1994     1993
                                                                                         ---------    ----     ----
<S>                                                                                      <C>          <C>      <C>
Net debt/Adjusted EBITDA..............................................................      3.0x      3.5x     3.4x
Adjusted EBITDA/Interest..............................................................      3.7x      3.1x     3.0x
</TABLE>
 
------------
 
(a) Pro   forma  ratios   for  1995  give   effect  to  the   formation  of  the
    TWE-Advance/Newhouse Partnership,  the  refinancing  of  approximately  $2.6
    billion  of pre-existing  bank debt, the  consolidation of  Paragon, the Six
    Flags Transaction and the Unclustered Cable Transactions, as if each of such
    transactions had occurred at  the beginning of  1995. Historical ratios  for
    1995 are not meaningful and have not been presented because they reflect the
    operating results of acquired or disposed entities for only a portion of the
    year in comparison to year-end net debt levels.
 
     Such  ratios may be adversely affected upon the transfer of certain of Time
Warner's newly-acquired cable systems  to the TWE-Advance/Newhouse  Partnership,
which,  if completed, is expected  to be structured so  that the systems will be
transferred subject to a portion of  Time Warner's debt, thereby increasing  the
under-leveraged  capitalization  of  the  TWE-Advance/Newhouse  Partnership  and
consequently, TWE.
 
CASH FLOWS
 
     In 1995, TWE's cash provided by  operations amounted to $1.519 billion  and
reflected $1.999
billion  of  EBITDA  from  the  Filmed  Entertainment,  Six  Flags  Theme Parks,
Broadcasting-The WB  Network,  Programming-HBO  and Cable  businesses  and  $230
million  related to a  reduction in working  capital requirements, other balance
sheet accounts and noncash  items, less $571 million  of interest payments,  $75
 
                                      F-67
 

<PAGE>
 
<PAGE>
                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
        OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
 
million  of income taxes and $64 million of corporate expenses. Cash provided by
operations of  $1.296  billion in  1994  reflected $1.791  billion  of  business
segment  EBITDA  and $155  million  related to  a  reduction in  working capital
requirements, other balance sheet accounts and noncash items, less $521  million
of  interest payments, $69 million of income  taxes and $60 million of corporate
expenses.
 
     Cash used  by  investing activities  decreased  to $688  million  in  1995,
compared  to $1.659  billion in 1994,  principally as  a result of  a $1 billion
increase in investment  proceeds relating to  management's asset sales  program.
Capital  expenditures increased  to $1.535 billion  in 1995,  compared to $1.153
billion in 1994, principally as a result of higher capital spending by the Cable
Division.
 
     Cash used by financing activities was  $1.693 billion in 1995, compared  to
cash  provided by financing activities of $96  million in 1994, principally as a
result of an approximate $1 billion reduction in debt in 1995 and a $918 million
increase in distributions paid to Time Warner, offset in part by a $368  million
increase  in collections on the note receivable from  U S WEST that were used to
partially finance the capital spending requirements of the Cable Division.
 
     Management believes that TWE's operating  cash flow, cash and  equivalents,
collections  on  the  U  S  WEST  Note  and  additional  borrowing  capacity are
sufficient to fund its capital and liquidity needs for the foreseeable future.
 
CABLE CAPITAL SPENDING
 
     Since the beginning of 1994, 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 $1.178 billion in  1995, compared to $699  million in 1994, and  was
financed  in part through  collections on the  note receivable from  U S WEST of
$602 million in 1995 and $234 million  in 1994. Capital spending by TWE's  Cable
division  for 1996 is budgeted to be  approximately $1.3 billion and is expected
to be  funded principally  by cable  operating  cash flow  and $169  million  of
collections  on the remaining portion  of the note receivable  from U S WEST. 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 has  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 the next five years. 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, the TWE-Advance/Newhouse Partnership and Time Warner.
Management  expects to continue to finance  such level of investment principally
through the  growth in  cable  operating cash  flow  derived from  increases  in
subscribers  and cable rates, borrowings under  the New Credit Agreement and the
development of new revenue streams from expanded programming options, high speed
data transmission, telephony and other services.
 
OFF-BALANCE SHEET ASSETS
 
     As discussed  below, TWE  believes that  the value  of certain  off-balance
sheet  assets should be considered, along with other factors discussed elsewhere
herein, in evaluating TWE's financial condition and prospects for future results
of operations, including its ability to meet its capital and liquidity needs.
 
INTANGIBLE ASSETS
 
     As a  creator  and distributor  of  branded information  and  entertainment
copyrights,  TWE  has a  significant  amount of  internally-generated intangible
assets  whose  value  is  not  fully  reflected  in  the  consolidated   balance
 
                                      F-68
 

<PAGE>
 
<PAGE>
                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
        OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
 
sheet.  Such intangible assets extend across TWE's principal business interests,
but are best exemplified by its interest in Warner Bros.' and HBO's  copyrighted
film  and television product libraries, and the creation or extension of brands,
as in the case  of The WB Network.  Generally accepted accounting principles  do
not  recognize the value of such assets, except at the time they may be acquired
in a business combination accounted for by the purchase method of accounting.
 
     Because TWE owns the copyrights  to such creative material, it  continually
generates  revenue through the sale of  such products across different media and
in  new  and  existing  markets.  The  value  of  film  and   television-related
copyrighted  product and trademarks is continually  realized by the licensing of
films  and  television  series  to  secondary  markets  and  the  licensing   of
trademarks,  such  as the  Looney  Tunes characters  and  Batman, to  the retail
industry and other  markets. In  addition, technological advances,  such as  the
introduction of the home videocassette in the 1980's and potentially the digital
versatile  disc in the  future, have historically  generated significant revenue
opportunities through  the repackaging  and sale  of such  copyrighted  products
under  the new  technological format.  Accordingly, such  intangible assets have
significant off-balance sheet asset value that  is not fully reflected in  TWE's
consolidated balance sheet.
 
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,  network,   basic  cable  and  syndicated  television
exhibition, amounted to $1.056  billion at December 31,  1995, compared to  $852
million  at December 31, 1994 (including amounts relating to HBO of $175 million
at each date). Because  such contracts are for  the licensing of theatrical  and
television  product which have already been produced, the recognition of revenue
is principally only dependent upon  the commencement of the availability  period
for  telecast under the  terms of the related  licensing agreement. In addition,
cash licensing fees  are collected  periodically over  the term  of the  related
licensing  agreements.  Accordingly,  the  portion  of  backlog  for  which cash
advances have 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  cash
through the sale of advertising spots received under such contracts.
 
FOREIGN CURRENCY RISK MANAGEMENT
 
     Time  Warner uses  foreign exchange contracts  primarily to  hedge the risk
that unremitted or future  license fees owed to  TWE domestic companies for  the
sale  or anticipated sale  of U.S. copyrighted products  abroad may be adversely
affected by changes in foreign currency  exchange rates. As part of its  overall
strategy  to  manage the  level  of exposure  to  the risk  of  foreign currency
exchange rate fluctuations, Time Warner hedges a portion of its foreign currency
exposures anticipated  over the  ensuing twelve  month period,  including  those
related  to  TWE.  At December  31,  1995,  Time Warner  has  effectively hedged
approximately half  of TWE's  total estimated  foreign currency  exposures  that
principally relate to anticipated cash flows to be remitted to the U.S. over the
ensuing  twelve month  period, using  foreign exchange  contracts that generally
have maturities of  three months  or less, which  generally are  rolled over  to
provide  continuing  coverage  throughout  the year.  TWE  is  reimbursed  by or
reimburses Time Warner  for Time  Warner contract  gains and  losses related  to
TWE's  foreign currency exposure. Time Warner often closes foreign exchange sale
contracts by purchasing an offsetting  purchase contract. At December 31,  1995,
Time  Warner had contracts for the sale of $504 million and the purchase of $140
million of foreign currencies at fixed  rates and maturities of three months  or
less.  Of Time  Warner's $364  million net sale  contract position,  none of the
foreign exchange purchase  contracts and  $113 million of  the foreign  exchange
sale  contracts related to  TWE's foreign currency  exposure, primarily Japanese
yen (21% of net contract position  related to TWE), French francs (22%),  German
marks (12%) and Canadian dollars (21%), compared to a net sale contract position
of $188 million of foreign currencies at December 31, 1994.
 
                                      F-69
 

<PAGE>
 
<PAGE>
                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
        OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
 
     Unrealized  gains  or  losses  related to  foreign  exchange  contracts are
recorded in income as  the market value of  such contracts change;  accordingly,
the  carrying value of foreign exchange contracts approximates market value. The
carrying value of foreign  exchange contracts was not  material at December  31,
1995  and 1994. No cash is  required to be received or  paid with respect to the
realization of  such  gains  and  losses  until  the  related  foreign  exchange
contracts are settled, generally at their respective maturity dates. In 1995 and
1994,  TWE  had $11  million and  $20  million, respectively,  of net  losses on
foreign exchange  contracts,  which  were  or  are  expected  to  be  offset  by
corresponding  increases in  the dollar  value of  foreign currency  license fee
payments that have been or are anticipated to be received in cash from the  sale
of  U.S.  copyrighted  products  abroad.  Time  Warner  places  foreign currency
contracts with a  number of major  financial institutions in  order to  minimize
credit risk.
 
     Based  on Time Warner's  outstanding foreign exchange  contracts related to
TWE's exposure at December 31, 1995, each  5% devaluation of the U.S. dollar  as
compared to the level of foreign exchange rates for currencies under contract at
December  31, 1995 would result in approximately $6 million of unrealized losses
on foreign exchange contracts. Conversely, a 5% appreciation of the U.S.  dollar
as compared to the level of foreign exchange rates for currencies under contract
at  December  31,  1995  would  result in  $6  million  of  unrealized  gains on
contracts. Consistent with  the nature of  the economic hedge  provided by  such
foreign  exchange contracts, such unrealized gains  or losses would be offset by
corresponding decreases  or  increases, respectively,  in  the dollar  value  of
future  foreign currency  license fee  payments that  would be  received in cash
within the  ensuing  twelve month  period  from  the sale  of  U.S.  copyrighted
products abroad.
 
                                      F-70


<PAGE>
 
<PAGE>
                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
                           CONSOLIDATED BALANCE SHEET
                                  DECEMBER 31,
                                   (MILLIONS)
 
<TABLE>
<CAPTION>
                                                                                                  1995         1994
                                                                                                 -------      -------
<S>                                                                                              <C>          <C>
ASSETS
CURRENT ASSETS
Cash and equivalents..........................................................................   $   209      $ 1,071
Receivables, including $354 and $266 due from Time Warner,
  less allowances of $365 and $306............................................................     1,635        1,426
Inventories...................................................................................       904          956
Prepaid expenses..............................................................................       161          120
                                                                                                 -------      -------
Total current assets..........................................................................     2,909        3,573
 
Noncurrent inventories........................................................................     1,909        1,807
Loan receivable from Time Warner..............................................................       400          400
Investments...................................................................................       383          666
Land and buildings............................................................................       732          841
Cable television equipment....................................................................     5,859        3,619
Furniture, fixtures and other equipment.......................................................     1,752        1,588
                                                                                                 -------      -------
                                                                                                   8,343        6,048
Less accumulated depreciation.................................................................    (3,138)      (2,264)
                                                                                                 -------      -------
Property, plant and equipment.................................................................     5,205        3,784
 
Cable television franchises...................................................................     3,360        3,236
Goodwill......................................................................................     4,119        4,433
Other assets..................................................................................       620          763
                                                                                                 -------      -------
Total assets..................................................................................   $18,905      $18,662
                                                                                                 -------      -------
                                                                                                 -------      -------
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES
Accounts payable..............................................................................   $   697      $   514
Participations and programming costs..........................................................     1,090          857
Other current liabilities, including $334 due to Time Warner at December 31, 1994.............     1,427        1,486
                                                                                                 -------      -------
Total current liabilities.....................................................................     3,214        2,857
 
Long-term debt................................................................................     6,137        7,160
Other long-term liabilities, including $198 and $89 due to Time Warner........................       924          749
Minority interests............................................................................       726           --
Time Warner General Partners' senior priority capital.........................................     1,426        1,663
PARTNERS' CAPITAL
Contributed capital...........................................................................     7,522        7,398
Undistributed partnership earnings (deficit)..................................................      (875)        (394)
Note receivable from U S WEST.................................................................      (169)        (771)
                                                                                                 -------      -------
Total partners' capital.......................................................................     6,478        6,233
                                                                                                 -------      -------
Total liabilities and partners' capital.......................................................   $18,905      $18,662
                                                                                                 -------      -------
                                                                                                 -------      -------
</TABLE>
 
See accompanying notes.
 
                                      F-71
 

<PAGE>
 
<PAGE>
                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
                      CONSOLIDATED STATEMENT OF OPERATIONS
                            YEARS ENDED DECEMBER 31,
                                   (MILLIONS)
 
<TABLE>
<CAPTION>
                                                                                          1995        1994        1993
                                                                                         ------      ------      ------
<S>                                                                                      <C>         <C>         <C>
Revenues (a)..........................................................................   $9,517      $8,460      $7,946
 
Cost of revenues (a)(b)...............................................................    6,597       5,976       5,679
Selling, general and administrative (a)(b)............................................    1,960       1,636       1,384
                                                                                         ------      ------      ------
 
Operating expenses....................................................................    8,557       7,612       7,063
                                                                                         ------      ------      ------
 
Business segment operating income.....................................................      960         848         883
Interest and other, net (a)...........................................................     (580)       (587)       (551)
Minority interest.....................................................................     (133)         --          --
Corporate services (a)................................................................      (64)        (60)        (60)
                                                                                         ------      ------      ------
Income before income taxes............................................................      183         201         272
Income taxes..........................................................................      (86)        (40)        (64)
                                                                                         ------      ------      ------
Income before extraordinary item......................................................       97         161         208
Extraordinary loss on retirement of debt, net of $7 million income tax benefit in 1993
  related to a taxable subsidiary.....................................................      (24)         --         (10)
                                                                                         ------      ------      ------
Net income............................................................................   $   73      $  161      $  198
                                                                                         ------      ------      ------
                                                                                         ------      ------      ------
</TABLE>
 
------------
(a) Includes  the following  income (expenses) resulting  from transactions with
    the partners of TWE and other related companies for the years ended December
    31, 1995, 1994  and 1993, respectively:  revenues-$56 million, $112  million
    and  $67 million;  cost of revenues-$(54)  million, $(70)  million and $(88)
    million; selling, general  and administrative-$(61)  million, $(72)  million
    and  $(38) million; interest and other,  net-$24 million, $21 million and $3
    million; and  corporate  expenses-$(64)  million, $(60)  million  and  $(60)
    million (Note 13).
 
<TABLE>
<S>                                                                                      <C>         <C>         <C>
(b) Includes depreciation and amortization expense of:................................   $1,039      $  943      $  902
                                                                                         ------      ------      ------
                                                                                         ------      ------      ------
</TABLE>
 
See accompanying notes.
 
                                      F-72
 

<PAGE>
 
<PAGE>
                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
                      CONSOLIDATED STATEMENT OF CASH FLOWS
                            YEARS ENDED DECEMBER 31,
                                   (MILLIONS)
 
<TABLE>
<CAPTION>
                                                                                        1995         1994         1993
                                                                                       -------      -------      -------
<S>                                                                                    <C>          <C>          <C>
OPERATIONS
Net income..........................................................................   $    73      $   161      $   198
Adjustments for noncash and nonoperating items:
Extraordinary loss on retirement of debt............................................        24           --           10
Depreciation and amortization.......................................................     1,039          943          902
Equity in (income) losses of investee companies, net of distributions...............        84           58          (21)
Changes in operating assets and liabilities:
    Receivables.....................................................................      (159)        (192)           1
    Inventories.....................................................................      (118)         (76)        (158)
    Accounts payable and other liabilities..........................................       679          400          260
    Other balance sheet changes.....................................................      (103)           2           79
                                                                                       -------      -------      -------
 
Cash provided by operations.........................................................     1,519        1,296        1,271
                                                                                       -------      -------      -------
 
INVESTING ACTIVITIES
Investments and acquisitions........................................................      (203)        (156)        (347)
Capital expenditures................................................................    (1,535)      (1,153)        (613)
Investment proceeds.................................................................     1,050           50          180
Loan to Time Warner.................................................................        --         (400)          --
                                                                                       -------      -------      -------
 
Cash used by investing activities...................................................      (688)      (1,659)        (780)
                                                                                       -------      -------      -------
 
FINANCING ACTIVITIES
Borrowings..........................................................................     2,484          977        3,075
Debt repayments.....................................................................    (3,596)        (945)      (3,734)
Capital contributions, including collections on note receivable from U S WEST.......       602          234        1,548
Capital distributions...............................................................    (1,088)        (170)         (33)
Other...............................................................................       (95)          --          (45)
                                                                                       -------      -------      -------
 
Cash provided (used) by financing activities........................................    (1,693)          96          811
                                                                                       -------      -------      -------
 
INCREASE (DECREASE) IN CASH AND EQUIVALENTS.........................................      (862)        (267)       1,302
 
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD.........................................     1,071        1,338           36
                                                                                       -------      -------      -------
 
CASH AND EQUIVALENTS AT END OF PERIOD...............................................   $   209      $ 1,071      $ 1,338
                                                                                       -------      -------      -------
                                                                                       -------      -------      -------
</TABLE>
 
See accompanying notes.
 
                                      F-73
 

<PAGE>
 
<PAGE>
                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
                 CONSOLIDATED STATEMENT OF PARTNERSHIP CAPITAL
                                   (MILLIONS)
 
<TABLE>
<CAPTION>
                                                                                     PARTNERS' CAPITAL
                                                     TIME WARNER    ---------------------------------------------------
                                                       GENERAL                     UNDISTRIBUTED
                                                      PARTNERS'                     PARTNERSHIP      U S        TOTAL
                                                       SENIOR       CONTRIBUTED      EARNINGS        WEST     PARTNERS'
                                                       CAPITAL        CAPITAL        (DEFICIT)       NOTE      CAPITAL
                                                     -----------    -----------    -------------    ------    ---------
<S>                                                  <C>            <C>            <C>              <C>       <C>
BALANCE AT DECEMBER 31, 1992......................     $    --        $ 6,451          $ (14)       $  --      $ 6,437
Net income........................................                                       198                       198
Admission of USW:
    Contributions.................................                      2,553                       (1,021)      1,532
    Time Warner General Partners' senior priority
      capital.....................................       1,501         (1,501)                                  (1,501)
Distributions (a).................................                                      (539)                     (539)
Distribution of Time Warner Service
  Partnership Assets (b)..........................                        (95)                                     (95)
Allocation of income..............................          35                           (35)                      (35)
Collections.......................................                                                     16           16
Other.............................................                        (10)            (3)                      (13)
                                                     -----------    -----------        -----        ------    ---------
BALANCE AT DECEMBER 31, 1993......................       1,536          7,398           (393)       (1,005)      6,000
Net income........................................                                       161                       161
Distributions (a).................................                                       (46)                      (46)
Allocation of income..............................         127                          (127)                     (127)
Collections.......................................                                                     234         234
Other.............................................                                        11                        11
                                                     -----------    -----------        -----        ------    ---------
BALANCE AT DECEMBER 31, 1994......................       1,663          7,398           (394)         (771)      6,233
Net income........................................                                        73                        73
Distributions (a).................................        (366)                         (421)                     (421)
Reacquisition of Time Warner Service
  Partnership Assets (b)..........................                        124                                      124
Allocation of income..............................         129                          (129)                     (129)
Collections.......................................                                                     602         602
Other.............................................                                        (4)                       (4)
                                                     -----------    -----------        -----        ------    ---------
BALANCE AT DECEMBER 31, 1995......................     $ 1,426        $ 7,522          $(875)       $ (169)    $ 6,478
                                                     -----------    -----------        -----        ------    ---------
                                                     -----------    -----------        -----        ------    ---------
</TABLE>
 
------------
(a) Distributions in 1995, 1994 and 1993 included $346 million, $173 million and
    $252  million, respectively,  of accrued tax-related  distributions, and $25
    million, $50  million and  $13 million  of cash  distributions to  the  Time
    Warner Service Partnerships, respectively. Stock option distributions of $50
    million  and  $274  million were  accrued  in 1995  and  1993, respectively,
    because of an increase in the market  price of Time Warner common stock  and
    $177  million of previously-accrued stock option distributions were reversed
    in 1994 because the market price of Time Warner common stock declined during
    the period.  In  addition, Time  Warner  General Partners'  senior  priority
    capital  was reduced in  1995 by a $366  million distribution of partnership
    income previously allocated to such interest.
 
(b) Time Warner General Partners'  junior priority capital  was reduced in  1993
    for  the $95 million historical cost  of the Time Warner Service Partnership
    Assets distributed to the Time Warner General Partners and was increased  in
    1995  by  the  $124  million  historical cost  of  the  Time  Warner Service
    Partnership Assets reacquired by TWE.
 
See accompanying notes.
 
                                      F-74


<PAGE>
 
<PAGE>
                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
 
     Time  Warner Entertainment  Company, L.P.,  a Delaware  limited partnership
('TWE'),  is  engaged  principally  in   two  fundamental  areas  of   business:
Entertainment,  consisting  principally  of interests  in  filmed entertainment,
broadcasting,   theme   parks    and   cable    television   programming;    and
Telecommunications,  consisting  principally  of interests  in  cable television
systems.
 
     Each of the business interests within Entertainment and  Telecommunications
is  important  to  TWE's  objective  of  increasing  partner  value  through the
creation, extension  and  distribution  of recognizable  brands  and  copyrights
throughout  the world.  Such brands  and copyrights  include (1)  the unique and
extensive film and television libraries of  Warner Bros. and trademarks such  as
the  Looney Tunes  characters and  Batman, (2)  The WB  Network, a  new national
broadcasting network launched in 1995 as an extension of the Warner Bros.  brand
and  as  an  additional  distribution outlet  for  Warner  Bros.'  collection of
children cartoons  and  television  programming,  (3)  Six  Flags,  the  largest
regional  theme park  operator in  the United  States, in  which TWE  owns a 49%
interest, (4) HBO and Cinemax, the leading pay television services and (5)  Time
Warner  Cable, the  second largest operator  of cable television  systems in the
U.S.
 
     The operating results  of TWE's  various business  interests are  presented
herein  as an indication of financial performance (Note 12). Except for start-up
losses incurred in an effort to create value in a branded national  broadcasting
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 significantly greater than their operating income due
to significant amounts of noncash  amortization of intangible assets  recognized
principally  in Time  Warner 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  in accordance with  the
pushdown  method  of  accounting.  Non-cash  amortization  of  intangible assets
recorded by TWE's businesses amounted to  $444 million in 1995, $478 million  in
1994 and $476 million in 1993.
 
     Subsidiaries  of Time Warner are the  general partners of TWE ('Time Warner
General Partners').  During  1995, Time  Warner  acquired the  aggregate  11.22%
limited  partnership interests previously held by subsidiaries of each of ITOCHU
Corporation and Toshiba Corporation. As a result, Time Warner and certain of its
wholly-owned subsidiaries  collectively  own 74.49%  of  the pro  rata  priority
capital  and residual equity partnership interests  in TWE, and certain priority
capital interests senior and junior to the pro rata priority capital  interests.
The  remaining  25.51% pro  rata priority  capital  and residual  equity limited
partnership interests are held by a subsidiary  of U S WEST, Inc. ('U S  WEST'),
which  acquired such interests in  1993 for $1.532 billion  of cash and a $1.021
billion 4.4% note (the 'U S WEST Note').
 
     In  lieu  of  contributing  certain  assets  to  the  partnership  at   its
capitalization  in  1992  (the  'Beneficial Assets'),  the  Time  Warner General
Partners assigned to TWE the net cash flow generated by such assets or agreed to
pay an amount equal to the net cash  flow generated by such assets. TWE has  the
right to receive from the Time Warner General Partners, at the limited partners'
option,  an amount  equal to  the fair  value of  the Beneficial  Assets, net of
associated liabilities, that have not been contributed to TWE by June 30,  1996,
rather  than continuing to receive the net cash  flow, or an amount equal to the
net cash flow, generated by  such Beneficial Assets. The consolidated  financial
statements  include the assets and liabilities  of the businesses contributed by
the Time Warner General Partners, including the Beneficial Assets and associated
liabilities, all at Time Warner's historical cost basis of accounting.
 
     The consolidated financial statements reflect (i) the consolidation by  TWE
of  the TWE-Advance/Newhouse  Partnership resulting  from the  formation of such
partnership (Note  2),  (ii)  the deconsolidation  of  Six  Flags  Entertainment
Corporation  ('Six  Flags') as  a  result of  the disposition  by  TWE of  a 51%
interest in Six  Flags effective  as of  June 23, 1995  (Note 3)  and (iii)  the
consolidation of Paragon Communications ('Paragon') as a
 
                                      F-75
 

<PAGE>
 
<PAGE>
                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
result  of  an increase  in TWE's  control  over the  management of  such entity
effective as of July 6, 1995. Certain other reclassifications have been made  to
the prior year's financial statements to conform to the 1995 presentation.
 
BASIS OF CONSOLIDATION AND
ACCOUNTING FOR INVESTMENTS
 
     The   consolidated  financial  statements  include   100%  of  the  assets,
liabilities, revenues, expenses,  income, loss  and cash  flows of  TWE and  all
companies  in which  TWE has a  direct and indirect  controlling voting interest
('subsidiaries'), as  if  TWE  and  its  subsidiaries  were  a  single  company.
Significant  intercompany  accounts  and transactions  between  the consolidated
companies have been  eliminated. Significant accounts  and transactions  between
TWE  and its partners and affiliates are disclosed as related party transactions
(Note 14).
 
     Investments in companies in  which TWE has  significant influence but  less
than  a controlling voting  interest are accounted for  using the equity method.
Under the equity method, only  TWE's investment in and  amounts due to and  from
the  equity investee are included in  the consolidated balance sheet, only TWE's
share of  the investee's  earnings  is included  in the  consolidated  operating
results,  and  only  the  dividends, cash  distributions,  loans  or  other cash
received from the investee, less any additional cash investment, loan repayments
or other cash paid to the investee are included in the consolidated cash flows.
 
     In accordance with Financial Accounting Standards Board ('FASB')  Statement
No.  115, 'Accounting  For Certain Investments  in Debt  and Equity Securities',
investments in companies in which TWE does not have the controlling interest  or
an  ownership and voting interest so large as to exert significant influence are
accounted for at market value if  the investments are publicly traded and  there
are  no  resale restrictions,  or  at cost,  if  the sale  of  a publicly-traded
investment is restricted or if the investment is not publicly traded. Unrealized
gains and losses on  investments accounted for at  market value are reported  in
partners' capital until the investment is sold, at which time, the realized gain
or  loss is  included in income.  Dividends and other  distributions of earnings
from both market value and cost  method investments are included in income  when
declared.
 
FOREIGN CURRENCY
 
     The  financial position and  operating results of  substantially all of the
foreign operations  of TWE  are consolidated  using the  local currency  as  the
functional currency. Local currency assets and liabilities are translated at the
rates  of exchange on  the balance sheet  date, and local  currency revenues and
expenses are  translated  at  average  rates  of  exchange  during  the  period.
Resulting  translation  gains  or  losses, which  have  not  been  material, are
included in partners'  capital. Foreign currency  transaction gains and  losses,
which have not been material, are included in operating results.
 
USE OF ESTIMATES
 
     The  preparation  of  financial  statements  in  conformity  with generally
accepted  accounting  principles  requires  management  to  make  estimates  and
assumptions  that affect  the amounts reported  in the  financial statements and
footnotes thereto. Actual results could differ from those estimates.
 
     Significant estimates  inherent  in  the preparation  of  the  accompanying
consolidated  financial statements include  management's forecast of anticipated
revenues from the distribution of theatrical and television product in order  to
evaluate  the ultimate recoverability of film  inventory recorded as an asset in
the consolidated balance sheet.  Management periodically reviews such  estimates
and  it is reasonably possible that management's assessment of recoverability of
individual films and television product may  change based on actual results  and
other factors.
 
                                      F-76
 

<PAGE>
 
<PAGE>
                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
REVENUES AND COSTS
 
     Feature  films are produced or acquired  for initial exhibition in theaters
followed by distribution in the home video, pay cable, broadcast network,  basic
cable   and  syndicated  television  markets.  Generally,  distribution  to  the
theatrical,  home  video  and  pay  cable  markets  (the  primary  markets)   is
principally  completed within eighteen months  of initial release and thereafter
with  respect  to  distribution  to  the  basic  cable,  broadcast  network  and
syndicated  television markets (the secondary  markets). Theatrical revenues are
recognized as the films are exhibited. Home video revenues, less a provision for
returns, are  recognized  when the  home  videos  are sold.  Revenues  from  the
distribution  of theatrical product  to cable, broadcast  network and syndicated
television markets are recognized when the films are available to telecast.
 
     Television films  and series  are initially  produced for  the networks  or
first-run  television syndication (the primary  markets) and may be subsequently
licensed to foreign  or domestic  cable and syndicated  television markets  (the
secondary  markets). Revenues  from the  distribution of  television product are
recognized when the films or series are available to telecast, except for barter
agreements where  the  recognition of  revenue  is deferred  until  the  related
advertisements are exhibited.
 
     License agreements for the telecast of theatrical and television product in
the  cable, broadcast  network and  syndicated television  markets are routinely
entered into well  in advance  of their available  date for  telecast, which  is
generally  determined by the telecast  privileges granted under previous license
agreements. Accordingly,  there are  significant contractual  rights to  receive
cash and barter upon which revenues will not be recognized until such product is
available  for  telecast  under the  contractual  terms of  the  related license
agreement. Such contractual rights for which revenue is not yet recognizable  is
referred  to as 'backlog.' Excluding advertising barter contracts, Warner Bros.'
backlog amounted to  $1.056 billion and  $852 million at  December 31, 1995  and
1994,  respectively (including amounts relating to the licensing of film product
to HBO of $175 million at each date).
 
     Inventories of theatrical and television product are stated at the lower of
amortized cost  or net  realizable value.  Cost includes  direct production  and
acquisition  costs, production overhead  and capitalized interest.  A portion of
the cost to acquire WCI was  allocated to its theatrical and television  product
as  of  December 31,  1989, including  an  allocation to  product that  had been
exhibited at least once in all markets ('Library'). Individual films and  series
are  amortized, and the related participations  and residuals are accrued, based
on the proportion  that current  revenues from  the film  or series  bear to  an
estimate  of total  revenues anticipated from  all markets.  These estimates are
revised periodically and losses, if any,  are provided in full. WCI  acquisition
cost  allocated to the Library is amortized on a straight-line basis over twenty
years. Current  film  inventories  include the  unamortized  cost  of  completed
feature  films allocated to the primary  markets, television films and series in
production pursuant to  a contract of  sale, film rights  acquired for the  home
video market and advances pursuant to agreements to distribute third-party films
in the primary markets. Noncurrent film inventories include the unamortized cost
of completed theatrical and television films allocated to the secondary markets,
theatrical  films  in  production  and WCI  acquisition  cost  allocated  to the
Library.
 
     A significant portion of  cable system and  cable programming revenues  are
derived  from subscriber fees, which  are recorded as revenue  in the period the
service is  provided. The  cost of  rights to  exhibit feature  films and  other
programming  on  pay  cable services  during  one or  more  availability periods
('programming costs') generally  is recorded when  the programming is  initially
available  for  exhibition, and  is  allocated to  the  appropriate availability
periods and amortized as the programming is exhibited.
 
ADVERTISING
 
     In accordance with FASB Statement No. 53, 'Financial Reporting by Producers
and Distributors of Motion Picture Films,' advertising costs for theatrical  and
television  product  are  capitalized  and amortized  over  the  related revenue
streams in  each market  for which  such costs  are intended  to benefit,  which
generally does not
 
                                      F-77
 

<PAGE>
 
<PAGE>
                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
exceed  three  months.  Other  advertising costs  are  expensed  upon  the first
exhibition of the advertisement.  Advertising expense, excluding theatrical  and
television  product, amounted to $241 million in  1995, $190 million in 1994 and
$169 million in 1993.
 
CASH EQUIVALENTS
 
     Cash equivalents consist of commercial paper and other investments that are
readily convertible into cash, and have  original maturities of three months  or
less.
 
PROPERTY, PLANT AND EQUIPMENT
 
     Property,  plant  and  equipment are  stated  at cost.  Additions  to cable
property, plant and  equipment generally include  material, labor, overhead  and
interest.  Depreciation is provided  generally on the  straight-line method over
useful lives ranging up to twenty-five years for buildings and improvements  and
up  to fifteen  years for  furniture, fixtures,  cable television  equipment and
other equipment.
 
     In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting  Standards  No.  121, 'Accounting  for  the  Impairment  of
Long-Lived  Assets and  for Long-Lived  Assets to  Be Disposed  Of,' ('FAS 121')
effective for fiscal  years beginning  after December  15, 1995.  The new  rules
establish  standards for the recognition and measurement of impairment losses on
long-lived assets and certain intangible  assets. TWE expects that the  adoption
of FAS 121 will not have a material effect on its financial statements.
 
INTANGIBLE ASSETS
 
     As  a  creator and  distributor  of branded  information  and entertainment
copyrights, TWE  has a  significant  and growing  amount of  intangible  assets,
including  goodwill, cable television franchises  and other copyrighted products
and trademarks. In accordance with generally accepted accounting principles, TWE
does not recognize  the fair  value of  internally-generated intangible  assets.
Costs  incurred to create and produce copyrighted product, such as feature films
and television series, are generally either expensed as incurred, or capitalized
as tangible assets, as  in the case of  cash advances and inventoriable  product
costs.  However, accounting  recognition is  not given  to any  increasing asset
value that may be associated with  the collection of the underlying  copyrighted
material.  Additionally, costs incurred to create  or extend brands, such as the
start-up of  The  WB  Network,  generally result  in  losses  over  an  extended
development  period and  are recognized  as a  reduction of  income as incurred,
while any corresponding brand value created  is not recognized as an  intangible
asset  in the consolidated  balance sheet. On the  other hand, intangible assets
acquired in  business  combinations accounted  for  by the  purchase  method  of
accounting  are capitalized and  amortized over their expected  useful life as a
noncash charge against future results of operations. Accordingly, the intangible
assets reported in the consolidated balance sheet do not reflect the fair  value
of  TWE's  internally-generated intangible  assets,  but rather  are  limited to
intangible assets resulting from certain acquisitions  in which the cost of  the
acquired  companies exceeded the fair value of their tangible assets at the time
of acquisition.
 
     TWE  amortizes  goodwill  over  periods   up  to  forty  years  using   the
straight-line  method. Cable  television franchises and  other intangible assets
are amortized over periods up to twenty years using the straight-line method. In
1995, 1994 and  1993, amortization of  goodwill amounted to  $127 million,  $129
million  and  $132  million,  respectively;  amortization  of  cable  television
franchises  amounted  to   $223  million,   $208  million   and  $222   million,
respectively;  and  amortization  of  other intangible  assets  amounted  to $94
million, $141 million and  $122 million, respectively. Accumulated  amortization
of  intangible assets at December  31, 1995 and 1994  amounted to $2.337 billion
and $1.867 billion, respectively.
 
                                      F-78
 

<PAGE>
 
<PAGE>
                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     TWE separately reviews the carrying value of acquired intangible assets for
each acquired entity on a quarterly basis to determine whether an impairment may
exist. TWE considers relevant cash flow and profitability information, including
estimated future operating results, trends  and other available information,  in
assessing whether the carrying value of intangible assets can be recovered. Upon
a  determination  that  the carrying  value  of  intangible assets  will  not be
recovered from the undiscounted future cash flows of the acquired business,  the
carrying  value of such intangible assets  would be considered impaired and will
be reduced by a charge to operations in the amount of the impairment. Impairment
is measured as any deficiency in estimated undiscounted future cash flows of the
acquired business  to  recover the  carrying  value related  to  the  intangible
assets.
 
INCOME TAXES
 
     As  a Delaware limited partnership, TWE is  not subject to U.S. federal and
state income taxation.  However, certain  of TWE's operations  are conducted  by
subsidiary corporations that are subject to domestic or foreign taxation. Income
taxes are provided on the income of such corporations using the liability method
of accounting for income taxes prescribed by FASB Statement No. 109, 'Accounting
for Income Taxes.'
 
2.  TWE-ADVANCE/NEWHOUSE PARTNERSHIP
 
     On  April 1,  1995, TWE  formed a cable  television joint  venture with the
Advance/Newhouse Partnership ('Advance/Newhouse') to which Advance/Newhouse  and
TWE   contributed  cable  television  systems  (or  interests  therein)  serving
approximately  4.5  million  subscribers,  as  well  as  certain  foreign  cable
investments  and  programming investments  that included  Advance/Newhouse's 10%
interest in Primestar Partners, L.P. ('Primestar'). TWE owns a two-thirds equity
interest in the  TWE-Advance/Newhouse Partnership and  is the managing  partner.
TWE  consolidates the  partnership and  the one-third  equity interest  owned by
Advance/Newhouse is  reflected in  TWE's  consolidated financial  statements  as
minority    interest.   In   accordance    with   the   partnership   agreement,
Advance/Newhouse can require TWE to purchase its equity interest for fair market
value at  specified intervals  following  the death  of  both of  its  principal
shareholders.  Beginning  in  the  third year,  either  partner  can  initiate a
dissolution in which  TWE would  receive two-thirds  and Advance/Newhouse  would
receive one-third of the partnership's net assets. The assets contributed by TWE
and  Advance/Newhouse to  the partnership  were recorded  at their predecessor's
historical cost, which,  with respect to  Advance/Newhouse, consisted of  assets
contributed  to the  partnership of  approximately $338  million and liabilities
assumed by the partnership of approximately  $9 million. No gain was  recognized
by TWE upon the capitalization of the partnership.
 
     The   accompanying  consolidated  statement   of  operations  includes  the
operating  results  of  the  Advance/Newhouse   businesses  from  the  date   of
contribution  to the partnership. On a pro forma basis, giving effect to (i) the
formation of  the TWE-Advance/Newhouse  Partnership, (ii)  the consolidation  of
Paragon,  (iii) the reacquisition of the  Time Warner Service Partnership Assets
(Note 8),  (iv) TWE's  debt refinancing  (Note  6) and  (v) TWE's  asset  sales,
including  the sale of 51% of its interest in Six Flags and the sale or expected
sale or transfer of certain unclustered cable television systems, as if each  of
such  transactions had occurred at the beginning  of the periods, TWE would have
reported for the  years ended  December 31, 1995  and 1994,  revenues of  $9.682
billion  and $8.779 billion, depreciation and amortization of $1.069 billion and
$1.035 billion, operating income of $962 million and $884 million, income before
extraordinary item  of $172  million and  $143 million  and net  income of  $148
million and $143 million, respectively.
 
3.  SIX FLAGS
 
     On  June  23,  1995, TWE  sold  51% of  its  interest  in Six  Flags  to an
investment group  led by  Boston Ventures  for $204  million and  received  $640
million in additional proceeds from Six Flags, representing
 
                                      F-79
 

<PAGE>
 
<PAGE>
                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
payment  of certain intercompany indebtedness and licensing fees. As a result of
the transaction,  Six Flags  has  been deconsolidated  and TWE's  remaining  49%
interest  in Six Flags is  accounted for under the  equity method of accounting.
TWE  reduced  debt  by  approximately  $850  million  in  connection  with   the
transaction, and a portion of the income on the transaction has been deferred by
TWE principally as a result of its guarantee of certain third-party, zero-coupon
indebtedness of Six Flags due in 1999.
 
     TWE  had owned all of Six Flags  since September 1993 when it provided $136
million in  funds to  Six Flags  to repurchase  the remaining  50% common  stock
interest held by other stockholders and preferred stock of certain subsidiaries.
 
4.  INVESTMENTS
 
    TWE's investments consist of:
 
<TABLE>
<CAPTION>
                                                                                                  DECEMBER 31,
                                                                                                -----------------
                                                                                                 1995       1994
                                                                                                ------     ------
                                                                                                   (MILLIONS)
<S>                                                                                             <C>        <C>
Equity method investments....................................................................   $  335     $  629
Cost method investments......................................................................       48         37
                                                                                                ------     ------
Total........................................................................................   $  383     $  666
                                                                                                ------     ------
                                                                                                ------     ------
</TABLE>
 
     Companies  accounted for using  the equity method  include Comedy Partners,
L.P. (50% owned),  certain cable  system joint ventures  (generally 50%  owned),
Primestar   (31%  owned   in  1995),   Six  Flags   (49%  owned   in  1995  when
deconsolidated), certain  international  cable and  programming  joint  ventures
(generally  25% owned  in 1995 and  1994) and Courtroom  Television Network (33%
owned in 1995). A summary of  combined financial information as reported by  the
equity investees of TWE is set forth below:
 
<TABLE>
<CAPTION>
                                                                                       YEARS ENDED DECEMBER 31,
                                                                                     ----------------------------
                                                                                      1995       1994       1993
                                                                                     ------     ------     ------
                                                                                              (MILLIONS)
<S>                                                                                  <C>        <C>        <C>
Revenues..........................................................................   $1,450     $  722     $  596
Depreciation and amortization.....................................................      195        125         97
Operating income (loss)...........................................................       (9)        11        115
Net income (loss).................................................................     (168)       (53)        80
Current assets....................................................................      455        192         72
Total assets......................................................................    2,416      1,281      1,054
Current liabilities...............................................................      405        305        163
Long-term debt....................................................................    1,778        554        613
Total liabilities.................................................................    2,323        926        794
Total shareholders' equity or partners' capital...................................       93        355        260
</TABLE>
 
                                      F-80
 

<PAGE>
 
<PAGE>
                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
5.  INVENTORIES
 
    TWE's inventories consist of:
 
<TABLE>
<CAPTION>
                                                                                     DECEMBER 31,
                                                                   -------------------------------------------------
                                                                            1995                       1994
                                                                   ----------------------     ----------------------
                                                                   CURRENT     NONCURRENT     CURRENT     NONCURRENT
                                                                   -------     ----------     -------     ----------
                                                                                      (MILLIONS)
<S>                                                                <C>         <C>            <C>         <C>
Film costs:
     Released, less amortization................................    $ 529        $  437       $  585        $  347
     Completed and not released.................................       74            22          123            24
     In process and other.......................................       11           396           18           361
     Library, less amortization.................................       --           717           --           769
Programming costs, less amortization............................      219           337          149           306
Merchandise.....................................................       71            --           81            --
                                                                   -------     ----------     -------     ----------
Total...........................................................    $ 904        $1,909       $  956        $1,807
                                                                   -------     ----------     -------     ----------
                                                                   -------     ----------     -------     ----------
</TABLE>
 
     Excluding  the Library, the unamortized cost of completed films at December
31, 1995 amounted to $1.062  billion, more than 90% of  which is expected to  be
amortized  within three years after release. Excluding the effects of accounting
for the  acquisition  of WCI,  the  total cost  incurred  in the  production  of
theatrical  and  television films  amounted to  $2.011  billion in  1995, $1.667
billion in  1994  and $1.784  billion  in 1993;  and  the total  cost  amortized
amounted to $2 billion, $1.640 billion and $1.619 billion, respectively.
 
6.  LONG-TERM DEBT
 
    Long-term debt consists of:
 
<TABLE>
<CAPTION>
                                                                                                  DECEMBER 31,
                                                                                             ----------------------
                                                                                              1995          1994
                                                                                             -------     ----------
                                                                                                   (MILLIONS)
<S>                                                                                          <C>         <C>
Credit agreement, weighted average interest rates of 6.4% and 6.5%........................   $2,185        $2,550
Commercial paper, weighted average interest rates of 6.2% and 6.2%........................      157           649
Six Flags 9.25% zero coupon notes due December 15, 1999...................................       --           123
9 5/8% notes due May 1, 2002..............................................................      600           600
7 1/4% debentures due September 1, 2008...................................................      599           599
10.15% notes due May 1, 2012..............................................................      250           250
8 7/8% notes due October 1, 2012..........................................................      347           347
8 3/8% debentures due March 15, 2023......................................................      991           990
8 3/8% debentures due July 15, 2033.......................................................      994           994
Other.....................................................................................       14            58
                                                                                             -------     ----------
Total.....................................................................................   $6,137        $7,160
                                                                                             -------     ----------
                                                                                             -------     ----------
</TABLE>
 
     In  June 1995, TWE, the TWE-Advance/Newhouse Partnership and a wholly-owned
subsidiary of Time Warner  ('TWI Cable') executed  a five-year revolving  credit
facility  (the 'New  Credit Agreement'). The  New Credit  Agreement enabled such
entities  to   refinance  certain   indebtedness   assumed  in   certain   cable
acquisitions,  to refinance TWE's indebtedness  under a pre-existing bank credit
agreement and to finance  the ongoing working  capital, capital expenditure  and
other corporate needs of each borrower.
 
     The New Credit Agreement permits borrowings in an aggregate amount of up to
$8.3  billion,  with no  scheduled reductions  in  credit availability  prior to
maturity. Borrowings are  limited to $4  billion in  the case of  TWI Cable,  $5
billion  in the case of the TWE-Advance/Newhouse Partnership and $8.3 billion in
the case of
 
                                      F-81
 

<PAGE>
 
<PAGE>
                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
TWE,  subject  in  each  case  to  certain  limitations  and  adjustments.  Such
borrowings  bear interest  at specific  rates for  each of  the three borrowers,
generally equal to LIBOR plus a margin  initially ranging from 50 to 87.5  basis
points,  which margin will vary based on the credit rating or financial leverage
of the  applicable borrower.  Unused credit  is available  for general  business
purposes  and  to  support any  commercial  paper borrowings.  Each  borrower is
required to pay a commitment fee initially ranging from .2% to .35% per annum on
the unused portion of its commitment. The New Credit Agreement contains  certain
covenants  for  each  borrower  relating  to,  among  other  things,  additional
indebtedness; liens  on assets;  cash  flow coverage  and leverage  ratios;  and
loans,  advances, distributions and  other cash payments  or transfers of assets
from the borrowers to their respective partners or affiliates.
 
     In July 1995, TWE borrowed approximately $2.6 billion under the New  Credit
Agreement  to repay  and terminate  its pre-existing  bank credit  agreement. In
connection therewith, TWE  recognized an  extraordinary loss of  $24 million  to
write-off deferred financing costs related to the former credit agreement.
 
     As  a result of  the Six Flags  transaction, long-term debt  was reduced by
approximately $850 million in 1995, including the deconsolidation of Six  Flags'
9.25% zero coupon notes due in 1999. Such zero coupon notes have been guaranteed
by TWE. In addition, TWE recognized an extraordinary loss of $10 million in 1993
in connection with the retirement by Six Flags of certain of its indebtedness.
 
     Each  Time  Warner General  Partner has  guaranteed a  pro rata  portion of
approximately $6 billion of TWE's debt and accrued interest thereon based on the
relative fair  value  of  the  net  assets  each  Time  Warner  General  Partner
contributed  to  TWE  (the  'Time  Warner  General  Partner  Guarantees').  Such
indebtedness is recourse to each Time Warner General Partner only to the  extent
of  its guarantee.  The indenture pursuant  to which TWE's  notes and debentures
have been issued (the 'Indenture') requires the unanimous consent of the holders
of the  notes  and debentures  to  terminate  the Time  Warner  General  Partner
Guarantees prior to June 30, 1997, and the consent of a majority of such holders
to  effect a termination thereafter. There  are generally no restrictions on the
ability of  the Time  Warner  General Partner  guarantors to  transfer  material
assets, other than TWE assets, to parties that are not guarantors.
 
     Interest  expense was $571 million  in 1995, $563 million  in 1994 and $573
million in 1993. The weighted average interest rate on TWE's total debt was 7.7%
and 7.6% at December 31, 1995 and 1994, respectively.
 
     TWE has  the intent  and the  ability  under the  New Credit  Agreement  to
continue  to refinance its commercial paper borrowings on a long-term basis. TWE
is not obligated to repay any portion of its long-term debt until the year  2000
when  the New Credit Agreement expires  and all borrowings thereunder, including
commercial paper  supported by  the New  Credit Agreement,  are required  to  be
repaid.
 
7.  INCOME TAXES
 
    Domestic and foreign pretax income (loss) are as follows:

<TABLE>
<CAPTION>
                                                                                              YEARS ENDED DECEMBER 31,
                                                                                              ------------------------
                                                                                              1995      1994      1993
                                                                                              ----      ----      ----
                                                                                                     (MILLIONS)
<S>                                                                                           <C>       <C>       <C>
Domestic.........................................................................             $191      $242      $271
Foreign..........................................................................               (8)      (41)        1
                                                                                              ----      ----      ----
Total............................................................................             $183      $201      $272
                                                                                              ----      ----      ----
                                                                                              ----      ----      ----
 
</TABLE>
 
                                      F-82
 

<PAGE>
 
<PAGE>
                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     As a partnership, TWE is not subject to U.S. federal, state or local income
taxation.  However,  certain of  TWE's  operations are  conducted  by subsidiary
corporations that  are subject  to domestic  or foreign  taxation. Income  taxes
(benefits) of TWE and subsidiary corporations are as set forth below:

<TABLE>
<CAPTION>
                                                                                              YEARS ENDED DECEMBER 31,
                                                                                              ------------------------
                                                                                              1995      1994      1993
                                                                                              ----      ----      ----
                                                                                                     (MILLIONS)
<S>                                                                                          <C>       <C>        <C>
Federal:
     Current(1)..................................................................             $  7      $  6      $ 10
     Deferred....................................................................               (5)       (2)      (12)
Foreign:
     Current(2)..................................................................               74        53        68
     Deferred....................................................................                6       (16)       (4)
State and local:
     Current.....................................................................                7        14        20
     Deferred....................................................................               (3)      (15)      (18)
                                                                                              ----      ----      ----
Total income taxes...............................................................             $ 86      $ 40      $ 64
                                                                                              ----      ----      ----
                                                                                              ----      ----      ----
 
</TABLE>
 
------------
 
(1) Includes  utilization of Six  Flags' tax carryforwards in  the amount of $16
    million in 1995, $35 million in 1994 and $75 million in 1993.
 
(2) Includes foreign withholding taxes  of $60 million in  1995, $44 million  in
    1994 and $59 million in 1993.
 
     The financial statement basis of TWE's assets exceeds the corresponding tax
basis  by  $8.8  billion  at  December 31,  1995,  principally  as  a  result of
differences in accounting for depreciable  and amortizable assets for  financial
statement and income tax purposes.
 
8.  TWE PARTNERS' CAPITAL
 
     Each partner's interest in TWE consists of the initial priority capital and
residual  equity amounts that  were assigned to that  partner or its predecessor
based on the  estimated fair value  of the  net assets each  contributed to  the
partnership,  as  adjusted for  the fair  value of  certain Time  Warner Service
Partnership Assets (as  defined below)  distributed by  TWE to  the Time  Warner
General  Partners in 1993 which were not  subsequently reacquired by TWE in 1995
('Contributed Capital'), plus,  with respect to  the priority capital  interests
only,  any undistributed  priority capital  return. The  priority capital return
consists of net  partnership income  allocated to  date in  accordance with  the
provisions  of  the TWE  partnership  agreement and  the  right to  be allocated
additional partnership income which, together with any previously allocated  net
partnership  income, provides for  the various priority  capital rates of return
specified  in  the  table  below.  The  sum  of  Contributed  Capital  and   the
undistributed  priority capital  return is  referred to  as 'Cumulative Priority
Capital.' Cumulative Priority Capital is not necessarily indicative of the  fair
value  of the  underlying priority capital  interests principally  due to above-
market rates of  return on  certain priority  capital interests  as compared  to
securities  of comparable credit risk  and maturity, such as  the 13.25% rate of
return on the  junior priority capital  interest owned by  subsidiaries of  Time
Warner.  Furthermore, the  ultimate realization  of Cumulative  Priority Capital
could be affected by the fair value of TWE, which is subject to fluctuation.
 
                                      F-83
 

<PAGE>
 
<PAGE>
                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     A summary of the priority of Contributed Capital, ownership of  Contributed
Capital  and  Cumulative  Priority Capital  at  December 31,  1995  and priority
capital rates of return thereon is set forth below:
 
<TABLE>
<CAPTION>
                                                                         PRIORITY       TIME       LIMITED PARTNERS
                                                          CUMULATIVE     CAPITAL       WARNER    ---------------------
                                            CONTRIBUTED    PRIORITY      RATES OF     GENERAL                     U S
PRIORITY OF CONTRIBUTED CAPITAL             CAPITAL(A)     CAPITAL      RETURN(B)     PARTNERS    TIME WARNER    WEST
------------------------------------------  -----------   ----------   ------------   --------   -------------   -----
                                                   (BILLIONS)          (% PER ANNUM            (OWNERSHIP %)
                                                                        COMPOUNDED
                                                                        QUARTERLY)
<S>                                         <C>           <C>          <C>            <C>        <C>             <C>
Senior priority capital...................     $ 1.4         $1.4(c)        8.00%      100.00%          --         --
Pro rata priority capital.................       5.6          8.7          13.00%(d)    63.27%       11.22%      25.51%
Junior priority capital...................       2.9          4.6          13.25%(e)   100.00%          --         --
Residual equity capital...................       3.3          3.3(f)          --(f)     63.27%       11.22%      25.51%
</TABLE>
 
------------
 
(a) Excludes partnership income or loss allocated thereto.
 
(b) Income allocations related to priority capital rates of return are based  on
    partnership income after any special tax allocations.
 
(c) Net  of $366 million of partnership  income distributed in 1995 representing
    the priority capital return thereon through June 30, 1995.
 
(d) 11.00% to the extent concurrently distributed.
 
(e) 11.25% to the extent concurrently distributed.
 
(f) Residual equity capital is not entitled  to stated priority rates of  return
    and,  as such, its  Cumulative Priority Capital is  equal to its Contributed
    Capital. However, in the case of  certain events such as the liquidation  or
    dissolution of TWE, residual equity capital is entitled to any excess of the
    fair  value of the net assets of TWE over the aggregate amount of Cumulative
    Priority  Capital  and   special  tax  allocations.   The  residual   equity
    Contributed Capital has priority over the priority returns on junior and pro
    rata priority capital.
 
     Because  Contributed Capital is based  on the fair value  of the net assets
that each partner contributed to the partnership, the aggregate of such  amounts
is  significantly  higher  than  TWE's partners'  capital  as  reflected  in the
consolidated financial statements, which is based on the historical cost of  the
contributed net assets. For purposes of allocating partnership income or loss to
the  partners, partnership income or loss is based  on the fair value of the net
assets  contributed  to  the  partnership  and  results  in  significantly  less
partnership  income, or  results in partnership  losses, in contrast  to the net
income reported by TWE for financial statement purposes, which is also based  on
the historical cost of contributed net assets.
 
     Under  the  TWE partnership  agreement, partnership  income, to  the extent
earned, is first allocated to  the partners so that  the economic burden of  the
income  tax  consequences  of  partnership operations  is  borne  as  though the
partnership were taxed as a corporation ('special tax allocations'), then to the
senior priority, pro  rata priority  and junior priority  capital interests,  in
order  of priority, at rates of return ranging  from 8% to 13.25% per annum, and
finally to  the  residual equity  interests.  Partnership losses  generally  are
allocated  first to  eliminate prior allocations  of partnership  income to, and
then to reduce the Contributed Capital of, the residual equity, junior  priority
capital  and pro rata priority capital interests,  in that order, then to reduce
the Time Warner General Partners' senior priority capital, including partnership
income allocated thereto, and finally to reduce any special tax allocations.  To
the extent partnership income is insufficient to satisfy all special allocations
in  a particular accounting period, the  right to receive additional partnership
income necessary to provide for the various priority capital rates of return  is
carried  forward until satisfied out of future partnership income, including any
partnership income that may result from any liquidation or dissolution of TWE.
 
     The TWE partnership  agreement provides, under  certain circumstances,  for
the  distribution of partnership income allocated to the senior priority capital
owned  by  the   Time  Warner   General  Partners   ('Senior  Priority   Capital
Distributions').  Pursuant to such provision, $366 million of partnership income
was distributed to the Time Warner General Partners in 1995. The senior priority
capital and,  to  the  extent not  previously  distributed,  partnership  income
allocated  thereto is  required to be  distributed in  three annual installments
beginning on July 1, 1997. The junior priority capital owned by subsidiaries  of
Time  Warner  may  be increased  if  certain operating  performance  targets are
achieved over a  five-year period  ending on December  31, 1996  and a  ten-year
 
                                      F-84
 

<PAGE>
 
<PAGE>
                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
period  ending  on  December 31,  2001.  Although satisfaction  of  the ten-year
operating performance target is indeterminable at this time, it is not  expected
that the five-year target will be attained.
 
     U  S WEST has  an option to  obtain up to  an additional 6.33%  of pro rata
priority capital and  residual equity  interests, depending  on cable  operating
performance.  The option is exercisable between January  1, 1999 and on or about
May 31, 2005  at a maximum  exercise price  ranging from $1.25  billion to  $1.8
billion,  depending on the  year of exercise. Either  U S WEST  or TWE may elect
that the exercise price be paid with partnership interests rather than cash.
 
     Distributions and  loans to  the partners  are subject  to partnership  and
credit agreement limitations. Generally, TWE must be in compliance with the cash
flow  coverage  and leverage  ratios, restricted  payment limitations  and other
credit agreement covenants in order to make such distributions or loans.
 
     In September  1993, certain  assets of  TWE were  distributed to  the  Time
Warner  General Partners and were owned  and operated by other partnerships (the
'Time Warner  Service Partnerships')  in  order to  ensure compliance  with  the
Modification  of Final Judgment entered on August  24, 1982 by the United States
District Court for  the District  of Columbia  applicable to  U S  WEST and  its
affiliated  companies,  which  may  have  included  TWE.  This  distribution was
recorded for financial statement  purposes based on  the $95 million  historical
cost of such assets and, for partnership agreement purposes, Time Warner General
Partners'  junior priority capital was reduced by approximately $300 million. In
1994, U S WEST received a judicial order that TWE was no longer prohibited  from
owning  or operating substantially all of such assets. Accordingly, in September
1995, TWE reacquired substantially all of the assets of the Time Warner  Service
Partnerships,  subject to  the liabilities  relating thereto,  (the 'Time Warner
Service Partnership Assets') in exchange  for junior priority capital  interests
in  TWE equal to approximately $400  million. The reacquisition was recorded for
financial statement purposes based  on the $124 million  historical cost of  the
Time  Warner Service Partnership Assets. Prior  to the reacquisition of the Time
Warner Service Partnership Assets  in September 1995, TWE  was required to  make
quarterly  cash distributions of junior priority  capital in the amount of $12.5
million to the Time  Warner General Partners  ('TWSP Distributions'), which  the
General  Partners were  then required to  contribute to the  Time Warner Service
Partnerships. TWE paid TWSP Distributions to the Time Warner General Partners in
the amount of $25 million, $50 million and $12.5 million in 1995, 1994 and 1993,
respectively, which were recorded as reductions of Time Warner General Partners'
junior priority capital.
 
     TWE reimburses Time Warner for the amount by which the market price on  the
exercise  date of Time Warner common stock options exercised by employees of TWE
exceeds the exercise price or, with respect to options granted prior to the  TWE
capitalization,  the greater of the exercise  price and $27.75, the market price
of the common  stock at  the time  of the TWE  capitalization on  June 30,  1992
('Stock  Option Distributions').  TWE accrues  Stock Option  Distributions and a
corresponding liability  with respect  to unexercised  options when  the  market
price  of Time Warner  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 common  stock declines. Stock
Option Distributions are paid  when the options are  exercised. At December  31,
1995  and 1994, TWE had  recorded a liability for  Stock Option Distributions of
$122 million and $89 million, respectively, based on the unexercised options and
the market prices at such dates  of $37.875 and $35.125, respectively, per  Time
Warner  common share. TWE paid Stock Option  Distributions to Time Warner in the
amount of  $17 million,  $5 million  and $20  million in  1995, 1994  and  1993,
respectively.
 
     Cash  distributions are required to be made  to the partners to permit them
to pay income taxes at statutory  rates based on their allocable taxable  income
from  TWE ('Tax Distributions'),  including any taxable  income generated by the
Beneficial Assets,  subject to  limitations referred  to herein.  The  aggregate
amount of such Tax Distributions is computed generally by reference to the taxes
that  TWE  would  have  been required  to  pay  if it  were  a  corporation. Tax
Distributions were previously subject  to restrictions until  July 1995 and  are
now  paid to the Time Warner General Partners  on a current basis. TWE paid $680
million of such Tax Distributions to the
 
                                      F-85
 

<PAGE>
 
<PAGE>
                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
Time Warner  General Partners  in 1995  (of which  $334 million  was accrued  at
December 31, 1994), compared to $115 million in 1994.
 
     In  addition to  Stock Option  Distributions, Tax  Distributions and Senior
Priority Capital Distributions, quarterly cash distributions may be made to  the
partners  to  the extent  of  excess cash,  as  defined in  the  TWE partnership
agreement ('Excess Cash Distribution'). Assuming that no additional  partnership
interests  are  issued  to  new  partners  and  that  certain  cash distribution
thresholds are met,  cash distributions other  than Stock Option  Distributions,
Tax  Distributions  and  Senior  Priority  Capital  Distributions  will  in  the
aggregate be made  63.27% to the  Time Warner General  Partners, 11.22% to  Time
Warner  and 25.51%  to U  S WEST prior  to June  30, 1998;  thereafter, the Time
Warner General  Partners  will  be entitled  to  additional  distributions  with
respect  to  junior priority  capital. If  aggregate  distributions made  to the
limited partners, generally  from all  sources, have  not reached  approximately
$800  million by June  30, 1997, cash  distributions to the  Time Warner General
Partners with respect to the Time Warner General Partners' pro rata priority and
residual  equity  capital,  other  than  Stock  Option  Distributions  and   Tax
Distributions,  will be deferred until such threshold is met. Similarly, if such
aggregate distributions to the limited  partners have not reached  approximately
$1.6  billion  by  June 30,  1998,  cash  distributions with  respect  to junior
priority capital  will be  deferred until  such threshold  is met.  If any  such
deferral  occurs, a portion of  the corresponding partnership income allocations
with respect  to such  deferred  amounts will  be made  at  a rate  higher  than
otherwise  would  have  been  the  case.  As  of  December  31,  1995,  no  cash
distributions have been made to the limited partners. In addition, if a division
of TWE or a substantial portion thereof is sold, the net proceeds of such  sale,
less  expenses and proceeds used to repay  outstanding debt, will be required to
be distributed  with respect  to the  partners' partnership  interests.  Similar
distributions are required to be made in the event of a financing or refinancing
of  debt.  Subject  to any  limitations  on  the incurrence  of  additional debt
contained in the TWE partnership and  credit agreements, and the Indenture,  TWE
may borrow funds to make distributions.
 
9.  STOCK OPTION PLANS
 
     Options  to purchase  Time Warner common  stock under  various stock option
plans have been granted  to employees of  TWE at, or in  excess of, fair  market
value  at the date  of grant. Generally,  the options become  exercisable over a
three-year vesting period and expire ten years from the date of grant. A summary
of stock option activity with respect to employees of TWE is as follows:
 
<TABLE>
<CAPTION>
                                                                                THOUSANDS OF SHARES
                                                                                  OF TIME WARNER       EXERCISE PRICE
                                                                                   COMMON STOCK          PER SHARE
                                                                                -------------------    --------------
<S>                                                                             <C>                    <C>
Outstanding at January 1, 1995...............................................          30,198              $ 8-45
Granted......................................................................           2,141               34-45
Exercised....................................................................          (1,316)               8-38
Cancelled (a)................................................................          (2,488)              17-45
                                                                                      -------
Balance at December 31, 1995.................................................          28,535              $17-45
                                                                                      -------
                                                                                      -------
</TABLE>
 
<TABLE>
<CAPTION>
                                                                                            DECEMBER 31,
                                                                                -------------------------------------
                                                                                       1995                 1994
                                                                                -------------------    --------------
                                                                                             (THOUSANDS)
<S>                                                                             <C>                    <C>
Exercisable..................................................................          21,846              21,318
                                                                                      -------          --------------
                                                                                      -------          --------------
</TABLE>
 
------------
 
(a) Includes all options  cancelled and forfeited  during the year,  as well  as
    options  related to employees who have been  transferred out of and into TWE
    to and from other Time Warner divisions.
 
                                      F-86
 

<PAGE>
 
<PAGE>
                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     TWE reimburses Time Warner for the use of Time Warner stock options on  the
basis described in Note 8. There were 437 thousand options exercised in 1994 and
1.9  million options exercised in 1993, at  prices ranging from $8-$36 per share
in each year.
 
10.  BENEFIT PLANS
 
     TWE  and  its  divisions  have  defined  benefit  pension  plans   covering
substantially  all domestic  employees. Pension  benefits are  based on formulas
that reflect  the employees'  years of  service and  compensation levels  during
their  employment  period.  Qualifying  plans  are  funded  in  accordance  with
government pension  and income  tax  regulations. Plan  assets are  invested  in
equity and fixed income securities.
 
     Pension expense included the following:
 
<TABLE>
<CAPTION>
                                                                                          YEARS ENDED DECEMBER 31,
                                                                                          ----------------------
                                                                                          1995     1994     1993
                                                                                          ----     ----     ----
                                                                                                (MILLIONS)
<S>                                                                                       <C>      <C>      <C>
Service cost...........................................................................   $ 20     $ 26     $ 21
Interest cost..........................................................................     21       24       19
Actual return on plan assets...........................................................    (55)       4      (21)
Net amortization and deferral..........................................................     37      (21)       5
                                                                                          ----     ----     ----
Total..................................................................................   $ 23     $ 33     $ 24
                                                                                          ----     ----     ----
                                                                                          ----     ----     ----
</TABLE>
 
     The status of funded pension plans is as follows:
 
<TABLE>
<CAPTION>
                                                                                                    DECEMBER 31,
                                                                                                    -------------
                                                                                                    1995     1994
                                                                                                    ----     ----
                                                                                                     (MILLIONS)
<S>                                                                                                 <C>      <C>
Accumulated benefit obligation (89% vested)......................................................   $213     $172
Effect of future salary increases................................................................    111       91
                                                                                                    ----     ----
Projected benefit obligation.....................................................................    324      263
Plan assets at fair value........................................................................    247      225
                                                                                                    ----     ----
Projected benefit obligation in excess of plan assets............................................    (77)     (38)
Unamortized actuarial losses.....................................................................     60       24
Unamortized plan changes.........................................................................      5        4
Other............................................................................................     (3)      (4)
                                                                                                    ----     ----
Accrued pension liability........................................................................   $(15)    $(14)
                                                                                                    ----     ----
                                                                                                    ----     ----
</TABLE>
 
     The following assumptions were used in accounting for pension plans:
 
<TABLE>
<CAPTION>
                                                                                          1995     1994     1993
                                                                                          ----     ----     ----
<S>                                                                                       <C>      <C>      <C>
Weighted average discount rate.........................................................   7.25%     8.5%     7.5%
Return on plan assets..................................................................      9%       9%       9%
Rate of increase in compensation levels................................................      6%       6%       6%
</TABLE>
 
     Certain  domestic  employees of  TWE  participate in  multiemployer pension
plans as to which the  expense amounted to $21 million  in 1995, $18 million  in
1994  and $19  million in  1993. Employees  in foreign  countries participate to
varying degrees  in  local  pension  plans,  which  in  the  aggregate  are  not
significant.
 
     Certain domestic employees also participate in Time Warner's 401(k) savings
plans  and  other savings  and  profit sharing  plans  as to  which  the expense
amounted to $25 million in  1995, $23 million in 1994  and $20 million in  1993.
Contributions  to the 401(k) and other savings plans are based upon a percentage
of the
 
                                      F-87
 

<PAGE>
 
<PAGE>
                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
employees' elected contributions. Contributions to the profit sharing plans  are
generally determined by management.
 
11. FINANCIAL INSTRUMENTS
 
     The  carrying value of TWE's financial instruments approximates fair value,
except for differences with  respect to long-term,  fixed-rate debt and  certain
differences  related to cost method  investments and other financial instruments
which are not  significant. The  fair value  of financial  instruments, such  as
long-term  debt and investments, is generally  determined by reference to market
values resulting  from  trading on  a  national  securities exchange  or  in  an
over-the-counter  market. In cases where quoted market prices are not available,
such as for derivative financial instruments,  fair value is based on  estimates
using present value or other valuation techniques.
 
LONG-TERM DEBT
 
     Based  on the level of interest rates  prevailing at December 31, 1995, the
fair value of TWE's fixed-rate debt exceeded its carrying value by $386  million
which  represents an unrealized loss. Based on TWE's fixed-rate debt outstanding
at December 31, 1995, each 25 basis  point increase or decrease in the level  of
interest  rates prevailing at December  31, 1995 would result  in a reduction or
increase in the unrealized loss of $95 million, respectively. Based on the level
of interest  rates prevailing  at December  31, 1994,  the fair  value of  TWE's
fixed-rate  debt was $460 million less  than its carrying value which represents
an unrealized gain. Unrealized gains or losses related to the differences in the
fair value and carrying value of TWE's long-term debt are not recognized  unless
such debt is retired prior to its maturity.
 
FOREIGN CURRENCY RISK MANAGEMENT
 
     Foreign  exchange contracts are used primarily  by Time Warner to hedge the
risk that unremitted or future license  fees owed to TWE domestic companies  for
the  sale  or  anticipated  sale  of U.S.  copyrighted  products  abroad  may be
adversely affected by changes in foreign currency exchange rates. As part of its
overall strategy to manage the level of exposure to the risk of foreign currency
exchange rate  fluctuations, Time  Warner  hedges a  portion  of its  and  TWE's
combined  foreign currency exposures  anticipated over the  ensuing twelve month
period, including those related  to TWE. At December  31, 1995, Time Warner  has
effectively  hedged approximately half of TWE's total estimated foreign currency
exposures that principally relate  to anticipated cash flows  to be remitted  to
the  U.S. over the ensuing twelve month period, using foreign exchange contracts
that generally have  maturities of  three months  or less,  which generally  are
rolled  over  to  provide  continuing  coverage  throughout  the  year.  TWE  is
reimbursed by  or reimburses  Time Warner  for Time  Warner contract  gains  and
losses related to TWE's exposure. Time Warner often closes foreign exchange sale
contracts  by purchasing an offsetting purchase  contract. At December 31, 1995,
Time Warner had contracts for the sale of $504 million and the purchase of  $140
million  of foreign currencies at fixed rates  and maturities of three months or
less. Of Time  Warner's $364  million net sale  contract position,  none of  the
foreign  exchange purchase  contracts and $113  million of  the foreign exchange
sale contracts related  to TWE's foreign  currency exposure, primarily  Japanese
yen  (21% of net contract position related  to TWE), French francs (22%), German
marks (12%) and Canadian dollars (21%), compared to a net sale contract position
of $188 million of foreign currencies at December 31, 1994.
 
     Unrealized gains  or  losses  related to  foreign  exchange  contracts  are
recorded  in income as  the market value of  such contracts change; accordingly,
the carrying value of foreign exchange contracts approximates market value.  The
carrying  value of foreign  exchange contracts was not  material at December 31,
1995 and 1994 and is included in other current liabilities. No cash is  required
to  be received or paid with respect to the realization of such gains and losses
until the related  foreign exchange  contracts are settled,  generally at  their
respective
 
                                      F-88
 

<PAGE>
 
<PAGE>
                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
maturity  dates.  In  1995  and  1994, TWE  had  $11  million  and  $20 million,
respectively, of net  losses on foreign  exchange contracts, which  were or  are
expected  to be offset by corresponding increases in the dollar value of foreign
currency license fee payments that have  been or are anticipated to be  received
in  cash from the sale  of U.S. copyrighted products  abroad. Time Warner places
foreign currency  contracts with  a number  of major  financial institutions  in
order to minimize credit risk.
 
     Based  on Time Warner's  outstanding foreign exchange  contracts related to
TWE's exposure at December 31, 1995, each  5% devaluation of the U.S. dollar  as
compared to the level of foreign exchange rates for currencies under contract at
December  31, 1995 would result in approximately $6 million of unrealized losses
on foreign exchange contracts. Conversely, a 5% appreciation of the U.S.  dollar
would result in $6 million of unrealized gains on contracts. Consistent with the
nature  of the economic hedge provided  by such foreign exchange contracts, such
unrealized gains  or  losses  would  be offset  by  corresponding  decreases  or
increases,  respectively, in the dollar value of future foreign currency license
fee payments that  would be  received in cash  within the  ensuing twelve  month
period from the sale of U.S. copyrighted products abroad.
 
12. SEGMENT INFORMATION
 
     TWE's  businesses  are  conducted  in two  fundamental  areas  of business:
Entertainment, consisting  principally  of interests  in  filmed  entertainment,
broadcasting,    theme   parks    and   cable    television   programming;   and
Telecommunications, consisting  principally  of interests  in  cable  television
systems.
 
     Information  as to the operations of  TWE in different business segments is
as  set  forth   below.  Cable   business  segment   information  reflects   the
consolidation  by TWE  of the  TWE-Advance/Newhouse Partnership  effective as of
April 1, 1995 and Paragon effective as of July 6, 1995. The operating results of
Six Flags have  been deconsolidated effective  as of June  23, 1995 and  results
prior to that date are reported separately to facilitate comparability.
 
<TABLE>
<CAPTION>
                                                                                       YEARS ENDED DECEMBER 31,
                                                                                     ----------------------------
                                                                                      1995       1994       1993
                                                                                     ------     ------     ------
                                                                                              (MILLIONS)
<S>                                                                                  <C>        <C>        <C>
REVENUES(1)
Filmed Entertainment..............................................................   $5,069     $4,476     $4,024
Six Flags Theme Parks.............................................................      227        557        533
Broadcasting-The WB Network.......................................................       33         --         --
Programming-HBO...................................................................    1,593      1,494      1,435
Cable.............................................................................    3,005      2,220      2,205
Intersegment elimination..........................................................     (410)      (287)      (251)
                                                                                     ------     ------     ------
Total.............................................................................   $9,517     $8,460     $7,946
                                                                                     ------     ------     ------
                                                                                     ------     ------     ------
</TABLE>
 
------------
 
(1) Substantially all operations outside of the United States support the export
    of  domestic products.  Revenues include export  sales of  $1.982 billion in
    1995, $1.693 billion in 1994 and  $1.650 billion in 1993. Approximately  58%
    of export revenues are from sales to European customers.
 
                                      F-89
 

<PAGE>
 
<PAGE>
                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
<TABLE>
<CAPTION>
                                                                                       YEARS ENDED DECEMBER 31,
                                                                                     ----------------------------
                                                                                      1995       1994       1993
                                                                                     ------     ------     ------
                                                                                              (MILLIONS)
<S>                                                                                  <C>        <C>        <C>
OPERATING INCOME
Filmed Entertainment..............................................................   $  228     $  201     $  210
Six Flags Theme Parks.............................................................       29         56         53
Broadcasting-The WB Network.......................................................      (66)        --         --
Programming-HBO...................................................................      274        236        213
Cable.............................................................................      495        355        407
                                                                                     ------     ------     ------
Total.............................................................................   $  960     $  848     $  883
                                                                                     ------     ------     ------
                                                                                     ------     ------     ------
</TABLE>
 
<TABLE>
<CAPTION>
                                                                                       YEARS ENDED DECEMBER 31,
                                                                                     ----------------------------
                                                                                      1995       1994       1993
                                                                                     ------     ------     ------
                                                                                              (MILLIONS)
<S>                                                                                  <C>        <C>        <C>
DEPRECIATION OF PROPERTY, PLANT AND EQUIPMENT
Filmed Entertainment..............................................................   $  107     $   71     $   46
Six Flags Theme Parks.............................................................       20         51         41
Broadcasting-The WB Network.......................................................       --         --         --
Programming-HBO...................................................................       16         13         14
Cable.............................................................................      452        330        325
                                                                                     ------     ------     ------
Total.............................................................................   $  595     $  465     $  426
                                                                                     ------     ------     ------
                                                                                     ------     ------     ------
</TABLE>
 
<TABLE>
<CAPTION>
                                                                                    YEARS ENDED DECEMBER 31,
                                                                                 -------------------------------
                                                                                  1995        1994        1993
                                                                                 -------     -------     -------
                                                                                           (MILLIONS)
<S>                                                                              <C>         <C>         <C>
AMORTIZATION OF INTANGIBLE ASSETS(1)
Filmed Entertainment..........................................................   $   124     $   135     $   143
Six Flags Theme Parks.........................................................        11          28          28
Broadcasting-The WB Network...................................................        --          --          --
Programming-HBO...............................................................         1           6           3
Cable.........................................................................       308         309         302
                                                                                 -------     -------     -------
Total.........................................................................   $   444     $   478     $   476
                                                                                 -------     -------     -------
                                                                                 -------     -------     -------
</TABLE>
 
------------
 
(1) Amortization  includes amortization relating  to the acquisitions  of WCI in
    1989  and  the  ATC  minority  interest  in  1992  and  to  other   business
    combinations accounted for by the purchase method.
 
                                      F-90
 

<PAGE>
 
<PAGE>
                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     Information as to the assets and capital expenditures of TWE is as follows:
 
<TABLE>
<CAPTION>
                                                                                    YEARS ENDED DECEMBER 31,
                                                                                 -------------------------------
                                                                                  1995        1994        1993
                                                                                 -------     -------     -------
                                                                                           (MILLIONS)
<S>                                                                              <C>         <C>         <C>
ASSETS
Filmed Entertainment..........................................................   $ 7,334     $ 7,133     $ 6,677
Six Flags Theme Parks.........................................................        --         814         848
Broadcasting-The WB Network...................................................        63          --          --
Programming-HBO...............................................................       935         895         855
Cable.........................................................................     9,842       8,191       8,041
Corporate(1)..................................................................       731       1,629       1,542
                                                                                 -------     -------     -------
Total.........................................................................   $18,905     $18,662     $17,963
                                                                                 -------     -------     -------
                                                                                 -------     -------     -------
</TABLE>
 
------------
(1) Consists principally of cash, cash equivalents and other investments.
 
<TABLE>
<CAPTION>
                                                                                    YEARS ENDED DECEMBER 31,
                                                                                 -------------------------------
                                                                                  1995        1994        1993
                                                                                 -------     -------     -------
                                                                                           (MILLIONS)
<S>                                                                              <C>         <C>         <C>
CAPITAL EXPENDITURES
Filmed Entertainment..........................................................   $   294     $   395     $   210
Six Flags Theme Parks.........................................................        43          46          34
Broadcasting-The WB Network...................................................        --          --          --
Programming-HBO...............................................................        20          13          17
Cable(1)......................................................................     1,178         699         352
                                                                                 -------     -------     -------
Total.........................................................................   $ 1,535     $ 1,153     $   613
                                                                                 -------     -------     -------
                                                                                 -------     -------     -------
</TABLE>
 
------------
 
(1) Cable  capital expenditures were funded in part through collections  on  the
    U S WEST Note in the amount  of  $602  million in 1995, $234 million in 1994
    and $16 million in 1993 (Note 1).
 
13. COMMITMENTS AND CONTINGENCIES
 
     Total  rent expense amounted to $176 million  in 1995, $143 million in 1994
and $119 million in  1993. The minimum  rental commitments under  noncancellable
long-term  operating leases are: 1996-$158 million; 1997-$156 million; 1998-$149
million; 1999-$143 million; 2000-$132 million and after 2000-$826 million.
 
     Minimum commitments and  guarantees under  certain programming,  licensing,
franchise  and other agreements at December 31, 1995 aggregated approximately $8
billion, which are payable principally over a five-year period.
 
     Pending  legal  proceedings   are  substantially   limited  to   litigation
incidental  to the businesses of TWE. In  the opinion of counsel and management,
the ultimate resolution of these matters will not have a material effect on  the
consolidated financial statements.
 
14. RELATED PARTY TRANSACTIONS
 
     In  the normal  course of conducting  their businesses, TWE  units have had
various transactions with Time Warner units, generally on terms resulting from a
negotiation among  the affected  parties that  in management's  view results  in
reasonable  allocations.  Employees of  TWE participate  in various  Time Warner
medical, stock  option and  other benefit  plans for  which TWE  is charged  its
allocable share of plan expenses, including
 
                                      F-91
 

<PAGE>
 
<PAGE>
                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
administrative  costs.  Time  Warner's corporate  group  provides  various other
services  to  TWE.  The  Music  division  of  WCI  provides  home  videocassette
distribution  services to  certain TWE  operations, and  certain TWE  units have
placed advertising in magazines published by Time Warner's Publishing division.
 
     TWE is required  to pay  a $130 million  advisory fee  to U S  WEST over  a
five-year  period  ending  September  15,  1998  for  U  S  WEST's  expertise in
telecommunications, telephony and information technology, and its  participation
in  the management and upgrade of the  cable systems to Full Service Network'tm'
capacity.
 
     In  1995,  TWE  and  certain  subsidiaries  of  Time  Warner  entered  into
management  services agreements,  pursuant to  which TWE  receives fees  for the
management of all cable television systems owned by Time Warner. Management fees
received from Time Warner in 1995 were not material.
 
     Time Warner provides TWE with certain corporate support services for  which
Time Warner was paid $60 million per year through June 30, 1995, with increasing
annual  amounts  as adjusted  for inflation  thereafter. The  corporate services
agreement runs through June 30, 1997, and  may be extended by agreement of  both
parties.  Management believes that the  corporate services fee is representative
of the cost of  corporate services that would  be necessary for the  stand-alone
operations of TWE.
 
     Time  Warner and TWE  entered into a  credit agreement in  1994 that allows
Time Warner to borrow up  to $400 million from  TWE through September 15,  2000.
Outstanding  borrowings from TWE bear interest at  LIBOR plus 1% per annum. Time
Warner borrowed $400 million in 1994 under the credit agreement.
 
     Prior to TWE's reacquisition of the Time Warner Service Partnership  Assets
in  September  1995, TWE  had service  agreements with  the Time  Warner Service
Partnerships for  program signal  delivery and  transmission services,  and  TWE
provided  billing, collection and marketing services  to the Time Warner Service
Partnerships. TWE also has distribution  and merchandising agreements with  Time
Warner  Entertainment Japan Inc., a company owned by certain former and existing
partners of TWE to conduct TWE's businesses in Japan.
 
     In addition to  transactions with  its partners, TWE  has had  transactions
with  Comedy Partners, L.P., Six  Flags and its other  equity investees and with
Turner Broadcasting  System,  Inc.,  The Columbia  House  Company  partnerships,
Cinamerica  Theatres, L.P. and other equity  investees of Time Warner, generally
with respect to sales of product in the ordinary course of business.
 
15. ADDITIONAL FINANCIAL INFORMATION
 
     Additional financial information with respect to cash flows is as follows:
 
<TABLE>
<CAPTION>
                                                                                        YEARS ENDED DECEMBER 31,
                                                                                       --------------------------
                                                                                       1995      1994       1993
                                                                                       ----     ------     ------
                                                                                               (MILLIONS)
<S>                                                                                    <C>      <C>        <C>
Cash payments made for interest.....................................................   $571     $  521     $  450
Cash payments made for income taxes, net............................................     75         69         70
Noncash capital contributions, net..................................................     50          4        384
</TABLE>
 
     Noncash  investing  activities  in  1995  included  the  formation  of  the
TWE-Advance/Newhouse Partnership in April 1995 (Note 2) and the reacquisition of
the Time Warner Service Partnership Assets in September 1995 (Note 8).
 
                                      F-92
 

<PAGE>
 
<PAGE>
                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     Other current liabilities consist of:
 
<TABLE>
<CAPTION>
                                                                                                  DECEMBER 31,
                                                                                                -----------------
                                                                                                 1995       1994
                                                                                                ------     ------
                                                                                                   (MILLIONS)
<S>                                                                                             <C>        <C>
Accrued expenses.............................................................................   $  937     $  827
Accrued compensation.........................................................................      216        143
Deferred revenues............................................................................      227        150
Tax Distributions due to Time Warner General Partners........................................       --        334
Debt due within one year.....................................................................       47         32
                                                                                                ------     ------
Total........................................................................................   $1,427     $1,486
                                                                                                ------     ------
                                                                                                ------     ------
</TABLE>
 
                                      F-93


<PAGE>
 
<PAGE>
                         REPORT OF INDEPENDENT AUDITORS
 
THE PARTNERS OF
TIME WARNER ENTERTAINMENT COMPANY, L.P.
 
We  have  audited the  accompanying consolidated  balance  sheet of  Time Warner
Entertainment Company, L.P. ('TWE')  as of December 31,  1995 and 1994, and  the
related  consolidated  statements  of  operations,  cash  flows  and partnership
capital for each of the three years  in the period ended December 31, 1995.  Our
audits  also included  the financial statement  schedule listed in  the Index at
Item 14(a). These financial  statements and schedule  are the responsibility  of
TWE's management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
 
We   conducted  our  audits  in  accordance  with  generally  accepted  auditing
standards. Those standards require that we plan and perform the audit to  obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also  includes
assessing  the  accounting principles  used  and significant  estimates  made by
management, as well as evaluating the overall financial statement  presentation.
We believe that our audits provide a reasonable basis for our opinion.
 
In  our opinion, the  financial statements referred to  above present fairly, in
all material respects, the  consolidated financial position  of TWE at  December
31,  1995 and 1994, and the consolidated  results of its operations and its cash
flows for each  of the three  years in the  period ended December  31, 1995,  in
conformity  with generally accepted accounting principles. Also, in our opinion,
the related financial  statement schedule,  when considered in  relation to  the
basic  financial statements  taken as a  whole, presents fairly  in all material
respects the information set forth therein.
 
                                          ERNST & YOUNG LLP
 
New York, New York
February 6, 1996
 
                                      F-94
 

<PAGE>
 
<PAGE>
                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
                         SELECTED FINANCIAL INFORMATION
 
     The selected financial information for each of the five years in the period
ended December 31, 1995 set forth below has been derived from and should be read
in conjunction with  the consolidated financial  statements and other  financial
information  presented elsewhere  herein. Capitalized  terms are  as defined and
described in such  consolidated financial statements,  or elsewhere herein.  The
selected historical financial information for 1995 reflects the consolidation by
TWE of the TWE-Advance/Newhouse Partnership resulting from the formation of such
partnership,  effective as  of April 1,  1995, and the  consolidation of Paragon
effective as  of July  6, 1995.  The selected  historical financial  information
gives  effect to the consolidation of  Six Flags Entertainment Corporation ('Six
Flags') effective as  of January 1,  1993 as a  result of an  increase in  TWE's
ownership  of Six Flags from  50% to 100% in  September 1993, and the subsequent
deconsolidation of Six  Flags resulting  from the disposition  by TWE  of a  51%
interest in Six Flags effective as of June 23, 1995.
 
     The selected historical financial information for 1993 also gives effect to
the  admission  of U  S  WEST as  an  additional limited  partner  of TWE  as of
September 15, 1993 and the issuance of $2.6 billion of TWE debentures during the
year to reduce indebtedness under the former TWE credit agreement, and for  1992
gives effect to the initial capitalization of TWE and associated refinancings as
of the dates such transactions were consummated and Time Warner's acquisition of
the  ATC minority  interest as of  June 30,  1992, using the  purchase method of
accounting. Time Warner's cost to acquire the ATC minority interest is reflected
in the consolidated  financial statements of  TWE under the  pushdown method  of
accounting.
 
<TABLE>
<CAPTION>
                                                                           YEARS ENDED DECEMBER 31,
                                                              ---------------------------------------------------
SELECTED OPERATING STATEMENT INFORMATION                       1995       1994       1993       1992       1991
                                                              -------    -------    -------    -------    -------
                                                                                  (MILLIONS)
<S>                                                           <C>        <C>        <C>        <C>        <C>
Revenues...................................................   $ 9,517    $ 8,460    $ 7,946    $ 6,761    $ 6,068
Depreciation and amortization..............................     1,039        943        902        782        733
Business segment operating income..........................       960        848        883        795        712
Interest and other, net....................................       580        587        551        525        520
Income before extraordinary item...........................        97        161        208        160         97
Net income.................................................        73        161        198        160         97
</TABLE>
 
<TABLE>
<CAPTION>
                                                                           YEARS ENDED DECEMBER 31,
                                                              ---------------------------------------------------
SELECTED BALANCE SHEET INFORMATION                             1995       1994       1993       1992       1991
                                                              -------    -------    -------    -------    -------
                                                                                  (MILLIONS)
<S>                                                           <C>        <C>        <C>        <C>        <C>
Total assets...............................................   $18,905    $18,662    $17,963    $15,848    $14,230
Debt due within one year...................................        47         32         24          7        878
Long-term debt.............................................     6,137      7,160      7,125      7,171      4,571
Time Warner General Partners' senior priority capital......     1,426      1,663      1,536         --         --
Partners' capital..........................................     6,478      6,233      6,000      6,437      6,717
</TABLE>
 
                                      F-95
 

<PAGE>
 
<PAGE>
                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
                  QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
 
<TABLE>
<CAPTION>
                                                                                                 OPERATING
                                                                                                 INCOME OF     NET
                                                                                                 BUSINESS     INCOME
QUARTER                                                                              REVENUES    SEGMENTS     (LOSS)
----------------------------------------------------------------------------------   --------    ---------    ------
                                                                                               (MILLIONS)
<S>                                                                                  <C>         <C>          <C>
1995
1st...............................................................................    $2,046       $ 191       $  4
2nd...............................................................................     2,392         266         56
3rd (a)...........................................................................     2,324         268         23
4th...............................................................................     2,755         235        (10)
Year (a)..........................................................................     9,517         960         73
 
1994
1st...............................................................................    $1,919       $ 203       $ 48
2nd...............................................................................     2,055         227         56
3rd...............................................................................     2,203         235         41
4th...............................................................................     2,283         183         16
Year..............................................................................     8,460         848        161
</TABLE>
 
------------
 
(a) Net  income for the third quarter of  1995 includes an extraordinary loss on
    the retirement of debt of $24 million.
 
                                      F-96
 

<PAGE>
 
<PAGE>
                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
                SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
                  YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
                                   (MILLIONS)
 
<TABLE>
<CAPTION>
                                                                                  ADDITIONS
                                                                    BALANCE AT    CHARGED TO                   BALANCE
                                                                    BEGINNING     COSTS AND                    AT END
                           DESCRIPTION                              OF PERIOD      EXPENSES     DEDUCTIONS    OF PERIOD
-----------------------------------------------------------------   ----------    ----------    ----------    ---------
<S>                                                                 <C>           <C>           <C>           <C>
1995:
Reserves deducted from accounts receivable:
     Allowance for doubtful accounts.............................      $188          $104         $  (96)(a)    $ 196
     Reserves for sales returns and allowances...................       118           218           (167)(b)      169
                                                                    ----------    ----------    ----------    ---------
          Total..................................................      $306          $322         $ (263)       $ 365
                                                                    ----------    ----------    ----------    ---------
                                                                    ----------    ----------    ----------    ---------
 
1994:
Reserves deducted from accounts receivable:
     Allowance for doubtful accounts.............................      $161          $ 49         $  (22)(a)    $ 188
     Reserves for sales returns and allowances...................        96           164           (142)(b)      118
                                                                    ----------    ----------    ----------    ---------
          Total..................................................      $257          $213         $ (164)       $ 306
                                                                    ----------    ----------    ----------    ---------
                                                                    ----------    ----------    ----------    ---------
 
1993:
Reserves deducted from accounts receivable:
     Allowance for doubtful accounts.............................      $166          $ 27         $  (32)(a)    $ 161
     Reserves for sales returns and allowances...................        74           131           (109)(b)       96
                                                                    ----------    ----------    ----------    ---------
          Total..................................................      $240          $158         $ (141)       $ 257
                                                                    ----------    ----------    ----------    ---------
                                                                    ----------    ----------    ----------    ---------
</TABLE>
 
------------
(a) Represents uncollectible receivables charged against the reserve.
 
(b) Represents returns or allowances applied against the reserve.
 
                                      F-97
<PAGE>
<PAGE>
                                 EXHIBIT INDEX
 
<TABLE>
<CAPTION>
                                                                                                            SEQUENTIAL
  EXHIBIT                                                                                                      PAGE
  NUMBER                                              DESCRIPTION                                             NUMBER
-----------   -------------------------------------------------------------------------------------------   ----------
<C>           <S>                                                                                           <C>
 2.1          Amended  and Restated Agreement and Plan of Merger dated as of September 22, 1995 among the        *
              Registrant, TW  Inc.,  Time Warner  Acquisition  Corp.,  TW Acquisition  Corp.  and  Turner
              Broadcasting System, Inc. (which is incorporated herein by reference to Exhibit 2(a) to the
              Registrant's  Current Report on  Form 8-K dated  December 1, 1995  (the 'December 1995 Form
              8-K')).
 2.2          Shareholders' Agreement dated as  of September 22, 1995  among the Registrant, R.E.  Turner        *
              and  certain associates  and affiliates  of R.E.  Turner (which  is incorporated  herein by
              reference to Exhibit 10(a) to the Registrant's  Current Report on Form 8-K dated  September
              22, 1995 (the 'September 1995 Form 8-K')).
 2.3          Amended and Restated LMC Agreement dated as of September 22, 1995, among the Registrant, TW        *
              Inc.,  Liberty  Media Corporation  ('Liberty'), TCI  Turner Preferred,  Inc., Communication
              Capital Corp. and United Turner Investment, Inc. (which is incorporated herein by reference
              to Exhibit 10(a) to the December 1995 Form 8-K).
 3.(i)(a)     Restated Certificate of  Incorporation of  the Registrant as  filed with  the Secretary  of        *
              State  of the State of Delaware on May  26, 1993 (which is incorporated herein by reference
              to Exhibit 3 to the Registrant's Quarterly Report  on Form 10-Q for the quarter ended  June
              30, 1993 (the 'June 1993 Form 10-Q').
 3.(i)(b)     Certificate  of Ownership  and Merger merging  TWE Holdings  Inc. into Time  Warner Inc. as        *
              filed with the Secretary of State  of the State of Delaware  on October 13, 1993 (which  is
              incorporated  herein by reference to Exhibit 3.(i)(b)  to the Registrant's Annual Report on
              Form 10-K for the year ended December 31, 1993 (the '1993 Form 10-K')).
 3.(i)(c)     Certificate of the  Voting Powers, Designations,  Preferences and Relative,  Participating,        *
              Optional and Other Special Rights and Qualifications, Limitations or Restrictions of Series
              A Participating Cumulative Preferred Stock of the Registrant as filed with the Secretary of
              State  of  the State  of Delaware  on January  26,  1994 (which  is incorporated  herein by
              reference to Exhibit 3.(i)(c) to the 1993 Form 10-K).
 3.(i)(d)     Certificate of the  Voting Powers, Designations,  Preferences and Relative,  Participating,
              Optional  or Other Special Rights, and Qualifications, Limitations or Restrictions thereof,
              of Series C Convertible Preferred  Stock of the Registrant as  filed with the Secretary  of
              State of the State of Delaware on May 1, 1995.
 3.(i)(e)     Certificate  of the Voting  Powers, Designations, Preferences  and Relative, Participating,
              Optional or Other Special Rights, and Qualifications, Limitations or Restrictions  thereof,
              of  Series D Convertible Preferred  Stock of the Registrant as  filed with the Secretary of
              State of the State of Delaware on July 6, 1995.
 3.(i)(f)     Certificate of the  Voting Powers, Designations,  Preferences and Relative,  Participating,
              Optional  or Other Special Rights, and Qualifications, Limitations or Restrictions thereof,
              of Series E Convertible Preferred  Stock of the Registrant as  filed with the Secretary  of
              State of the State of Delaware on January 4, 1996.
 3.(i)(g)     Certificate  of the Voting  Powers, Designations, Preferences  and Relative, Participating,
              Optional or Other Special Rights, and Qualifications, Limitations or Restrictions  thereof,
              of  Series F Convertible Preferred  Stock of the Registrant as  filed with the Secretary of
              State of the State of Delaware on January 4, 1996.
 3.(i)(h)     Certificate of Designations of  Series G Convertible Preferred  Stock of the Registrant  as        *
              filed  with the Secretary of State of the State  of Delaware on September 5, 1995 (which is
              incorporated herein by reference to Exhibit 4(a) to Registrant's Current Report on Form 8-K
              dated August 31, 1995 (the 'August 1995 Form 8-K')).
 3.(i)(i)     Certificate of Designations of  Series H Convertible Preferred  Stock of the Registrant  as        *
              filed  with the Secretary of State of the State  of Delaware on September 5, 1995 (which is
              incorporated herein by reference to Exhibit 4(b) to the August 1995 Form 8-K).
 3.(i)(j)     Certificate of Designations of  Series I Convertible Preferred  Stock of the Registrant  as
              filed with the Secretary of State of the State of Delaware on October 2, 1995.
 3.(ii)       By-laws  of the Registrant, as amended through March 18, 1993 (which is incorporated herein        *
              by reference to Exhibit  3.3 to the Registrant's  Annual Report on Form  10-K for the  year
              ended December 31, 1992 (the '1992 Form 10-K')).
</TABLE>
 
                                       i
<PAGE>
 
<PAGE>
 
<TABLE>
<CAPTION>
                                                                                                            SEQUENTIAL
  EXHIBIT                                                                                                      PAGE
  NUMBER                                              DESCRIPTION                                             NUMBER
-----------   -------------------------------------------------------------------------------------------   ----------
<C>           <S>                                                                                           <C>
 4.1          Specimen  Certificate of  the Registrant's  Common Stock  (which is  incorporated herein by        *
              reference to Exhibit 4.1 to the Registrant's Annual Report on Form 10-K for the year  ended
              December 31, 1991 (the '1991 Form 10-K').
 4.2          Amended  and Restated Declaration of  Trust of Time Warner  Financing Trust (the 'Financing
              Trust') dated  as of  August 15,  1995,  among the  trustees of  the Financing  Trust,  the
              Registrant  and the holders  of undivided beneficial  interests in assets  of the Financing
              Trust, relating to the $1.24 Preferred Exchangeable Redemption Cumulative Securities of the
              Financing Trust (the 'PERCS'), including, as exhibits thereto, the Restated Certificate  of
              Trust  of the Financing Trust, the Terms of the Preferred Securities (including the Form of
              Certificate) and the Terms of the Common Securities (including the Form of Certificate).
 4.3          Indenture dated  as of  August  15, 1995,  between the  Registrant  and Chemical  Bank,  as
              trustee,  relating to the Registrant's 4% Subordinated  Notes due December 23, 1997, issued
              in connection with the PERCS, including, as Exhibit A thereto, the Form of Note.
 4.4          Guarantee Agreement dated as of August 15, 1995, executed and delivered by the  Registrant,
              as  guarantor, and The First National  Bank of Chicago, as trustee,  for the benefit of the
              holders of the PERCS.
 4.5          Amended and Restated Declaration of Trust of Time Warner Capital I ('Time Warner  Capital')
              dated as of December 5, 1995, among the trustees of Time Warner Capital, the Registrant and
              the  holders  of undivided  beneficial  interests in  the  assets of  Time  Warner Capital,
              relating to the 8 7/8%  Preferred Trust Securities of  Time Warner Capital (the  'Preferred
              Trust Securities'), including, as exhibits thereto, the Certificate of Trust of Time Warner
              Capital,  the Terms of the Preferred Securities (including the Form of Certificate) and the
              Terms of the Common Securities (including the Form of Certificate).
 4.6          Indenture dated  as of  December 5,  1995, between  the Registrant  and Chemical  Bank,  as
              trustee, relating to the issuance of the Preferred Trust Securities.
 4.7          First  Supplemental Indenture  dated as  of December  5, 1995,  between the  Registrant and
              Chemical Bank, as trustee, relating to the Registrant's 8 7/8% Subordinated Debentures  due
              December  31, 2025, issued in connection with the Preferred Trust Securities, including, as
              Exhibit A thereto, the Form of Debenture.
 4.8          Guarantee Agreement dated as of December 5, 1995, executed and delivered by the Registrant,
              as guarantor, and The First  National Bank of Chicago, as  trustee, for the benefit of  the
              holders of the Preferred Trust Securities.
 4.9          Rights  Agreement dated as of January 20, 1994 between the Registrant and Chemical Bank, as        *
              Rights Agent (which is incorporated herein by reference to Exhibit 4(a) to the Registrant's
              Current Report on Form 8-K dated January 20, 1994).
 4.10         Indenture dated as of April 30, 1992, as amended by the First Supplemental Indenture, dated        *
              as of June 30, 1992, among Time Warner Entertainment Company, L.P. ('TWE'), the Registrant,
              certain of its subsidiaries party  thereto and The Bank of  New York, as Trustee (which  is
              incorporated  herein by reference to  Exhibits 10(g) and 10(h)  to the Registrant's Current
              Report on Form 8-K dated July 14, 1992 (the 'July 1992 Form 8-K').
 4.11         Second Supplemental  Indenture dated  as of  December 9,  1992 among  TWE, the  Registrant,        *
              certain  of its subsidiaries party thereto  and The Bank of New  York, as Trustee (which is
              incorporated herein by  reference to Exhibit  4.2 to  Amendment No. 1  to the  Registration
              Statement  on Form  S-4 Reg.  No. 33-67688 of  TWE filed  with the  Securities and Exchange
              Commission (the 'Commission') on October 25, 1993 (the '1993 TWE S-4')).
 4.12         Third Supplemental  Indenture dated  as of  October  12, 1993  among TWE,  the  Registrant,        *
              certain  of its subsidiaries party thereto  and The Bank of New  York, as Trustee (which is
              incorporated herein by reference to Exhibit 4.3 to the 1993 TWE S-4).
 4.13         Fourth Supplemental Indenture dated as of March 29, 1994 among TWE, the Registrant, certain        *
              of its  subsidiaries  party  thereto and  The  Bank  of  New York,  as  Trustee  (which  is
              incorporated herein by reference to Exhibit 4.4 to TWE's Annual Report on Form 10-K for the
              year ended December 31, 1993 ('TWE's 1993 Form 10-K')).
</TABLE>
 
                                       ii
<PAGE>
 
<PAGE>
 
<TABLE>
<CAPTION>
                                                                                                            SEQUENTIAL
  EXHIBIT                                                                                                      PAGE
  NUMBER                                              DESCRIPTION                                             NUMBER
-----------   -------------------------------------------------------------------------------------------   ----------
<C>           <S>                                                                                           <C>
 4.14         Fifth  Supplemental Indenture  dated as  of December  28, 1994  among TWE,  the Registrant,        *
              certain of its subsidiaries party  thereto and The Bank of  New York, as Trustee (which  is
              incorporated herein by reference to Exhibit 4.5 to TWE's Annual Report on Form 10-K for the
              year ended December 31, 1994 ('TWE's 1994 Form 10-K')).
 4.15         Indenture  dated as  of October 15,  1985 between  the Registrant and  Marine Midland Bank,        *
              N.A., as successor Trustee (which  is incorporated herein by  reference to Exhibit 4(a)  to
              the  Registrant's  Registration  Statement on  Form  S-3  Reg. No.  33-724  filed  with the
              Commission on October 8, 1985).
 4.16         Indenture dated as  of October 15,  1992, as  amended by the  First Supplemental  Indenture        *
              dated  as of December 15, 1992, as  supplemented by the Second Supplemental Indenture dated
              as of January  15, 1993, between  the Registrant and  Chemical Bank, as  Trustee (which  is
              incorporated herein by reference to Exhibit 4.10 to the 1992 Form 10-K).
 4.17         Indenture dated as of January 15, 1993 between the Registrant and Chemical Bank, as Trustee        *
              (which is incorporated herein by reference to Exhibit 4.11 to the 1992 Form 10-K).
 4.18         First Supplemental Indenture dated as of June 15, 1993, between the Registrant and Chemical        *
              Bank,  as Trustee, to the Indenture dated as of January 15, 1993 between the Registrant and
              Chemical Bank, as Trustee, including as Exhibit A the Form of Liquid Yield Option Note  due
              2013 (which is incorporated herein by reference to Exhibit 4 to the June 1993 Form 10-Q).
10.1          Time  Warner 1981 Stock Option Plan, as amended through May 14, 1991 (which is incorporated        *
              herein by reference to Exhibit 10.1 to the 1991 Form 10-K).
10.2          Time Warner 1986 Stock Option Plan, as amended through May 14, 1991 (which is  incorporated        *
              herein by reference to Exhibit 10.2 to the 1991 Form 10-K).
10.3          1988  Stock Incentive Plan of Time  Warner Inc., as amended through  May 14, 1991 (which is        *
              incorporated herein by reference to Exhibit 10.3 to the 1991 Form 10-K).
10.4          Time Warner  1989  Stock  Incentive  Plan,  as amended  through  May  14,  1991  (which  is        *
              incorporated herein by reference to Exhibit 10.4 to the 1991 Form 10-K).
10.5          Time  Warner 1989 WCI Replacement  Stock Option Plan, as  amended through February 14, 1995        *
              (which is  incorporated herein  by reference  to Exhibit  10.5 to  the Registrant's  Annual
              Report on Form 10-K for the year ended December 31, 1994 (the '1994 Form 10-K')).
10.6          Time Warner 1989 Lorimar Non-Employee Replacement Stock Option Plan, as amended through May        *
              14,  1991 (which is  incorporated herein by  reference to Exhibit  10.6 to the Registrant's
              1991 Form 10-K).
10.7          Time Warner  1994  Stock Option  Plan,  as amended  through  November 17,  1994  (which  is        *
              incorporated herein by reference to Exhibit 10.7 to the 1994 Form 10-K).
10.8          Time Warner Corporate Group Stock Incentive Plan, as amended through May 14, 1991 (which is        *
              incorporated herein by reference to Exhibit 10.8 to the 1994 Form 10-K).
10.9          Time  Warner  1988 Restricted  Stock Plan  for Non-Employee  Directors, as  amended through        *
              November 18,  1993 (which  is  incorporated herein  by reference  to  Exhibit 10.8  to  the
              Registrant's  Annual Report on  Form 10-K for the  year ended December  31, 1993 (the '1993
              Form 10-K').
10.10         Deferred Compensation Plan for  Directors of Time Warner,  as amended through November  18,        *
              1993 (which is incorporated herein by reference to Exhibit 10.9 to the 1993 Form 10-K).
10.11         Time  Warner Retirement Plan for  Outside Directors, as amended  through September 21, 1989        *
              (which is incorporated herein by reference to Exhibit 10.10 to the 1991 Form 10-K).
10.12         Amended and Restated Time Warner  Inc. Annual Bonus Plan  for Executive Officers (which  is        *
              incorporated  by reference to Annex A to  the Registrant's definitive Proxy Statement dated
              March  30,  1995,  used  in  connection  with  the  Registrant's  1995  Annual  Meeting  of
              Stockholders).
</TABLE>
 
                                      iii
<PAGE>
 
<PAGE>
 
<TABLE>
<CAPTION>
                                                                                                            SEQUENTIAL
  EXHIBIT                                                                                                      PAGE
  NUMBER                                              DESCRIPTION                                             NUMBER
-----------   -------------------------------------------------------------------------------------------   ----------
<C>           <S>                                                                                           <C>
10.13         Amended  and Restated Employment  and Termination Agreement  dated as of  March 3, 1989, as        *
              amended and restated as of  January 10, 1990, between the  Registrant and J. Richard  Munro
              (which  is incorporated  herein by  reference to Exhibit  10.26 to  the Registrant's Annual
              Report on Form 10-K for the year ended December 31, 1989).
10.14         Amended and  Restated Employment  Agreement dated  as  of November  15, 1990,  between  the        *
              Registrant  and Gerald M. Levin (which is incorporated herein by reference to Exhibit 10.26
              to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1990.
10.15         Employment Agreement made  as of  May 17,  1995 between the  Registrant and  Peter R.  Haje        *
              (which  is incorporated herein by  reference to Exhibit 10.5  to the Registrant's Quarterly
              Report on Form 10-Q for the quarter ended June 30, 1995).
10.16         Employment Agreement made  as of November  2, 1994  between the Registrant  and Richard  D.        *
              Parsons (which is incorporated herein by reference to Exhibit 10.17 to the 1994 Form 10-K).
10.17         Employment  Agreement effective as of January 1, 1995 between the Registrant and Richard J.        *
              Bressler (which is  incorporated herein  by reference  to Exhibit  10.18 to  the 1994  Form
              10-K).
10.18         Amended  and Restated  Employment Agreement  effective as  of January  1, 1994  between the        *
              Registrant and Tod R. Hullin (which is incorporated herein by reference to Exhibit 10.19 to
              the 1994 Form 10-K).
10.19         Amended and  Restated Employment  Agreement effective  as of  January 1,  1994 between  the        *
              Registrant and Philip R. Lochner, Jr. (which is incorporated herein by reference to Exhibit
              10.20 to the 1994 Form 10-K).
10.20         Employment  Agreement dated as  of February 1,  1992 between the  Registrant and Timothy A.        *
              Boggs (which is incorporated herein by reference to Exhibit 10.21 to the 1992 Form 10-K).
10.21         The Time Warner Deferred Compensation Plan (Amended and Restated as of November 1, 1995).
10.22         Travel and Accident  Insurance Policy  issued by  INA Life  Insurance Company  of New  York        *
              (which  is incorporated by reference to Exhibit  10.44 to the Registrant's Annual Report on
              Form 10-K for the year ended December 31, 1988).
10.23         Credit Agreement  dated  as  of  June  30,  1995  among  TWE,  Time  Warner  Entertainment-        *
              Advance/Newhouse  Partnership  ('TWE-AN Partnership')  and  TWI Cable  Inc.,  as borrowers,
              Chemical, as administrative agent, Bank of America National Trust and Savings  Association,
              The  Bank of New York and  Morgan Guaranty Trust Company of  New York, as documentation and
              syndication agents,  and the  lending  institutions named  therein (which  is  incorporated
              herein  by reference to Exhibit 10(a) to the  Registrant's Current Report on Form 8-K dated
              July 6, 1995).
10.24         Agreement of Limited Partnership, dated  as of October 29, 1992,  as amended by the  Letter        *
              Agreement, dated February 11, 1992, and the Letter Agreement dated June 23, 1992, among the
              Registrant  and  certain of  its subsidiaries,  ITOCHU  Corporation ('ITOCHU')  and Toshiba
              Corporation ('Toshiba') (which is  incorporated herein by reference  to Exhibit (A) to  the
              Registrant's Current Report on Form 8-K dated October 29, 1991 and Exhibits 10(b) and 10(c)
              to the July 1992 Form 8-K).
10.25         Admission  Agreement, dated as  of May 16,  1993 between TWE  and U S  WEST, Inc. (which is        *
              incorporated herein by reference to Exhibit 10(a) to TWE's Current Report on Form 8-K dated
              May 16, 1993 (the 'TWE May 1993 Form 8-K')).
10.26         Amendment Agreement, dated as of September 14, 1993, among ITOCHU, Toshiba, the Registrant,        *
              US WEST, Inc. and  certain of their respective  subsidiaries, amending the TWE  Partnership
              Agreement,  as amended (which is  incorporated herein by reference  to Exhibit 3.2 to TWE's
              1993 Form 10-K).
10.27         Letter Agreement,  dated  May  16,  1993,  between the  Registrant  and  ITOCHU  (which  is        *
              incorporated herein by reference to Exhibit 10(b) to the TWE May 1993 Form 8-K).
10.28         Letter  Agreement,  dated  May 16,  1993,  between  the Registrant  and  Toshiba  (which is        *
              incorporated herein by reference to Exhibit 10(c) to the TWE May 1993 Form 8-K).
</TABLE>
 
                                       iv
<PAGE>
 
<PAGE>
 
<TABLE>
<CAPTION>
                                                                                                            SEQUENTIAL
  EXHIBIT                                                                                                      PAGE
  NUMBER                                              DESCRIPTION                                             NUMBER
-----------   -------------------------------------------------------------------------------------------   ----------
<C>           <S>                                                                                           <C>
10.29         Restructuring Agreement dated as of August 31, 1995 among the Registrant, ITOCHU and ITOCHU        *
              Entertainment Inc. (which is incorporated herein by reference to Exhibit 2(a) to the August
              1995 Form 8-K).
10.30         Restructuring Agreement dated  as of  August 31, 1995  between the  Registrant and  Toshiba        *
              (including  Form  of Registration  Rights Agreement,  between  the Registrant  and Toshiba)
              (which is incorporated herein by reference to Exhibit 2(b) to the August 1995 Form 8-K).
10.31         Option Agreement, dated as of September 15, 1993  between TWE and U S WEST, Inc. (which  is        *
              incorporated herein by reference to Exhibit 10.9 to TWE's 1993 Form 10-K).
10.32         Promissory  Note  of  U  S WEST  Cable  Corporation,  dated September  15,  1993  (which is        *
              incorporated herein by reference to Exhibit 10.10 to TWE's 1993 Form 10-K).
10.33         Guarantee, dated as of September 15, 1993, by U S WEST, Inc. of the Promissory Note of U  S        *
              WEST Cable Corporation, dated September 15, 1993 (which is incorporated herein by reference
              to Exhibit 10.11 to TWE's 1993 Form 10-K).
10.34         Contribution Agreement dated as of September 9, 1994 among TWE, Advance Publications, Inc.,        *
              Newhouse  Broadcasting Corporation, Advance/Newhouse  Partnership ('Advance/Newhouse'), and
              TWE-A/N Partnership (which is  incorporated herein by reference  to Exhibit 10(a) to  TWE's
              Current Report on Form 8-K dated September 9, 1994 ('TWE's September 1994 Form 8-K')).
10.35         Partnership  Agreement,  dated as  of September  9, 1994  between TWE  and Advance/Newhouse        *
              (which is incorporated herein by  reference to Exhibit 10(b)  to TWE's September 1994  Form
              8-K).
10.36         Letter  Agreement dated  April 1, 1995  among TWE,  Advance/Newhouse, Advance Publications,        *
              Inc. and Newhouse Broadcasting  Corporation (which is incorporated  herein by reference  to
              Exhibit 10(c) to TWE's Current Report on Form 8-K dated April 1, 1995).
10.37         Agreement  and Plan  of Merger  dated as  of January  26, 1995,  among KBLCOM Incorporated,        *
              Houston Industries  Incorporated,  Registrant  and  TW KBLCOM  Acquisition  Sub  (which  is
              incorporated herein by reference to Exhibit 2(a) to the Registrant's Current Report on Form
              8-K dated January 26, 1995).
10.38         Agreement  and Plan of  Merger dated as  of February 6,  1995, among Cablevision Industries        *
              Corporation ('CVI'), Alan Gerry, Registrant and  TW CVI Acquisition Corp. ('TWCVI')  (which
              is  incorporated herein by reference to Exhibit  2(a) to the Registrant's Current Report on
              Form 8-K dated February 6, 1995 (the 'February 1995 Form 8-K')).
10.39         Agreement and Plan  of Merger dated  as of  February 6, 1995  among Cablevision  Properties        *
              Inc.,  Alan Gerry and Registrant (which is incorporated herein by reference to Exhibit 2(b)
              to the February 1995 Form 8-K).
10.40         Agreement and Plan  of Merger dated  as of  February 6, 1995  among Cablevision  Management        *
              Corporation  of Philadelphia,  Alan Gerry and  Registrant (which is  incorporated herein by
              reference to Exhibit 2(c) to the February 1995 Form 8-K).
10.41         Agreement and Plan of Merger dated as  of December 8, 1995 among Cablevision Industries  of        *
              Middle  Florida, Inc., Alan Gerry, the Registrant  and CVI (which is incorporated herein by
              reference to Exhibit 2(c) to the Registrant's  Current Report on Form 8-K dated January  4,
              1996 (the 'January 1996 Form 8-K')).
10.42         Purchase  Agreement dated as of February 6, 1995, as amended and restated as of December 8,        *
              1995 among Alan  Gerry, the  corporations and partnerships  listed on  the signature  pages
              thereof  as the Purchase Gerry Companies and  the Direct Holders, and the Registrant (which
              is incorporated herein by reference to Exhibit 2(d) to the January 1996 Form 8-K).
10.43         Purchase Agreement dated as of February 6, 1995 among Alan Gerry, Cablevision Industries of        *
              Delaware,  Inc.,  ARA  Cablevision   Inc.,  Cablevision  Industries  Limited   Partnership,
              Cablevision  Industries of Tennessee  L.P., Cablevision Industries  of Saratoga Associates,
              Cablevision  of  Fairhaven/Acushnet,  Cablevision  Industries  of  Middle  Florida,   Inc.,
              Cablevision  Industries of  Florida, Inc. and  Registrant (which is  incorporated herein by
              reference to Exhibit 2(d) to the February 1995 Form 8-K).
</TABLE>
 
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<TABLE>
<CAPTION>
                                                                                                            SEQUENTIAL
  EXHIBIT                                                                                                      PAGE
  NUMBER                                              DESCRIPTION                                             NUMBER
-----------   -------------------------------------------------------------------------------------------   ----------
<C>           <S>                                                                                           <C>
10.44         Supplemental Agreement  dated as  of February  6,  1995 including  Annex A  thereto,  among        *
              Cablevision   Industries  Corporation,  Cablevision  Industries   of  Delaware,  Inc.,  ARA
              Cablevision Inc.,  Cablevision Industries  Limited Partnership,  Cablevision Industries  of
              Tennessee   L.P.,   Cablevision   Industries  of   Saratoga   Associates,   Cablevision  of
              Fairhaven/Acushnet, Cablevision Industries of Middle Florida, Inc., Cablevision  Industries
              of  Florida, Inc., Alan Gerry,  Registrant and TW CVI  Acquisition Sub. ('TWCVI') (which is
              incorporated herein by reference to Exhibit 2(e) to the February 1995 Form 8-K).
10.45         Amendment Agreement dated as of December 8, 1995 to the Supplemental Agreement dated as  of        *
              February  6, 1995, including Annex A thereto,  among CVI, the corporations and partnerships
              listed on the signature pages thereof as  the Gerry Companies and the Direct Holders,  Alan
              Gerry,  the Registrant and TWCVI (which is incorporated herein by reference to Exhibit 2(f)
              to the January 1996 Form 8-K).
21            Subsidiaries of the Registrant.
23.1          Consent of Ernst & Young LLP, Independent Auditors.
23.2          Consent of Price Waterhouse LLP, Independent Accountants.
24            Powers of Attorney, dated as of March 21, 1996.
27            Financial Data Schedule.
99.1          The 1994 financial statements  of the Time  Warner Service Partnerships  and the report  of        *
              independent  auditors thereon (which is incorporated herein by reference to TWE's 1994 Form
              10-K).
99.2          The unaudited  financial  statements  of  the Time  Warner  Service  Partnerships  for  the        *
              quarterly period ended September 30, 1995 (which is incorporated herein by reference to the
              Current  Report on  Form 8-K  of TWE  dated November  28, 1995  ('TWE's November  1995 Form
              8-K')).
99.3          The 1994 financial statements  and financial statement  schedule of Paragon  Communications        *
              and  the  report  of  independent  accountants thereon  (which  is  incorporated  herein by
              reference to TWE's 1994 10-K).
99.4          The unaudited financial statements of Paragon Communications for the quarterly period ended        *
              June 30, 1995 (which is incorporated herein by reference to TWE's November 1995 Form 8-K).
99.5          Complaint in U S WEST,  Inc. et al. v.  Time Warner Inc., et  al. (Civil Action No.  14555)        *
              filed  by U S WEST, Inc. in  the Court of Chancery of the  State of Delaware in and for New
              Castle County (which is incorporated herein by reference to Exhibit 99(c) to the  September
              1995 Form 8-K).
99.6          Amended  and Supplemental Complaint in U  S WEST, Inc., et al.  v. Time Warner Inc., et al.
              (Civil Action No. 14555) filed by U S WEST,  Inc. in the Court of Chancery of the State  of
              Delaware in and for New Castle County.
99.7          Annual  Report on Form 11-K of  the Time Warner Employees' Savings  Plan for the year ended
              December 30, 1995 (to be filed by amendment).
99.8          Annual Report on Form 11-K of the Time  Warner Thrift Plan for the year ended December  31,
              1995 (to be filed by amendment).
99.9          Annual  Report on Form 11-K of the Cable Employees Savings Plan for the year ended December
              31, 1995 (to be filed by amendment).
99.10         Annual Report on Form 11-K of the  Paragon Communications Employees Stock Savings Plan  for
              the year ended December 31, 1995 (to be filed by amendment).
</TABLE>
 
------------
 
*  Incorporated by reference.
 
The  Registrant  hereby  agrees  to  furnish  to  the  Securities  and  Exchange
Commission at  its request  copies of  long-term debt  instruments defining  the
rights  of holders of  the Registrant's outstanding long-term  debt that are not
required to be filed herewith.
 
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