<PAGE>
 
 
 
 
                                      LOGO
 
                                PROXY STATEMENT
 
                          FOR THE 1998 ANNUAL MEETING
 
                                 AND FORM 10-K
 
                                      1997
<PAGE>
 
                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549
 
                                   FORM 10-K
(MARK ONE)
[ X ]
  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
  ACT OF 1934
  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
                                      OR
[ ]
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
  EXCHANGE ACT OF 1934
  FOR THE TRANSITION PERIOD FROM            TO
 
                        COMMISSION FILE NUMBER 1-06590
 
                                     LOGO
                           COX COMMUNICATIONS, INC.
            (Exact name of registrant as specified in its charter)
 
               DELAWARE                              58-2112281
    (State or other jurisdiction of     (I.R.S. Employer Identification No.)
    incorporation or organization)
 
    1400 LAKE HEARN DRIVE, ATLANTA,                     30319
                GEORGIA
    (Address of principal executive                  (Zip Code)
               offices)
 
      REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (404) 843-5000
 
          SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
                     Class A Common Stock, $1.00 par value
 
          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 (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO
SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS.
   YES [X] NO [_]
 
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405
OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENTS TO
THIS FORM 10-K. [X]
 
AS OF MARCH 10, 1998, THE AGGREGATE MARKET VALUE OF THE CLASS A COMMON STOCK
HELD BY NON-AFFILIATES OF THE REGISTRANT WAS $2,651,419,494 BASED ON THE
CLOSING PRICE ON THE NEW YORK STOCK EXCHANGE ON SUCH DATE.
 
THERE WERE 257,452,514 SHARES OF CLASS A COMMON STOCK OUTSTANDING AS OF MARCH
10, 1998.
THERE WERE 13,798,896 SHARES OF CLASS C COMMON STOCK OUTSTANDING AS OF MARCH
10, 1998.
 
                      DOCUMENTS INCORPORATED BY REFERENCE
 
Portions of the 1997 Annual Report to Stockholders are incorporated by
reference into Part II. Portions of the Proxy Statement for the 1998 Annual
Meeting of Stockholders are incorporated by reference into Part III.
<PAGE>
 
                            COX COMMUNICATIONS, INC.
 
                          1997 FORM 10-K ANNUAL REPORT
 
                               TABLE OF CONTENTS
 
<TABLE>
<CAPTION>
                                                                            PAGE
                                                                            ----
 <C>      <S>                                                               <C>
                                     PART I
 Item 1.  Business.......................................................     3
 Item 2.  Properties.....................................................    31
 Item 3.  Legal Proceedings..............................................    32
 Item 4.  Submission of Matters to a Vote of Security Holders............    32
                                    PART II
 Item 5.    Market for Registrant's Common Equity and Related Stockholder
          Matters........................................................    32
 Item 6.  Selected Financial Data........................................    33
 Item 7.  Management's Discussion and Analysis of Financial Condition and
          Results of Operations..........................................    34
 Item 7a. Quantitative and Qualitative Disclosure about Market Risk......    42
 Item 8.  Financial Statements and Supplementary Data....................    43
 Item 9.  Changes in and Disagreements with Accountants on Accounting and
          Financial Disclosure...........................................    71
                                    PART III
 Item 10. Directors and Executive Officers of the Registrant.............    71
 Item 11. Executive Compensation.........................................    71
 Item 12. Security Ownership of Certain Beneficial Owners and Management.    71
 Item 13. Certain Relationships and Related Transactions.................    71
                                    PART IV
 Item 14.  Exhibits, Financial Statement Schedules and Reports on Form 8-
          K..............................................................    71
 SIGNATURES...............................................................   75
</TABLE>
 
                                       2
<PAGE>
 
                                    PART I
 
ITEM 1. BUSINESS
 
  Cox Communications, Inc. ("Cox") is among the nation's largest broadband
communications companies with (i) U.S broadband network operations and (ii)
investments in cable television programming, telecommunications and technology
and broadband networks.
 
  Cox is an indirect 75.0% owned subsidiary of Cox Enterprises, Inc. ("CEI").
CEI, a privately-held corporation headquartered in Atlanta, Georgia, is one of
the largest media companies in the United States with consolidated revenues in
1997 of approximately $4.9 billion. CEI, which has an 100-year history in the
media and communications industry, publishes 16 daily newspapers and owns or
operates 11 television stations in addition to its interest in Cox. Through
its indirect majority-owned subsidiary, Cox Radio, Inc., CEI owns or operates
54 radio broadcast stations pending closing of previously announced
transactions. Through Manheim Auctions, CEI is also the world's largest
operator of auto auctions.
 
  Cox's business strategy includes the development of new and advanced
communications services for its customers by capitalizing on its highly
clustered cable television systems, its industry leading position in upgrading
the technological capabilities of its broadband networks, and its commitment
to customer service. Cox believes that an integrated package of existing
multichannel video, new services such as digital video, high-speed Internet
access and local and long-distance telephone, and commercial competitive local
exchange carrier operations, will enhance its ability to acquire and retain
customers while increasing revenues per customer.
 
  In addition, Cox has sought to utilize its expertise and position as one of
the nation's premier cable television companies to invest in programming,
telecommunications and technology companies which are complementary to Cox's
business strategy. Cox believes that these investments have contributed
substantially to the growth of its core broadband communications business and
that its leadership position in broadband communications has facilitated the
growth of these investments. Cox seeks to utilize insights gained from the
integrated operations of its cable television systems and related programming,
telecommunications and technology investments to continue its leadership in
the broadband communications industry by anticipating and capitalizing upon
long-term industry trends.
 
U.S. BROADBAND NETWORKS
 
BUSINESS STRATEGY
 
  Cox's strategy for its U.S. broadband network is to capitalize on the
capabilities of its advanced broadband platform and the strength of its
current cable television business to provide its residential and commercial
customers with an integrated package of existing multichannel video and new
services, including digital video, high-speed Internet access and local and
long distance telephone services. Cox believes that the long-term competitive
advantages of clustering, its aggressive investment in the technological
capabilities of its broadband network and its commitment to customer service
will enhance Cox's ability to continue to grow its core cable television
operations and offer this package of new services to existing and new
customers.
 
  CLUSTERING. As an integral part of its broadband communications strategy,
Cox has continually sought the advantages and efficiencies of operating large
cable television clusters. As of December 31, 1997, approximately 85% of Cox's
customers were served by Cox's nine largest clusters which averaged over
300,000 customers each. See "--Cable Television Business--Operating Data."
Large cable television clusters enable Cox to reduce expenses through the
consolidation of marketing and support functions and to place more experienced
management teams at the system level who are better equipped to meet the new
regulatory and competitive challenges of today's telecommunications industry.
Large operating clusters will also increase the speed and effectiveness of
Cox's new product and services deployment, enhancing its ability to increase
both customers and revenues.
 
 
                                       3
<PAGE>
 
  Cox has and will continue to make strategic acquisitions of contiguous cable
television systems to create and expand large clusters, while disposing of
cable operations in non-strategic regions. In the past year, Cox has made the
following acquisitions and exchanges of cable television systems:
 
  In January 1997, Cox and Tele-Communications, Inc. ("TCI") exchanged certain
cable television systems with the result that Cox increased the size of its
existing clusters in Hampton Roads, Phoenix, New Orleans, Rhode Island, and
Omaha and disposed of several non-strategic cable television systems. Cox and
TCI each exchanged more than 300,000 customers.
 
  In January 1997, Cox exchanged its western Massachusetts and Weymouth,
Massachusetts cable television systems serving approximately 48,000 customers
for the MediaOne of Delaware, Inc., formally Continental Cablevision, Inc.,
("MediaOne") James City and York County, Virginia and Pawtucket, Rhode Island
systems serving approximately 49,000 customers. This exchange resulted in an
increase to the size of Cox's existing clusters in Hampton Roads and New
England.
 
  In March 1997, Cox exchanged its Myrtle Beach, South Carolina cable
television system serving approximately 42,200 customers for Time Warner
Entertainment Company L.P.'s ("Time Warner") Hampton and Williamsburg,
Virginia systems serving approximately 45,300 customers. This transaction also
included a Texas cable television system serving approximately 7,000 customers
which was purchased by Cox and immediately traded to Time Warner. This
exchange increased the size of Cox's existing cluster in Hampton Roads.
 
  In December 1997, Cox exchanged its Lafayette, Indiana cable television
system serving approximately 38,000 customers for a suburban Phoenix cable
system serving approximately 36,000 customers. This exchange increased the
size of Cox's existing cluster in Phoenix.
 
  TECHNOLOGY AND CAPITAL IMPROVEMENTS. Cox emphasizes high technical standards
for its cable television clusters. Cox continues to deploy fiber optic cable
and to upgrade the technical quality of its hybrid fiber-coaxial ("HFC")
broadband network. The result is a significant increase in network capacity,
quality and reliability, facilitating the delivery of additional programming
and services such as digital video, high-speed Internet access and local and
long-distance telephone services. Cox's aggressive investment in its broadband
network upgrade will allow it to offer these services more quickly.
 
  Cox strives to maintain the highest technological standards in the industry.
Cox's U.S. cable television systems have bandwidth capacities ranging from 
400 MHz to 750 MHz, which permits carriage of 54 to 112 analog channels. At the
end of 1997, approximately 68% of Cox's network had bandwidth capacity of
550 MHz or 750 MHz. Cox anticipates that approximately 82% of its network will
have bandwidth capacity of 550 MHz or 750 MHz by the end of 1998. In Cox's
nine largest systems, by the end of 1998, Cox anticipates that approximately
67% of its customers will have access to 750 MHz capacity and approximately
2.5 million customers will be able to receive two-way services.
 
  In addition to increasing channel capacity, Cox's aggressive investment in
technology has improved the reliability of its service. Cox's HFC broadband
networks had a 99.991% reliability rate in 1997, as measured by average
customer minutes of outage per year, which exceeds the BellCore standard of
99.989% utilized by the RBOCs. Cox's fiber optic network design of ring-in-
ring architecture provides significant improvements over existing non-ring
network architecture in capability, flexibility, and reliability, without
creating additional cost.
 
  CUSTOMER AND COMMUNITY SERVICE. Strong customer service is a key element of
Cox's business strategy to deliver new advanced communications services for
its customers. Cox has always been committed to customer service and has been
recognized by several industry groups as a leader in providing quality
customer service. In 1996, Cox was distinguished by J.D. Power & Associates
for achieving highest overall customer satisfaction among cable television
users in the first study on the cable industry. Cox systems have won the
"Customer is Key Award" nine times, more than all other cable companies
combined. The award is presented by CTAM, the
 
                                       4
<PAGE>
 
marketing society of the cable and telecommunications industries, to recognize
outstanding customer service. Cox anticipates that its high level of customer
satisfaction will help it compete more effectively as it has begun delivering
new services such as digital video, high-speed Internet access and local and
long-distance telephone. Cox places special emphasis on training its customer
contact employees and has developed customer service standards and programs
that exceed national customer service standards developed by the National
Cable Television Association ("NCTA") and the Federal Communications
Commission ("FCC").
 
  A key element of Cox's community service is enhancing education through the
use of cable technology and programming. Cox currently participates in four
education initiatives. First, Cox participates in a national initiative, "Cox
Cable in the Classroom", which provides schools with free basic cable service
and more than 540 hours of commercial-free educational television programming
each month. Second, Cox is participating in the NCTA nationwide initiative
called "Cable's High Speed Connection," branded "Cox Line to Learning"
program, in which major cable companies are providing high-speed Internet
access, free of charge, to each accredited public and private school in their
respective communities where digital services are available. Third, Cox has
established Cox Model Technology Schools in Chula Vista, California, Omaha,
Nebraska, Norfolk, Virginia, and Warwick, Rhode Island where it is testing
future broadband services, such as interactive fiber optic links to local
colleges, to determine their value in the classroom. Additionally, Cox has
established The Multimedia Academy to train educators, students, parents, and
community leaders about the use of multimedia technology as an educational
tool.
 
  ALTERNATIVE REVENUE SOURCES. Implementation of Cox's business strategy will
allow Cox to develop revenue sources ancillary to its core cable television,
telephony and high-speed Internet access businesses. In recent years, Cox has
increasingly generated revenues from additional sources such as advertising,
pay-per-view and home shopping.
 
  Cox derives revenues from the sale of advertising time on satellite-
delivered networks such as ESPN, MTV and CNN. Currently, Cox inserts
advertising on approximately 15 channels in each of its cable television
systems. Local cable television advertising is often more effective and less
expensive than alternative local advertising sources. As such, Cox expects
continued growth in this revenue source. In addition, Cox participates in the
national and regional cable television advertising market through its
investment in National Cable Communications, L.P. ("NCC"), a partnership which
represents cable television companies to advertisers. NCC is the largest
representation firm in spot cable advertising sales.
 
CABLE TELEVISION BUSINESS
 
  Cox's domestic cable television operations represent the core element of its
integrated broadband communications strategy. Cox owns and operates cable
television systems organized into 16 locally managed clusters in 14 states.
These clusters pass approximately 5.0 million homes and provide service to
approximately 3.2 million customers. Cox's U.S. cable television systems are
diversified geographically and are not dependent on the economic viability of
any one particular region.
 
  Cox's U.S. cable television systems offer customers packages of basic and
cable programming services consisting of television signals available off-air,
a limited number of television signals from so-called "superstations,"
numerous satellite-delivered non-broadcast channels (such as Cable News
Network, MTV: Music Television, USA Network, ESPN, Arts and Entertainment
Channel, The Discovery Channel, The Learning Channel, Turner Network
Television and Nickelodeon), displays of information featuring news, weather,
stock and financial market reports and public, governmental and educational
access channels. In some systems, some of these satellite-delivered non-
broadcast services are offered at a per channel charge or are packaged
together to form a tier of services offered at a discount from the combined
per channel rate. Cox's cable television systems also provide premium
television services to their customers for an extra monthly charge. Such
services (including Home Box Office, Showtime and Cinemax) are satellite-
delivered channels that consist principally of feature motion pictures
presented without commercial interruption, sports events, concerts and other
entertainment programming. Customers generally pay initial connection charges
and fixed monthly fees for cable programming and premium television services,
which constitute the principal sources of revenues to Cox.
 
                                       5
<PAGE>
 
  OPERATING DATA. The following table indicates the growth of Cox's cable
television systems by summarizing the number of homes passed by cable, basic
customers, premium service units and penetration levels as of December 31 for
each of the five years set forth below:
 
<TABLE>
<CAPTION>
                            1997       1996       1995       1994       1993
                          ---------  ---------  ---------  ---------  ---------
<S>                       <C>        <C>        <C>        <C>        <C>
Homes passed (a)........  5,023,870  5,016,749  5,005,858  2,878,857  2,838,197
Basic customers (b).....  3,235,338  3,259,384  3,248,759  1,851,726  1,784,337
Basic penetration (c)...       64.4%      65.0%      64.9%      64.3%      62.9%
Premium service units
 (d)....................  1,865,184  2,000,673  1,827,068  1,203,606  1,205,587
Premium penetration (e).       57.7%      61.4%      56.2%      65.0%      67.6%
</TABLE>
--------
(a) A home is deemed to be "passed" if it can be connected to the distribution
    system without any further extension of the distribution plant.
(b) A home with one or more television sets connected to a cable television
    system is counted as one basic service customer.
(c) Basic customers as a percentage of homes passed by cable.
(d) Premium service units include single or multi-channel services offered for
    a monthly fee per service.
(e) Premium service units as a percentage of basic customers. A basic service
    customer may purchase more than one premium service, each of which is
    counted as a separate premium service unit.
 
  The following table is a summary of certain operating data as of December
31, 1997 for Cox's U.S. cable television clusters:
 
<TABLE>
<CAPTION>
                                                               HOMES     BASIC
                                                              PASSED   CUSTOMERS
                                                             --------- ---------
<S>                                                          <C>       <C>
TOP NINE CLUSTERS:
 Phoenix, AZ................................................ 1,061,531   577,862
 San Diego, CA..............................................   701,346   482,086
 New England................................................   610,194   420,396
 Hampton Roads, VA..........................................   593,739   392,008
 New Orleans, LA............................................   455,073   272,931
 Orange County, CA..........................................   324,354   247,267
 Omaha, NE..................................................   246,830   151,345
 Pensacola/Ft. Walton Beach, FL (a).........................   200,368   148,704
 Oklahoma City, OK..........................................   204,449   120,320
                                                             --------- ---------
  Subtotal Top Nine......................................... 4,397,884 2,812,919
OTHER SYSTEMS:
 Central Coast California...................................   131,037    91,375
 Gainesville/Ocala, FL......................................   118,784    87,305
 West Texas.................................................   134,177    78,516
 Middle Georgia.............................................   105,353    72,368
 Cleveland, OH..............................................    98,664    71,917
 Roanoke, VA................................................    78,629    57,576
 Humboldt, CA...............................................    43,495    31,948
                                                             --------- ---------
  Subtotal Other Systems....................................   710,139   491,005
                                                             --------- ---------
TOTAL (INCLUDING FT. WALTON BEACH) (A)...................... 5,108,023 3,303,924
                                                             ========= =========
TOTAL....................................................... 5,023,870 3,235,338
                                                             ========= =========
</TABLE>
--------
(a) Includes the Ft. Walton Beach, FL system which is managed as part of Cox's
    Pensacola cluster. The system is 50% owned by Cox through a partnership
    with Time Warner. This partnership also owns a system in Staten Island, NY
    which is managed by Time Warner.
 
                                       6
<PAGE>
 
  FRANCHISES. Cable television systems are constructed and operated under non-
exclusive franchises granted by local governmental authorities. These
franchises typically contain many conditions, such as time limitations on
commencement and completion of system construction, service standards
including number of channels, types of programming and the provision of free
service to schools and certain other public institutions, and the maintenance
of insurance and indemnity bonds. The provisions of local franchises are
subject to federal regulation under the Cable Communications Policy Act of
1984 (the "1984 Cable Act"), as amended by the Cable Television Consumer
Protection and Competition Act of 1992 (the "1992 Cable Act") and the
Telecommunications Act of 1996 (the "1996 Act").
 
  As of March 1998, Cox held 171 franchises. These franchises provide for the
payment of fees to the issuing authority. The 1984 Cable Act prohibits
franchising authorities from imposing annual franchise fees in excess of 5% of
gross revenues and also permits the cable television system operator to seek
renegotiation and modification of franchise requirements if warranted by
changed circumstances. For each of 1997 and 1996, franchise fee payments made
by Cox averaged approximately 4% of gross revenues.
 
  Cox has never had a franchise revoked. The 1984 Cable Act provides for an
orderly franchise renewal process, and it establishes comprehensive renewal
procedures which require that an incumbent franchisee's renewal application be
assessed on its own merit and not as part of a comparative process with
competing applications. A franchising authority may not unreasonably withhold
the renewal of a franchise. If a franchise renewal is denied and the system is
acquired by the franchise authority or a third party, then the franchise
authority must pay the operator the "fair market value" for the system covered
by the franchise, but with no value allocated to the franchise itself. Cox
believes that it has satisfactory relationships with its franchising
authorities.
 
  PROGRAMMING SUPPLIERS. Cox has various contracts to obtain basic and premium
programming from program suppliers whose compensation is typically based on a
fixed fee per customer or a percentage of Cox's gross receipts for the
particular service. Some program suppliers provide volume discount pricing
structures or offer marketing support to Cox. Cox's programming contracts are
generally for a fixed period of time and are subject to negotiated renewal.
Cox's programming costs have increased in recent years and are expected to
continue to increase due to additional programming being provided to Cox's
customers, increased costs to produce or purchase programming, inflationary
increases and other factors. Increases in the cost of programming services
have been offset in part by additional volume discounts as a result of the
growth of Cox and its success in selling such services to its customers. Cox
believes that it will continue to have access to programming services at
reasonable cost levels.
 
DIGITAL TELEVISION
 
  Digital compression technology currently allows up to 12 digital channels to
be inserted into the space of only one traditional analog channel. Digital
compression will enable Cox to increase the channel capacity of its cable
television systems by approximately 200 channels. Cox believes that the cable
television system upgrades, along with the distribution of digital compression
technology, will provide its customers with greater programming diversity,
better picture quality, improved reliability, and enhanced customer service.
In October 1997, Cox introduced "Cox Digital TV" in Orange County, California
and Cox anticipates that it will be launched in several of the other top nine
clusters during 1998. A Cox Digital TV customer can currently receive up to
200 channels including enhanced pay-per-view service, digital music channels,
new networks grouped by genre and an interactive program guide.
 
HIGH-SPEED INTERNET ACCESS
 
  The use of computers, online services and the Internet has increased
significantly over the last few years. Cox believes in the revenue
opportunities of Internet related services and is taking advantage of these
opportunities by developing and providing high-speed Internet access and work-
at-home services to residential and commercial customers. In December 1996,
Cox launched high-speed Internet access, offered as
 
                                       7
<PAGE>
 
"Cox@Home," in Orange County, California and introduced the service in five
additional markets in 1997. Cox@Home delivers access to the Internet at speeds
up to 100 times faster than traditional phone modems and provides unique
online content that capitalizes on the immense capacity of Cox's broadband
network. In 1997, Cox launched "Cox@Work" to provide high-speed Internet
access and work-at-home services to businesses. To enhance Cox's entry into
the cable based high-speed Internet access market, in August 1996 Cox acquired
an interest in At Home Corporation. See "--Investments--Telecommunications and
Technology Investments--@Home." Below is a summary of Cox@Home operating
statistics as of December 31, 1997 and 1996:
 
<TABLE>
<CAPTION>
                                                                   DECEMBER 31,
                                                                  --------------
                                                                   1997    1996
                                                                  ------- ------
      <S>                                                         <C>     <C>
      Markets Launched...........................................       6      1
      "Data Ready" Homes Passed.................................. 954,271 70,909
      Customers..................................................  15,296    134
      Penetration................................................    1.6%   0.2%
</TABLE>
 
LOCAL AND LONG DISTANCE TELEPHONY
 
  Cox utilizes the capacity and reliability of its advanced broadband network,
which will pass virtually all homes and most businesses in its markets, by
providing local telephone services and reselling long distance services. Cox
can thereby access a portion of a revenue market as large as $180 billion for
telephony services. In 1996, Cox began offering phone service, along with
cable television and high-speed Internet access services, to residents of a
large apartment complex. In 1997, "Cox Digital Telephone" was introduced to
residential customers in Orange County, California and Omaha, Nebraska. During
1998, Cox will launch Cox Digital Telephone in additional markets.
 
COMMERCIAL CLEC OPERATION
 
  Cox delivers telecommunications services to businesses through its
competitive local exchange carrier ("CLEC") operation. Through its dedicated
fiber optic networks, Cox's CLEC operation provides business customers video,
telephony and high-speed Internet access services. Below is a summary of Cox's
CLEC operation as of December 1997 and 1996:
 
<TABLE>
<CAPTION>
                                                                  DECEMBER 31,
                                                                 ---------------
                                                                  1997    1996
                                                                 ------- -------
      <S>                                                        <C>     <C>
      Cities in Operation.......................................       4       3
      Buildings Connected On-Net................................     433     313
      Fiber Route Miles.........................................   2,889   2,652
      Circuit Switches Installed................................       7     --
      Network ATM Switches Installed............................      35       8
      Voice Grade Equivalent Circuits........................... 251,086 176,512
</TABLE>
 
                                       8
<PAGE>
 
INVESTMENTS
 
CABLE TELEVISION PROGRAMMING INVESTMENTS
 
  Cox has made substantial investments in cable television networks as a means
of generating additional interest among consumers in cable television. A
summary of Cox's significant programming investments as of December 31, 1997
is set forth below:
 
<TABLE>
<CAPTION>
                                                                        COX
                                                                     PERCENTAGE
                                                                     OWNERSHIP
 INVESTMENT                                    DESCRIPTION            INTEREST
 ----------                                    -----------           ----------
 <C>                                  <S>                            <C>
 Speedvision Network................. Automotive, marine and            51.4%
                                      aviation-related programming
 GEMS Television..................... Spanish-language service          50.0
                                      targeted at women
 Outdoor Life Network................ Outdoor recreation-related        49.3
                                      programming
 Product Information Network......... Infomercial distribution          45.0
 Discovery Communications, Inc....... Owns Discovery Channel,           24.6
                                      Learning Channel, Animal
                                      Planet Network, retail and
                                      other ancillary businesses
 PPVN, Inc........................... Pay-per-view programming,         20.0
                                      including Viewer's Choice
 Digital Cable Radio Associates...... Digital audio services,           13.6
                                      including Music Choice
 Flextech plc........................ Cable and satellite               12.6
                                      programming based in the
                                      U.K.
 European Channel Management Limited. News and entertainment            10.0
                                      programming in Europe,
                                      including BBC Europe and BBC
                                      Prime
 The Sunshine Network Inc............ Sports, public affairs and         5.3
                                      general entertainment
</TABLE>
 
  SPEEDVISION NETWORK AND OUTDOOR LIFE NETWORK. In October 1995, Cox acquired
a 39% interest in the Speedvision Network ("Speedvision") and a 41% interest
in the Outdoor Life Network ("Outdoor Life"), two new U.S. programming
services. Speedvision's programming consists of a broad variety of material
for automobile, boat and airplane enthusiasts; Outdoor Life's programming
consists primarily of outdoor recreation, adventure and wildlife themes. Cox's
interest in Speedvision and Outdoor Life was increased to 51.4% and 49.3% as
of December 31, 1997, respectively. Cox's interest is expected to be reduced
below 50% as a result of a third party investment.
 
  GEMS TELEVISION. In June 1994, Cox entered into an equal partnership with
International Television, Inc. ("ITI"), a subsidiary of Empresas 1-BC,
Venezuela's largest media company. Prior to the formation of the partnership,
ITI had licensed and broadcast Spanish-language television programming under
the name of GEMS Television. The Cox-ITI partnership will continue the
existing business of GEMS Television and expand into additional markets in the
United States, South America and other Spanish or Portuguese-speaking regions.
The programming of GEMS Television is produced in Venezuela, consists largely
of telenovelas (soap operas) and is targeted primarily to women in Latin
America and to Spanish-speaking women in the United States.
 
  PRODUCT INFORMATION NETWORK. Cox and Jones International Ltd. formed a joint
venture known as the Product Information Network ("PIN"). PIN was organized to
develop a network for the distribution of multiple direct response television
commercials, or "infomercials," through cable television systems and other
television programming outlets. In January 1996, Adelphia Communications
purchased an interest in PIN, reducing Cox's interest to 45%.
 
  DISCOVERY COMMUNICATIONS, INC. The principal businesses of Discovery
Communications, Inc. ("Discovery") are the advertiser-supported basic cable
networks The Discovery Channel, The Learning Channel, Animal Planet Network
and Discovery Europe and its retail division consisting primarily of 113
stores of The Nature Company. The Discovery Channel provides nature, science
and technology, history, exploration and adventure programming and is
distributed to customers in virtually all U.S. cable homes. The Learning
Channel broadcasts a variety of educational and non-fiction programming. In
addition, through internally generated funding, significant investments are
being made by Discovery in building a documentary programming library. The
Learning Channel has increased distribution from fewer than 14 million cable
homes prior to its acquisition
 
                                       9
<PAGE>
 
by Discovery in 1991 to over 61 million homes as of December 31, 1997. Cox
holds a 24.6% interest in Discovery, with TCI, NewChannels Corp.
("NewChannels") and Discovery's management holding interests of 49.3%, 24.6%
and 1.4%, respectively.
 
  The following table sets forth certain financial and subscriber data
relating to Discovery, The Discovery Channel and The Learning Channel:
 
<TABLE>
<CAPTION>
                                                             DECEMBER 31,
                                                         ----------------------
                                                          1997    1996    1995
                                                         ------  ------  ------
<S>                                                      <C>     <C>     <C>
DISCOVERY
 Revenues (millions of dollars)......................... $859.8  $661.8  $447.2
 Growth.................................................   29.9%   47.8%   35.7%
THE DISCOVERY CHANNEL
 Subscribers (millions).................................   72.6    70.6    66.5
 Growth.................................................    2.8%    6.2%    8.1%
 Nielsen Rating--Avg....................................   0.64    0.61    0.63
THE LEARNING CHANNEL
 Subscribers (millions).................................   61.7    53.9    43.2
 Growth.................................................   14.5%   24.8%   37.1%
 Nielsen Rating--Avg....................................   0.46    0.38    0.35
</TABLE>
 
  PPVN, INC. PPVN, Inc. ("PPVN"), which operates under the brand-name Viewer's
Choice, is a cable operator-controlled buying cooperative for pay-per-view
programming. Cox holds a 20% interest in PPVN, with the remaining equity
interests held in varying proportions by Time Warner, TCI, Comcast Corporation
("Comcast"), MediaOne, Viacom International Inc. and Walt Disney Pictures and
Television.
 
  DIGITAL CABLE RADIO ASSOCIATES. Digital Cable Radio Associates distributes
audio programming, under the brand name Music Choice, in a digital format via
coaxial cable to more than one million customers in the United States. This
service allows cable television customers to receive compact disc quality
sound in diverse music formats. Cox currently holds a 13.6% interest, with the
remaining interests held in varying proportions by Jerrold Communications,
Sony Music Entertainment, Inc., MediaOne, Comcast, Time Warner, Adelphia
Communications and EMI Music.
 
  FLEXTECH PLC. In April 1997, Cox exchanged its 37.9% interest in UK Gold and
49.6% interest in UK Living for 20,701,084 shares, or a 12.6% interest, in
Flextech plc, a United Kingdom publicly held programming company.
 
  EUROPEAN CHANNEL MANAGEMENT LIMITED. In January 1995, Cox invested in an
international programming joint venture in Europe. Cox is a 10% partner in
European Channel Management Limited which delivers BBC World, a 24-hour news
channel, and BBC Prime, an entertainment channel, to European subscribers
outside the United Kingdom. The ventures' other partners are the BBC and
Pearson plc.
 
  E! ENTERTAINMENT TELEVISION. E! Entertainment Television, Inc. is an
entertainment-related news service which seeks to build value based on
international interest in Hollywood and entertainment industry news,
information and features. In December 1997, Cox sold its 10.4% interest in E!
Entertainment to Comcast/The Walt Disney Company for $57 million, resulting in
a pre-tax gain of $44.9 million.
 
                                      10
<PAGE>
 
TELECOMMUNICATIONS AND TECHNOLOGY INVESTMENTS
 
  Cox has made substantial investments in telecommunications and technology. A
summary of Cox's significant telecommunications and technology investments as
of December 31, 1997 is set forth below:
 
<TABLE>
<CAPTION>
                                                                        COX
                                                                     PERCENTAGE
                                                                     OWNERSHIP
 INVESTMENT                                    DESCRIPTION            INTEREST
 ----------                                    -----------           ----------
 <C>                                  <S>                            <C>
 Cox Communications PCS, L.P......... Operation of the PCS system       40.0%
                                      in the Los Angeles-San Diego
                                      MTA
 Teleport Communications Group Inc... Competitive local exchange        22.4
                                      carrier
 PhillieCo, L.P...................... Operation of the PCS system       17.6
                                      in the Philadelphia MTA
 Sprint Spectrum, L.P................ Wireless communications           15.0
                                      business, primarily PCS
 National Cable Communications, L.P.. Cable television advertising      12.5
                                      sales
 @Home............................... National Internet services        12.3
 PrimeStar Partners, L.P............. DBS services                      10.4
</TABLE>
 
  COX COMMUNICATIONS PCS, L.P. In 1995, Cox was awarded a broadband personal
communications service ("PCS") license for the Los Angeles-San Diego Major
Trading Area ("MTA") under the FCC's pioneer preference program. The Los
Angeles-San Diego market has a total population of over 22 million and
includes most of southern California, southern Nevada and a small portion of
Arizona.
 
  Cox and CEI, through subsidiaries, have formed a partnership, Cox Pioneer
Partnership ("CPP"), to own the two companies' joint interest in a PCS system
in the Los Angeles-San Diego MTA. CPP is owned approximately 78% by Cox and
approximately 22% by CEI. Cox and CEI have made and will make capital
contributions to CPP in proportion to their percentage interests. In December
1996, pursuant to previous agreements, CPP and Sprint Spectrum Holding
Company, L.P. (a partnership of Cox, TCI, Comcast and Sprint Corporation
("Sprint")) formed Cox Communications PCS, L.P. ("Cox PCS") to operate the PCS
system in the Los Angeles-San Diego MTA. Cox PCS is currently owned 49% by
Sprint Spectrum Holding Company, L.P. as limited partner and 51% by CPP as
general partner. In March 1997, upon approval from the FCC, Cox transferred
the PCS license for the Los Angeles-San Diego MTA to Cox PCS and Cox PCS
assumed the related license payment obligation to the FCC of $251.9 million.
The December 1996 formation of Cox PCS and the March 1997 transfer of the
license and obligation resulted in Cox recording $36.5 million as a capital
contribution from CEI.
 
  In February 1998, CPP exercised its right under the Cox PCS partnership
agreement to sell a portion of its interest in Cox PCS to Sprint Spectrum
Holding Company, L.P. Upon the consummation of this sale, which will occur
following the receipt of required regulatory approvals, Cox PCS will be owned
59.2% by Sprint Spectrum Holding Company, L.P. as general partner and limited
partner and 40.8% by CPP as general partner. The net proceeds of the sale will
be allocated between Cox and CEI in accordance with the partnership agreement
of CPP.
 
  In addition, Cox PCS agreed to affiliate its PCS system with the Sprint PCS
nationwide network and use the "Sprint PCS" trademark. As of December 31,
1997, Cox PCS had launched service in San Diego, Orange County and Los
Angeles, California under the "Sprint PCS" trademark.
 
  TELEPORT COMMUNICATIONS GROUP INC. Prior to June 1996, Cox held a 30.06%
interest in each of Teleport Communications Group Inc. ("TCGI") and TCG
Partners ("TCGP"), which both owned and operated fiber optic networks serving
several U.S. markets and provide point-to-point digital communications links
to telecommunications businesses and long-distance carriers. In June 1996,
TCGI entered into a reorganization under which, among other things, TCGI's
four stockholders, Cox, Comcast, MediaOne and TCI (collectively, the "Cable
Stockholders") contributed to TCGI all of their partnership interests in TCGP,
additional interests in local joint ventures and debt and accrued interest
owed by TCGI to the Cable Stockholders (the "Reorganization"). Following the
Reorganization, TCGI conducted an initial public offering in which it
 
                                      11
<PAGE>
 
sold 27,025,000 shares of its Class A Common Stock (the "TCGI IPO"). MediaOne
sold its equity interest in TCGI through several transactions culminating in a
secondary offering in November 1997. Cox owns 39,087,594 shares of TCGI's
Class B Common Stock which, as of December 31, 1997, represented 34.4% of
TCGI's Class B Common Stock, 22.4% of total shares outstanding and 32.7% of
the voting power of TCGI. Each share of Class B Common Stock is convertible
into one share of TCGI's Class A Common Stock.
 
  In January 1998, TCGI agreed to a merger with AT&T Corp. ("AT&T") under
which TCGI shareholders will exchange each share of TCGI common stock for
0.943 of a share of AT&T common stock. Pending regulatory approval, the
transaction is expected to close in late 1998. Cox has been named along with
TCGI and TCGI officers and directors (including some who are officers of Cox),
as defendants in three putative class action suits filed in the Chancery Court
of New Castle County, Delaware. The suits challenge the proposed AT&T/TCGI
merger and seek injunctive relief and damages based on various theories
alleging that the proposed AT&T/TCGI merger's terms do not offer appropriate
compensation or protection to TCGI's public shareholders. The actions are
being defended vigorously. As a result of this transaction, if consummated,
Cox will own 36,859,601 shares of AT&T common stock, representing
approximately 2% of total AT&T common shares outstanding. Cox expects to
recognize a gain on this transaction.
 
  PHILLIECO, L.P. Cox also owns, as of December 31, 1997, a 17.6% interest in
PhillieCo L.P. ("PhillieCo"), a partnership formed by subsidiaries of Cox, TCI
and Sprint. PhillieCo was the successful bidder for a broadband PCS license
for the Philadelphia MTA. The approximately $85 million purchase price for
this license has already been paid to the FCC. PhillieCo is also affiliated
with the Sprint PCS nationwide network and uses the "Sprint PCS" trademark.
 
  SPRINT SPECTRUM L.P. Cox, TCI, Comcast and Sprint engage in the wireless
communications business, primarily PCS, through a limited partnership, Sprint
Spectrum L.P. with its subsidiaries ("Sprint PCS"), of which Cox owns a 15%
interest. Sprint PCS was the successful bidder for 29 broadband PCS licenses
in the auction conducted by the FCC that was completed in March 1995. The $2.1
billion total purchase price for the 29 licenses has been paid to the FCC.
Additionally, Sprint PCS has invested in other entities that hold and operate
PCS licenses. Sprint PCS and its affiliates have obtained licenses to offer a
full range of wireless telecommunications services using the "Sprint PCS"
trademark to areas with an aggregate population of approximately 200 million
and Sprint PCS is in the process of building and completing its seamless
integrated nationwide network. As of March 1, 1998, Sprint PCS had launched
service in most major U.S. markets and had approximately 1 million customers.
 
  As of January 1, 1998, a "Deadlock Event" occurred due to the failure of the
partnership board of Sprint Spectrum Holding Company, L.P. (the parent of
Sprint PCS) to approve the proposed 1998 budget. If the 1998 budget is not
approved through the resolution procedures set forth in the Sprint Spectrum
Holding Company, L.P. partnership agreement, certain specified buy/sell
procedures may be triggered which might result in a restructuring of the
partners' interests in Sprint Spectrum Holding Company, L.P., Cox's sale of
its interest in Sprint Spectrum Holding Company, L.P., Cox's acquisition of
interests in Sprint Spectrum Holding Company, L.P. held by other partners, or
liquidation of Sprint Spectrum Holding Company, L.P. Discussions among the
partners about restructuring their interests in Sprint PCS are ongoing.
However, there is no certainty the discussions will result in a change to the
partnership structure.
 
  NATIONAL CABLE COMMUNICATIONS, L.P. Cox has a 12.5% limited partnership
interest in NCC, a partnership which represents cable television companies to
advertisers. NCC is the largest representation firm in spot cable advertising
sales. It enables advertisers to place advertising in selected multiple
systems on a regional or national single-source basis, and enhances the
ability of affiliated cable television systems to attract advertisers other
than purely local advertisers. The other limited partners in NCC are MediaOne,
Time Warner and Comcast. Katz Cable Corporation is the sole general partner.
 
  @HOME. In August 1996, Cox acquired a 14.2% interest in At Home Corporation
("@Home"). @Home is a national Internet "backbone" service that allows
customers access to the Internet at speeds up to a hundred times faster than
traditional phone modems by using a cable modem and the cable television
broadband network. In July 1997, @Home conducted an initial public offering.
As a result, the value of the @Home share price became readily determinable,
and accordingly Cox began to account for its investment in @Home as an
 
                                      12
<PAGE>
 
available-for-sale investment under Statement of Financial Accounting
Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." The initial public offering reduced Cox's ownership
percentage to approximately 12.3% as of December 31, 1997. Also in the fourth
quarter 1997, Cablevision Systems Corporation was admitted as a partner
through the issuance of warrants. On a fully diluted basis giving effect to
the exercise of these warrants, Cox's ownership is approximately 11.3%.
 
  PRIMESTAR PARTNERS, L.P. PrimeStar Partners, L.P. ("PrimeStar Partners") is
a provider of DBS services. As of December 31, 1997, Cox owned a 10.4%
interest in PrimeStar Partners. PrimeStar Partners' direct-to-home television
delivery business served, as of December 31, 1997, approximately 1,949,000
customers (representing an estimated 40% of the U.S. DBS market) using a
single satellite owned and operated by GE Americom. PrimeStar Partners
programming includes 94 channels of popular cable and network television,
professional sports and movies, as well as 14 channels of quality audio
services. PrimeStar Partners has secured a long-term agreement with GE
Americom for the use of a new satellite which was launched in January 1997.
The new satellite will increase PrimeStar Partners' offering to approximately
160 channels. PrimeStar Partners was formed in 1990 by GE Americom and nine of
the nation's largest cable television companies, including Cox, TCI, Comcast,
MediaOne and Time Warner.
 
  The following table sets forth certain financial and subscriber data with
respect to PrimeStar Partners:
 
<TABLE>
<CAPTION>
                                                            DECEMBER 31,
                                                       ------------------------
                                                        1997     1996     1995
                                                       -------  -------  ------
      <S>                                              <C>      <C>      <C>
      Revenues (millions)............................. $ 626.1  $ 413.0  $180.6
      Growth..........................................      52%     129%    550%
      Subscribers (thousands)......................... 1,949.1  1,565.7   961.2
      Growth..........................................      24%      63%    316%
</TABLE>
 
  Pursuant to the Letter Agreement and Summary of Business Terms dated June
11, 1997, as superseded by certain definitive documentation, each of the
partners of PrimeStar agreed to merge with, or contribute their partnership
interests in PrimeStar and related assets and liabilities to, a new subsidiary
of TCI Satellite Entertainment, Inc., PrimeStar, Inc., in exchange for shares
of common stock of PrimeStar, Inc. and cash or the assumption of indebtedness.
Upon consummation of this transaction, Cox will own approximately 9.35% of
PrimeStar, Inc. The balance of PrimeStar, Inc. will be owned by the other
PrimeStar partners and the shareholders of TSAT. It is anticipated that Cox
will recognize a gain on this transaction, which is expected to close during
the second quarter of 1998.
 
  GEMSTAR INTERNATIONAL GROUP LIMITED. In May 1997, Gemstar International
Group Limited ("Gemstar"), a public company that develops and markets
proprietary technologies aimed at making technology more user-friendly to
consumers, merged with Starsight Telecast, Inc. ("Starsight"). Cox, as a
holder of 2,166,647 Starsight shares, received 1,313,421 shares of Gemstar as
a result of the merger, representing a 2.8% interest in Gemstar as of December
31, 1997, and recognized a gain of approximately $11.0 million related to this
transaction. In December 1997, Cox sold its entire interest in Gemstar for
$29.3 million, resulting in an additional gain of approximately $9.9 million.
 
  SYNTELLECT, INC. Cox holds 1,150,000 shares of Syntellect, Inc.
("Syntellect") common stock, representing approximately 8.6% of the equity of
Syntellect as of December 31, 1997. Syntellect designs and markets ARUs. In
March 1996, Syntellect merged with Telecorp Systems, Inc. ("Telecorp"), which
also designs, manufactures and markets ARUs and a full line of cable-specific
voice and data products and services. Applications include inbound and
outbound call processing, pay-per-view ordering, information management and
voice production services.
 
BROADBAND NETWORK INVESTMENTS
 
  TELEWEST COMMUNICATIONS PLC. At December 31, 1997, Cox had a 14.6% ownership
interest in TeleWest Communications plc ("TeleWest"), a company that is
currently operating and constructing cable television and telephony systems in
the United Kingdom. Other significant shareholders of TeleWest are U S West
Inc., TCI and SBC Communications, Inc.
 
                                      13
<PAGE>
 
  TeleWest is the largest cable television and telephony operator in the U.K.
based on the number of homes passed and subscribers. The following table sets
out certain data concerning TeleWest's owned and operated and affiliated
franchises:
 
<TABLE>
<CAPTION>
                                                                DECEMBER 31,
                                                             -------------------
                                                               1997      1996
                                                             --------- ---------
      <S>                                                    <C>       <C>
      CABLE TELEVISION
       Homes passed and marketed............................ 3,096,582 2,626,835
       Basic subscribers....................................   687,352   599,599
      RESIDENTIAL TELEPHONY
       Homes passed and marketed............................ 3,062,327 2,543,041
       Residential subscribers..............................   894,682   686,101
       Residential lines connected..........................   922,540   693,521
      BUSINESS TELEPHONY
       Business subscribers.................................    28,331    23,297
       Business lines connected.............................   116,673    78,569
</TABLE>
 
  In December 1997, the decline in the fair market value of TeleWest was
considered to be other than temporary and accordingly Cox recognized an $183.9
million loss on write down of affiliated company in its Consolidated Statement
of Operations.
 
  TWC CABLE PARTNERS. Cox and Time Warner each have a 50% ownership interest
in a joint venture which owns two additional cable television systems in Fort
Walton Beach, Florida and Staten Island, New York, which, as of December 31,
1997, passed approximately 244,000 homes and provided service to approximately
172,000 customers. The Ft. Walton Beach system is managed as part of Cox's
Pensacola cluster and the Staten Island system is managed by Time Warner.
 
COMPETITION
 
  Each of Cox's major business segments faces competition in varying forms.
Cable television faces competition from other providers of video and other
entertainment. Telephone services face competition from incumbent and new
entrant providers of landline and wireless communications services. Wireless
services face competition from incumbent and recently-authorized cellular, PCS
and SMR providers.
 
CABLE TELEVISION COMPETITION
 
  The cable television systems owned by Cox compete with other communications
and entertainment media, including conventional off-air television
broadcasting service, newspapers, movie theaters, live sporting events and
home video products. Cable television service was first offered as a means of
improving television reception in markets where terrain factors or remoteness
from major cities limited the availability of off-air television. In some of
the areas served by Cox's systems, a substantial variety of television
programming can be received off-air. The extent to which cable television
service is competitive depends upon the cable television system's ability to
provide a greater variety of programming than is available off-air.
 
  Since Cox's U.S. cable television systems operate under non-exclusive
franchises, other companies may obtain permission to build cable television
systems in areas where Cox operates. To date, the extent of actual
overbuilding in these areas has been relatively slight, and fewer than 2% of
Cox's total homes passed are overbuilt at this time. While Cox believes that
the current level of overbuilding has not had a material impact on its
operations, it is unable to predict the extent to which adverse effects may
occur in the future as a result of overbuilds.
 
  Additional competition may come from private satellite master antenna
television ("SMATV") systems which transmit signals by satellite to receiving
facilities located on customers' premises such as condominiums, apartment
complexes and other private residential developments. The 1996 Act broadens
the definition of SMATV systems not subject to regulation as a franchised
cable communications service. The operators of these private systems often
enter into exclusive agreements with apartment building owners or homeowners'
associations that may preclude operators of franchised cable television
systems from serving residents of such private complexes. A private cable
television system normally is free of the regulatory burdens imposed on
franchised cable television systems. Cox is unable to predict the extent to
which additional competition from these services will materialize in the
future or the impact such competition would have on Cox's operations.
 
                                      14
<PAGE>
 
  In recent years, the FCC has initiated new policies and authorized new
technologies to provide a more favorable operating environment for new and
existing technologies that provide, or have the potential to provide,
substantial additional competition to cable television systems. These
technologies include, among others, DBS and MMDS (as defined below) services.
High-powered direct-to-home satellites have made possible the wide-scale
delivery of programming to individuals throughout the United States using
roof-top or wall-mounted antennas. Companies offering DBS services are using
video compression technology to increase satellite channel capacity and to
provide a package of movies, network programming and other program services
competitive to those of cable television systems.
 
  The availability of reasonably-priced home satellite dish earth stations
("HSDs") enables individual households to receive many of the satellite-
delivered program services formerly available only to cable subscribers.
Furthermore, the 1992 Cable Act contains provisions, which the FCC has
implemented with regulations, to enhance the ability of cable competitors to
purchase and make available to HSD owners certain satellite-delivered cable
programming at competitive costs. The 1996 Act and FCC regulations
implementing that law preempt certain local restrictions on the use of HSDs
and roof-top antennae to receive satellite programming and over-the-air
broadcasting services.
 
  Programming is currently available to the owners of HSDs through
conventional, medium and high-powered satellites. PrimeStar, a consortium
comprised of cable operators including Cox and a satellite company, commenced
operation in 1990 of a medium-power DBS satellite system using the Ku portion
of the frequency spectrum and currently provides service consisting of
approximately 95 channels of programming, including broadcast signals and pay-
per-view services. See "--Investments--Telecommunications and Technology
Investments--PrimeStar Partners L.P." In January 1997, PrimeStar launched a
replacement medium-power DBS satellite which will enable it to increase its
capacity to approximately 160 channels. NewsCorp., MCI and ASkyB recently
announced several agreements in which the three would sell to PrimeStar two
high-powered DBS satellites under construction. This sale, which is subject to
various governmental consents, has been challenged by several parties and is
currently under review by the Justice Department and the FCC. The previously
announced plan of News Corp. to purchase an interest in EchoStar
Communications Corporation ("EchoStar") is currently the subject of litigation
between News Corp. and EchoStar. On February 19, 1998, the FCC initiated a DBS
rulemaking proceeding, which, among other issues, requests comments on whether
the FCC should implement cross-ownership restrictions between DBS and cable
television operators and whether the FCC's alien ownership restrictions should
apply to DBS subscription services.
 
  Several other major companies are offering or are currently developing
nation-wide high-power DBS services, including DirecTV and EchoStar. DirecTV
began offering nationwide high-power DBS service in 1994 accompanied by
extensive marketing efforts, along with United States Satellite Broadcasting
Company which uses capacity on DirecTV's satellite. Together, both companies
offer over 200 channels of service using video compression technology.
 
  Currently, satellite program providers are only authorized to provide the
signals of television network stations to subscribers who live in areas where
over-the-air reception of such signals cannot be received. EchoStar, which
currently offers a similar package of programming, recently announced plans to
offer some local television signals in a limited number of markets. Efforts
are underway at the United States Copyright Office and in Congress to ensure
that such offerings are permissible under the Copyright law. Legislation has
been introduced which would permit DBS operators to rebroadcast local
television upon compliance with certain requirements, including market-
specific must-carry requirements and compliance with programming black-out
obligations. Cox cannot predict whether such legislation will be passed, or
the effect that it will have on Cox's business. The offering of local
broadcast signals in DBS program packages would provide substantial
competition to the cable industry.
 
  The degree to which DBS service providers will be able to compete with the
cable television industry will depend on, among other factors, the
availability of reception equipment at reasonable prices and whether DBS
providers will be permitted to offer local broadcast signals in their program
packages. Although it is not possible at this time to predict the likelihood
of success of any DBS services venture, DBS may offer substantial competition
to cable television operators.
 
                                      15
<PAGE>
 
  Cable television systems also compete with wireless program distribution
services such as multichannel, multipoint distribution service ("MMDS"),
commonly called wireless cable, which are licensed to serve specific areas
using low-power microwave frequencies to transmit video programming over-the-
air to subscribers. There are MMDS operators who are authorized to provide or
are providing broadcast and satellite programming to subscribers in areas
served by Cox's cable systems. Several Regional Bell Operating Companies
("BOCs") have acquired significant interests in major MMDS companies operating
in certain of Cox's cable service areas. BellSouth Entertainment, a Bell
South-affiliated company, recently commenced wireless cable service in the New
Orleans market using MMDS technology and offering a basic package of over 160
local, cable, satellite and CD music channels. Cox has initiated the
introduction of new programming services in response to the increasing
competitive environment in which the New Orleans system operates. Under the
1996 Act, the provision of video service by a telephone affiliated company
constitutes effective competition and permits deregulation of both basic and
CPS tier rates. (See Federal Regulation-Rate Regulation.) On January 28, 1998,
Cox filed a petition with the FCC which requested deregulation of its rates in
the New Orleans and Jefferson Parish markets. Pacific Telesis Enterprises, a
BOC operating in California, also is providing or is authorized to provide
wireless cable services in several California communities which Cox serves.
However, recent reports indicate that it is reconsidering its business plans
to provide video services, will not expand its operations, and is seeking a
purchaser for its wireless cable system. Additionally, the FCC recently
adopted new regulations allocating frequencies in the 28 GHz band for a new
multichannel wireless video service similar to MMDS called Local Multipoint
Distribution Service ("LMDS"), which is capable for transmitting voice as well
as video transmissions. Spectrum auctions for LMDS licenses commenced in
February 1998. The FCC has imposed cross-ownership restrictions of these
frequencies by cable operators and telephone companies which were recently
upheld by the United States Court of Appeals for the District of Columbia
Circuit. For a three-year period, cable operators and telephone companies will
be precluded from operating on these frequencies in the same authorized or
franchised service areas in which they provide service. Cox is unable to
predict whether wireless video services will have a material impact on its
operations.
 
  The 1996 Act repeals the cable/television cross-ownership ban adopted in the
1984 Cable Act, and contains restrictions on telephone companies buying out
incumbent cable operators in a telephone company's service area, especially in
suburban and rural markets. The 1996 Act will enable common carriers to
provide video programming services as either cable operators or open video
system ("OVS") operators.
 
  Other new technologies may become competitive with respect to certain non-
entertainment services that cable television systems can also offer. The FCC
has authorized television broadcast stations to transmit textual and graphic
information useful both to consumers and to businesses. The FCC also permits
commercial and non-commercial FM stations to use their subcarrier frequencies
to provide non-broadcast services, including data transmissions. The FCC
established an over-the-air Interactive Video and Data Service that will
permit two-way interaction with commercial and educational programming along
with informational and data services. Telephone companies and other common
carriers also provide facilities for the transmission and distribution of data
and other non-video services.
 
TELEPHONY COMPETITION
 
  LANDLINE TELECOMMUNICATIONS SERVICES. While the current switched voice and
data telecommunications market is dominated by local telephone companies, also
known as incumbent LECs, the 1996 Act presents new opportunities for new
entrants into these markets. Incumbent LECs provide a wide range of local
telecommunications services and equipment to customers, as well as providing
originating and terminating access to their local networks to interexchange
carriers and mobile radio service providers. Because LECs historically have
had exclusive state franchises by law to provide telephone service, they have
established long-term, exclusive relationships with their customers. Under the
new law, and subject to certain limitations for rural LECs, the FCC is
directed to preempt any state law or regulation that acts to prevent new
competitive entry into incumbent LEC markets.
 
  The 1996 Act represents the most comprehensive reform of the nation's
telecommunications laws since the Communications Act of 1934. The 1996 Act is
intended to open local exchange markets to competition, which
 
                                      16
<PAGE>
 
should result in a substantial increase in Cox's business opportunities to
deliver telephony over its broadband networks. Among its more significant
provisions, the 1996 Act: (i) removes legal barriers to entry in local
telephone markets; (ii) requires incumbent LECs to "interconnect" with
competitors, including the provision of necessary elements for local
competition such as telephone number portability; (iii) establishes procedures
for incumbent LEC entry into new markets such as long distance and cable
television; (iv) relaxes regulation of telecommunications services provided by
incumbent LECs and all other telecommunications service providers; and (v)
directs the FCC to establish an explicit subsidy mechanism for the
preservation of universally affordable telephone service.
 
  Under the 1996 Act, new landline entrants will become subject to additional
federal regulatory requirements when they provide local exchange service in
any market. The 1996 Act imposes a number of access and interconnection
requirements on all LECs, with additional requirements imposed on incumbent
LECs. Specifically, the 1996 Act required the FCC to implement rules under
which all LECs must provide telephone number portability, dialing parity,
reciprocal compensation for transport and termination of local traffic, resale
and access to rights of way. The 1996 Act also requires state commissions to
review and approve voluntarily negotiated interconnection agreements and to
arbitrate compulsory interconnection negotiations between new entrants and
incumbent LECs. These requirements also place burdens on new entrants that may
benefit other competitors. In particular, the resale requirement means that a
company could seek to resell the facilities of a new entrant without making a
similar investment in facilities.
 
  The 1996 Act eliminates the requirement that incumbent LECs obtain FCC
authorization prior to constructing facilities for interstate services. The
1996 Act also limits the FCC's ability to review incumbent LEC tariff filings.
These changes will increase the speed with which the LECs are able to
introduce new service offerings and new pricing of existing services, thereby
increasing their flexibility to respond to new entrants.
 
  In addition to incumbent LECs and existing competitive access providers, new
entrants potentially capable of offering switched and non-switched services
include individual cable television companies, electric utilities, long-
distance carriers, microwave carriers, wireless service providers, resellers
and private networks built by large end-users.
 
  The FCC has adopted most, but not all, of the rules required to implement
the 1996 Act. On August 1, 1996 the FCC adopted a report and order
promulgating rules and regulations to implement the 1996 Act's provision that
obligates CLECs and incumbent LECs to interconnect their networks and to
develop a methodology to translate the 1996 Act's pricing guidelines into
incumbent LEC pricing of interconnection for reciprocal transport and
termination, unbundled elements and resale (the "Local Competition Order").
The Local Competition Order adopts a national pro-competitive framework for
interconnection but leaves to the individual state commissions the task of
implementing the FCC's rules in their process of reviewing interconnection
agreements. The states are to base rates for interconnection, the reciprocal
termination of local telephone traffic and the purchase of ILEC unbundled
network elements on an incremental cost methodology established by the FCC,
called Total Element Long-Run Incremental Cost ("TELRIC"). Incumbent LECs may
present the states with TELRIC cost studies, while the FCC adopted interim
"default" rates the states could apply pending state review of TELRIC studies.
Additionally, the FCC interpreted the non-discrimination provisions of the
1996 Act to allow carriers to request that the incumbent LEC make available to
them any interconnection, service or network element contained in an approved
agreement to which the LEC was a party under the same terms and conditions
(known as the "pick and choose" rule).
 
  Many petitions for reconsideration of the FCC's Local Competition Order
remain pending at the FCC. Despite the adoption of generally pro-competitive
rules that Cox views as consistent with the requirements of the 1996 Act, the
interconnection rules, particularly those containing the TELRIC pricing
methodology and "default" rates, have not taken effect due to successful
appeals filed by incumbent LECs and jurisdictional challenges filed by several
state utility commissions. The Eighth Circuit Court of Appeals has overturned
many of the interconnection rules affecting LECs, including most aspects of
the FCC's pricing rules, intrastate dialing parity rules, certain rules
governing unbundled elements and the "pick and choose" rule. The Eighth
Circuit permitted the FCC's rules governing interconnection by wireless
providers to remain in effect. While the Eighth
 
                                      17
<PAGE>
 
Circuit's decision remains in effect, on January 26, 1998, the United States
Supreme Court agreed to hear several appeals from that decision. The Supreme
Court will hear oral argument in its October 1998 term, and its not expected
to issue its decision until late 1998 or early 1999. The Eighth Circuit's
determination regarding wireless providers was not appealed to the Supreme
Court. Many states have applied the FCC's interpretations of the 1996 Act as
guidelines, even though many FCC interconnection rules are not in effect.
 
  The Local Competition Order was the first part in a "trilogy" of orders that
will reform access pricing and universal service consistent with the 1996
Act's goal of encouraging competition. As described below, the FCC also issued
orders in 1997 that were intended to substantially reduce the prices incumbent
LECs charge for interstate access services in separate proceedings on reform
of the current access charge regime and of current universal service
procedures.
 
  In July 1996 the FCC released an Order promulgating rules implementing the
1996 Act's directive for local telephone number portability (the "Number
Portability Order"). Under the Number Portability Order and several subsequent
orders in that proceeding, the FCC ordered all LECs to begin phased
development of a long-term service provider portability method in the 100
largest Metropolitan Statistical Areas ("MSAs") no later than October 1, 1997,
and to complete deployment in those MSAs by March 31, 1998 in areas where
other carriers have requested the availability of portability. After March 31,
1998, each LEC must make number portability available within specified
periods, but no longer than six months, after receiving a specific request by
another telecommunications carrier in areas outside the 100 largest area MSAs.
Several LECs have petitioned the FCC for additional time to implement
portability in certain markets due to difficulties in performing required
equipment upgrades and the failure of a vendor to provide necessary database
services. Until long-term service provider number portability is available,
all LECs must provide currently available number portability measures as soon
as reasonably possible after a specific request from another carrier. Because
new carriers are at a competitive disadvantage without telephone number
portability, the Number Portability Order should enhance Cox's ability to
offer service in competition with the incumbent LECs. It is uncertain how
effective these regulations will be in promoting cost effective and efficient
number portability. The Number Portability Order does not address how the
costs of implementing long-term service provider number portability will be
recovered. This issue was subject to an additional comment period and has not
yet been decided. The Number Portability Order is subject to appeals pending
before the Eighth Circuit Court of Appeals.
 
  The 1996 Act mandated creation of a Federal-State Joint Board regarding
universal service and subsequent action by the FCC. In the fall of 1996, the
Joint Board proposed a new regime for funding universal telephone service and
for distributing universal service subsidies. The FCC received public comment
on that proposal and adopted an order in the universal service proceeding (the
"Universal Service Order") on May 7, 1997. The recommended decision proposed,
and the Universal Service Order adopted, specific subsidy programs to replace
the previous subsidies for high cost carriers and for low income consumers,
new subsidies for telecommunications services, Internet access services and
internal connections for schools and libraries and new subsidies for
telecommunications services for rural health care facilities. Under the
Universal Service Order, any telecommunications carrier that provided all of
the services that fall within the definition of "universal service" would be
eligible to receive subsidies, as would any entity that provided
telecommunications services, internal connections or Internet services used by
schools and libraries. The FCC has not adopted final rules governing subsidies
for high cost areas generally or final rules for subsidies to rural carriers.
These topics are the subject of ongoing proceedings that are expected to
continue through 1998. As part of this process, the FCC is developing a "cost
proxy" model intended to identify those markets and carriers in need of
subsidies to maintain universal service.
 
  Funding for the federal universal service subsidies will come from mandatory
payments imposed on all telecommunications carriers (with limited exceptions).
For the first quarter of 1998, the amount of payment is 0.72 percent of all
revenues and 3.19 percent of interstate and international revenues for all
carriers with interstate revenues. For the second quarter of 1998, the amount
of the payment is 0.76 percent of all revenues and 3.14 percent of interstate
and international revenues. In addition to the federal universal service plan,
it is likely that most or all states will adopt their own universal service
support mechanisms.
 
  Although the FCC has acted on many petitions for reconsideration of the
Universal Service Order, many other petitions for reconsideration remain
pending. The Universal Service Order also is the subject of pending
 
                                      18
<PAGE>
 
appeals by incumbent LECs, wireless service providers and state regulators in
the United States Court of Appeals for the Fifth Circuit. The FCC has been
directed to submit a report to Congress by April 10, 1998 concerning certain
universal service issues, including its decision to exempt certain non-
telecommunications offerings of Internet service providers from federal
universal service assessments; what services may be subsidized; the extent to
which the support should be subsidized through federal or state universal
service programs and the FCC's ability to use intrastate revenues to calculate
payment obligations.
 
  While not directly required under the 1996 Act, the FCC also adopted an
order intended to reform interstate access charges that are generally
acknowledged to contain subsidy elements (the "Access Reform Order"). The
Access Reform Order modified the previous access charge system by shifting
some costs from per-minute charges to flat charges and through other changes.
The FCC also simultaneously adopted an order that reduced access charges under
the existing regime of rate regulation for those charges. The Access Reform
Order also affirmed the FCC's previous determination that interstate access
charges should not be imposed on enhanced services traffic such as Internet
access traffic.
 
  In a separate proceeding, the FCC was asked in 1997 to declare that traffic
to Internet service providers should be treated as local traffic for purposes
of determining whether a carrier is entitled to compensation for terminating
such traffic. Incumbent LECs opposed this petition, which remains pending. As
of February 23, 1998, every state commission that had considered this issue
had concluded that traffic to Internet service providers should be treated as
local traffic.
 
  On February 19, 1998, the FCC adopted new rules concerning the privacy of
customer information held by telecommunications providers. These rules will
apply to all telecommunications providers and will permit carriers to use such
information for marketing services within specified categories, such as local
service or long distance service, without specific customer permission. Use of
such information to market services in a different category of service will
require affirmative oral or written customer permission.
 
  OTHER PCS PROVIDERS. Sprint PCS and Cox PCS will face direct competition for
PCS subscribers from other licensed PCS systems within its markets. There are
potentially six PCS providers (not counting resellers and marketing agents for
licensees) in each PCS service area. Three licensees will each hold 30 MHz of
PCS spectrum, one of which is licensed for a basic trading area, and the
remaining three licensees will hold 10 MHz of PCS spectrum. It is likely that
some of the 10 MHz licenses will be used to provide niche services or will be
purchased by existing cellular providers for added spectrum, while the 30 MHz
licenses will be used to offer a broad range of voice, data and related
communications services, and may ultimately develop into services that include
a wireless local loop functionality.
 
  Sprint PCS may also face competition from other current or developing
technologies. Specialized Mobile Radio ("SMR") systems, such as those used by
taxicabs, as well as other forms of mobile communications service, may provide
competition in certain markets. SMR systems are permitted by the FCC to be
interconnected to the public switched telephone network and are significantly
less expensive to build and operate than cellular telephone systems. SMR
systems, however, are licensed to operate on substantially fewer channels than
PCS systems and generally lack PCS's ability to expand capacity through
frequency reuse by using many low-power transmitters and micro-cells to hand
off calls.
 
  Nextel, which holds a considerable number of SMR licenses across the nation,
is implementing its digital system to use available SMR spectrum to provide a
range of mobile radio communications services. The implementation of this
service, known as Enhanced Specialized Mobile Radio ("ESMR") service, has
resulted in legislation and FCC rules that regulate ESMR services in a manner
that reflects its potential interchangeability ith cellular and PCS services.
In 1994, the FCC decided to license SMR systems in the 800 Mhz bands for wide-
area use, thus increasing potential competition with cellular and PCS. In
1997, the FCC completed the first of two auctions of contiguous spectrum
blocks for ESMR. This auction resulted in the company described above winning
rights to a significant number of additional SMR licenses. The second auction
is scheduled to take place in 1998. These results of these auctions may
further the potential of digital SMR services to compete with cellular and
PCS.
 
                                      19
<PAGE>
 
LEGISLATION AND REGULATION
 
  The cable television industry is regulated by the FCC, some state
governments and substantially all local governments. In addition, various
legislative and regulatory proposals under consideration from time to time by
the Congress and various federal agencies may materially affect the cable
television industry. The following is a summary of federal laws and
regulations affecting the growth and operation of the cable television
industry and a description of certain state and local laws.
 
  CABLE COMMUNICATIONS POLICY ACT OF 1984. The 1984 Cable Act generally became
effective in December 1984. This federal statute, which amended the
Communications Act of 1934, established comprehensive national standards and
guidelines for the regulation of cable television systems and identified the
boundaries of permissible federal, state and local government regulation. The
FCC, in turn, was charged with responsibility for adopting rules to implement
the 1984 Cable Act. Among other things, the 1984 Cable Act affirmed the right
of franchising authorities (state or local, depending on the practice in
individual states) to award one or more franchises within their jurisdictions.
It also prohibited non-grandfathered cable television systems from operating
without a franchise in such jurisdictions. In connection with new franchises,
the 1984 Cable Act provides that in granting or renewing franchises,
franchising authorities may establish requirements for cable-related
facilities and equipment, but may not establish or enforce requirements for
video programming or information services other than in broad categories.
 
  CABLE TELEVISION CONSUMER PROTECTION AND COMPETITION ACT OF 1992. In October
1992, Congress enacted the 1992 Cable Act. This legislation, which amended the
1984 Cable Act, made significant changes to the legislative and regulatory
environment for the cable industry. The 1992 Cable Act became effective in
December 1992, although certain provisions, most notably those dealing with
rate regulation and retransmission consent, took effect at later dates. The
1992 Cable Act permitted a greater degree of regulation of the cable industry
with respect to, among other things: (i) cable system rates for both basic and
certain cable programming 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) customer service requirements; (vii)
franchise renewals; (viii) television broadcast signal carriage and
retransmission consent; (ix) technical standards; (x) customer privacy; (xi)
consumer protection issues; (xii) cable equipment compatibility; (xiii)
obscene or indecent programming; and (xiv) subscription to tiers of service
other than basic service as a condition of purchasing premium services.
Additionally, the legislation encouraged competition with existing cable
television systems by allowing municipalities to own and operate their own
cable television systems without a franchise, preventing franchising
authorities from granting exclusive franchises or unreasonably refusing to
award additional franchises covering an existing cable system's service area,
and prohibiting the common ownership of cable systems and co-located MMDS or
SMATV systems. The 1992 Cable Act also precluded video programmers affiliated
with cable television companies from favoring cable operators over competitors
and required such programmers to sell their programming to other multichannel
video distributors. The legislation required the FCC to initiate a number of
rulemaking proceedings to implement various provisions of the statute, the
majority of which, including certain proceedings related to rate regulation,
have been completed.
 
  THE TELECOMMUNICATIONS ACT OF 1996. On February 1, 1996, Congress passed the
1996 Act, which was signed into law by the President on February 8, 1996. The
1996 Act substantially revises the Communications Act of 1934, as amended (the
"Communications Act"), including the 1984 Cable Act and the 1992 Cable Act
under which the cable industry is regulated. The FCC has been conducting
various rulemaking proceedings to implement the provisions of the 1996 Act
over the last two years.
 
  The 1996 Act has been described as one of the most significant changes in
communications regulation since the passage of the Communications Act. The
1996 Act modifies various rate regulation provisions of the Cable Act of 1992.
Generally, under the 1996 Act, cable programming service ("CPS") tier rates
are deregulated on March 31, 1999. Upon enactment, the CPS rates charged by
small cable operators are deregulated in systems serving 50,000 or fewer
subscribers. The 1996 Act also revises the CPS complaint filing procedures and
adds a new effective competition test under which cable rates may be
deregulated. The 1996 Act allows cable operators
 
                                      20
<PAGE>
 
to aggregate equipment costs into broad categories, such as converter boxes,
regardless of the varying levels of functionality of the equipment within each
such broad category, on a franchise, system, regional, or company level. The
statutory changes also facilitate the rationalizing of equipment rates across
jurisdictional boundaries. These favorable cost-aggregation rules do not apply
to the limited equipment used by basic service-only subscribers.
 
  The 1996 Act is intended, in part, to promote substantial competition in the
marketplace for telephone local exchange service and in the delivery of video
and other services and permits cable television operators to enter the local
telephone exchange market. Cox's ability to competitively offer telephone
services may be adversely affected by the degree and form of regulatory
flexibility afforded to LECs, and in part, will depend upon the final outcome
of the appeals of various FCC orders, including the Local Competition Order,
the Universal Service Order and the Number Portability Order. The 1996 Act
also repeals the cable television/telephone cross-ownership ban adopted in the
1984 Cable Act and permits local telephone companies (also known as LECs) and
other service providers to provide video programming.
 
  The most far-reaching changes in communications businesses will result from
the telephony provisions of the 1996 Act. These provisions promote local
exchange competition as a national policy by eliminating legal barriers to
competition in the local telephone business and setting standards to govern
the relationships among telecommunications providers, establishing uniform
requirements and standards for entry, competitive carrier interconnection and
unbundling of LEC monopoly services. The statute expressly preempts any legal
barriers to competition under state and local laws. Many of these barriers had
been lifted by state actions during the early 1990s, but the 1996 Act
completes the task. The 1996 Act also establishes new requirements to maintain
and enhance universal telephone service and new obligations for
telecommunications providers to maintain the privacy of customer information.
 
  Under the 1996 Act, LECs may provide video service as cable operators or
through "open video systems" ("OVSs"), a regulatory regime that gives them
more flexibility than traditional cable systems. The 1996 Act eliminates the
requirement that telephone companies file Section 214 applications with the
FCC before providing video service. This will limit the ability of cable
operators to challenge the economic viability of telephone company entry into
the video market. With certain exceptions, the 1996 Act also restricts
telephone companies from buying out incumbent cable operators in the LECs
service area.
 
  Other parts of the 1996 Act also will affect cable operators. The 1996 Act
directs the FCC to revise the current pole attachment rate formula. This will
result in an increase in the rates paid by entities, including cable
operators, that provide telecommunication services. (Cable operators that
provide only cable services are unaffected.) The 1996 Act also contains
provisions regulating the content of video programming and computer services.
Specifically, the new law prohibits the use of computer services to transmit
"indecent" and "obscene" material to minors. The U.S. Supreme Court has held
that these computer-related provisions are unconstitutional to the extent they
regulate the transmission of indecent material. The 1992 Cable Act requires
cable operators to block fully both the video and audio portion of sexually
explicit or indecent programming on channels that are primarily dedicated to
sexually oriented programming, or alternatively, to carry such programming
only at "safe harbor" time, periods currently defined by the FCC as the hours
between 10 p.m. to 6 a.m. Several adult-oriented cable programmers have
challenged the constitutionality of this statutory provision, but the U.S.
Supreme Court recently refused to overturn a lower court's denial of a
preliminary injunction motion seeking to enjoin the enforcement of this law.
The FCC's regulations implementing this statutory provision became effective
in May 1997. In accordance with the 1996 Act, the television industry recently
adopted a voluntary ratings system for violent and indecent video programming.
The 1996 Act also requires all new television sets to contain a so-called "V-
chip" capable of blocking all programs with a given rating.
 
  Under the 1996 Act, a franchising authority may not require a cable operator
to provide telecommunications services or facilities, other than an
institutional network, as a condition to a grant, renewal, or transfer of a
cable franchise, and franchising authorities are preempted from regulating
telecommunications services provided by
 
                                      21
<PAGE>
 
cable operators and from requiring cable operators to obtain a franchise to
provide such services. The 1996 Act also repeals the 1992 Cable Act's anti-
trafficking provision which generally required the holding of cable television
systems for three years.
 
  It is premature to predict the effect of the 1996 Act on the cable industry
in general or Cox in particular. The FCC must undertake numerous rulemaking
proceedings to interpret and implement the 1996 Act. Most of these rulemakings
have been completed, but are subject to pending petitions for reconsideration,
appeals, or both. It is not possible at this time to predict the outcome of
those proceedings or their effect on Cox.
 
FEDERAL REGULATION
 
  The FCC, the principal federal regulatory agency with jurisdiction over
cable television, has promulgated regulations covering such areas as the
registration of cable television systems, cross-ownership between cable
television systems and other communications businesses, carriage of television
broadcast programming, consumer education and lockbox enforcement, origination
cablecasting and sponsorship identification, children's programming, the
regulation of non-premium cable service rates in areas where cable television
systems are not subject to effective competition, signal leakage and frequency
use, technical performance, maintenance of various records, equal employment
opportunity, and antenna structure notification, marking and lighting. The FCC
may 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. The 1992 Cable Act required the FCC to adopt additional
regulations covering, among other things, cable rates, broadcast signal
carriage, consumer protection and customer service, leased access, indecent
programming, programmer access to cable television systems, programming
agreements, technical standards, consumer electronics equipment compatibility,
ownership of home wiring, program exclusivity, equal employment opportunity,
and various aspects of DBS system ownership and operation. A brief summary of
certain of these federal regulations as adopted to date follows.
 
  RATE REGULATION. The 1992 Cable Act substantially changed the regulatory
environment. Although the regulation of premium channels is still prohibited,
the 1992 Cable Act replaced the FCC's effective competition test, under which
most cable systems were not subject to local rate regulation, with a statutory
provision that results in nearly all cable television systems becoming subject
to rate regulation. Additionally, the legislation eliminated the permissible
automatic 5% annual rate increase for regulated basic services previously
allowed by the 1984 Cable Act; required the FCC to adopt a formula for
franchising authorities to enforce to assure that basic cable rates are
reasonable; allowed the FCC to review rates for cable programming service
tiers (other than per-channel or per-event services) in response to complaints
filed by franchising authorities and/or cable customers; prohibited cable
television systems from requiring subscribers to purchase service tiers above
basic service in order to purchase premium services if the system is
technically capable of doing so; required the adoption of regulations by the
FCC to establish, on the basis of actual costs, the price for installation of
cable service, remote controls, converter boxes and additional outlets; and
permitted the imposition by the FCC of restrictions on the retiering and
rearrangement of cable services, under certain limited circumstances. The
FCC's rules governing rates for the regulation of basic and cable programming
service tiers generally became effective in September 1993.
 
  In February 1994, the FCC revised its benchmark regulations adopted in April
1993. Effective May 1994, cable television systems not seeking to justify
rates with a cost-of-service showing were to reduce rates by up to 17% of the
rates in effect on September 30, 1992, adjusted for inflation, channel
modifications, equipment costs and certain increases in programming costs.
Under certain conditions systems were permitted to defer these rate
adjustments until July 14, 1994. Further rate reductions for cable systems
whose rates are below the revised benchmark levels, as well as reductions that
would require operators to reduce rates below benchmark levels in order to
achieve a 17% rate reduction were held in abeyance pending completion of cable
system cost studies. The FCC adopted an order which made permanent its
deferral of the full 17 percent rate reduction, and consequently these systems
will not be required to reduce their rates by the full competitive
differential previously implemented by the FCC.
 
                                      22
<PAGE>
 
  The FCC also revised its regulations governing the manner in which cable
operators may charge subscribers for new channels added to cable programming
services tiers. The FCC instituted a three-year flat fee mark-up plan.
Commencing on January 1, 1995, operators may charge subscribers up to $.20 per
channel for any channels added after May 14, 1994, but may not make
adjustments to monthly rates totaling more than $1.20 plus an additional $.30
to cover programming license fees for those channels over the first two years
of the three-year period. In year three, an additional channel may be added
with another $.20 increase in rates. Rates also may increase in the third year
to cover any additional costs for the programming for any of the channels
added during the entire three-year period. Cable operators electing to use the
$.20 per channel adjustment may not also take a 7.5% mark-up on programming
cost increases, which is otherwise permitted under the FCC's regulations. The
FCC has requested further comment on whether cable operators should continue
to receive the 7.5% mark-up on increases in license fees on existing
programming services.
 
  The FCC will permit cable operators to exercise their discretion in setting
rates for New Product Tiers ("NPT") so long as, among other conditions, the
channels that are subject to rate regulation are priced in conformity with
applicable regulations and cable operators do not remove programming services
from existing rate-regulated service tiers and offer them on an NPT.
 
  In September 1995, the FCC authorized a new, alternative method of
implementing rate adjustments which will allow cable operators to increase
rates for programming annually on the basis of projected increases in external
costs (programming costs, local regulatory fees and state and local taxes
applicable to the provision of cable television services), inflation and
changes in the number of regulated channels rather than on the basis of cost
increases incurred in the preceding quarter. Operators that elect not to
recover all of their accrued external costs and inflation pass-throughs each
year may recover them (with interest) in subsequent years. In March, 1997, the
FCC implemented regulations that provide cable operators with the option of
establishing uniform rates throughout multiple franchise areas served by the
same system. The FCC will review proposals to implement uniform rates on a
case by case basis.
 
  In December 1995, the FCC adopted final cost-of-service rate regulations
requiring, among other things, cable operators to exclude 34% of system
acquisition costs related to intangible and tangible assets used to provide
regulated services. The FCC also reaffirmed the industry-wide 11.25% after tax
rate of return on an operator's allowable rate base, but initiated a further
rulemaking in which it proposed to use an operator's actual debt cost and
capital structure to determine an operator's cost of capital or rate of
return. After a rate has been set pursuant to a cost-of-service showing, rate
increases for regulated services are indexed for inflation, and operators are
permitted to increase rates in response to increases in costs beyond their
control, such as taxes and increased programming costs.
 
  The 1996 Act amends the rate regulation provisions of the 1992 Cable Act.
Regulation of basic cable service continues in effect until a cable system
becomes subject to effective competition. Regulation of CPS rates will be
deregulated in franchise areas with more than 50,000 residents on March 31,
1999. The 1996 Act deregulates rates of small operators upon enactment where a
small cable operator serves 50,000 or fewer subscribers. A small cable
operator is defined as an operator that serves fewer than 1% of all
subscribers and is not affiliated with any entity whose gross annual revenues
in the aggregate exceed $250 million. Subscribers are no longer permitted to
file programming service complaints with the FCC, and complaints may only be
brought by a franchising authority if, within 90 days after a rate increase
becomes effective, it receives subscriber complaints. The FCC is required to
act on such complaints within 90 days. In addition to the existing definition
of effective competition, a new effective competition test permits
deregulation of both basic and CPS tier rates where a telephone company offers
cable service by any means (other than direct-to-home satellite services)
provided that such service is comparable to the services provided in the
franchise area by the unaffiliated cable operator. The uniform rate provision
of the 1992 Cable Act is amended to exempt bulk discounts to multiple dwelling
units so long as a cable operator that is not subject to effective competition
does not charge predatory prices to a multiple dwelling unit.
 
                                      23
<PAGE>
 
  Franchising authorities in a number of communities in which Cox operates
cable television systems initiated basic service rate regulation pursuant to
Section 623 of the Communications Act and corresponding regulations of the FCC
and required Cox to justify its existing basic service rates. In addition,
certain subscribers and franchising authorities filed complaints with the FCC
pursuant to Section 623 of the Communications Act and corresponding FCC
regulations challenging the reasonableness of Cox's rates for cable
programming services. Cox submitted rate justifications to these franchising
authorities and filed responses to the rate complaints with the FCC.
Franchising authorities and the FCC issued a number of rate decisions
regarding basic and CPS rates, and the FCC is currently processing several
additional rate complaints.
 
  On December 1, 1995, the FCC issued an order adopting the terms of a rate
settlement in the form of a proposed resolution between Cox and the FCC's
Cable Services Bureau (the "Resolution"). The order resolves the outstanding
programming service rate complaints covering all of Cox's systems as of June
30, 1995. The order provides for $7 million in refunds plus interest and
covers one million subscribers. The fees paid by the former TMCT subscribers
for additional were eliminated as of January 6, 1996 and accounted for
virtually all of the refund amount. The order also permits Cox to move as many
as four regulated services to a new tier in each franchise area where an a la
carte package previously was not provided, which provides Cox additional
pricing flexibility for this new tier. In addition, the order confirms that
Cox's cable programming service tier rates, as of June 30, 1995, are not
unreasonable and that the acceptance of the Resolution by the FCC does not
constitute an admission by Cox of any violation or failure to conform to any
law, rule or policy. On January 29, 1996, the City of Irvine and six other
cities located in California filed an appeal to set aside the order in the
United States Court of Appeals for the Ninth Circuit. Cox and the cities
reached a settlement of the suit and the appeal was dismissed by the Ninth
Circuit with prejudice on November 6, 1997.
 
  The FCC and Congress continue to be concerned that rates for regulated
programming services are rising at a rate exceeding inflation. The FCC has
begun to explore ways of addressing this issue. Congress is also looking into
this matter. It is therefore possible that the FCC will further restrict the
ability of cable operators to implement rate increases and/or Congress will
enact legislation which would, for example, delay or suspend the scheduled
March 1999 termination of CPST rate regulation. Congress and the FCC are also
examining means to spur competition in the delivery of video services as an
alternative to new rate regulations. In December 1997 the FCC initiated a
rulemaking to address a number of possible changes to its program access
rules. The FCC is seeking comment, among other issues, on whether it has
jurisdiction to extend its program access rules to terrestrially-delivered
programming, and if it has such jurisdiction, whether it should expand the
rules in this fashion.
 
  CARRIAGE OF BROADCAST TELEVISION SIGNALS. In March 1997 the U.S. Supreme
Court affirmed a three-judge court decision upholding the constitutional
validity of the 1992 Cable Act's mandatory "must carry" signal carriage
requirements. The FCC adopted rules implementing the must-carry provisions for
non-commercial and commercial stations and the retransmission consent
provision for commercial stations in March 1993. These rules allow commercial
television broadcast stations which are "local" to a cable system, i.e., the
system is located in the station's Area of Dominant Influence ("ADI"), to
elect every three years whether to require the cable system to carry the
station, subject to certain exceptions, or whether to require the cable system
to negotiate for "retransmission consent" to carry the station. The first such
election was made in June 1993 and the second in October 1996. With the 1999
election, FCC rules require broadcasters to use their DMA as the relevant
television market for must-carry purposes. A recent amendment to the Copyright
Act of 1976 will in some cases increase the number of stations that may elect
must-carry status on cable systems located within such stations' ADI. 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 WGN). All
commercial stations entitled to carriage were to have been carried by June
1993, and any non-must-carry stations (other than superstations) for which
retransmission consent had not been obtained could no longer be carried after
October 5, 1993. A number of stations previously carried by Cox's cable
television systems elected retransmission consent. Cox generally reached
agreements with broadcasters who elected retransmission consent or negotiated
extensions to the retransmission deadline. Cox has agreed to carry some
services (e.g., fX and
 
                                      24
<PAGE>
 
ESPN2) in specified markets pursuant to retransmission consent agreements
which it believes are comparable to those entered into by most other large
cable television operators. Local non-commercial television stations are also
given mandatory carriage rights, subject to certain exceptions, within the
larger of: (i) a 50 mile radius from the station's city of license; or (ii)
the station's Grade B contour (a measure of signal strength). Unlike
commercial stations, non-commercial stations are not given the option to
negotiate retransmission consent for the carriage of their signals. The must-
carry provisions for non-commercial stations became effective in December
1992. The FCC will soon initiate a rulemaking proceeding on the carriage of
television signals in high definition and digital formats. Cox cannot predict
the ultimate outcome of this proceeding which could have a material effect on
the number of services that a cable operator will be required to carry.
 
  NONDUPLICATION OF NETWORK PROGRAMMING. Cable television systems that have
1,000 or more customers must, upon the appropriate request of a local
television station, delete the simultaneous or nonsimultaneous network
programming of a distant station when such programming has also been
contracted for by the local station on an exclusive basis.
 
  DELETION OF SYNDICATED PROGRAMMING. FCC regulations enable television
broadcast stations that have obtained exclusive distribution rights for
syndicated programming in their market to require a cable system to delete or
"black out" such programming from other distant television stations which are
carried by the cable system. The extent of such deletions will vary from
market to market and cannot be predicted with certainty. However, it is
possible that such deletions could be substantial and could lead the cable
operator to drop a distant signal in its entirety. The FCC also has commenced
a proceeding to determine whether to relax or abolish the geographic
limitations on program exclusivity contained in its rules, which would allow
parties to set the geographic scope of exclusive distribution rights entirely
by contract, and to determine whether such exclusivity rights should be
extended to noncommercial educational stations. It is possible that the
outcome of these proceedings will increase the amount of programming that
cable operators are required to black out. Finally, the FCC has declined to
impose equivalent syndicated exclusivity rules on satellite carriers who
provide services to the owners of home satellite dishes similar to those
provided by cable systems.
 
  REGISTRATION PROCEDURE AND REPORTING REQUIREMENTS. Prior to commencing
operation in a particular community, all cable television systems must file a
registration statement with the FCC listing the broadcast signals they will
carry and certain other information. Additionally, cable operators
periodically are required to file various informational reports with the FCC.
 
  TECHNICAL REQUIREMENTS. Historically, the FCC has imposed technical
standards applicable to the cable channels on which broadcast stations are
carried, and has prohibited franchising authorities from adopting standards
which were in conflict with or more restrictive than those established by the
FCC. The FCC revised its standards and made them applicable to all classes of
channels which carry downstream National Television System Committee ("NTSC")
video programming. Local franchising authorities are permitted to enforce the
FCC's new technical standards. 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. The 1992 Cable Act requires the FCC to
periodically update its technical standards to take into account changes in
technology and to entertain waiver requests from franchising authorities who
seek to impose more stringent technical standards upon their franchised cable
television systems.
 
  POLE ATTACHMENTS. The FCC currently regulates the rates, terms and
conditions imposed by certain public utilities for use of their poles, unless
under the Federal Pole Attachment Act state public utilities commissions are
able to demonstrate that they regulate rates, terms and conditions of the
cable television pole attachments. A number of states and the District of
Columbia have so certified to the FCC. In the absence of state regulation, the
FCC administers such pole attachment rates through use of a formula which it
has devised and from time to time revises. Recently the FCC initiated a
proceeding to determine whether it should make other adjustments to the
current pole attachment formula which, if implemented, generally would result
in increased rates for pole
 
                                      25
<PAGE>
 
attachments and conduit space. The 1996 Act extends the regulation of rates,
terms and conditions of pole attachments to telecommunications service
providers, and requires the FCC to prescribe regulations to govern the charges
for pole attachments used by telecommunications carriers to provide
telecommunications services when the parties fail to resolve the dispute over
such charges. The 1996 Act, among other provisions, increases significantly
future pole attachment rates for cable systems which use pole attachments in
connection with the provision of telecommunications services as a result of a
new rate formula charged to telecommunication carriers for the non-useable
space of each pole. These rates are to be phased in after a five-year period
beginning in 2001.
 
  REGULATORY FEES AND OTHER MATTERS. Pursuant to the Communications Act, the
FCC has adopted requirements for payment of annual "regulatory fees" by the
various industries it regulates, including the cable television industry.
Currently, cable television systems are required to pay regulatory fees of
$0.54 per subscriber per year, which may be passed on to subscribers as
"external cost" adjustments to rates for basic cable service. Fees are also
assessed for other licenses, including licenses for business radio and cable
television relay systems (CARS). Those fees, however, may not be collected
directly from subscribers.
 
  In addition, the FCC has adopted regulations pursuant to the 1992 Cable Act
which require cable systems not subject to effective competition to permit
customers to purchase video programming on a per-channel or a per-event basis
without the necessity of subscribing to any tier of service, other than the
basic service tier, unless the cable system is technically incapable of doing
so. Generally cable systems must become technically capable of complying with
the statutory obligation by December 2002. On October 9, 1997, three
individual subscribers filed a putative class action suit in Superior Court of
the State of California, County of San Diego against Cox and its cable system
subsidiaries in California (the "Cox California Systems") arising out of the
manner in which the Cox California Systems sell premium channel cable
services. The suit alleges that the Cox California Systems unlawfully require
limited basic cable customers to purchase the expanded basic services tier in
order to purchase premium channels, i.e., channels sold on an a la carte basis
such as Home Box Office and Showtime. The suit asserts causes of action under
California antitrust and consumer protection laws. The suit seeks injunctive
relief as well as an order awarding the class members compensatory damages,
plus statutory damages, punitive damages, interest and attorney's fees. On
February 13, 1998, the Court granted Cox's motion to stay the suit and
referred it on grounds of Primary Jurisdiction to the Federal Communications
Commission for consideration of issues best addressed by the FCC's expertise.
The outcome of this matter cannot be predicted at this time. Consistent with
its statutory obligations, the FCC also has adopted a number of measures for
improving compatibility between existing cable systems and consumer
electronics equipment, including a prohibition from scrambling program signals
carried on the basic tier, absent a waiver. The FCC also is considering
whether to extend this prohibition to cover all regulated tiers of
programming.
 
  In December 1994, the FCC announced that its long-standing Emergency
Broadcast System rules were to be replaced. The new rules establish cable
television and broadcast technical standards to support a new Emergency Alert
System. Cable operators that serve 10,000 or more subscribers from a headend
must install and activate equipment necessary for the new system by December
31, 1998.
 
  FCC regulations also address the carriage of local sports programming;
restrictions on origination and cablecasting by cable system operators; closed
captioning of video programming; application of the rules governing political
broadcasts; customer service standards; home wiring and limitations on
advertising contained in nonbroadcast children's programming. The FCC recently
adopted new procedural guidelines governing the disposition of home run wiring
(a line running to an individual subscriber's unit from a common feeder or
riser cable) in multi-dwelling units ("MDUs"). MDU owners can use these new
rules to attempt to force cable operators without contracts to either sell,
abandon or remove home run wiring which may carry voice as well as video
communications and terminate service to MDU subscribers unless operators
retain rights under common or state law to maintain ownership rights in the
home run wiring.
 
  CONSUMER EQUIPMENT. The 1996 Act requires the FCC, in consultation with
industry standard-setting organizations, to adopt regulations which would
encourage commercial availability to consumers of all services offered by
multichannel video programming distributors, such as converter boxes,
interactive communications
 
                                      26
<PAGE>
 
equipment and other equipment used by consumers to access multichannel video
programming. The FCC has initiated a proceeding seeking comment as to how to
implement its obligations under the 1996 Act. Pursuant to the 1996 Act, the
regulations adopted may not prohibit programming distributors from offering
consumer equipment, so long as the cable operator's rates for such equipment
are not subsidized by charges for the services offered. The rules also may not
compromise the security of the services offered, or the efforts of service
providers from preventing theft of service. The FCC may waive these rules so
as not to hinder the development of advanced services and equipment.
 
  FRANCHISE FEES AND OBLIGATIONS. Although franchising authorities may impose
franchise fees under the 1984 Cable Act, such payments cannot exceed 5% of a
cable system's annual gross revenues. Recently, a federal appellate court
overturned an FCC order which had held that a cable operator's gross revenue
does not include money collected from subscribers that is allocated to pay
local franchise fees. Franchising authorities are also empowered in awarding
new franchises or renewing existing franchises to require cable operators to
provide cable-related facilities and equipment and to enforce compliance with
voluntary commitments. In the case of franchises in effect prior to the
effective date of the 1984 Cable Act, franchising authorities may enforce
requirements contained in the franchise relating to facilities, equipment and
services, whether or not cable-related. The 1984 Cable Act, under certain
limited circumstances, permits a cable operator to obtain modifications of
franchise obligations.
 
  CHANNEL SET-ASIDES. The 1984 Cable Act permits local franchising authorities
to require cable operators to set aside certain channels for public,
educational and governmental access programming. The 1984 Cable Act further
requires cable television systems with 36 or more activated channels to
designate a portion of their channel capacity for commercial leased access by
unaffiliated third parties. While the 1984 Cable Act allowed cable operators
substantial latitude in setting leased access rates, the 1992 Cable Act
requires leased access rates to be set according to an FCC-prescribed formula.
The FCC has adopted rules regulating: (i) the maximum reasonable rate a cable
operator may charge for commercial use of the designated channel capacity;
(ii) the terms and conditions for commercial use of such channels; and (iii)
the procedures for the expedited resolution of disputes concerning rates or
commercial use of the designated channel capacity. The FCC recently
reconsidered and revised the formula governing the rates that may be charged
for the use of leased access channels. The new formula, which resulted in a
downward adjustment in such rates, has been appealed by a party seeking even
lower rates for access.
 
  OWNERSHIP. The FCC rules generally prohibit the direct or indirect common
ownership, operation, control or interest in a cable television system, on the
one hand, and a local television broadcast station whose television signal
(predicted grade B contour as defined under FCC regulations) reaches any
portion of the community served by the cable television system, on the other
hand. For purposes of the cross-ownership rules, "control" of licensee
companies is attributed to all 5% or greater stockholders, except for mutual
funds, banks and insurance companies which may own less than 10% without
attribution of control. This rule prohibits Cox from owning or operating a
cable television system in the same area in which CEI or one of CEI's
subsidiaries owns or operates a television broadcast station. The FCC has
requested comment as to whether to raise the attribution criteria from 5% to
10% and for passive investors from 10% to 20%, and whether it should exempt
from attribution certain widely held limited partnership interests where each
individual interest represents an insignificant percentage of total
partnership equity. The 1996 Act eliminated the statutory ban on the cross-
ownership of a cable system and a television station and permits the FCC to
amend or revise its own regulations regarding the cross-ownership ban. The FCC
has repealed its broadcast network/cable system cross-ownership ban, and
recently initiated a rulemaking proceeding in connection with a review of its
cross-ownership rules to determine whether the cable television/broadcast
cross-ownership ban is necessary and in the public interest or whether it
should be eliminated.
 
  Finally, in order to encourage competition in the provision of video
programming, the FCC adopted a rule in 1993 prohibiting the common ownership,
affiliation, control or interest of cable television systems and MMDS
facilities having overlapping service areas, except in very limited
circumstances. However, the 1996 Act permits co-ownership of MMDS and cable
systems in areas where the cable operator is subject to effective competition.
The 1992 Cable Act also codified this restriction and extended it to co-
located SMATV systems, except that a
 
                                      27
<PAGE>
 
cable system may acquire a co-located SMATV system if it provides cable
service to the SMATV system in accordance with the terms of its cable
television franchise. Under the 1992 Cable Act, permitted arrangements in
effect as of October 5, 1992 were grandfathered. The 1992 Cable Act permits
states or local franchising authorities to adopt certain additional
restrictions on the transfer of ownership of cable television systems.
 
  The cross-ownership prohibitions would preclude investors from holding
ownership interests in Cox if they simultaneously served as officers or
directors of, or held an attributable ownership interest in, these other
businesses, and would also preclude Cox from acquiring a cable television
system when Cox's officers or directors served as officers or directors of, or
held an attributable ownership in, these other businesses which were located
within the same area as the cable system which was to be acquired.
 
  The 1996 Act generally restricts common carriers from holding greater than a
10% financial interest or any management interest in cable operators which
provide cable service within the carrier's telephone exchange service area or
from entering joint ventures or partnerships with cable operators in the same
market subject to four general exceptions which include population density and
competitive market tests. The FCC may waive the buyout restrictions if it
determines that, because of the nature of the market served by the cable
system or the telephone exchange facilities, the cable operator or LEC would
be subject to undue economic distress by enforcement of the restrictions, the
system or LEC facilities would not be economically viable if the provisions
were enforced, the anticompetitive effects of the proposed transaction clearly
would be outweighed by the public interest in serving the community, and the
local franchising authority approves the waiver.
 
  Pursuant to the 1992 Cable Act, the FCC has imposed regulatory ownership
restrictions on the number of cable systems which a single cable operator may
own. In general, no cable operator may hold an attributable interest in cable
systems which pass more than 30% of all homes nationwide. Attributable
interests for these purposes include voting interests of 5% or more (unless
there is another single holder of more than 50% of the voting stock),
officerships, directorships and general partnership interests. The FCC has
stayed the effectiveness of these rules pending the outcome of the appeal of
the United States District Court decision holding the multiple ownership limit
provision of the 1992 Cable Act unconstitutional. The appeal of that decision
has been consolidated with an appeal of the FCC's regulatory ownership
restrictions. The FCC also has adopted rules which limit the number of
channels on a cable system that can be occupied by programming in which the
entity that owns the cable system has an attributable interest. The limit is
40% of all activated channels.
 
  Federal cross-ownership restrictions have previously limited entry into the
cable television business by potentially strong competitors such as telephone
companies. The 1996 Act repeals the cross-ownership ban and provides that
telephone companies may operate cable television systems within their own
service areas.
 
  The 1996 Act permits telephone companies to provide video programming
services as common carriers, cable operators or open video system ("OVS")
operators. If OVS systems become widespread in the future, cable television
systems could be placed at a competitive disadvantage because, unlike OVS
operators, cable television systems are required to obtain local franchises to
provide cable television service and must comply with a variety of obligations
under such franchises. Under the 1996 Act, common carriers leasing capacity
for the provision of video programming services over cable systems or OVS
operators are not bound by the interconnection obligations of Title II, which
otherwise would require the carrier to make capacity available on a
nondiscriminatory basis to any other person for the provision of cable service
directly to subscribers. Additionally, under the 1996 Act, common carriers
providing video programming are not required to obtain a Section 214
certification to establish or operate a video programming delivery system.
 
  Common carriers that qualify as OVS operators are exempt from many of the
regulatory obligations that currently apply to cable operators. However,
certain restrictions and requirements that apply to cable operators will still
be applicable to OVS operations. Common carriers that elect to provide video
services over an OVS may do so upon obtaining certification by the FCC. Among
other requirements, the 1996 Act prohibits OVS operators from discriminating
in the provision of video programming services and requires OVS operators to
limit carriage of video services selected by the OVS operator to one-third of
the OVS's capacity. OVS operators must also comply with the FCC's sports
exclusivity, network nonduplication and syndicated
 
                                      28
<PAGE>
 
exclusivity restrictions, public, educational, and government channel use
requirements, the "must-carry" requirements of the 1992 Cable Act, and
regulations that prohibit anticompetitive behavior or discrimination in the
prices, terms and conditions of providing vertically integrated satellite-
delivered programming. The manner in which OVS operators will be treated as
cable operators for purposes of copyright liability has not yet been
determined by the Copyright Office. Upon compliance with such requirements and
FCC rules that mirror statutory requirements, an OVS operator will be exempt
from various statutory restrictions which apply to cable operators, such as
broadcast-cable ownership restrictions, commercial leased access requirements,
franchising, rate regulation, and consumer electronics compatibility
requirements. Although OVS operators are not subject to franchise fees, as
defined by the 1996 Act, they may be subject to fees charged by local
franchising authorities or other governmental entities in lieu of franchise
fees. Such fees may not exceed the rate at which franchise fees are imposed on
cable operators and may be itemized separately on subscriber bills.
 
  The FCC has ruled that cable operators may opt to operate OVS systems, but
only if they are subject to effective competition. Under the FCC's rules, a
cable operator may not terminate an existing franchise agreement to become an
OVS operator. An appeal of these rules is currently pending in the United
States Court of Appeals for the Fifth Circuit.
 
  TELECOMMUNICATIONS REGULATION. The telecommunications services currently
offered by Cox affiliates and Sprint PCS are subject to varying degrees of
federal, state and local regulation. The FCC exercises jurisdiction over all
facilities of, and services offered by, telecommunications service providers
to the extent that those facilities are used to provide, originate and
terminate interstate or international communications.
 
  LANDLINE TELECOMMUNICATIONS SERVICES. While the current switched voice and
data market is dominated by local exchange companies, also known as incumbent
LECs, the 1996 Act presents new opportunities for new entrants into these
markets. The LECs provide a full range of local telecommunications services
and equipment to customers, as well as originating and terminating access to
their local networks to interexchange carriers and commercial mobile radio
service providers. Because LECs historically have had exclusive state
franchises by law to provide telephone services, they have established
monopoly relationships with their customers. Under the new law and subject to
certain exemptions for rural telephone companies, the FCC is directed to
preempt any state law or regulation that acts to prevent new competitive entry
into incumbent LEC markets.
 
  The 1996 Act also eliminates the interexchange (interLATA) restrictions
contained in the Modified Final Judgment, the 1981 consent decree, and
establishes procedures under which a Bell Operating Company (BOC) can enter
the market for interLATA services within its telephone service area. Before a
BOC can enter the landline interLATA market, it must enter into a state-
approved interconnection agreement with a company that provides local exchange
service to business and residential customers predominantly over its own
facilities. Alternatively, if no such competitor requests interconnection, the
BOC can request authority to provide interLATA services if it offers
interconnection pursuant to state-approved terms and conditions. The
interconnection provided by the BOC must comply with a "competitive
checklist." Several BOCs have filed applications for authority to provide
interLATA services, including Southwestern Bell for Oklahoma and BellSouth for
Louisiana. The FCC has denied each of the applications it has considered to
date, although some of these denials are subject to pending appeals in the
United States Court of Appeals for the District of Columbia Circuit. The
United States District Court for the Northern District of Texas has declared
these provisions of the 1996 Act unconstitutional on the ground that they
constitute an impermissible bill of attainder against the BOCs, but the
effectiveness of that order has been stayed and both the FCC and several long
distance carriers have announced their intention to appeal the decision.
 
  REGULATORY REQUIREMENTS FOR ALL LECS INCLUDING NEW ENTRANTS. Under the 1996
Act, new landline entrants will become subject to additional federal
regulatory requirements when they provide local exchange service in any
market. The 1996 Act imposes a number of access and interconnection
requirements on all LECs, with additional requirements imposed on incumbent
LECs. Specifically, the 1996 Act required the FCC to implement rules under
which all LECs must provide telephone number portability, dialing parity,
reciprocal compensation for transport and termination of local traffic, resale
and access to rights of way. In addition, the 1996 Act specifies procedures
for state commissions to review and approve both voluntary and compulsory
interconnection
 
                                      29
<PAGE>
 
agreements entered into between new entrants and incumbent LECs. These
requirements also place burdens on new entrants that may benefit other
competitors. In particular, the resale requirement means that a company can
seek to resell the facilities of a new entrant without making a similar
investment in facilities.
 
  One of the primary goals of the original Communications Act of 1934 was to
extend telephone service to all citizens of the United States. This goal has
been achieved primarily by maintaining the rates for basic local exchange
service at a reasonable level. It was widely accepted that incumbent LECs were
able to maintain relatively low local rates by subsidizing them with revenues
from business and toll services, and by subsidizing rural service at the
expense of urban customers. The extent of these subsidies has been widely
disputed and incumbent LECs that have this information generally have not made
it available for review and verification.
 
  The 1996 Act continues the goal of preserving and advancing universal
service by requiring the FCC to establish an explicit mechanism for
subsidizing service to those who might otherwise drop off the public switched
telephone network. The rules adopted by the FCC in the Universal Service Order
require telecommunications carriers generally (subject to limited exemptions)
to contribute to funding existing universal service programs for high cost
carriers and low income customers and to new universal service programs for
schools, libraries and rural health care providers. The FCC has not yet
addressed universal service funding for high cost areas generally or
modifications to its universal service programs for rural carriers.
 
  Depending upon how the FCC completes the implementation of its statutory
mandate and how states adjust their existing programs or create new programs,
this subsidy mechanism may provide an additional source of revenue to those
LECs willing and able to provide service to those markets that are less
financially desirable, either because of the high cost of providing service or
the limited revenues that might be available from serving a particular subset
of customers in an area, i.e., residential customers.
 
  Another goal of the 1996 Act is to increase competition for
telecommunications services, thereby reducing the need for continuing
regulation of these services. To this end the 1996 Act requires the FCC to
streamline its regulation of incumbent LECs and permits the FCC to forbear
from regulating particular classes of telecommunications services or
providers, including through relaxation or potentially eventual termination of
FCC service tariffing requirements.
 
  The 1996 Act eliminates the requirement that incumbent LECs obtain FCC
authorization prior to constructing facilities for interstate services. The
1996 Act also limits the FCC's ability to review incumbent LEC tariff filings.
These changes will increase the speed with which incumbent LECs are able to
introduce new service offerings and new pricing of existing services, thereby
increasing their flexibility to respond to new entrants.
 
  In addition to incumbent LECs and existing competitive access providers, new
entrants potentially capable of offering switched and non-switched services
include individual cable television companies, electric utilities, long
distance carriers, microwave carriers, wireless service providers, resellers
and private networks built by large end-users.
 
  BROADBAND PCS AUCTION. In the 1993 Budget Act, Congress gave the FCC the
authority to preempt states from regulating the entry of or the rates charged
by any Commercial Mobile Radio Service ("CMRS") provider, including PCS
providers. On February 3, 1994, the FCC adopted rules implementing the 1993
Budget Act and
created the CMRS regulatory classification. The CMRS classification applies to
all mobile services (including PCS) that are for profit and that provide
interconnected service to the public or a substantial portion of the public.
At that time, the FCC preempted state regulation and established a procedure
for states to petition the FCC for authority to regulate CMRS rates. Eight
states submitted requests to continue regulation of cellular providers within
their jurisdictions. On May 19, 1995, the FCC released orders denying the
requests.
 
  States are permitted under the 1993 Budget Act to regulate "other terms and
conditions" of CMRS, including the siting and zoning of CMRS equipment. A
petition for rulemaking is pending before the FCC requesting that the FCC
preempt state and local siting and zoning regulation to the extent such
regulation acts to
 
                                      30
<PAGE>
 
inhibit or prevent entry into the CMRS marketplace. The petition generally has
been opposed by state and local governments and supported by CMRS providers
and potential PCS providers. The 1996 Act contains a provision prohibiting
state and local governments from discriminating in their zoning decisions that
apply to personal wireless service facilities and enforcing rules or
regulations that prevent the provision of wireless services.
 
  Additionally, the 1996 Act specifically determined that CMRS providers are
not required to provide equal access to interexchange carriers for the
provision of interexchange services. While the FCC has prescribed rules for
the unblocking of access to a preferred interexchange carrier, the legislation
does away with the equal access requirement imposed on the wireless affiliates
of the BOCs. In addition, the 1996 Act permits the BOCs, on enactment, to
provide interexchange service to their cellular customers.
 
  The FCC has allocated 120 MHz of spectrum in the 2 GHz band to be licensed
to competing broadband PCS providers, which it is anticipated will offer
advanced digital wireless services in competition with current cellular and
specialized mobile radio services as well as with landline telephone service.
Broadband PCS spectrum was first auctioned by MTA licenses by the FCC in an
auction which ended in mid-March 1995. Six broadband PCS licenses have been
auctioned in each service area (except that only five licenses were auctioned
in the three markets in which pioneer preference licenses were issued), and
FCC rules permit some aggregation and disaggregation of PCS spectrum by PCS
operators. The first broadband PCS auction included two 30 MHz frequency
blocks of spectrum (Blocks "A" and "B") licensed by MTA. The second auction
was for 30 MHz blocks of broadband spectrum, licensed using Basic Trading
Areas (Block "C" auction). Block C licenses were available only to parties
that met specific FCC eligibility criteria. A Basic Trading Area spectrum
block, Block "F," was also auctioned only to parties meeting specific
eligibility criteria following the Block "C" auction. The FCC also has
licensed two Basic Trading Area 10 MHz blocks of spectrum, Blocks "D" and "E,"
which are not be subject to the additional eligibility requirements imposed on
Blocks "C" and "F."
 
STATE AND LOCAL REGULATION
 
  CABLE TELEVISION REGULATION. Because a cable television system uses local
streets and rights-of-way, cable television systems are subject to state and
local regulation, typically imposed through the franchising process.
Consistent with the Communications Act, state and/or local officials are
usually involved in franchise selection, system design and construction,
safety, service rates, consumer relations, billing practices and community
related programming and services.
 
  Cable television systems generally are operated pursuant to non-exclusive
franchises, permits or licenses granted by a municipality or other state or
local government entity. Franchises generally are granted for fixed terms and
in many cases are terminable if the franchise operator fails to comply with
material provisions. Although the 1984 Cable Act provides for certain
procedural protections, there can be no assurance that renewals will be
granted or that renewals will be made on similar terms and conditions.
Franchises usually call for the payment of fees, often based on a percentage
of the system's gross customer revenues, to the granting authority. Upon
receipt of a franchise, the cable system owner usually is subject to a broad
range of obligations to the issuing authority directly affecting the business
of the system. The terms and conditions of franchises vary materially from
jurisdiction to jurisdiction, and even from city to city within the same
state, historically ranging from reasonable to highly restrictive or
burdensome. The 1984 Cable Act places certain limitations on a franchising
authority's ability to control the operation of a cable system, and courts
have from time to time reviewed the constitutionality of several general
franchise requirements, including franchise fees and access channel
requirements, often with inconsistent results. On the other hand, the 1992
Cable Act prohibits exclusive franchises and allows franchising authorities to
exercise greater control over the operation of franchised cable television
systems, especially in the area of customer service and rate regulation. The
1992 Cable Act also allows franchising authorities to operate their own
multichannel video distribution system without having to obtain a franchise
and permits states or local franchising authorities to adopt certain
restrictions on the ownership of cable television systems. Moreover,
franchising authorities have immunity from monetary damage awards arising from
regulation of cable television systems or decisions made on franchise grants,
renewals, transfers and amendments.
 
                                      31
<PAGE>
 
  The specific terms and conditions of a franchise and the laws and
regulations under which it was granted directly affect the profitability of
the cable television system. Cable franchises generally contain provisions
governing fees to be paid to the franchising authority, length of the
franchise term, renewal, sale or transfer of the franchise, territory of the
franchise, design and technical performance of the system, use and occupancy
of public streets and number and types of cable services provided.
 
  Various proposals have been introduced at the state and local levels with
regard to the regulation of cable television systems, and a number of states
have adopted legislation subjecting cable television systems to the
jurisdiction of centralized state governmental agencies, some of which impose
regulation of a character similar to that of a public utility.
 
  STATE TELECOMMUNICATIONS REGULATION. In addition to federal rules and
regulations that apply to Cox's telephony operations, state commissions
regulate, to varying degrees, the intrastate services of landline
telecommunications providers, including those of Cox's landline affiliates.
While state commission regulation of new telecommunications providers is
generally less onerous than the regulation imposed on incumbent LECs, new
entrants providing local exchange services typically must apply for and
receive state certification and operate in accordance with state commission
pricing, terms and quality of service regulations. Under the 1996 Act, state
commissions also must review interconnection agreements entered into between
incumbent LECs and new entrants, as well as enforce the terms of disputed
agreements. States may also choose to assess universal service funding
contributions from new carriers provided that a state's program is consistent
with the FCC's universal service rules.
 
  Most wireless services, including cellular and PCS, are exempted from state
certification requirements and from state rate regulation by Section 332 of
the Communications Act. States are permitted to regulate "other terms and
conditions" of wireless service, although the extent of that authority has not
been determined. The FCC has held that states are permitted to require
wireless providers to make payments into state universal service funds. That
determination is subject of pending appeals in the U.S. Courts of Appeals for
the Fifth Circuit and before the District of Columbia Circuit.
 
  The foregoing does not purport to describe all present and proposed federal,
state and local regulations and legislation relating to the cable television
or telephony industries. 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 or telephony systems
operate. Neither the outcome of these proceedings nor their impact upon the
cable television or telephony industries can be predicted at this time.
 
  The government of Mexico has authorized the allocation of a new broadcast
station on channel 3 in Tijuana, Mexico, which if constructed, will cause
interference with the operations of the Cox's cable system serving the San
Diego area. Cox provides its subscribers with converters which are tuned to
channel 3, and ingress from the station's signal wall cause co-channel
interference on the system in those areas of the San Diego market where the
station's signal is received. The United States Government has requested the
Mexican government to modify its proposed allocation. If the Mexican
government declines, Cox would be required to incur expenses to retune
subscribers' converters to a different channel. Cable reception in those
franchise areas where the station could be received would be disrupted until
the converters were retuned.
 
EMPLOYEES
 
  At December 31, 1997, Cox had approximately 7,700 full-time-equivalent
employees. Cox considers its relations with its employees to be satisfactory.
 
ITEM 2. PROPERTIES
 
  Cox's principal physical assets consist of cable television operating plant
and equipment, including signal receiving, encoding and decoding devices,
headends and distribution systems and customer house drop equipment for each
of its cable television systems. The signal receiving apparatus typically
includes a tower,
 
                                      32
<PAGE>
 
antenna, ancillary electronic equipment and earth stations for reception of
satellite signals. Headends, consisting of associated electronic equipment
necessary for the reception, amplification and modulation of signals, are
located near the receiving devices. Cox's distribution system consists
primarily of coaxial and fiber optic cables and related electronic equipment.
Customer devices consist of decoding converters, cable modems and telephone
network interface units. The physical components of cable television systems
require maintenance and periodic upgrading to keep pace with technological
advances.
 
  Cox's cable distribution plant and related equipment are generally attached
to utility poles under pole rental agreements with local public utilities,
although in some areas the distribution cable is buried in underground ducts
or trenches. Cox owns or leases parcels of real property for signal reception
sites (antenna towers and headends), microwave facilities and business offices
in each of its market areas and leases most of its service vehicles. Cox
believes that its properties, both owned and leased, taken as a whole, are in
good operating condition and are suitable and adequate for Cox's business
operations.
 
ITEM 3. LEGAL PROCEEDINGS
 
  On October 9, 1997, three individual subscribers filed a putative class
action suit in Superior Court of the State of California, County of San Diego
against Cox and its cable system subsidiaries in California (the "Cox
California Systems") arising out of the manner in which the Cox California
Systems sell premium channel cable services. The suit alleges that the Cox
California Systems unlawfully require limited basic cable customers to
purchase the expanded basic services tier in order to purchase premium
channels, i.e., channels sold on an a la carte basis such as Home Box Office
and Showtime. The suit asserts causes of action under California antitrust and
consumer protection laws. The suit seeks injunctive relief as well as an order
awarding the class members compensatory damages, plus statutory damages,
punitive damages, interest and attorney's fees. On February 13, 1998, the
Court granted Cox's motion to stay the suit and referred it on grounds of
Primary Jurisdiction to the Federal Communications Commission for
consideration of issues best addressed by the FCC's expertise should the
plaintiffs elect to file a complaint with the FCC. The outcome of this matter
cannot be predicted at this time.
 
  Cox and its subsidiaries in Arizona, Oklahoma, Louisiana and Florida are
defendants in seven putative subscriber class action suits in the respective
state courts initiated between October 17, 1997 and January 26, 1998. The
suits all challenge the propriety of late fees charged by the subsidiaries to
customers who fail to pay for services in a timely manner. The suits seek
injunctive relief and various formulations of damages under various claimed
causes of action under various bodies of state law. The actions are being
defended vigorously. The outcome of these matters cannot be predicted at this
time.
 
  Cox is a party to various legal proceedings that are ordinary and incidental
to its business. Management does not expect that any legal proceedings
currently pending, individually or in the aggregate, will have a material
adverse effect on Cox or its business or operations. See Note 16 to the
Consolidated Financial Statements included herein.
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
  None.
 
                                      33
<PAGE>
 
                                    PART II
 
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
 
  The information required by this Item is incorporated by reference to the
section entitled "Shareholder Information" of Cox's 1997 Annual Report to
Stockholders (see Exhibit 13).
 
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
 
  The following selected historical financial information for each of the five
years in the period ended December 31, 1997 has been derived from and should
be read in conjunction with the Consolidated Financial Statements and notes
thereto and Management's Discussion and Analysis of Financial Condition and
Results of Operations.
 
  The following selected pro forma data give effect to the Merger (as defined
herein) and related transactions as if they occurred on January 1, 1994. The
pro forma data do not purport to represent what Cox's results of operations or
financial condition would actually have been had the Merger occurred on such
date and are not necessarily indicative of future operating results or
financial condition.
 
<TABLE>
<CAPTION>
                                              YEAR ENDED DECEMBER 31
                          ------------------------------------------------------------------------
                                                                                    PRO FORMA
                                                                                ------------------
                            1997        1996        1995      1994      1993      1995      1994
                          --------    --------    --------  --------  --------  --------  --------
                                   (MILLIONS OF DOLLARS, EXCEPT PER SHARE DATA)
<S>                       <C>         <C>         <C>       <C>       <C>       <C>       <C>
STATEMENTS OF OPERATIONS
 DATA:
 Revenues...............  $1,610.4    $1,460.3    $1,286.2  $  736.3  $  708.0  $1,328.1  $1,235.2
 Operating income.......     205.3       221.7       226.0     139.8     179.7     231.3     219.8
 Interest expense.......     202.1       146.1       132.3      46.1      12.9     140.1     148.9
 Equity in net losses of
  affiliated companies..     404.4       170.4        79.7      43.9      28.2      79.7      54.2
 Gain on sale and
  exchange of cable
  television systems....      51.8         --          --        --        --        --        --
 Gain on issuance of
  stock by affiliated
  companies.............      90.8        50.1         --        --        --        --        --
 Gain on sale of
  affiliated companies..     248.7         4.6       188.8       --        --      188.8       --
 Loss on write down of
  affiliated company....     183.9         --          --        --        --        --        --
 Income (loss) before
  cumulative effect of
  accounting changes....    (136.5)      (51.6)      103.8      26.6      77.1     101.2     (12.8)
 Net income (loss)......    (136.5)      (51.6)      103.8      26.6      97.8     101.2     (12.8)
 Basic and diluted net
  income (loss) per
  share.................  $  (0.50)   $  (0.19)   $   0.41       --        --   $   0.39  $  (0.05)
OTHER OPERATING AND
 FINANCIAL DATA (A):
 Operating cash flow....  $  609.8    $  556.9    $  493.3  $  268.5  $  295.7  $  510.4  $  473.6
 Operating cash flow
  margin................      37.9%       38.1%       38.4%     36.5%     41.8%     38.4%     38.3%
 Debt to operating cash
  flow ratio............      5.2x(b)     5.2x(b)     5.2x      2.9x      2.0x      5.0x      4.5x
BALANCE SHEET DATA:
December 31
 Total assets...........  $6,556.6    $5,784.6    $5,555.3  $1,874.7  $1,527.4  $5,555.3  $4,460.7
 Total debt (including
  amounts due to CEI)...   3,148.8     2,881.0     2,575.3     787.8     595.6   2,575.3   2,150.9
</TABLE>
 
 
                                      34
<PAGE>
 
<TABLE>
<CAPTION>
                                                      DECEMBER 31
                         ---------------------------------------------------------------------------
                                            HISTORICAL                             PRO FORMA (A)
                         -----------------------------------------------------  --------------------
                           1997       1996       1995       1994       1993       1995       1994
                         ---------  ---------  ---------  ---------  ---------  ---------  ---------
<S>                      <C>        <C>        <C>        <C>        <C>        <C>        <C>
CUSTOMER DATA:
December 31
 Homes passed........... 5,023,870  5,016,749  5,005,858  2,878,857  2,838,197  5,005,858  4,956,055
 Basic customers........ 3,235,338  3,259,384  3,248,759  1,851,726  1,784,337  3,248,759  3,126,634
 Premium service units.. 1,865,184  2,000,673  1,827,068  1,203,606  1,205,587  1,827,068  1,984,561
 Basic penetration......      64.4%      65.0%      64.9%      64.3%      62.9%      64.9%      63.1%
 PrimeStar customers....   171,531    130,606     56,822     17,894        --      56,822     17,894
</TABLE>
--------
(a) Operating cash flow (operating income before depreciation and
    amortization) is a commonly used financial analysis tool for measuring and
    comparing cable television companies in several areas, such as liquidity,
    operating performance and leverage. Operating cash flow should not be
    considered by the reader as an alternative to net income as an indicator
    of Cox's performance or as an alternative to cash flows from operating
    activities as a measure of liquidity.
 
(b) Using the fourth quarter annualized operating cash flow, the ratio was
    4.6x and 4.9x at December 31, 1997 and 1996, respectively.
 
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
        RESULTS OF OPERATIONS
 
RECENT ACQUISITIONS, DISPOSITIONS AND INVESTMENTS
 
 U.S. BROADBAND NETWORKS
 
  On February 1, 1995, Cox Communications, Inc. ("Cox"), Cox Enterprises, Inc.
("CEI"), The Times Mirror Company ("Times Mirror") and New TMC Inc. ("New
Times Mirror") consummated a merger (the "Merger"), pursuant to which Times
Mirror (which, at the time of the Merger, was engaged only in the cable
television business) merged with and into Cox. In connection with the Merger,
Cox Class A Common Stock became publicly traded on the New York Stock
Exchange. Following the Merger, New Times Mirror changed its name to "The
Times Mirror Company." As a result of the Merger, the former Times Mirror
stockholders received a total of approximately 54,904,252 shares of Cox Class
A Common Stock. Subsidiaries of CEI received 181,296,833 shares of Cox Class A
Common Stock and 13,798,896 shares of Cox Class C Common Stock.
 
  In September 1995, Cox sold its cable television system serving
approximately 13,000 customers in Bullhead City, Arizona for $20 million. No
gain or loss resulted from this transaction.
 
  In January 1996, Cox acquired a cable television system serving
approximately 51,000 customers in Newport News, Virginia, for approximately
$122.3 million. Cox operates this system as part of its cluster of systems in
the Hampton Roads, Virginia area.
 
  In January 1996, Cox sold its cable television system in Texarkana, Texas.
The system, which was acquired as part of the Merger, served approximately
23,400 customers. No gain or loss resulted from this transaction.
 
  In April 1996, Cox exchanged its Williamsport, Pennsylvania cable television
system for $13 million and a cable television system in East Providence, Rhode
Island. The Williamsport system, which was acquired as part of the Merger,
served approximately 24,500 customers in Williamsport. The East Providence
system serves approximately 15,500 customers. No gain or loss resulted from
this transaction.
 
  In April 1996, Cox sold certain cable television systems in the Ashland,
Kentucky and Defiance, Ohio area for $136 million. These systems, which were
acquired as a result of the Merger, together served approximately 78,600
customers. No gain or loss resulted from this transaction.
 
  In January 1997, Cox and Tele-Communications, Inc. ("TCI") exchanged certain
cable television systems owned by Cox serving approximately 319,000 customers
for certain cable television systems owned by TCI serving approximately
296,000 customers. As a result of the transaction, Cox received TCI's systems
in
 
                                      35
<PAGE>
 
Bellevue/LaVista, Nebraska and Council Bluffs, Iowa; Chesapeake, Virginia;
Scottsdale, Arizona; North Attleboro/Taunton, Massachusetts; Lincoln, Rhode
Island; and St. Bernard, Louisiana. In exchange, TCI received Cox's systems in
the greater Pittsburgh area; Spokane, Washington; Springfield, Illinois; Cedar
Rapids, Iowa and the Quad Cities area of Illinois and Iowa; and Saginaw,
Michigan. No significant gain or loss resulted from this transaction.
 
  In January 1997, Cox exchanged cable television systems in western
Massachusetts and Weymouth, Massachusetts for cable television systems in
James City and York County, Virginia and Pawtucket, Rhode Island. Each of the
systems served approximately 48,000 customers. No gain or loss resulted from
this transaction.
 
  In March 1997, Cox exchanged its Myrtle Beach, South Carolina cable
television system serving approximately 42,200 customers for Hampton and
Williamsburg, Virginia cable television systems serving approximately 45,300
customers. The transaction included a Texas cable television system serving
approximately 7,000 customers which was purchased and them immediately traded
by Cox. Cox recognized a book gain of $27.8 million in conjunction with the
exchange.
 
  In September 1997, Cox sold its Sun City, California cable television
system, serving approximately 10,000 customers. An insignificant loss was
recognized in conjunction with the sale. The net proceeds from the sale of Sun
City were used in the Lafayette exchange described below.
 
  In December 1997, Cox exchanged its Lafayette, Indiana cable television
system serving approximately 38,000 customers and the net proceeds from the
sale of Sun City for a suburban Phoenix cable system serving approximately
36,000 customers. No gain or loss resulted from this transaction.
 
  In December 1997, Cox sold its Central Ohio cable television system, serving
approximately 85,000 customers for $204.2 million. Cox recognized a book gain
of $26.4 million in conjunction with the sale. For tax purposes, Cox accounted
for the disposition as a like-kind exchange. Tax rules allow Cox to defer a
substantial portion of the related tax gain on this transaction upon the
reinvestment of the net proceeds in qualifying future acquisitions. Cox is
presently pursuing additional qualifying reinvestment assets. At December 31,
1997, restricted cash of $204.2 million was held in escrow pending
reinvestment.
 
 Telephony
 
  Cox, TCI, Comcast and Sprint Corporation ("Sprint") engage in the wireless
communications business, primarily personal communication services ("PCS")
through a limited partnership, Sprint Spectrum L.P. with its subsidiaries
("Sprint PCS"), of which Cox owns a 15% interest. Sprint PCS was the
successful bidder for 29 broadband PCS licenses in the auction conducted by
the FCC that was completed in March 1995. The $2.1 billion total purchase
price for the 29 licenses has been paid to the FCC. Additionally, Sprint PCS
has invested in other entities that hold and operate PCS licenses. The
partnership agreement of Sprint PCS contemplates that the partners in the
aggregate may be required to make cash capital of up to $4.2 billion. Cox
recorded $225.2 million, $56.5 million and $7.9 million of equity in net
losses in affiliated companies for the years ended December 31, 1997, 1996 and
1995, respectively, for its ownership interest in Sprint PCS. As of January 1,
1998, a "Deadlock Event" occurred due to the failure of the partnership board
of Sprint Spectrum Holding Company, L.P. (the parent of Sprint PCS) to approve
the proposed 1998 budget. If the 1998 budget is not approved through the
resolution procedures set forth in the Sprint Spectrum Holding Company, L.P.
partnership agreement, certain specified buy/sell procedures may be triggered
which might result in a restructuring of the partners' interests in Sprint
Spectrum Holding Company, L.P., Cox's sale of its interest in Sprint Spectrum
Holding Company, L.P., Cox's acquisition of interests in Sprint Spectrum
Holding Company, L.P. held by other partners, or liquidation of Sprint
Spectrum Holding Company, L.P. Discussions among the partners about
restructuring their interest in Sprint PCS are ongoing. However, there is no
certainty the discussion will result in a change to the partnership structure.
 
  Cox also owns, as of December 31, 1997, a 17.6% interest in PhillieCo L.P.
("PhillieCo"), a partnership formed by subsidiaries of Cox, TCI and Sprint.
PhillieCo was the successful bidder for a broadband PCS license for the
Philadelphia MTA. The approximately $85 million purchase price for this
license has already been paid to the FCC. PhillieCo is also affiliated with
the Sprint PCS nationwide network and uses the "Sprint PCS" trademark.
 
                                      36
<PAGE>
 
  In 1995, Cox was awarded a broadband personal communications service ("PCS")
license for the Los Angeles-San Diego Major Trading Area ("MTA") under the
Federal Communications Commission's ("FCC") pioneer preference program. Cox
and CEI, through subsidiaries, have formed a partnership, Cox Pioneer
Partnership ("CPP"), to own the two companies' joint interest in a PCS system
in the Los Angeles-San Diego MTA. CPP is owned approximately 78% by Cox and
approximately 22% by CEI. Cox and CEI have made and will make capital
contributions to CPP in proportion to their percentage interests. In December
1996, pursuant to previous agreements, CPP and Sprint Spectrum Holding
Company, L.P. (a partnership of Cox, TCI, Comcast and Sprint) formed Cox
Communications PCS, L.P. ("Cox PCS") to operate the PCS system in the Los
Angeles-Sand Diego MTA. Cox PCS is currently owned 49% by Sprint Spectrum
Holding Company, L.P. as limited partner and 51% by CPP as general partner. In
March 1997, upon approval from the FCC, Cox transferred the PCS license for
the Los Angeles-San Diego MTA to Cox PCS and Cox PCS assumed the related
license payment obligation to the FCC of $251.9 million. The December 1996
formation of Cox PCS and the March 1997 transfer of the license and obligation
resulted in Cox recording $36.5 million as a capital contribution from CEI.
 
  In February 1998, CPP exercised its right under the Cox PCS partnership
agreement to sell a portion of its interest in Cox PCS to Sprint Spectrum
Holding Company, L.P. Upon the consummation of this sale, which will occur
following the receipt of required regulatory approvals, Cox PCS will be owned
59.2% by Sprint Spectrum Holding Company, L.P. as general partner and limited
partner and 40.8% by CPP as general partner. The net proceeds of the sale will
be allocated between Cox and CEI in accordance with the partnership agreement
of CPP. Cox recorded $85 million of equity in net losses in affiliated
companies for the year ended December 31, 1997 related to the operations of
Cox PCS. Additionally, Cox recorded $60.7 million and $6 million of equity in
net losses of affiliated companies for the years ended December 31, 1996 and
1995 respectively, related to the operations of the PCS system prior to the
formation of Cox PCS.
 
  Prior to June 1996, Cox held a 30.06% interest in each of Teleport
Communications Group Inc. ("TCGI") and TCG Partners ("TCGP"), which both owned
and operated fiber optic networks serving several U.S. markets and provide
point-to-point digital communications links to telecommunications businesses
and long-distance carriers. In June 1996, TCGI entered into a reorganization
under which, among other things, TCGI's four stockholders, Cox, Comcast,
MediaOne of Delaware, Inc., formerly Continental Cablevision, Inc.
("MediaOne") and TCI (collectively, the "Cable Stockholders") contributed to
TCGI all of their partnership interests in TCGP, additional interests in local
joint ventures and debt and accrued interest owned by TCGI to the Cable
Stockholders (the "Reorganization"). Following the Reorganization, TCGI
conducted an initial public offering in which it sold 27,025,000 shares of its
Class A Common Stock (the "TCGI IPO"). MediaOne sold its equity interest in
TCGI through several transactions culminating in a secondary offering in
November 1997. Cox owns 39,087,594 shares of TCGI's Class B Common Stock
which, as of December 31, 1997, represented 34.4% of TCGI's Class B Common
Stock, 22.4% of total shares outstanding and 32.7% of the voting power of
TCGI. Each share of Class B Common Stock is convertible into one share of
TCGI's Class A Common Stock. As a result of the TCGI IPO, Cox recorded a pre-
tax gain of $50.1 million to recognize Cox's proportionate increase in its
share of the underlying net assets of TCGI. Cox recorded $48.6 million, $28.5
million, and $19.3 million of equity in net losses of affiliated companies for
the years ended December 31, 1997, 1996 and 1995, respectively, for its
ownership interests in TCGI, TCGP and related joint ventures. In November
1997, Cox recognized a gain of approximately $90.8 million primarily resulting
from a secondary offering by TCGI. This offering reduced Cox's ownership
percentage to 22.4%.
 
  In January 1998, TCGI agreed to a merger with AT&T Corp. ("AT&T") under
which TCGI shareholders will exchange each share of TCGI common stock for
0.943 of a share of AT&T common stock. Pending regulatory approval, the
transaction is expected to close in late 1998. Cox has been named along with
TCGI and TCGI officers and directors (including some who are officers of Cox),
as defendants in three putative class action suits filed in the Chancery Court
of New Castle County, Delaware. The suits challenge the proposed AT&T/TCGI
merger and seek injunctive relief and damages based on various theories
alleging that the proposed AT&T/TCGI merger's terms do not offer appropriate
compensation or protection to TCGI's public shareholders. The actions are
being defended vigorously. As a result of this transaction, if consummated,
Cox will own 36,859,601 shares of AT&T common stock, representing
approximately 2% of total AT&T common shares outstanding. Cox expects to
recognize a gain on this transaction.
 
                                      37
<PAGE>
 
 International Broadband Networks
 
  In May 1995, Cox sold its 50% interest in STOFA A/S, a private operator of
cable television systems in Denmark, for $13.3 million resulting in a pre-tax
gain of approximately $10.2 million.
 
  At December 31, 1997, Cox had a 14.6% ownership interest in TeleWest
Communications plc ("TeleWest"), a company that is currently operating and
constructing cable television and telephony systems in the U.K. Cox acquired
this interest in October 1995 through the merger of SBC CableComms (UK), which
was 50% owned by Cox, with TeleWest (the "TeleWest Merger"). As a result of
the TeleWest Merger, Cox recognized a pre-tax net gain of $174.8 million. In
December 1997, the decline in the fair market value of TeleWest was considered
to be other than temporary and accordingly Cox recognized an $183.9 million
loss on write down of affiliated company in its Consolidated Statement of
Operations. At December 31, 1997 and 1996, the carrying value of Cox's
investment in TeleWest was $240.4 million and $440.4 million, respectively.
 
 Cable Television Programming and Other Investments
 
  In October 1995, Cox acquired a 39% interest in the Speedvision Network
("Speedvision") and a 41% interest in the Outdoor Life Network ("Outdoor
Life"), two new U.S. programming services. Speedvision's programming consists
of a broad variety of material for automobile, boat and airplane enthusiasts;
Outdoor Life's programming consists primarily of outdoor recreation, adventure
and wildlife themes. Cox's interest in Speedvision and Outdoor Life was
increased to 51.4% and 49.3% as of December 31, 1997, respectively. Cox's
interest is expected to be reduced below 50% as a result of a third-party
investment. Cox recorded $22.6 million and $18.7 million of equity in net
losses of affiliated companies for the years ended December 31, 1997 and 1996,
respectively, for its ownership interests in both Speedvision and Outdoor
Life. The other partners include Comcast and MediaOne.
 
  In March 1996, Syntellect, Inc. ("Syntellect") merged with the operations of
Telecorp Systems, Inc. ("Telecorp"). As a result of this merger, Cox received
an 8.6% interest in Syntellect in exchange for its 24.5% interest in Telecorp.
Cox recognized a pre-tax gain of $4.6 million related to this transaction.
 
  In August 1996, Cox acquired a 14.2% interest in At Home Corporation
("@Home"). @Home is a national Internet "backbone" service that allows
customers access to the Internet at speeds up to a hundred times faster than
traditional phone modems by using a cable modem and the cable television
broadband network. In July 1997, @Home conducted an initial public offering.
As a result, the value of the @Home share price became readily determinable,
and accordingly Cox began to account for its investment in @Home as an
available-for-sale investment under Statement of Financial Accounting
Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." The initial public offering reduced Cox's ownership
percentage to approximately 12.3% as of December 31, 1997. Also in the fourth
quarter 1997, Cablevision Systems Corporation was admitted as a partner
through the issuance of warrants. On a fully diluted basis giving effect to
the exercise of these warrants, Cox's ownership is approximately 11.3%.
 
  In April 1997, Cox exchanged its 37.9% interest in UK Gold and 49.6%
interest in UK Living for 20,701,084 shares, or a 12.6% interest as of
December 31, 1997, in Flextech plc, a United Kingdom publicly held programming
company. Cox recognized a gain related to this transaction of $179.8 million.
 
  In May 1997, Starsight Telecast, Inc. ("Starsight") merged with Gemstar
International Group Limited ("Gemstar"), a public company that develops and
markets proprietary technologies aimed at making technology more user-friendly
to consumers. Cox, as a holder of 2,166,647 Starsight shares, received
1,313,421 shares of Gemstar as a result of the merger, representing a 2.8%
interest in Gemstar as of December 31, 1997, and recognized a gain of
approximately $11 million related to this transaction. In December 1997, Cox
sold its entire interest in Gemstar for $29.3 million resulting in an
additional gain of approximately $9.9 million.
 
  Pursuant to the Letter Agreement and Summary of Business Terms dated June
11, 1997, as superseded by certain definitive documentation, each of the
partners of PrimeStar agreed to merge with, or contribute their partnership
interests in PrimeStar and related assets and liabilities to, a new subsidiary
of TCI Satellite
 
                                      38
<PAGE>
 
Entertainment, Inc., PrimeStar, Inc., in exchange for shares of common stock
of PrimeStar, Inc. and cash or the assumption of indebtedness. Upon
consummation of this transaction, Cox will own approximately 9.35% of
PrimeStar, Inc. The balance of PrimeStar, Inc. will be owned by the other
PrimeStar partners and the shareholders of TSAT. It is anticipated that Cox
will recognize a gain on this transaction, which is expected to close during
the second quarter of 1998.
 
 
  In December 1997, Cox sold its 10.4% interest in E! Entertainment to
Comcast/The Walt Disney Company for $57 million, resulting in a pre-tax gain
of $44.9 million.
 
RESULTS OF OPERATIONS
 
 1997 COMPARED WITH 1996
 
  Revenues for the year ended December 31, 1997 were $1,610.4 million, a 10%
increase over revenues of $1,460.3 million for the year ended December 31,
1996. Basic customers were 3,235,338, a 2.7% increase over customers at
December 31, 1996 after adjusting for the trades and sales of cable systems
during 1997.
 
  Complete basic revenues increased 8% to $1,074.5 million in 1997 due to
customer growth and average rate increases ranging between 6-7% each
implemented during the fourth quarters of 1996 and 1997. These increases are
the result of new channel additions, increased programming costs and pass-
through of inflation adjustments. New product tier revenues grew 28% to $18.2
million as a result of launching channel offerings in additional systems
during 1997.
 
  Premium service revenues in 1997 were $186.6 million, down $2.2 million
compared to the comparable period in 1996, as premium units decreased to
1,865,184 due to the completion of the spring 1996 three-for-one promotion.
Pay-per-view revenues in 1997 were $47.3 million, a 4% increase from the same
period in 1996; however, excluding revenues from a March 1996 Tyson/Bruno
boxing event and a November 1996 Tyson/Holyfield boxing event, pay-per-view
revenues increased 21%. Advertising revenues increased 8% to $103.3 million
due to growth in local and national advertising sales during 1997; however,
excluding revenues from non-recurring 1996 Sprint campaigns, advertising
revenues increased 12%.
 
  Revenues from satellite operations were $120.6 million for the current year,
a 45% increase over revenues of $83.2 million for the same period in 1996 as
PrimeStar customers increased to 171,531 at December 31, 1997 from 130,606 at
December 31, 1996. Other revenues increased to $59.9 million due to strong
growth in competitive local exchange carrier operations and residential high-
speed data services.
 
  Programming costs were $357.9 million in 1997, an increase of 9% over 1996
due primarily to Cox's customer growth, January 1997 programming rate
increases and new channel additions. Plant operations expenses decreased 5% to
$133.3 million and included the effect of a revised cost component factor used
to capitalize indirect costs relating to network construction activity.
Marketing costs increased to $76.6 million in 1997 due in part to costs
associated with the rollout of high-speed data and telephony services. General
and administrative expenses for the year ended December 31, 1997 increased 9%
to $323.5 million due primarily to the increase in direct costs associated
with high-speed data and telephony services.
 
  Depreciation was $330 million for the year ended December 31, 1997, a 25%
increase compared to the same period in 1996 due to the continued upgrade and
rebuild of the broadband network. Amortization increased 5% to $74.6 million
due to additional goodwill resulting from the trades of cable systems during
1997. Operating income for 1997 was $205.3 million, a decrease of 7% compared
to the same period in 1996.
 
  Interest expense increased $56.1 million to $202.1 million due to the
discontinuance of capitalizing interest resulting from the launch of services
by Cox's PCS investments. Equity in net losses of affiliated companies was
$404.4 million primarily due to losses of $225.2 million, $85 million and
$48.8 million associated with Sprint PCS, Cox PCS and Teleport, respectively.
 
  Gain on sale and exchange of cable television systems of $51.8 million
includes $24.6 million primarily related to the exchange of the Myrtle Beach
cable system during the first quarter of 1997 and $27.2 million
 
                                      39
<PAGE>
 
primarily related to the sale of the Central Ohio cable television operation
in December 1997. Gain on issuance of stock by affiliated companies of $90.8
million, recognized during the fourth quarter 1997, primarily resulted from a
secondary public offering of Teleport. Gain on sale of affiliated companies of
$248.7 million includes $190.8 million recognized in the second quarter of
1997 primarily as a result of the exchange of Cox's interest in UK Gold and UK
Living to Flextech plc and $54.9 million recognized in the fourth quarter of
1997 primarily related to the sale of E! Entertainment Television. Loss on
write down of affiliated company of $183.9 million is due to the decline in
fair value of TeleWest considered to be other than temporary.
 
  Net loss for the year ended December 31, 1997 was $136.5 million as compared
to net loss of $51.6 million for the year ended December 31, 1996.
 
  Operating cash flow (operating income before depreciation and amortization)
is a commonly used financial analysis tool for measuring and comparing cable
television companies in several areas, such as liquidity, operating
performance and leverage. Consolidated operating cash flow increased 10% to
$609.8 million for the year ended December 31, 1997. Operating cash flow for
the core video business, which excludes satellite and competitive local
exchange carrier operations and $23.5 million of direct costs associated with
residential and commercial high-speed data and telephony services, grew 11% to
$612.3 million compared to 1996.
 
  The consolidated operating cash flow margin (operating cash flow as a
percentage of revenues) for the year ended December 31, 1997 was 37.9%, a
slight decrease from 38.1% for the year ended December 31, 1996 due to the
increased launch costs associated with residential and commercial data and
telephony. The core video business operating cash flow margin was 41.6% for
the year, an increase from 40.4% for the comparable period of 1996. Operating
cash flow should not be considered as an alternative to net income as an
indicator of Cox's performance or as an alternative to cash flows from
operations as a measure of liquidity.
 
 1996 COMPARED WITH 1995
 
  The historical results discussed below for 1995 include the results of
operations for the former Times Mirror cable television systems from the
merger date of February 1, 1995.
 
  Revenues for the year ended December 31, 1996 increased 14% over 1995 to
$1,460.3 million. Basic customers at December 31, 1996 were 3,259,384.
Adjusting for the acquisitions and sales of cable systems during 1996, basic
customers grew 2.3% in 1996.
 
  Complete basic revenues grew 11% to $996.0 million in 1996 due to the larger
customer base and rate increases resulting from the 1996 channel additions and
pass-through of inflation adjustments. Premium service revenues for 1996 were
$188.8 million, a 2% increase over 1995. Although premium units increased 10%
to 2,000,673 at December 31, 1996, the average rate per unit was lower in the
current year due to a three-for-one premium channel promotion launched in
spring 1996. Pay-per-view revenues grew 8% to $45.6 million in 1996 primarily
due to the Tyson/Bruno and Tyson/Holyfield boxing events in 1996. Advertising
revenues increased 17% to $95.8 million in 1996 reflecting continued gains in
national account revenue and new customers such as Sprint.
 
  Revenues from satellite operations (Cox Satellite Programming and PrimeStar)
for 1996 were $83.2 million compared to $41.1 million in 1995. This increase
is due to strong growth as PrimeStar customers more than doubled during the
current year to 130,606 at December 31, 1996 from 56,822 at December 31, 1995.
 
  Programming costs were $326.9 million in 1996, a 11% increase over 1995 due
to Cox's larger customer base and the offering of additional channels in 1996.
Plant operations expenses increased 9% in 1996 as a result of Cox's increased
focus on customer retention programs and repairs of storm damage in certain
systems. Marketing costs were up 12% in 1996 due to the sales programs
associated with the premium channel promotion and an increase in overall Cox
advertising. General and administrative expenses were $297.3 million in 1996,
a 11% increase over 1995 due in part to direct costs associated with the
development of new high-speed data and
 
                                      40
<PAGE>
 
telephony services and higher property taxes resulting from the continued
upgrade and rebuild of the broadband network in preparation for the delivery
of these new services.
 
  Depreciation increased 33% in 1996 to $264.2 million reflecting accelerated
depreciation expensed in the current year as a result of the upgrade and
rebuild of the broadband network. Operating income for 1996 was $221.7
million, a 2% decrease compared to 1995.
 
  Interest expense increased $13.8 million due primarily to the increase in
total debt outstanding. Equity in net losses of affiliated companies increased
$90.7 million due to increased losses from Sprint PCS, Cox PCS, Outdoor Life
and Speedvision. During 1996, Sprint PCS and Cox PCS's losses increased as a
result of developing and constructing their PCS networks in preparation for
their commercial launch of PCS services in December 1996. Outdoor Life and
Speedvision, which were launched as new cable programming networks during 1995
and 1996, respectively, incurred higher losses in the current year due to the
development of their customer base and program content.
 
  A gain on issuance of stock by affiliated companies of $50.1 million was
recognized as a result of the initial public offering of TCGI. A gain on sale
of affiliated companies of $4.6 million was recognized as a result of the
merger of Telecorp and Syntellect. Net loss for the year was $51.6 million as
compared to net income of $103.8 million in 1995.
 
  Operating cash flow for 1996 was $556.9 million, a 13% increase over
operating cash flow of $493.3 million in 1995. The consolidated operating cash
flow margin was 38.1% for 1996 as compared to 38.4% for 1995. The core video
business operating cash flow margin was 40.4% for 1996, an increase from 39.8%
for 1995.
 
LIQUIDITY AND CAPITAL RESOURCES
 
 USES OF CASH
 
  As part of Cox's ongoing strategic plan, Cox has invested, and will continue
to invest, significant amounts of capital to enhance the reliability and
capacity of its broadband network in preparation for the offering of new
services and to make investments in affiliated companies primarily focused on
telephony, programming and communications-related activities.
 
  During 1997, Cox made capital expenditures of $708.1 million. These
expenditures were primarily directed at upgrading and rebuilding its broadband
network in preparation for the delivery of high-speed data and telephony.
Capital expenditures for 1998 and 1999 are expected to range between $725
million and $775 million. Capital expenditures for 2000 are expected to range
between $575 million and $625 million and for 2001 and 2002 are expected to
range between $475 million and $525 million.
 
  In addition to expenditures in existing systems, Cox made strategic
investments in businesses focused on telephony, programming and communications
related activities. Investments in affiliated companies of $388.1 million
included additional equity funding of $366.7 million to Sprint PCS, Cox PCS
and other telephony investments and $21.4 million to PrimeStar Partners,
Outdoor Life, Speedvision and other interests. Future funding requirements for
investments in affiliated companies are expected to be approximately $70
million, primarily for Sprint PCS. These capital requirements for investments
in affiliated companies may vary significantly from the amounts stated above
and will depend on numerous factors as many of these affiliates are growing
businesses and specific financing requirements will change depending on the
evolution of these businesses.
 
  Payments for exchange and acquisition of cable television systems of $66.8
million were made for exchanges of cable television systems that closed during
the first and fourth quarters of 1997.
 
  Cox's current credit facilities contain covenants which, among other
provisions, restrict the payment of cash dividends or the repurchase of
capital stock if certain requirements are not met as to the ratio of debt to
operating
 
                                      41
<PAGE>
 
cash flow. Historically, Cox has not paid dividends nor does Cox intend to pay
dividends in the foreseeable future but to reinvest future earnings,
consistent with Cox's business strategy. At December 31, 1997, the amount
available for the payment of dividends was $34.1 million; however, Cox does
not intend to pay dividends in the foreseeable future.
 
 SOURCES OF CASH
 
  During 1997, Cox generated $554.5 million from operations. Additionally, net
cash provided by financing activities was $539.3 million and included the
proceeds from revolving credit borrowings and the issuance of medium term
notes.
 
  At December 31, 1997, Cox had $1,200 million revolving credit facility which
matures on October 9, 2002. In addition, Cox had an $800 million revolving
credit facility which matures on October 8, 1998, at which time any
outstanding borrowings convert to a long-term loan due October 8, 2001. These
facilities are committed to back outstanding commercial paper.
 
  In June 1996, Cox entered into a commercial paper program under which Cox
may borrow $750 million. The commercial paper program is backed by amounts
available under the revolving credit facilities. The outstanding notes have
maturities up to 270 days and interest rates based on market. The interest
rates for outstanding commercial paper at December 31, 1997 and 1996 ranged
from 5.84% to 6.19% and 5.52% to 5.80%, respectively. In January, 1998 the
program was amended to increase the facility to $1,500 million. The proceeds
from the increase in the program will be used to refinance existing bank debt.
Thereafter, the proceeds will be used for general corporate purposes.
 
  In April 1996, Cox filed a Form S-3 Registration Statement (the "Shelf
Registration") with the Securities and Exchange Commission under which Cox may
from time to time offer and issue debentures, notes, bonds or other evidence
of indebtedness for a maximum aggregate amount of $750 million. During 1996,
Cox sold $125 million of medium term notes under the Shelf Registration. The
notes are due in varying amounts through November 2006 with interest at fixed
rates ranging from 6.94% to 7.19%. The net proceeds to Cox were approximately
$124.3 million. During 1997, Cox sold an $100 million medium term note due
September 20, 2004 with interest at a fixed rate of 6.69%. The net proceeds to
Cox were approximately $99.4 million.
 
  In June 1997, Cox issued $150 million principal amount of Floating Rate
Reset Notes due June 15, 2009 (the "Notes"). The Notes bear interest at a
floating rate equal to 0.8975% per annum below LIBOR until June 15, 1999, at
which time the interest rate will be reset at a fixed annual rate equal to
5.34% plus Cox's spread to the ten year Treasury. The Notes are redeemable at
the election of the holder, in whole but not in part, at 100% of the principal
amount on June 15, 1999. In addition, in exchange for a premium paid to Cox of
$2.9 million, the Notes may be purchased by a third party at the election of
the third party, in whole but not in part, at 100% of the principal amount on
June 15, 1999. Amortization of the premium will be reflected as adjustments to
interest expense. The interest rate for the Notes at December 31, 1997 was
4.91%.
 
  In March 1997, upon approval from the FCC, Cox transferred the PCS license
for the Los Angeles-San Diego MTA and the related obligation to the FCC of
$251.9 million to Cox PCS. Prior to this transfer, the obligation to the FCC
was included in Cox's outstanding debt.
 
  Proceeds from sale of affiliated companies of $93.3 million consist
primarily of proceeds received for the sale of E! Entertainment Television.
Proceeds from sale of cable television systems of $217.6 million included
$204.2 million resulting from the sale of the Central Ohio cable television
operation in December 1997 and $13.4 million resulting primarily from the sale
of the Sun City cable system in September 1997. Cash restricted for investment
of $204.2 million resulting from the sale of the Central Ohio cable television
operation will be held in escrow pending reinvestment in a future cable system
acquisition.
 
  CEI continues to perform day-to-day cash management services for Cox with
settlements of balances between Cox and CEI occurring periodically at market
interest rates.
 
                                      42
<PAGE>
 
  At December 31, 1997, Cox had approximately $3,148.8 million of outstanding
indebtedness and had approximately $2,504 million available under its
revolving credit facilities, Shelf Registration and commercial paper program.
Cox's Notes and Debentures issued during 1997 are rated Baa2 by Moody's and A-
by Standard & Poor's.
 
  Cox expects that the cost of its cable upgrades and investment activity will
exceed Cox's funds from operations and, therefore, additional capital will be
necessary. Cox believes it will be able to meet its capital needs for the next
twelve months with unused amounts available under existing revolving
agreements, the Shelf Registration and the commercial paper program. In
addition, Cox is pursuing alternatives to monetize certain unconsolidated
investments.
 
OTHER MATTERS
 
  Cox is currently working to resolve the potential impact of the year 2000 on
the processing of data-sensitive information by Cox's computerized information
systems. The year 2000 problem is the result of computer programs being
written using two digits rather than four to define the applicable year. Any
of Cox's programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000, which could result in
miscalculations or system failures. Based on preliminary information, costs of
addressing potential problems are not currently expected to have a material
adverse impact on Cox's financial position, results of operations or cash
flows in future periods. However, if Cox, its customers or vendors are unable
to resolve such processing issues in a timely manner, it could result in a
material financial risk. Accordingly, Cox plans to devote the necessary
resources to resolve all significant year 2000 issues in a timely manner.
 
RATE REGULATION
 
  Many franchising authorities have become certified by the FCC to regulate
rates charged by Cox for basic cable service and associated basic cable
service equipment. Some local franchising authority decisions have been
rendered that were adverse to Cox. In addition, a number of such franchising
authorities and customers of Cox filed complaints with the FCC regarding the
rates charged for cable programming services. In December 1995, the FCC
approved a Resolution of all outstanding rate complaints covering the Cox and
former Times Mirror cable television systems. The Resolution, among other
things, provided for the payment of refunds of $7.1 million plus interest to
one million customers in January 1996, and the removal of additional outlet
charges for regulated services from all of the former Times Mirror cable
television systems. The Resolution also stated that Cox's CPS tier rates as of
June 30, 1995 were not unreasonable. Refunds under the Resolution were fully
provided for in Cox's financial statements at December 31, 1995. In January
1996, the City of Irvine and six other cities located in California filed an
appeal to set aside the Resolution in the United States Court of Appeals for
the Ninth Circuit. Cox and the cities reached a settlement of the suit and the
appeal was dismissed with prejudice on November 6, 1997.
 
  The Telecommunications Act of 1996 ("the 1996 Act") became effective in
February 1996. The 1996 Act is intended to promote substantial competition in
the delivery of video and other services by local telephone companies (also
known as local exchange carriers or "LECs") and other service providers, and
permits cable television operators to provide telephone services. Among other
provisions, the 1996 Act deregulates the CPS tier of large cable operators on
March 31, 1999 and upon enactment the CPS rates of small cable operators
serving 50,000 or fewer subscribers, revises the procedures for filing a CPS
complaint, and adds a new effective competition test.
 
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
  Cox is exposed to interest rate risk due to its various debt instruments. In
accordance with the requirements of SFAS No. 107, "Disclosures About Fair
Value of Financial Instruments," Cox estimated the fair value of its debt
instruments based on discounted cash flow analyses using Cox's incremental
borrowing rate for similar types of borrowing arrangements and dealer
quotations. The revolving credit agreements, commercial paper and floating
rate reset notes, at December 31, 1997 and 1996, bear interest at current
market rates and, thus, approximate fair value. The effect of a hypothetical
one percentage point increase in interest rates would decrease the estimated
fair value of remaining debt with a carrying amount of $1,518.4 million to
$1,477.7.
 
                                      43
<PAGE>
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
                            COX COMMUNICATIONS, INC.
 
                          CONSOLIDATED BALANCE SHEETS
 
<TABLE>
<CAPTION>
                                                              DECEMBER 31
                                                        -----------------------
                                                              1997        1996
                                                        ----------- -----------
                                                        (THOUSANDS OF DOLLARS,
                                                        EXCEPT PER SHARE DATA)
<S>                                                     <C>         <C>
ASSETS
Cash................................................... $    28,259 $    42,349
Restricted cash........................................     204,210         --
Accounts and notes receivable, less allowance for
 doubtful accounts of
 $6,955 and $7,778.....................................     144,073     122,574
Net plant and equipment................................   1,979,063   1,531,811
Investments............................................   1,598,273   1,219,082
Intangible assets......................................   2,458,717   2,728,955
Amounts due from Cox Enterprises, Inc. ("CEI").........      50,856         --
Other assets...........................................      93,150     139,819
                                                        ----------- -----------
  Total assets......................................... $ 6,556,601 $ 5,784,590
                                                        =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses.................. $   217,984 $   220,859
Deferred income........................................      26,698      29,440
Deferred income taxes..................................     721,594     294,453
Other liabilities......................................      84,179      97,526
Debt...................................................   3,148,834   2,823,853
Amounts due to CEI.....................................         --       57,147
                                                        ----------- -----------
  Total liabilities....................................   4,199,289   3,523,278
                                                        ----------- -----------
Commitments and contingencies (Note 16)
Shareholders' equity
  Preferred Stock, $1 par value; 5,000,000 shares
   authorized; none issued.............................         --          --
  Class A Common Stock, $1 par value; 316,000,000
   shares authorized; shares issued and outstanding:
   257,276,414 and 256,463,651.........................     257,276     256,464
  Class C Common Stock, $1 par value; 14,000,000 shares
   authorized; shares issued and outstanding:
   13,798,896..........................................      13,799      13,799
  Additional paid-in capital...........................   1,790,833   1,742,121
  Retained earnings....................................      79,605     216,097
  Foreign currency translation adjustment..............      13,510      23,424
  Net unrealized gain on securities....................     202,289       9,407
                                                        ----------- -----------
    Total shareholders' equity.........................   2,357,312   2,261,312
                                                        ----------- -----------
    Total liabilities and shareholders' equity.........  $6,556,601  $5,784,590
                                                        =========== ===========
</TABLE>
 
                See notes to consolidated financial statements.
 
                                       44
<PAGE>
 
                            COX COMMUNICATIONS, INC.
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
 
<TABLE>
<CAPTION>
                                               YEAR ENDED DECEMBER 31
                                       ----------------------------------------
                                           1997          1996          1995
                                       ------------  ------------  ------------
                                         (THOUSANDS OF DOLLARS, EXCEPT PER
                                                    SHARE DATA)
<S>                                    <C>           <C>           <C>
REVENUES
  Complete basic.....................  $  1,074,495  $    995,952  $    900,869
  New product tier...................        18,151        14,222         8,227
  Premium service....................       186,625       188,809       184,586
  Pay-per-view.......................        47,314        45,610        42,343
  Advertising........................       103,271        95,840        81,858
  Satellite..........................       120,574        83,164        41,084
  Other..............................        59,934        36,688        27,279
                                       ------------  ------------  ------------
    Total revenues...................     1,610,364     1,460,285     1,286,246
COSTS AND EXPENSES
  Programming costs..................       357,880       326,857       293,943
  Plant operations...................       133,348       140,927       128,810
  Marketing..........................        76,570        62,589        55,954
  General and administrative.........       323,536       297,335       267,418
  Satellite operating and
   administrative....................       109,195        75,680        41,682
  Restructuring charge...............           --            --          5,139
  Depreciation.......................       329,951       264,188       198,788
  Amortization.......................        74,587        70,973        68,524
                                       ------------  ------------  ------------
OPERATING INCOME.....................       205,297       221,736       225,988
Interest expense.....................      (202,136)     (146,077)     (132,308)
Equity in net losses of affiliated
 companies...........................      (404,440)     (170,435)      (79,734)
Gain on sale and exchange of cable
 television systems..................        51,835           --            --
Gain on issuance of stock by
 affiliated companies................        90,796        50,100           --
Gain on sale of affiliated companies.       248,656         4,640       188,806
Loss on write down of affiliated
 company.............................      (183,914)          --            --
Other, net...........................         3,918        11,531           951
                                       ------------  ------------  ------------
INCOME (LOSS) BEFORE INCOME TAXES....      (189,988)      (28,505)     (203,703)
Income taxes.........................       (53,496)       23,046        99,894
                                       ------------  ------------  ------------
NET INCOME (LOSS)....................  $   (136,492) $    (51,551) $    103,809
                                       ============  ============  ============
PER SHARE DATA
  Basic and diluted net loss per
   share.............................  $      (0.50) $      (0.19) $       0.41
  Basic weighted-average shares
   outstanding.......................   270,500,791   270,240,757   255,886,525
  Diluted weighted-average shares
   outstanding.......................   270,500,791   270,240,757   255,457,955
</TABLE>
 
                See notes to consolidated financial statements.
 
                                       45
<PAGE>
 
                            COX COMMUNICATIONS, INC.
 
                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
 
<TABLE>
<CAPTION>
                                                                                         NET
                                                                            FOREIGN   UNREALIZED
                                                    ADDITIONAL             CURRENCY      GAIN
                                     COMMON STOCK
                         PREFERRED ----------------  PAID-IN   RETAINED   TRANSLATION (LOSS) ON
                           STOCK   CLASS A  CLASS C  CAPITAL   EARNINGS   ADJUSTMENT  SECURITIES   TOTAL
                         --------- -------- ------- ---------- ---------  ----------- ---------- ----------
                                                      (THOUSANDS OF DOLLARS)
<S>                      <C>       <C>      <C>     <C>        <C>        <C>         <C>        <C>
BALANCE AT DECEMBER 31,
 1994...................    --          --      --  $  670,495 $ 163,839    $(1,221)   $  1,712  $  834,825
 Net income.............                                         103,809                            103,809
 Issuance of stock
  related to Merger.....           $236,201 $13,799    682,001                                      932,001
 Issuance of stock
  related to public
  offering and private
  placement.............             19,799            337,231                                      357,030
 Issuance of stock
  related to stock
  compensation plans....                365              5,851                                        6,216
 Capital contribution by
  CEI...................                                43,844                                       43,844
 Foreign currency
  translation
  adjustment............                                                     (2,192)                 (2,192)
 Change in net
  unrealized gain (loss)
  on securities.........                                                                 56,480      56,480
                            ---    -------- ------- ---------- ---------    -------    --------  ----------
BALANCE AT DECEMBER 31,
 1995...................    --      256,365  13,799  1,739,422   267,648     (3,413)     58,192   2,332,013
 Net loss...............                                         (51,551)                           (51,551)
 Issuance of stock
  related to stock
  compensation Plans....                 99              1,591                                        1,690
 Capital contribution by
  CEI...................                                 1,108                                         1108
 Foreign currency
  translation
  adjustment............                                                     26,837                  26,837
 Change in net
  unrealized gain (loss)
  on securities.........                                                                (48,785)    (48,785)
                            ---    -------- ------- ---------- ---------    -------    --------  ----------
BALANCE AT DECEMBER 31,
 1996...................    --      256,464  13,799  1,742,121   216,097     23,424       9,407   2,261,312
 Net loss...............                                        (136,492)                          (136,492)
 Issuance of stock
  related to stock
  compensation plans....                812             12,188                                       13,000
 Capital contribution by
  CEI...................                                36,524                                       36,524
 Foreign currency
  translation
  adjustment............                                                     (9,914)                 (9,914)
 Change in net
  unrealized gain (loss)
  on securities.........                                                                192,882     192,882
                            ---    -------- ------- ---------- ---------    -------    --------  ----------
BALANCE AT DECEMBER 31,
 1997...................    --     $257,276 $13,799 $1,790,833 $  79,605    $13,510    $202,289  $2,357,312
                            ===    ======== ======= ========== =========    =======    ========  ==========
</TABLE>
 
                See notes to consolidated financial statements.
 
                                       46
<PAGE>
 
                            COX COMMUNICATIONS, INC.
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
 
<TABLE>
<CAPTION>
                                                YEAR ENDED DECEMBER 31
                                           -----------------------------------
                                              1997        1996        1995
                                           -----------  ---------  -----------
                                                (THOUSANDS OF DOLLARS)
<S>                                        <C>          <C>        <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)........................  $  (136,492) $ (51,551) $   103,809
Adjustments to reconcile net income
 (loss) to net cash provided by operating
 activities, net of effects of
 acquisitions:
  Depreciation...........................      329,951    264,188      198,788
  Amortization...........................       74,587     70,973       68,524
  Equity in net losses of affiliated
   companies.............................      404,440    170,435       79,734
  Deferred income taxes..................      101,821    (52,519)      22,730
  Gain on issuance of stock by affiliated
   companies.............................      (90,796)   (50,100)         --
  Gain on sale and exchange of cable
   television systems....................      (51,835)       --           --
  Gain on sale of affiliated companies...     (248,656)    (4,640)    (188,806)
  Loss on write down of affiliated
   company...............................      183,914        --        20,662
Increase in accounts receivable..........      (29,312)    (4,222)     (25,372)
Increase (decrease) in accounts payable
 and accrued expenses....................       (4,350)    31,161       15,666
Increase (decrease) in taxes payable.....        7,730    (32,762)      25,389
Other, net...............................       13,535    (31,826)       3,786
                                           -----------  ---------  -----------
    Net cash provided by operating
     activities..........................      554,537    309,137      324,910
                                           ===========  =========  ===========
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures.....................     (708,089)  (578,926)    (369,557)
Investments in affiliated companies......     (388,075)  (338,402)    (527,922)
Proceeds from affiliated companies.......          --     162,287      113,222
Proceeds from sale of affiliated
 companies...............................       93,342        --           --
Proceeds from sale of cable television
 systems.................................      217,578    201,791       20,000
Cash restricted for investments..........     (204,210)       --           --
Payments for exchange and acquisition of
 cable television systems................      (66,762)       --      (102,909)
Increase in amounts due from CEI.........      (50,856)       --           --
Other, net...............................         (889)     1,085        1,632
                                           -----------  ---------  -----------
  Net cash used in investing activities..   (1,107,961)  (552,165)    (865,534)
                                           -----------  ---------  -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Revolving credit borrowings (repayments),
 net.....................................      350,000   (418,364)  (1,191,902)
Commercial paper borrowings (repayments),
 net.....................................      (34,748)   718,704          --
Proceeds from issuance of debt...........      246,457    124,279    1,203,662
Repayment of debt........................      (15,993)    (8,104)     (19,990)
Proceeds from exercise of stock options..       13,000      1,275          --
Payment to reacquire nonvoting redeemable
 preferred stock outstanding.............      (10,000)       --           --
Increase (decrease) in amounts due to
 CEI.....................................      (19,359)  (126,764)     175,770
Proceeds from issuance of common stock...          --         --       357,030
Increase (decrease) in book overdrafts...        9,977    (44,815)      51,874
                                           -----------  ---------  -----------
  Net cash provided by financing
   activities............................      539,334    246,211      576,444
                                           -----------  ---------  -----------
Net increase (decrease) in cash..........      (14,090)     3,183       35,820
Cash at beginning of period..............       42,349     39,166        3,346
                                           -----------  ---------  -----------
Cash at end of period....................  $    28,259  $  42,349  $    39,166
                                           ===========  =========  ===========
</TABLE>
 
                See notes to consolidated financial statements.
 
                                       47
<PAGE>
 
                           COX COMMUNICATIONS, INC.
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
1. ORGANIZATION AND BASIS OF PRESENTATION
 
  Cox Communications, Inc. ("Cox"), an indirect 75.0% owned subsidiary of CEI,
is among the nation's largest multiple system operators, serving more than 3.2
million customers. Cox is a fully integrated, diversified broadband
communications company with interests in domestic cable distribution systems,
programming networks, telecommunications and technology and broadband
networks.
 
  All significant intercompany accounts have been eliminated in the
consolidated financial statements of Cox. Certain amounts in the 1996 and 1995
financial statements have been reclassified for comparative purposes with
1997.
 
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 Restricted Cash
 
  In December 1997, Cox sold its Central Ohio cable television operation,
serving approximately 85,000 customers, for $204,210,000. For tax purposes,
Cox accounted for the disposition as a like-kind exchange. Tax rules allow Cox
to defer a substantial portion of the related tax gain on this transaction
upon the reinvestment of the net proceeds in qualifying future acquisitions.
Cox is presently pursuing qualifying reinvestment properties. At December 31,
1997, restricted cash of $204,210,000 was held in escrow pending reinvestment.
 
 Plant and Equipment
 
  Depreciation is computed using principally the straight-line method at rates
based upon estimated useful lives of five to 20 years for buildings and
building improvements, five to 12 years for cable television systems and three
to 10 years for other plant and equipment.
 
  The costs of initial cable television connections are capitalized as cable
plant at standard rates for Cox's labor and at actual costs for materials and
outside labor. Expenditures for maintenance and repairs are charged to
operating expense as incurred. At the time of retirements, sales or other
dispositions of property, the original cost and related accumulated
depreciation are written off.
 
  Effective July 1, 1997, Cox revised the cost component factor used to
capitalize indirect costs relating to network construction activity resulting
in additional indirect costs being capitalized during the third and fourth
quarters.
 
 Investments
 
  Investments in affiliates are accounted for under the equity method or cost
basis depending upon the level of ownership in the investment and/or Cox's
ability to exercise significant influence over the operating and financial
policies of the investee. Equity method investments are recorded at cost and
adjusted periodically to recognize Cox's proportionate share of the investees'
undistributed income or losses.
 
  Cost method investments in publicly traded companies are classified as
available-for-sale and are stated at publicly quoted market values with the
unrealized gains and losses recorded, net of taxes, as a separate component of
shareholders' equity. Losses are recorded as expense for any decline in market
value considered to be other than temporary. Cost method investments in
privately held companies are stated at cost adjusted for any known diminution
in value determined to be other than temporary in nature.
 
                                      48
<PAGE>
 
                           COX COMMUNICATIONS, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 Intangible Assets
 
  Intangible assets consist primarily of goodwill and franchise costs.
Intangibles resulting from business combinations generally are amortized on a
straight-line basis over 40 years. Cox assesses on an on-going basis the
recoverability of intangible assets based on estimates of future undiscounted
cash flows for the applicable business acquired compared to net book value. If
the future undiscounted cash flow estimate is less than net book value, net
book value is then reduced to the undiscounted cash flow estimate. Cox also
evaluates the amortization periods of intangible assets to determine whether
events or circumstances warrant revised estimates of useful lives.
 
 Impairment of Long-Lived Assets
 
  Effective January 1, 1996, Cox adopted Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of." This Statement requires
that long-lived assets and certain intangibles be reviewed for impairment when
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable, with any impairment losses being reported in the
period in which the recognition criteria are first applied based on the fair
value of the asset. Long-lived assets and certain intangibles to be disposed
of are required to be reported at the lower of carrying amount or fair value
less cost to sell. There was no impact on the financial statements upon
adoption of SFAS No. 121.
 
 Pension, Postretirement and Postemployment Benefits
 
  Cox generally provides defined pension benefits to all employees based on
years of service and compensation during those years. Cox provides certain
health care and life insurance benefits to substantially all employees and
retirees through certain CEI plans. Expense related to the CEI plans is
allocated to Cox through the intercompany account. The amount of the
allocations is generally based on actuarial determinations of the effects of
Cox employees' participation in the plans.
 
 Stock Compensation Plans
 
  As described in Note 11, Cox accounts for stock compensation plans using the
intrinsic value method prescribed in APB Opinion 25, "Accounting for Stock
Issued to Employees," and discloses the pro forma effect on net income and
earnings per share of using the fair value method as required by SFAS No. 123,
"Accounting for Stock-Based Compensation."
 
 Foreign Currency Translation
 
  The financial statements of Cox's non-U.S. investments are translated into
U.S. dollars in accordance with SFAS No. 52, "Foreign Currency Translation."
Net assets of non-U.S. investments whose functional currencies are other than
the U.S. dollar are translated at the current rate of exchange. Income and
expense items are translated at the average exchange rate for the year. The
resulting translation adjustments are recorded, net of taxes, directly into a
separate component of shareholders' equity.
 
 Revenue Recognition
 
  Cox bills its customers in advance; however, revenue is recognized as cable
television services are provided. Receivables are generally collected within
30 days. Credit risk is managed by disconnecting services to customers who are
delinquent. Other revenues are recognized as services are provided. Revenues
obtained from
 
                                      49
<PAGE>
 
                           COX COMMUNICATIONS, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
the connection of customers to the cable television systems are less than
related direct selling costs; therefore, such revenues are recognized as
received.
 
 Restructuring Charge
 
  During December 1995, Cox recorded a $5,139,000 pre-tax restructuring
charge. This charge principally represents severance, benefits and other
related costs associated with the elimination of 202 accounting and MIS staff
positions during 1996. At December 31, 1997 and 1996, the balance of the
restructuring liability was $0 and $1,698,000, respectively.
 
 Capitalized Interest
 
  Interest is capitalized as part of the historical cost of acquiring
qualifying assets, including advances to equity method investees used to
acquire qualifying assets while the investee has activities in progress
necessary to commence its planned principal operations. Interest capitalized
for the years ended December 31, 1996 and 1995 was $43,183,000 and
$14,188,000, respectively.
 
 Income Taxes
 
  The accounts of Cox historically have been included in the consolidated
federal income tax return and certain state income tax returns of CEI. Current
federal and state income tax expenses and benefits have been allocated on a
separate return basis to Cox based on the current year tax effects of the
inclusion of its income, expenses and credits in the consolidated income tax
returns of CEI or based on separate state income tax returns.
 
  Deferred income tax assets and liabilities arise from differences in
recording certain income and expenses for financial reporting and income tax
purposes and are principally related to depreciation and amortization and
equity in net losses of affiliated companies.
 
 Net Income (Loss) Per Common Share
 
  Effective December 1997, Cox adopted SFAS No. 128, "Earnings per Share."
This statement establishes standards for computing and presenting earnings per
share ("EPS"). It replaces the presentation of primary EPS with a presentation
of basic EPS. It also requires dual presentation of basic and diluted EPS on
the face of the consolidated statement of operations for all entities with
complex capital structures. Basic EPS is computed by dividing income available
to common shareholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS is computed similarly to fully diluted
EPS pursuant to APB Opinion No. 15, "Earnings per Share," which is superseded
by this Statement. This Statement requires restatement of all prior-period EPS
data presented. As Cox is in a net loss position for the years ended December
31, 1997 and 1996, basic and diluted EPS are based on the actual weighted-
average number of common shares outstanding. All potentially dilutive
securities are currently anti-dilutive and are not included in the diluted EPS
caluclation.
 
  Cox Class A Common Stock became publicly traded on the New York Stock
Exchange effective February 1, 1995. The basic and diluted EPS calculations
for the year ended December 31, 1995 are presented in Note 12.
 
 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 reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
 
                                      50
<PAGE>
 
                           COX COMMUNICATIONS, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 Recently Issued Accounting Pronouncements
 
  In June 1997, SFAS No. 130, "Reporting Comprehensive Income," was issued.
This Statement requires that Cox (a) classify, by nature, items of
comprehensive income in a financial statement and (b) display the accumulated
balance of other comprehensive income separately from retained earnings and
additional paid-in capital in the equity section of the balance sheet. This
statement will also require Cox to report comprehensive income, a measure of
performance that includes all non-owner sources of changes in equity, in
addition to net income (loss) reported in the financial statements.
Reclassification of financial statements for earlier periods provided for
comparative purposes will be required. There will be no effect on Cox's
financial position upon adoption in the first quarter of 1998.
 
  In June 1997, SFAS No. 131, "Disclosure about Segments of an Enterprise and
Related Information," was issued. This Statement establishes standards for the
way public companies report information about their operating segments.
Operating segments are components of the enterprise about which separate
financial information is available and is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in
assessing performance. This Statement requires that a public company report
segment profit or loss, certain specific revenue and expense items, and
segment assets. Companies must report information about the revenues derived
from the products or services (or groups of similar products and services),
about the countries in which the companies earn revenues and hold assets, and
about major customers regardless of whether that information is used in making
operating decisions. This Statement also requires that a public company
enterprise report descriptive information about the way that the operating
segments were determined, the products and services provided by the operating
segments, differences between the measurements used in reporting segment
information and those used in the enterprise's general-purpose financial
statements, and changes in the measurement of segment amounts from period to
period. SFAS 131 is effective for Cox's annual 1998 financial statements and
interim 1999 financial statements. The applicability of this statement to Cox
is still being assessed.
 
3. CASH MANAGEMENT SYSTEM
 
  Cox participates in CEI's cash management system, whereby the bank sends
daily notification of checks presented for payment. CEI transfers funds from
other sources to cover the checks presented for payment. Book overdrafts of
$33,602,000 and $23,663,000 existed at December 31, 1997 and 1996,
respectively, as a result of checks outstanding. These book overdrafts are
reclassified as accounts payable and are considered financing activities in
the Consolidated Statement of Cash Flows.
 
4. ACQUISITIONS, DISPOSITIONS AND EXCHANGES OF BUSINESSES
 
  Effective February 1, 1995, Cox, CEI, The Times Mirror Company ("Times
Mirror") and New TMC Inc. ("New Times Mirror") consummated a merger (the
"Merger"), pursuant to which Times Mirror (which, at the time of the Merger,
was engaged only in the cable television business) merged with and into Cox.
In connection with the Merger, Cox Class A Common Stock became publicly traded
on the New York Stock Exchange. Following the Merger, New Times Mirror changed
its name to "The Times Mirror Company." As a result of the Merger, the former
Times Mirror stockholders received a total of approximately 54,904,252 shares
of Cox Class A Common Stock. Subsidiaries of CEI received 181,296,833 shares
of Cox Class A Common Stock and 13,798,896 shares of Cox Class C Common Stock.
The Merger was accounted for by the purchase method of accounting, whereby the
purchase price was allocated to the assets and liabilities assumed based on
their estimated fair values at the date of acquisition. The excess of the
purchase price over the fair value of net assets acquired has been recorded as
goodwill and is being amortized on a straight-line basis over 40 years.
Results of operations have been included in the consolidated financial
statements from the date of acquisition.
 
 
                                      51
<PAGE>
 
                           COX COMMUNICATIONS, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
  In September 1995, Cox sold its cable television system serving
approximately 13,000 customers in Bullhead City, Arizona for $20,000,000. No
gain or loss resulted from this transaction.
 
  In January 1996, Cox acquired a cable television system serving
approximately 51,000 customers in Newport News, Virginia, for approximately
$122,250,000. Cox operates this system as part of its cluster of systems in
the Hampton Roads, Virginia area.
 
  In January 1996, Cox sold its cable television system in Texarkana, Texas.
The system, which was acquired as part of the Merger, served approximately
23,400 customers. No gain or loss resulted from this transaction.
 
  In April 1996, Cox exchanged its Williamsport, Pennsylvania cable television
system for $13,000,000 and a cable television system in East Providence, Rhode
Island. The Williamsport system, which was acquired as part of the Merger,
served approximately 24,500 customers in Williamsport. The East Providence
system serves approximately 15,500 customers. No gain or loss resulted from
this transaction.
 
  In April 1996, Cox sold certain cable television systems in the Ashland,
Kentucky and Defiance, Ohio area for $136,000,000. These systems, which were
acquired as a result of the Merger, together served approximately 78,600
customers. No gain or loss resulted from this transaction.
 
  In January 1997, Cox and Tele-Communications, Inc. ("TCI") exchanged certain
cable television systems owned by Cox serving approximately 319,000 customers
for certain cable television systems owned by TCI serving approximately
296,000 customers. As a result of the transaction, Cox received TCI's systems
in Bellevue/LaVista, Nebraska and Council Bluffs, Iowa; Chesapeake, Virginia;
Scottsdale, Arizona; North Attleboro/Taunton, Massachusetts; Lincoln, Rhode
Island; and St. Bernard, Louisiana. In exchange, TCI received Cox's systems in
the greater Pittsburgh area; Spokane, Washington; Springfield, Illinois; Cedar
Rapids, Iowa and the Quad Cities area of Illinois and Iowa; and Saginaw,
Michigan. No significant gain or loss resulted from this transaction.
 
  In January 1997, Cox exchanged cable television systems in western
Massachusetts and Weymouth, Massachusetts for cable television systems in
James City and York County, Virginia and Pawtucket, Rhode Island. Each of the
systems served approximately 48,000 customers. No gain or loss resulted from
this transaction.
 
  In March 1997, Cox exchanged its Myrtle Beach, South Carolina cable
television system serving approximately 42,230 customers for Hampton and
Williamsburg, Virginia cable television systems serving approximately 45,300
customers. The transaction included a Texas cable television system serving
approximately 7,000 customers which was purchased and them immediately traded
by Cox. Cox recognized a book gain of $27,800,000 in conjunction with the
exchange.
 
  In September 1997, Cox sold its Sun City California cable television system,
serving approximately 10,000 customers. An insignificant loss was recognized
in conjunction with the sale. The net proceeds from the sale of Sun City were
used in the Lafayette exchange described below.
 
  In December 1997, Cox exchanged its Lafayette, Indiana cable television
system serving approximately 38,000 customers for a suburban Phoenix cable
system serving approximately 36,000 customers. No gain or loss resulted from
this transaction.
 
  In December 1997, Cox sold its Central Ohio cable television system, serving
approximately 85,000 customers for $204,200,000. Cox recognized a book gain of
$26,400,000 in conjunction with the sale. For tax purposes, Cox accounted for
the disposition as a like-kind exchange. Tax rules allow Cox to defer a
substantial
 
                                      52
<PAGE>
 
                            COX COMMUNICATIONS, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
portion of the related tax gain on this transaction upon the reinvestment of
the net proceeds in qualifying future acquisitions. Cox is presently pursuing
qualifying reinvestment assets. At December 31, 1997, restricted cash of
$204,200,000 was held in escrow pending reinvestment.
 
5. PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
                                                             DECEMBER 31
                                                       ------------------------
                                                             1997         1996
                                                       -----------  -----------
                                                       (THOUSANDS OF DOLLARS)
<S>                                                    <C>          <C>
Land.................................................. $    29,384  $    26,649
Buildings and building improvements...................     128,772       90,522
Transmission and distribution plant...................   2,398,746    1,923,729
Miscellaneous equipment...............................     239,068      187,496
Construction in progress..............................      44,948      114,627
                                                       -----------  -----------
  Plant and equipment, at cost........................   2,840,918    2,343,023
Less accumulated depreciation.........................    (861,855)    (811,212)
                                                       -----------  -----------
  Net plant and equipment............................. $ 1,979,063  $ 1,531,811
                                                       ===========  ===========
</TABLE>
 
6. INVESTMENTS
<TABLE>
<CAPTION>
                                                              DECEMBER 31
                                                        -----------------------
                                                              1997        1996
                                                        ----------- -----------
                                                        (THOUSANDS OF DOLLARS)
<S>                                                     <C>         <C>
Equity method investments.............................. $   795,179 $   713,500
Cost method investments:
  Publicly traded companies............................     799,518     474,396
  Privately held companies.............................       3,576      31,186
                                                        ----------- -----------
    Total investments.................................. $ 1,598,273 $ 1,219,082
                                                        =========== ===========
</TABLE>
 
  Summarized combined unaudited financial information for all equity method
investments and Cox's proportionate share (determined based on Cox's ownership
interest in each investment) for 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
                                                                  COX'S
                                         COMBINED          PROPORTIONATE SHARE
                                        YEAR ENDED             YEAR ENDED
                                       DECEMBER 31             DECEMBER 31
                                  -----------------------  --------------------
                                     1997         1996       1997       1996
                                  -----------  ----------  ---------  ---------
                                            (THOUSANDS OF DOLLARS)
<S>                               <C>          <C>         <C>        <C>
Revenues......................... $ 2,589,222  $1,569,634  $ 541,655  $ 359,926
Operating loss...................  (1,740,697)   (283,539)  (324,465)   (82,637)
Net loss.........................  (2,243,610)   (566,626)  (421,830)  (159,415)
</TABLE>
 
<TABLE>
<CAPTION>
                                                                COMBINED
                                                               DECEMBER 31
                                                         -----------------------
                                                               1997        1996
                                                         ----------- -----------
                                                         (THOUSANDS OF DOLLARS)
<S>                                                      <C>         <C>
Current assets.......................................... $ 1,854,575 $ 1,925,686
Noncurrent assets.......................................  10,685,314   6,144,486
Current liabilities.....................................   2,462,963     925,633
Noncurrent liabilities..................................   6,633,148   3,497,226
Equity..................................................   3,443,778   3,647,313
</TABLE>
 
                                       53
<PAGE>
 
                           COX COMMUNICATIONS, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
  The summarized unaudited financial information presented below for certain
significant equity method investments served as the basis for which Cox
recorded its share of equity in net losses:
 
<TABLE>
<CAPTION>
                           SPRINT                         OUTDOOR                 GEMS
                            PCS      COX PCS     TCGI      LIFE    SPEEDVISION TELEVISION
                         ----------  --------  ---------  -------  ----------- ----------
                                         YEAR ENDED DECEMBER 31, 1997
                         ----------------------------------------------------------------
<S>                      <C>         <C>       <C>        <C>      <C>         <C>
Revenues................    248,607    37,366    494,300   13,287     10,882     11,529
Operating loss.......... (1,310,734) (223,656)  (132,500) (22,029)   (32,279)    (5,406)
Net loss................ (1,563,387) (226,667)  (222,700) (23,944)   (34,314)    (9,665)
Current assets..........    456,823    71,612    600,161   17,034     11,143      9,338
Noncurrent assets.......  6,440,186   633,709  1,856,140    1,680      1,186     11,472
Current liabilities.....    750,546   164,457    375,272   11,002     11,329      7,245
Noncurrent liabilities..  4,301,931   196,720  1,049,413      --         --      22,815
Equity..................  1,844,532   344,144  1,031,616    7,712      1,000     (9,250)
<CAPTION>
                                         YEAR ENDED DECEMBER 31, 1996
                         ----------------------------------------------------------------
<S>                      <C>         <C>       <C>        <C>      <C>         <C>
Revenues................      4,175       692    283,400    3,278      2,254      8,776
Operating loss..........   (355,873)  (60,871)   (83,600) (23,173)   (32,530)   (11,444)
Net loss................   (443,094)  (60,757)  (126,600) (22,990)   (32,418)   (14,793)
Current assets..........    399,543    26,381    787,561    3,584      2,239      4,997
Noncurrent assets.......  3,923,858   197,797  1,262,536   14,862      7,372     15,367
Current liabilities.....    450,869   123,070    242,236    4,327      7,085     19,973
Noncurrent liabilities..  1,425,879     2,450  1,010,991      --         --         --
Equity..................  2,446,653    98,658    796,870   14,119      2,526        391
</TABLE>
 
  Cox's share of the net losses as stated above is not equal to the net losses
from equity investments reported in the Consolidated Statements of Operations
due to amortization and other expenses. At December 31, 1997, the aggregate
unamortized excess of Cox's investments over its equity in the underlying net
assets of the affiliates was approximately $31,184,000 and is being amortized
over periods ranging from five to 40 years. Amortization included in equity in
net losses of affiliates for the years ended December 31, 1997, 1996 and 1995
was $2,527,000, $4,272,000 and $5,622,000, respectively.
 
  The investment balances above include investments in and advances to
affiliated companies. The advances are generally interest-bearing, long-term
notes receivable totaling $5,740,000 and $72,175,000 at December 31, 1997 and
1996, respectively. Interest income recognized on notes receivable was
$1,700,000, $11,951,000 and $9,496,000 in 1997, 1996 and 1995, respectively.
 
  Cox has classified its cost method investments in publicly traded companies
as available-for-sale which have an aggregate cost of $439,378,000. At
December 31, 1997 and 1996, the carrying values of publicly traded companies
included unrealized gains of $339,356,000 ($202,289,000 net-of-tax) and
$15,787,000 ($9,407,000 net-of-tax), respectively. These unrealized gains are
based on quoted market values of publicly traded investments. The carrying
value of publicly traded companies at December 31, 1997 and 1996 also includes
a $20,784,000 and $33,277,000 foreign currency translation adjustment,
respectively, related primarily to Cox's interest in TeleWest Communications
plc ("TeleWest").
 
  At December 31, 1997 and 1996, cost method investments in privately held
companies were carried at an aggregate cost of $3,576,000 and $31,186,000,
respectively. It was not practicable to estimate the fair values of privately
held investments due to lack of quoted market prices and the excessive cost
involved in determining such fair values.
 
                                      54
<PAGE>
 
                           COX COMMUNICATIONS, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
Telephony
 
  In 1995, Cox was awarded a broadband PCS license for the Los Angeles-San
Diego Major Trading Area ("MTA") under the Federal Communications Commission's
("FCC") pioneer preference program. Cox and CEI, through subsidiaries, have
formed a partnership, Cox Pioneer Partnership ("CPP"), to own the two
companies' joint interest in a PCS system in the Los Angeles-San Diego MTA.
CPP is owned approximately 78% by Cox and approximately 22% by CEI. Cox and
CEI have made and will make capital contributions to CPP in proportion to
their percentage interests. In December 1996, pursuant to previous agreements,
CPP and Sprint Spectrum Holding Company, L.P. (a partnership of Cox, TCI,
Comcast Corporation ("Comcast") and Sprint Corporation ("Sprint")) formed Cox
Communications PCS, L.P. ("Cox PCS") to operate the PCS system in the Los
Angeles-San Diego MTA. Cox PCS is currently owned 49% by Sprint Spectrum
Holding Company, L.P. as limited partner and 51% by CPP as general partner. In
March 1997, upon approval from the FCC, Cox transferred the PCS license for
the Los Angeles-San Diego MTA to Cox PCS and Cox PCS assumed the related
license payment obligation to the FCC of $251.9 million. The December 1996
formation of Cox PCS and the March 1997 transfer of the license and obligation
resulted in Cox recording $36.5 million as a capital contribution from CEI.
 
  In February 1998, CPP exercised its right under the Cox PCS partnership
agreement to sell a portion of its interest in Cox PCS to Sprint Spectrum
Holding Company, L.P. Upon the consummation of this sale, which will occur
following the receipt of required regulatory approvals, Cox PCS will be owned
59.2% by Sprint Spectrum Holding Company, L.P. as general partner and limited
partner and 40.8% by CPP as general partner. The net proceeds of the sale will
be allocated between Cox and CEI in accordance with the partnership agreement
of CPP. Cox recorded $84,980,000 of equity in net losses in affiliated
companies for the year ended December 31, 1997 related to the operations of
Cox PCS. Additionally, Cox recorded $60,700,000 and $6,000,000 of equity in
net losses of affiliated companies for the years ended December 31, 1996 and
1995 respectively, related to the operations of the PCS system prior to the
formation of Cox PCS.
 
  In addition, Cox is a 15% partner in Sprint Spectrum L.P. ("Sprint PCS"),
which owns and operates a national, integrated wireless communications network
providing PCS services. Cox recorded $225,160,000, $56,500,000 and $7,900,000
of equity in net losses in affiliated companies for the years ended December
31, 1997, 1996 and 1995, respectively, for its ownership interest in Sprint
PCS. As of January 1, 1998, a "Deadlock Event" occurred due to the failure of
the partnership board of Sprint Spectrum Holding Company, L.P. (the parent of
Sprint PCS) to approve the proposed 1998 budget. If the 1998 budget is not
approved through the resolution procedures set forth in the Sprint Spectrum
Holding Company, L.P. partnership agreement, certain specified buy/sell
procedures may be triggered which might result in a restructuring of the
partners' interests in Sprint Spectrum Holding Company, L.P., Cox's sale of
its interest in Sprint Spectrum Holding Company, L.P., Cox's acquisition of
interests in Spring Spectrum Holding Company, L.P. held by other partners, or
liquidation of Sprint Spectrum Holding Company, L.P. Discussions among the
partners about restructuring their interests in Sprint PCS are ongoing.
However, there is no certainty the discussions will result in a change to the
partnership structure.
 
  Prior to June 1996, Cox held a 30.06% interest in each of Teleport
Communications Group Inc. ("TCGI") and TCG Partners ("TCGP"), which both owned
and operated fiber optic networks serving several U.S. markets and provide
point-to-point digital communications links to telecommunications businesses
and long-distance carriers. In June 1996, TCGI entered into a reorganization
under which, among other things, TCGI's four stockholders, Cox, Comcast,
MediaOne of Delaware, Inc., formerly Continental Cablevision, Inc.
("MediaOne") and TCI (collectively, the "Cable Stockholders") contributed to
TCGI all of their partnership interests in TCGP, additional interests in local
joint ventures and debt and accrued interest owed by TCGI to the Cable
Stockholders (the "Reorganization"). Following the Reorganization, TCGI
conducted an initial public offering in which it sold 27,025,000 shares of its
Class A Common Stock (the "TCGI IPO"). MediaOne sold its equity interest in
TCGI through several transactions culminating in a secondary offering in
November 1997. Cox owns 39,087,594 shares of TCGI's Class B Common Stock
which, as of December 31, 1997, represented 34.4% of
 
                                      55
<PAGE>
 
                           COX COMMUNICATIONS, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
TCGI's Class B Common Stock, 22.4% of total shares outstanding and 32.7% of
the voting power of TCGI. Each share of Class B Common Stock is convertible
into one share of TCGI's Class A Common Stock. As a result of the TCGI IPO,
Cox recorded a pre-tax gain of $50,100,000 to recognize Cox's proportionate
increase in its share of the underlying net assets of TCGI. Cox recorded
$48,631,000, $28,500,000, and $19,300,000 of equity in net losses of
affiliated companies for the years ended December 31, 1997, 1996 and 1995,
respectively, for its ownership interests in TCGI, TCGP and related joint
ventures. In November 1997, Cox recognized a gain of approximately $90,800,000
primarily resulting from a secondary offering by TCGI. This offering reduced
Cox's ownership percentage to 22.4%.
 
  In January 1998, TCGI agreed to a merger with AT&T Corp. ("AT&T") under
which TCGI shareholders will exchange each share of TCGI common stock for
0.943 of a share of AT&T common stock. Pending regulatory approval, the
transaction is expected to close in late 1998. Cox has been named along with
TCGI and TCGI officers and directors (including some who are officers of Cox),
as defendants in three putative class action suits filed in the Chancery Court
of New Castle County, Delaware. The suits challenge the proposed AT&T/TCGI
merger and seek injunctive relief and damages based on various theories
alleging that the proposed AT&T/TCGI merger's terms do not offer appropriate
compensation or protection to TCGI's public shareholders. The actions are
being defended vigorously. As a result of this transaction, if consummated,
Cox will own 36,859,601 shares of AT&T common stock, representing
approximately 2% of total AT&T common shares outstanding. Cox expects to
recognize a gain on this transaction.
 
International Broadband Networks
 
  In May 1995, Cox sold its 50% interest in STOFA A/S, a private operator of
cable television systems in Denmark for $13,300,000 resulting in a pre-tax
gain of approximately $10,200,000.
 
  At December 31, 1997, Cox had a 14.6% ownership interest in TeleWest, a
company that is currently operating and constructing cable television and
telephony systems in the U.K. Cox acquired this interest in October 1995
through the merger of SBC CableComms (UK), which was 50% owned by Cox, with
TeleWest (the "TeleWest Merger"). As a result of the TeleWest Merger, Cox
recognized a pre-tax net gain of $174,833,000. In December 1997, the decline
in the fair market value of TeleWest was considered to be other than temporary
and accordingly Cox recognized an $183,914,000 loss on write down of
affiliated company in its Consolidated Statement of Operations. At December
31, 1997 and 1996, the carrying value of Cox's investment in TeleWest was
$240,409,000 and $440,398,000, respectively.
 
Cable Television Programming and Other Investments
 
  In October 1995, Cox acquired a 39% interest in the Speedvision Network
("Speedvision") and a 41% interest in the Outdoor Life Network ("Outdoor
Life"), two new U.S. programming services. Speedvision's programming consists
of a broad variety of material for automobile, boat and airplane enthusiasts;
Outdoor Life's programming consists primarily of outdoor recreation, adventure
and wildlife themes. Cox's interest in Speedvision and Outdoor Life was
increased to 51.4% and 49.3% as of December 31, 1997, respectively. Cox's
interest is expected to be reduced below 50% as a result of a third party
investment. Cox recorded $18,700,000 and $22,600,000 of equity in net losses
of affiliated companies for the years ended December 31, 1997 and 1996,
respectively, for its ownership interests in both Speedvision and Outdoor
Life. The other partners include Comcast and MediaOne.
 
  In March 1996, Syntellect, Inc. ("Syntellect") merged with the operations of
Telecorp Systems, Inc. ("Telecorp"). As a result of this merger, Cox received
an 8.6% interest in Syntellect in exchange for its 24.5% interest in Telecorp.
Cox recognized a pre-tax gain of $4,640,000 related to this transaction.
 
  In August 1996, Cox acquired a 14.2% interest in At Home Corporation
("@Home"). @Home is a national Internet "backbone" service that allows
customers access to the Internet at speeds up to a hundred times faster than
traditional phone modems by using a cable modem and the cable television
broadband network. In July
 
                                      56
<PAGE>
 
                           COX COMMUNICATIONS, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1997, @Home conducted an initial public offering. As a result, the value of
the @Home share price became readily determinable, and accordingly Cox began
to account for its investment in @Home as an available-for-sale investment
under SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." The initial public offering reduced Cox's ownership percentage to
approximately 12.3%. Also in the fourth quarter 1997, Cablevision Systems
Corporation was admitted as a partner through the issuance of warrants. On a
fully diluted basis giving effect to the exercise of these warrants, Cox's
ownership is approximately 11.3%.
 
  In April 1997, Cox exchanged its 37.9% interest in UK Gold and 49.6%
interest in UK Living for 20,701,084 shares, or a 12.6% interest, in Flextech
plc, a United Kingdom publicly held programming company. Cox recognized a gain
related to this transaction of $179,800,000.
 
  In May 1997, Starsight Telecast, Inc. ("Starsight") merged with Gemstar
International Group Limited ("Gemstar"), a public company that develops and
markets proprietary technologies aimed at making technology more user friendly
to consumers. Cox, as a holder of 2,166,647 Starsight shares, received
1,313,421 shares of Gemstar as a result of the merger, representing a 2.8%
interest in Gemstar and recognized a gain of approximately $11,000,000 related
to this transaction. In December 1997, Cox sold its 2.8% interest in Gemstar
for $29,300,000 resulting in an additional gain of approximately $9,900,000.
 
  Pursuant to the Letter Agreement and Summary of Business Terms dated June
11, 1997, as superseded by certain definitive documentation, each of the
partners of PrimeStar agreed to merge with, or contribute their partnership
interests in PrimeStar and related assets and liabilities to, a new subsidiary
of TCI Satellite Entertainment, Inc., PrimeStar, Inc., in exchange for shares
of common stock of PrimeStar, Inc. and cash or the assumption of indebtedness.
Upon consummation of this transaction, Cox will own approximately 9.35% of
PrimeStar, Inc. The balance of PrimeStar, Inc. will be owned by the other
PrimeStar partners and the shareholders of TSAT. It is anticipated that Cox
will recognize a gain on this transaction, which is expected to close during
the second quarter of 1998.
 
  In December 1997, Cox sold its 10.4% interest in E! Entertainment to
Comcast/The Walt Disney Company for $57,000,000 resulting in a pre-tax gain of
$44,900,000.
 
  Cox also owns: a 50% interest in TWC Cable Partners, which owns cable
television systems in Staten Island, New York, and Fort Walton Beach, Florida;
a 24.6% interest in Discovery Communications, Inc., a documentary programming
network that operates The Discovery Channel and The Learning Channel; a 50%
interest in GEMS Television, a Spanish-language network in North and South
America; and various other programming networks and cable television
businesses.
 
7. INTANGIBLE ASSETS
 
<TABLE>
<CAPTION>
                                                             DECEMBER 31
                                                       ------------------------
                                                             1997         1996
                                                       -----------  -----------
                                                       (THOUSANDS OF DOLLARS)
<S>                                                    <C>          <C>
Goodwill.............................................. $ 2,727,321  $ 2,659,258
Franchise costs.......................................      66,232       79,195
PCS licenses including capitalized interest...........         --       277,176
Other.................................................      15,033       17,671
                                                       -----------  -----------
  Total...............................................   2,808,586    3,033,300
Less accumulated amortization.........................    (349,869)    (304,345)
                                                       -----------  -----------
  Net intangible assets............................... $ 2,458,717  $ 2,728,955
                                                       ===========  ===========
</TABLE>
 
                                      57
<PAGE>
 
                           COX COMMUNICATIONS, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
8. INCOME TAXES
 
  Current and deferred income tax expenses (benefits) are as follows:
 
<TABLE>
<CAPTION>
                                                     YEAR ENDED DECEMBER 31
                                                   ----------------------------
                                                     1997       1996     1995
                                                   ---------  --------  -------
                                                     (THOUSANDS OF DOLLARS)
<S>                                                <C>        <C>       <C>
Current:
  Federal......................................... $(152,623) $ 41,694  $59,029
  State...........................................    (2,694)   33,871   18,135
                                                   ---------  --------  -------
    Total current.................................  (155,317)   75,565   77,164
                                                   ---------  --------  -------
Deferred:
  Federal.........................................    95,932   (38,340)  22,806
  State...........................................     5,889   (14,179)     (76)
                                                   ---------  --------  -------
    Total deferred................................   101,821   (52,519)  22,730
                                                   ---------  --------  -------
    Net income tax expense........................ $ (53,496) $ 23,046  $99,894
                                                   =========  ========  =======
</TABLE>
 
  Income tax expense differs from the amount computed by applying the U.S.
statutory federal income tax rate (35%) to income (loss) before income taxes
as a result of the following items:
 
<TABLE>
<CAPTION>
                                                      YEAR ENDED DECEMBER 31
                                                     --------------------------
                                                       1997     1996     1995
                                                     --------  -------  -------
                                                      (THOUSANDS OF DOLLARS)
<S>                                                  <C>       <C>      <C>
Computed tax expense (benefit) at federal statutory
 rates on income (loss) before income taxes........  $(66,499) $(9,977) $71,296
State income taxes, net of federal tax benefit.....    (7,404)  12,793   11,738
Amortization of acquisition adjustments............    18,491   19,075   19,257
Benefit arising from low income housing credits....       --    (3,494)  (4,532)
Non-deductible preferred stock dividends of a
 subsidiary........................................     1,169    2,339    2,339
Other, net.........................................       747    2,310     (204)
                                                     --------  -------  -------
  Net income tax expense...........................  $(53,496) $23,046  $99,894
                                                     ========  =======  =======
</TABLE>
 
  Significant components of the net deferred tax liability consist of the
following:
 
<TABLE>
<CAPTION>
                                                            DECEMBER 31
                                                      ------------------------
                                                            1997         1996
                                                      -----------  -----------
                                                      (THOUSANDS OF DOLLARS)
<S>                                                   <C>          <C>
Depreciation and amortization........................ $  (463,527) $  (266,219)
Equity in net losses of affiliated companies.........    (124,478)     (27,921)
Unrealized gain on securities........................    (143,788)      (6,341)
Other................................................      10,199        6,028
                                                      -----------  -----------
  Net deferred tax liability......................... $  (721,594) $  (294,453)
                                                      ===========  ===========
</TABLE>
 
  Management believes that any additional liabilities arising from current
tax-related audits are sufficiently provided for at December 31, 1997.
 
                                      58
<PAGE>
 
                           COX COMMUNICATIONS, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
9. DEBT
<TABLE>
<CAPTION>
                                                             DECEMBER 31
                                                       -----------------------
                                                             1997        1996
                                                       ----------- -----------
                                                       (THOUSANDS OF DOLLARS)
<S>                                                    <C>         <C>
Revolving credit facilities........................... $   799,999 $   449,999
Commercial Paper, net of unamortized discount of
 $2,191 and $3,296....................................     683,300     718,704
Medium-term notes.....................................     263,352     166,082
Floating Rate Reset Notes, due June 15, 2009, net of
 unamortized discount
 of $2,820............................................     147,180         --
6.375% Notes due June 15, 2000, net of unamortized
 discount of $587 and $821............................     424,414     424,179
6.5% Notes, due November 15, 2002, net of unamortized
 discount of $430
 and $517.............................................     199,570     199,483
6.875% Notes, due June 15, 2005, net of unamortized
 discount and hedging of $12,462 and $13,661..........     362,538     361,339
7.25% Debentures, due November 15, 2015, net of
 unamortized discount of $840 and $880................      99,160      99,120
7.625% Debentures, due June 15, 2025, net of
 unamortized discount and hedging of $17,953 and
 $18,128..............................................     132,047     131,872
Obligation to the FCC.................................         --      251,918
Capitalized lease obligations.........................      37,274      21,157
                                                       ----------- -----------
Total debt............................................ $ 3,148,834 $ 2,823,853
                                                       =========== ===========
</TABLE>
 
Revolving Credit Facilities
 
  At December 31, 1997, Cox had an $1,200 million revolving credit facility
which matures on October 9, 2002. In addition, Cox had an $800 million
revolving credit facility which matures on October 8, 1998, at which time any
outstanding borrowings convert to a long-term loan due October 8, 2001. These
facilities are committed to back outstanding commercial paper as discussed
below.
 
  At Cox's option, the interest rates on borrowings under the revolving credit
agreements are based on the London Interbank Offered Rate or the certificate
of deposit rate plus varying percentages or an alternate base rate. In
addition, the $1,200 million facility permits up to $500 million in borrowings
in any G-7 currency, with interest thereon based on the interbank domestic
eurocurrency rate for such currency. Interest rates under the revolving credit
facilities ranged from 5.81% to 6.37% and 5.69% to 6.94% during the years
ended December 31, 1997 and 1996, respectively. The credit facilities impose a
commitment fee on the unused portion of the total amount available of.085%
to.375% based on the ratio of debt to operating cash flow and a utilization
fee of.0625% to.1250% based on the level of borrowings.
 
  These facilities contain covenants which, among other provisions, limit
Cox's ability to pay dividends and sell assets and require Cox to meet certain
requirements as to the ratio of debt to operating cash flow and the ratio of
operating cash flow to debt service. Historically, Cox has not paid dividends
nor does Cox intend to pay dividends in the foreseeable future but intends to
reinvest future earnings, consistent with Cox's business strategy. At December
31, 1997, the amount available for the payment of dividends was $34.1 million;
however, Cox does not intend to pay dividends in the foreseeable future.
 
Commercial Paper
 
  In June 1996, Cox entered into a commercial paper program under which Cox
may borrow $750 million. The commercial paper program is backed by amounts
available under the revolving credit facilities. The
 
                                      59
<PAGE>
 
                           COX COMMUNICATIONS, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
outstanding notes have maturities up to 270 days and interest rates based on
market. The interest rates for outstanding commercial paper at December 31,
1997 and 1996 ranged from 5.84% to 6.19% and 5.52% to 5.80%, respectively.
 
  In January 1998 the program was amended to increase the facility to $1,500
million. The proceeds from the increase in the program will be used to
refinance existing bank debt. Thereafter, the proceeds will be used for
general corporate purposes.
 
Medium Term Notes
 
  In April 1996, Cox filed a Form S-3 Registration Statement (the "Shelf
Registration") with the Securities and Exchange Commission under which Cox may
from time to time offer and issue debentures, notes, bonds or other evidence
of indebtedness for a maximum aggregate amount of $750 million. During 1996,
Cox sold $125 million of medium term notes under the Shelf Registration. The
notes are due in varying amounts through November 2006 with interest at fixed
rates ranging from 6.94% to 7.19%. The net proceeds to Cox were approximately
$124.3 million. During 1997, Cox sold $100 million medium term notes due
September 20, 2004 with interest at a fixed rate of 6.69%. The net proceeds to
Cox were approximately $99.4 million.
 
  In addition, at December 31, 1997 and 1996, Cox had outstanding borrowings
under several fixed rate medium term notes totaling $41.8 million. The notes
are due in varying amounts through 2023 and interest is fixed at rates ranging
from 7.125% to 8.875%.
 
Floating Rate Reset Notes, due June 15, 2009
 
  In June 1997, Cox issued $150 million principal amount of Floating Rate
Reset Notes due June 15, 2009 (the "Notes"). The Notes bear interest at a
floating rate equal to 0.8975% per annum below LIBOR until June 15, 1999, at
which time the interest rate will be reset at a fixed annual rate equal to
5.34% plus Cox's spread to the ten year Treasury. The Notes are redeemable at
the election of the holder, in whole but not in part, at 100% of the principal
amount on June 15, 1999. In addition, in exchange for a premium paid to Cox of
$2.9 million, the Notes may be purchased by a third party at the election of
the third party, in whole but not in part, at 100% of the principal amount on
June 15, 1999. Amortization of the premium will be reflected as adjustments to
interest expense. The interest rate for the Notes at December 31, 1997 was
4.91%.
 
6.375% Notes Due 2000
6.875% Notes Due 2005
7.625% Debentures Due 2025
 
  In June 1995, Cox issued $425 million of unsecured 6.375% Notes Due 2000,
$375 million of unsecured 6.875% Notes Due 2005 and $150 million of unsecured
7.625% Debentures Due 2025. In anticipation of the issuance of these debt
securities, Cox had entered into a series of transactions under a forward
treasury lock agreement in order to hedge its interest rate exposure. Such
hedging transactions totaled a notional amount of $100 million for the Notes
Due 2005 and $100 million for the Debentures Due 2025. The hedging
transactions were settled at a total cost of approximately $32.3 million,
which will be reflected as adjustments to interest expense over the life of
the Notes Due 2005 and Debentures Due 2025. Amortization of the market
discounts, underwriting discounts and commissions and hedging and other
issuance costs will increase the effective interest rates on the Notes Due
2005 and Debentures Due 2025 to 7.452% and 8.784%, respectively.
 
  The debt securities may not be redeemed by Cox prior to maturity, nor is Cox
required to make mandatory redemption or sinking fund payments prior to
maturity. In addition, the debt securities contain certain restrictive
 
                                      60
<PAGE>
 
                           COX COMMUNICATIONS, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
covenants relating to, among other things, liens on assets, indebtedness of
restricted subsidiaries, designation of restricted subsidiaries and mergers
and sales of assets.
 
6.5% Notes Due 2002
7.25% Debentures Due 2015
 
  In November 1995, Cox issued $200 million of unsecured 6.5% Notes Due 2002
and $100 million of unsecured 7.25% Debentures Due 2015. Amortization of the
market discounts, underwriting discounts and commissions and other issuance
costs increased the effective interest rates to 6.724% and 7.431%,
respectively. Net proceeds to Cox from the issuance of the debt securities
were approximately $296 million after market discounts, underwriting discounts
and commissions and other issuance costs.
 
  The debt securities are redeemable in whole or in part, at Cox's option, at
fixed redemption prices. Cox is not required to make mandatory redemption or
sinking fund payments prior to maturity. In addition, the debt securities
contain certain restrictive covenants relating to, among other things, liens
on assets, indebtedness of restricted subsidiaries, designation of restricted
subsidiaries and mergers and sales of assets.
 
Obligation to the FCC
 
  In March 1995, Cox was awarded a broadband PCS license for the Los Angeles-
San Diego MTA under the FCC's pioneer preference program at a cost to Cox of
$251.9 million. In March 1997, upon approval from the FCC, Cox transferred the
license and the related obligation to the FCC of $251.9 million to Cox PCS.
See additional discussion at Note 6.
 
Other
 
  Maturities of long-term debt, including debt discount, for each of the five
years following December 31, 1997, are: $7.6 million, $28.4 million, $435.5
million, $44.3 million, $1,001.3 million, respectively. Commercial paper
outstanding at December 31, 1997 is classified as long-term as Cox intends to
refinance these borrowings on a long-term basis either through continued
commercial paper borrowings or utilization of other available credit
facilities. Included in the maturities of long-term debt are obligations under
capital leases of $7.6 million, $6.5 million, $4.9 million, $3.1 million and
$1.7 million for each of the five years following December 31, 1997,
respectively.
 
Fair Value of Financial Instruments
 
  In accordance with the requirements of SFAS No. 107, "Disclosures About Fair
Value of Financial Instruments," Cox estimated the fair value of its debt
instruments. The estimates are based on discounted cash flow analyses using
Cox's incremental borrowing rate for similar types of borrowing arrangements
and dealer quotations. The revolving credit agreements, commercial paper and
floating rate reset notes, at December 31, 1997 and 1996, bear interest at
current market rates and, thus, approximate fair value. Remaining debt with a
carrying amount of $1,518.4 million and $1,645.3 million is estimated to have
a fair value of $1,595.0 million and $1,671.6 million at December 31, 1997 and
1996, respectively.
 
10. RETIREMENT PLANS
 
Qualified Pension Plan
 
  Effective January 1, 1996, Cox established the Cox Communications, Inc.
Pension Plan (the "CCI Plan"), a qualified noncontributory defined benefit
pension plan. The employees of the former Times Mirror cable
 
                                      61
<PAGE>
 
                           COX COMMUNICATIONS, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
television systems became participants in the CCI Plan retroactive to the
Merger date of February 1, 1995. The remaining Cox employees, excluding
certain key employees, participated in the qualified noncontributory defined
benefit pension plan of CEI (the "CEI Plan") until August 1, 1996, when they
entered the CCI Plan and plan assets were transferred to the CCI Plan from
CEI. Times Mirror also transferred plan assets to the CCI Plan during 1996.
Plan assets consist primarily of common stock, investment-grade corporate
bonds, cash and cash equivalents and U.S. government obligations. The CCI Plan
calls for benefits to be paid to eligible employees at retirement based
primarily upon years of service with Cox and compensation rates near
retirement. Current policy is to fund the CCI Plan in an amount that falls
between the minimum contribution required by ERISA and maximum tax deductible
contribution.
 
  Total pension expense attributable to Cox employees' participation in the
CCI Plan and the CEI Plan was $4,027,000, $5,180,000 and $3,972,000 for the
years ended December 31, 1997, 1996 and 1995, respectively. The 1997 pension
expense includes a credit to adjust for prior years estimates of pension
expense recognized for former employees of Times Mirror.
 
  The reconciliation of the funded status of the CCI Plan at December 31, 1997
and 1996 is as follows:
 
<TABLE>
<CAPTION>
                            YEAR ENDED DECEMBER 31
                            ------------------------
                                 1997         1996
                            -----------  -----------
                            (THOUSANDS OF DOLLARS)
<S>                         <C>          <C>
Actuarial present value
 of:
  Vested benefit
   obligation.............  $    41,633  $   22,212
  Nonvested benefit
   obligation.............        6,723       1,259
                            -----------  ----------
Accumulated benefit
 obligation...............  $    48,356  $   23,471
                            ===========  ==========
Plan assets at fair value.  $    95,083  $   78,425
Projected benefit
 obligation...............       75,676      68,486
                            -----------  ----------
Plan assets in excess of
 projected benefit
 obligation...............       19,407       9,939
Unrecognized:
  Net gain on plan assets.      (15,304)     (8,285)
  Prior service costs.....          735         535
  Net transition asset....       (1,107)     (1,346)
                            -----------  ----------
Prepaid pension cost......  $     3,731  $      843
                            ===========  ==========
</TABLE>
 
  The assumptions used in the actuarial computations at December 31, 1997 and
1996 were:
 
<TABLE>
<CAPTION>
                                                                   YEAR ENDED
                                                                   DECEMBER 31
                                                                   ------------
                                                                   1997   1996
                                                                   -----  -----
<S>                                                                <C>    <C>
Discount rate.....................................................  7.25%  7.75%
Rate of increase in compensation levels...........................  5.00   5.50
Expected long-term rate of return on plan assets..................  9.00   9.00
</TABLE>
 
 Nonqualified Pension Plan
 
  Certain key employees of Cox participate in an unfunded, nonqualified
supplemental pension plan of CEI (the "Nonqualified CEI Plan") which has
generally the same benefit payout formula as the CCI Plan. Total pension
expense recorded by Cox for the Nonqualified CEI Plan was $1,474,000,
$1,386,000, and $895,000 for the years ended December 31, 1997, 1996 and 1995,
respectively.
 
                                      62
<PAGE>
 
                           COX COMMUNICATIONS, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
Other Retirement Plans
 
  CEI provides certain health care and life insurance benefits to
substantially all retirees of Cox. Postretirement expense allocated to Cox by
CEI was $1,185,000, $1,060,000 and $888,000 for the years ended December 31,
1997, 1996 and 1995, respectively. The accumulated postretirement benefit
obligation ("APBO") attributable to Cox employees and retirees was $11,598,000
and $8,804,000 at December 31, 1997 and 1996, respectively. The funded status
of the postretirement plan covering the employees of Cox is not determinable.
The APBO for the postretirement plan of CEI substantially exceeded the fair
value of assets held in the plan at December 31, 1997 and 1996.
 
  Actuarial assumptions used to determine the APBO include a discount rate of
7.25% and 7.75% for the years ended December 31, 1997 and 1996, respectively,
and an expected long-term rate of return on plan assets of 9% for both years.
For the years ended December 31, 1997 and 1996, the assumed health care cost
trend rate for retirees is 10.5% and 11.5%, respectively. For participants
prior to age 65, the trend rate gradually decreases to 5.5% by year 2007 and
remains level thereafter. For retirees at age 65 or older, this rate decreases
to 5.0% by year 2008. Increasing the assumed health care cost trend rate by
one percentage point would have resulted in an increase in the CEI plan's APBO
of approximately 9.6% and 6.5% and an increase in the aggregate of the service
cost and interest cost components of the net periodic postretirement benefit
cost of approximately 4.5% and 5.1% for the years ended December 31, 1997 and
1996, respectively.
 
  In addition, substantially all of Cox's employees are eligible to
participate in the savings and investment plan of CEI. Under the terms of the
plan, Cox matches 50% of employee contributions up to a maximum of 6% of the
employee's base salary. Cox's expense under the plan was $4,606,000,
$4,504,000 and $3,881,000 for the years ended December 31, 1997, 1996 and
1995, respectively.
 
11. STOCK COMPENSATION PLANS
 
  At December 31, 1997, Cox had two stock-based compensation plans: a Long-
Term Incentive Plan ("LTIP") and an Employee Stock Purchase Plan ("ESPP"). Cox
applies APB Opinion 25 in accounting for its plans and accordingly, since the
grant price of stock compensation awards equals or exceeds the current market
price at the grant date, no compensation cost was recognized in 1997, 1996 and
1995 for these plans. Had compensation cost for the LTIP and ESPP been
determined based on the fair value at the grant dates for awards in 1997, 1996
and 1995 consistent with the provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation," Cox's net income (loss) and net income (loss) per
share would have been reduced (increased) to the pro forma amounts indicated
below:
 
<TABLE>
<CAPTION>
                                                     YEAR ENDED DECEMBER 31
                                                     (THOUSANDS OF DOLLARS)
                                                   -----------------------------
                                                     1997       1996      1995
                                                   ---------  --------  --------
<S>                                                <C>        <C>       <C>
Net income (loss)--As reported...................  $(136,492) $(51,551) $103,809
Net income (loss)--Pro Forma.....................   (146,465)  (55,807)   99,192
Basic and diluted net income (loss) per share--As
 reported........................................  $   (0.50) $  (0.19) $   0.41
Basic and diluted net income (loss) per share--
 Pro Forma.......................................      (0.54)    (0.21)     0.39
</TABLE>
 
  Effective upon consummation of the Merger, Cox adopted a LTIP under which
executive officers and selected key employees are eligible to receive awards
of various forms of equity-based incentive compensation, including stock
options, stock appreciation rights, stock bonuses, restricted stock awards,
performance units and phantom stock. Cox has reserved 6,000,000 shares of
Class A Common Stock for issuance under the LTIP. The LTIP is to be
administered by the Compensation Committee of the Cox Board of Directors or
its designee.
 
                                      63
<PAGE>
 
                           COX COMMUNICATIONS, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
  Options granted may be "Incentive Stock Options" or "Nonqualified Stock
Options." The exercise prices of the options are determined by the
Compensation Committee when the options are granted, subject to a minimum
price of the fair market value of the Class A Common Stock on the date of
grant. These options become exercisable over a period of three to five years
from the date of grant and expire 10 years from the date of grant. An
accelerated vesting schedule has been provided such that the options become
fully vested if the market value of the shares exceeds the exercise price by
140% for ten consecutive trading days. During 1997, the acceleration
provisions were met based on the market value of the shares, effectively
resulting in all outstanding options becoming fully vested.
 
  The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions used for
grants in 1997 and 1996: expected volatility of 28%, no payment of dividends,
expected life of 4 years after vesting and risk-free interest rates of 6.3%
and 5.6%, respectively.
 
  A summary of the status of Cox's stock options granted under the LTIP as of
December 31, 1997 1996 and 1995 and changes during the years ending on those
dates is presented below:
 
<TABLE>
<CAPTION>
                                 1997                 1996                 1995
                          -------------------- -------------------- --------------------
                                     WEIGHTED-            WEIGHTED-            WEIGHTED-
                                      AVERAGE              AVERAGE              AVERAGE
                                     EXERCISE             EXERCISE             EXERCISE
                           SHARES      PRICE    SHARES      PRICE    SHARES      PRICE
                          ---------  --------- ---------  --------- ---------  ---------
<S>                       <C>        <C>       <C>        <C>       <C>        <C>
Outstanding at beginning
 of year................  2,007,695   $18.34   1,506,253   $17.03         --       --
Granted.................    665,129    22.63     706,930    20.94   1,530,202   $17.03
Exercised...............   (239,865)   17.87     (59,210)   16.98         --       --
Canceled................   (120,549)   19.25    (146,278)   17.98     (23,949)   16.98
                          ---------            ---------            ---------
Outstanding at end of
 year...................  2,312,410   $19.57   2,007,695   $18.34   1,506,253   $17.03
                          =========            =========            =========
Options exercisable at
 year-end...............  2,312,410               18,851               59,277
Weighted-average grant
 date fair value of
 options granted during
 the year...............  $   10.22            $    9.17            $    6.28
</TABLE>
 
  The following table summarizes information about stock options outstanding
at December 31, 1997:
 
<TABLE>
<CAPTION>
                             OPTIONS OUTSTANDING                OPTIONS EXERCISABLE
                 ------------------------------------------- --------------------------
                   NUMBER    WEIGHTED-AVERAGE   WEIGHTED-      NUMBER      WEIGHTED-
   RANGE OF      OUTSTANDING    REMAINING        AVERAGE     EXERCISABLE    AVERAGE
EXERCISE PRICES  AT 12/31/97 CONTRACTUAL LIFE EXERCISE PRICE AT 12/31/97 EXERCISE PRICE
---------------  ----------- ---------------- -------------- ----------- --------------
<S>              <C>         <C>              <C>            <C>         <C>
$16.98            1,062,265        7.28           $16.98      1,062,265      $16.98
$20.44-
 $21.13             619,707        7.81            20.93        619,707       20.93
$22.63              630,438        8.78            22.63        630,438       22.63
                  ---------                                   ---------
                  2,312,410        7.83           $19.57      2,312,410      $19.57
                  =========                                   =========
</TABLE>
 
  In June 1995, Cox adopted an ESPP (the "1995 ESPP"), under which Cox was
authorized and did issue purchase rights totaling 750,000 shares of Class A
Common Stock to substantially all employees who had completed six months of
service. Under the terms of the 1995 ESPP, the purchase price was 90% of the
market value on June 1, 1995 and employees were allowed to purchase the shares
via payroll deductions through August 31, 1997, at which time the shares were
issued to the employees. As of August 31, 1997 the 1995 ESPP was completed and
557,209 shares were issued to employees. During 1996, 20,203 shares were
issued to employees due to cancellation of employees' participation in the
1995 ESPP or termination of employment. The fair value of the employees'
purchase rights granted in 1995 was estimated using the Black-Scholes model
with the
 
                                      64
<PAGE>
 
                           COX COMMUNICATIONS, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
following assumptions: expected volatility of 28%, no payment of dividends,
expected life of 2.25 years and risk-free interest rate of 5.8%. The weighted-
average fair value of each purchase right granted in 1995 was $4.38.
 
  In January 1998, Cox began administering a second ESPP which had been
adopted by Cox in April 1997 (the "1997 ESPP"), under which Cox was authorized
to issue purchase rights totaling 1,250,000 shares of Class A Common Stock to
substantially all employees who had completed six months of service. Purchase
rights totaling 558,001 shares were issued under the 1997 ESPP. Under the
terms of the ESPP, the purchase price was 85% of the market value on October
31, 1997 and employees were allowed to purchase the shares via payroll
deductions through January 31, 2000, at which time the shares will be issued
to the employees.
 
  Units awarded under the UAP that would have matured in 1995, 1996 and 1997
were converted to 365,954 shares of restricted stock issued under the LTIP in
1995. These restricted shares vested on January 1, 1997 following the end of
the original five-year UAP appreciation period except that 34,684 shares
vested and 5,533 shares were canceled during 1995 and 1996 due to the
retirement or termination of certain participants.
 
12. SHAREHOLDERS' EQUITY
 
  Cox is authorized to issue 316,000,000 shares of Class A Common Stock and
14,000,000 shares of Class C Common Stock. Except with respect to voting,
transfer and convertibility, shares of Class A Common Stock and Class C Common
Stock are identical in all respects. Holders of Class A Common Stock are
entitled to one vote per share and holders of Class C Common Stock are
entitled to ten votes per share. The Class C Common Stock is subject to
significant transfer restrictions and is convertible on a share for share
basis into Class A Common Stock at the option of the holder. In addition, Cox
is authorized to issue 5,000,000 shares of Preferred Stock. There are no
issued or outstanding shares of Preferred Stock at December 31, 1997.
 
  In June 1995, Cox completed a public offering of 11,500,000 shares of Class
A Common Stock at a price of $18.875 per share. Cox also sold 8,298,755 shares
of Class A Common Stock for $150,000,000 in a private placement to CEI. Total
proceeds to Cox were approximately $357,031,000, net of underwriting discounts
and commissions and other issuance costs of approximately $10,032,000.
 
  The following table reconciles the numerator and the denominator of the
basic and diluted per-share computations for income from operations for the
year ended December 31, 1995:
 
<TABLE>
<CAPTION>
                                                YEAR ENDED DECEMBER 31, 1995
                                            ------------------------------------
                                               INCOME       SHARES     PER-SHARE
                                            (NUMERATOR)  (DENOMINATOR)  AMOUNT
                                            ------------ ------------- ---------
<S>                                         <C>          <C>           <C>
Net income................................. $103,809,000
                                            ------------
BASIC EPS..................................  103,809,000  255,886,525    $0.41
                                                                         =====
EFFECT OF DILUTIVE SECURITIES
  Options..................................          --      (111,392)
  ESPP.....................................          --      (317,178)
                                            ------------  -----------
DILUTED EPS................................ $103,809,000  255,457,955    $0.41
                                            ============  ===========    =====
</TABLE>
 
  Options to purchase 542,717 shares of common stock at $39.22 per share were
granted on January 1, 1998. In addition, purchase rights totaling 558,001
shares of common stock were issued under the 1998 ESPP effective January 1998.
 
  As of December 31, 1997 and 1996, CEI owned approximately 75.0% and 75.3%,
respectively, of the outstanding shares of Cox Common Stock and 82.9% and
83.1%, respectively, of the voting power of Cox.
 
                                      65
<PAGE>
 
                           COX COMMUNICATIONS, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
13. TRANSACTIONS WITH AFFILIATED COMPANIES
 
  Cox borrows funds for working capital and other needs from CEI. In addition,
certain management services are provided to Cox by CEI. Such services include
legal, corporate secretarial, tax, cash management, internal audit, risk
management, benefits administration and other support services. Cox was
allocated expenses for the years ended December 31, 1997, 1996 and 1995 of
approximately $2,838,000, $2,493,000 and $2,000,000, respectively, related to
these services. Cox pays rent and certain other occupancy costs to CEI for its
home office facilities, which amounts approximated $3,844,000, $3,000,000 and
$2,600,000 for the years ended December 31, 1997, 1996 and 1995, respectively.
Allocated expenses are based on CEI's estimate of expenses related to the
services provided to Cox in relation to those provided to other divisions of
CEI. Rent and occupancy expense is allocated based on occupied space.
Management believes that these allocations were made on a reasonable basis.
However, the allocations are not necessarily indicative of the level of
expenses that might have been incurred had Cox contracted directly with third
parties. Management has not made a study or any attempt to obtain quotes from
third parties to determine what the cost of obtaining such services from third
parties would have been. The fees and expenses to be paid by Cox to CEI are
subject to change.
 
  In connection with the Merger, during 1995 CEI made additional capital
contributions to Cox of $43,844,000 by forgiving indebtedness in such amount
which Cox owed CEI.
 
  In June 1995, CEI purchased 8,298,755 shares of Cox Class A Common Stock for
$150,000,000 in a private placement at a price per share equal to the public
offering price of the June 27, 1995 public offering less the underwriting
discounts thereon.
 
  In August 1996, CEI transferred to the CCI Plan a prepaid pension cost of
$1,816,000 which represents the excess of the plan assets over the projected
benefit obligation attributable to the Cox employees that had previously
participated in the CEI Plan. This transfer resulted in a contribution to
capital of $1,108,000, net of federal and state deferred tax liabilities of
$708,000.
 
  In March 1997, the formation of Cox PCS and the subsequent transfer to Cox
PCS of the PCS license for the Los Angeles-San Diego MTA and the related
obligation to the FCC (see Note 9) resulted in a capital contribution to Cox
of $36,524,000 from CEI.
 
  The amounts due to CEI are generally due on demand and represent the net of
various transactions, including those described above. Outstanding amounts
to/from CEI bear interest at fifty basis points above CEI's current commercial
paper borrowings. This rate as of December 31, 1997 and 1996 was 6.5% and
6.2%, respectively.
 
  Included in amounts due to (from) CEI are the following transactions:
 
<TABLE>
<CAPTION>
                                                          (THOUSANDS OF DOLLARS)
                                                          ----------------------
<S>                                                       <C>
Intercompany due to CEI, December 31, 1995...............       $ 182,605
  Cash transferred to CEI................................        (282,829)
  Net operating expense allocations and reimbursements...         158,479
  Contribution to capital................................          (1,108)
                                                                ---------
Intercompany due to CEI, December 31, 1996...............          57,147
  Cash transferred from CEI..............................          83,900
  Net operating expense allocations and reimbursements...        (155,379)
  Contribution to capital................................         (36,524)
                                                                ---------
Intercompany due from CEI, December 31, 1997.............       $ (50,856)
                                                                =========
</TABLE>
 
                                      66
<PAGE>
 
                           COX COMMUNICATIONS, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
  In accordance with the requirements of SFAS No. 107, "Disclosures About Fair
Value of Financial Instruments," Cox has estimated the fair value of its
intercompany advances and notes payable. Given the short-term nature of these
advances, the carrying amounts reported in the balance sheets approximate fair
value.
 
  Cox pays fees to certain entities in which it has an ownership interest in
exchange for cable television programming. Programming fees paid to such
affiliates for the years ended December 31, 1997, 1996 and 1995 were
approximately $30,225,000, $24,535,000 and $28,178,000, respectively.
 
14. SUBSIDIARY PREFERRED STOCK
 
  At December 31, 1996, a subsidiary of Cox had $177,000,000 of nonvoting
redeemable preferred stock outstanding. In exchange for the stock, the
subsidiary of Cox received $10,000,000 in cash upon issuance of the stock in
1990 and a note receivable due in January 2001 of $167,000,000.
 
  The long-term notes receivable from the outside investor have been netted
against the preferred stock due to a right of offset. The net amount,
$10,000,000 at December 31, 1996, has been included in other liabilities in
the Consolidated Balance Sheets.
 
  The subsidiaries pay annual dividends of approximately $6,700,000 in the
aggregate on the outstanding preferred stock, which have been recorded as a
reduction of interest income on the notes.
 
  On July 1, 1997, the Cox subsidiary exercised its right to call the
nonvoting redeemable preferred stock and paid the outside investor the
$10,000,000 originally received in 1990. The preferred stock was outstanding
for six months of 1997; thus, total dividends paid in 1997 were $3,300,000 and
were recorded as a reduction of interest income on the notes.
 
15. SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
 
<TABLE>
<CAPTION>
                                                   1997       1996      1995
                                                 ---------  -------- ----------
                                                    (THOUSANDS OF DOLLARS)
<S>                                              <C>        <C>      <C>
SIGNIFICANT NON-CASH TRANSACTIONS:
  Capital contributions by CEI.................. $  36,524  $  1,108 $   43,844
  Cox Common Stock issued in connection with the
   Merger.......................................       --        --     932,000
  Debt assumed in connection with Merger........       --        --   1,364,000
  Purchase (transfer) of PCS license............  (251,918)      --     251,918
  TeleWest Merger stock exchange................       --        --     407,800
  Capitalized lease obligations.................    31,201    11,408     17,177
ADDITIONAL CASH FLOW INFORMATION:
  Cash paid for interest........................ $ 206,861  $143,094 $  141,692
  Cash paid (refunded) for income taxes.........  (151,047)  108,964     52,135
</TABLE>
 
                                      67
<PAGE>
 
                           COX COMMUNICATIONS, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
16. COMMITMENTS AND CONTINGENCIES
 
  Cox leases land, office facilities, and various items of equipment under
noncancellable operating leases. Rental expense under operating leases
amounted to $19,767,000 in 1997, $19,009,000 in 1996 and $15,660,000 in 1995.
Future minimum lease payments as of December 31, 1997 for all noncancellable
operating leases are as follows:
 
<TABLE>
<CAPTION>
                                                          (THOUSANDS OF DOLLARS)
                                                          ----------------------
<S>                                                       <C>
1998.....................................................        $ 7,206
1999.....................................................          5,583
2000.....................................................          4,794
2001.....................................................          4,191
2002.....................................................          3,175
Thereafter...............................................         18,506
                                                                 -------
  Total..................................................        $43,455
                                                                 =======
</TABLE>
 
  At December 31, 1997, Cox had outstanding purchase commitments totaling
approximately $54,285,000 for additions to plant and equipment and $95,377,000
to rebuild certain existing cable systems. Other commitments include
approximately $45,000,000 to fund the operations of Sprint PCS.
 
  Cox has guaranteed borrowings of certain affiliates totaling approximately
$2,519,000 at December 31, 1997. Cox has unused letters of credit outstanding
totaling $1,839,000 at December 31, 1997, as required under agreements with
its franchise authorities.
 
  Many franchising authorities have become certified by the FCC to regulate
rates charged by Cox for basic cable service and associated basic cable
service equipment. Some local franchising authority decisions have been
rendered that were adverse to Cox. In addition, a number of such franchising
authorities and customers of Cox filed complaints with the FCC regarding the
rates charged for cable programming services. In December 1995, the FCC
approved a Resolution of all outstanding rate complaints covering the Cox and
former Times Mirror cable television systems. The Resolution, among other
things, provided for the payment of refunds of $7,120,000 plus interest to one
million customers in January 1996, and the removal of additional outlet
charges for regulated services from all of the former Times Mirror cable
television systems. The Resolution also stated that Cox's cable programming
services tier rates as of June 30, 1995 were not unreasonable. Refunds under
the Resolution were fully provided for in Cox's financial statements at
December 31, 1995. In January 1996, the City of Irvine and six other cities
located in California filed an appeal to set aside the Resolution in the
United States Court of Appeals for the ninth Circuit. Cox and the cities
reached a settlement of the suit and the appeal was dismissed with prejudice
on November 6, 1997.
 
  On October 9, 1997, three individual subscribers filed a putative class
action suit in Superior Court of the State of California, County of San Diego
against Cox and its cable system subsidiaries in California (the "Cox
California Systems") arising out of the manner in which the Cox California
Systems sell premium channel cable services. The suit alleges that the Cox
California Systems unlawfully require limited basic cable customers to
purchase the expanded basic services tier in order to purchase premium
channels, i.e., channels sold on an a la carte basis such as Home Box Office
and Showtime. The suit asserts causes of action under California antitrust and
consumer protection laws. The suit seeks injunctive relief as well as an order
awarding the class members compensatory damages, plus statutory damages,
punitive damages, interest and attorney's fees. On February 13, 1998, the
Court granted Cox's motion to stay the suit and referred it on grounds of
Primary Jurisdiction to the
 
                                      68
<PAGE>
 
                           COX COMMUNICATIONS, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Federal Communications Commission for consideration of issues best addressed
by the FCC's expertise. The outcome of this matter cannot be predicted at this
time.
 
  Cox and its subsidiaries in Arizona, Oklahoma, Louisiana and Florida are
defendants in seven putative subscriber class action suits in the respective
state courts initiated between October 17, 1997 and January 26, 1998. The
suits all challenge the propriety of late fees charged by the subsidiaries to
customers who fail to pay for services in a timely manner. The suits seek
injunctive relief and various formulations of damages under various claimed
causes of action under various bodies of state law. The actions are being
defended vigorously. The outcome of these matters cannot be predicted at this
time.
 
  Cox is a party to various other legal proceedings that are ordinary and
incidental to its business. Management does not expect that any legal
proceedings currently pending, including the putative class actions, will have
a material adverse impact on Cox's consolidated financial position,
consolidated results of operations or consolidated cash flows.
 
17. UNAUDITED QUARTERLY FINANCIAL INFORMATION
 
 The following table sets forth selected historical quarterly financial
information for Cox. This information is derived from unaudited financial
statements of Cox and includes, in the opinion of management, all normal and
recurring adjustments that management considers necessary for a fair
presentation of the results for such periods.
 
<TABLE>
<CAPTION>
                                                   1997
                              ----------------------------------------------------
                                  1ST           2ND          3RD           4TH
                                QUARTER       QUARTER      QUARTER       QUARTER
                              -----------   -----------  -----------   -----------
                               (MILLIONS OF DOLLARS, EXCEPT PER SHARE DATA)
<S>                           <C>           <C>          <C>           <C>
Complete basic..............  $     263.3   $     265.9  $     267.6   $     277.7
New product tier............          4.7           4.8          4.6           4.1
Premium service.............         45.7          47.3         46.7          46.9
Pay-per-view................         11.0          15.7          9.5          11.1
Advertising.................         21.3          25.8         25.5          30.7
Satellite...................         25.9          29.9         32.3          32.5
Other.......................         11.2          11.7         22.0          15.0
                              -----------   -----------  -----------   -----------
  Total revenues............        383.1         401.1        408.2         418.0
Programming costs...........         88.5          92.2         89.2          88.0
Plant operations............         38.1          38.2         33.2          23.8
Marketing...................         17.8          18.0         23.7          17.1
General and administrative..         74.8          77.1         82.7          88.9
Satellite operating and
 administrative.............         24.3          28.3         27.1          29.5
Depreciation................         72.9          85.3         81.4          90.4
Amortization................         17.0          19.0         21.6          17.0
                              -----------   -----------  -----------   -----------
Operating income............  $      49.7   $      43.0  $      49.3   $      63.3
                              ===========   ===========  ===========   ===========
Net income (loss)...........  $     (37.8)  $      61.2  $     (82.0)  $     (77.9)
                              ===========   ===========  ===========   ===========
Basic and diluted net income
 (loss) per share...........  $     (0.14)  $      0.23  $     (0.30)  $     (0.29)
                              ===========   ===========  ===========   ===========
</TABLE>
 
                                      69
<PAGE>
 
                            COX COMMUNICATIONS, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
<TABLE>
<CAPTION>
                                                  1996
                             ---------------------------------------------------
                                 1ST          2ND          3RD           4TH
                               QUARTER      QUARTER      QUARTER       QUARTER
                             -----------  -----------  -----------   -----------
                              (MILLIONS OF DOLLARS, EXCEPT PER SHARE DATA)
<S>                          <C>          <C>          <C>           <C>
Complete basic.............  $     247.9  $     246.7  $     246.1   $     255.3
New product tier...........          3.2          3.4          3.5           4.1
Premium service............         47.5         47.7         47.3          46.3
Pay-per-view...............         12.9          9.9         10.2          12.6
Advertising................         20.5         22.0         25.3          28.0
Satellite..................         17.7         19.3         22.0          24.2
Other......................          7.8          8.4          9.4          11.1
                             -----------  -----------  -----------   -----------
  Total revenues...........        357.5        357.4        363.8         381.6
Programming costs..........         82.7         79.5         81.8          82.9
Plant operations...........         34.8         34.5         35.8          35.8
Marketing..................         15.3         17.0         16.0          14.3
General and administrative.         72.6         73.2         72.9          78.6
Satellite operating and
 administrative............         15.7         17.6         19.3          23.1
Depreciation...............         55.9         63.2         61.0          84.1(a)
Amortization...............         18.5         17.6         17.4          17.5
                             -----------  -----------  -----------   -----------
Operating income...........  $      62.0  $      54.8  $      59.6   $      45.3
                             ===========  ===========  ===========   ===========
Net income (loss)..........  $       7.3  $      27.0  $     (28.1)  $     (57.8)
                             ===========  ===========  ===========   ===========
Basic and diluted net
 income (loss) per share...  $      0.03  $      0.10  $     (0.10)  $     (0.21)
                             ===========  ===========  ===========   ===========
</TABLE>
--------
(a) Depreciation for the fourth quarter of 1996 includes accelerated
    depreciation of $18.5 million as a result of the upgrade and rebuild of the
    broadband network.
 
                                       70
<PAGE>
 
                           COX COMMUNICATIONS, INC.
 
                         INDEPENDENT AUDITORS' REPORT
 
 
The Board of Directors and Shareholders
Cox Communications, Inc.
 
  We have audited the accompanying consolidated balance sheets of Cox
Communications, Inc. (Cox) as of December 31, 1997 and 1996, and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the three years in the period ended December 31, 1997. These financial
statements are the responsibility of Cox's management. Our responsibility is
to express an opinion on these financial statements based on our audits.
 
  We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
 
  In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Cox
Communications, Inc. at December 31, 1997 and 1996, and the consolidated
results of its operations and its cash flows for each of the three years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
 
DELOITTE & TOUCHE LLP
Atlanta, Georgia
February 6, 1998
 
                                      71
<PAGE>
 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE
 
  None.
 
                                   PART III
 
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
 
  The information required by this Item is incorporated by reference to Cox's
Proxy Statement for the 1998 Annual Meeting of Stockholders.
 
ITEM 11. EXECUTIVE COMPENSATION
 
  The information required by this Item is incorporated by reference to Cox's
Proxy Statement for the 1998 Annual Meeting of Stockholders.
 
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
  The information required by this Item is incorporated by reference to Cox's
Proxy Statement for the 1998 Annual Meeting of Stockholders.
 
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
  The information required by this Item is incorporated by reference to Cox's
Proxy Statement for the 1998 Annual Meeting of Stockholders.
 
                                    PART IV
 
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
 
  (a) Documents incorporated by reference or filed with this Report
 
    (1) The financial statements required by Item 8 with respect to Cox
  Communications PCS, L.P. and Cox California PCS, Inc. are incorporated by
  reference herein (see Exhibit 99.1). The financial statements required by
  Item 8 with respect to Sprint Spectrum Holding Company, L.P. are
  incorporated by reference herein (see Exhibit 99.2). The financial
  statements required by Item 8 with respect to Teleport Communications Group
  Inc. are incorporated by reference herein (see Exhibit 99.3).
 
    (2) No financial statement schedules are required to be filed by Items 8
  and 14(d) because they are not required or are not applicable, or the
  required information is set forth in the applicable financial statements or
  notes thereto.
 
    (3) Exhibits required to be filed by Item 601 of Regulation S-K:
 
                                      72
<PAGE>
 
    Listed below are the exhibits which are filed as part of this Report
  (according to the number assigned to them in Item 601 of Regulation S-K):
 
<TABLE>
<CAPTION>
 EXHIBIT
 NUMBER  DESCRIPTION
 ------- -----------
 <C>     <S>
   2.1   -- Agreement and Plan of Merger, dated as of June 5, 1994, by and
           among The Times Mirror Company, New TMC Inc., Cox Communications,
           Inc. and Cox Enterprises, Inc. (Incorporated by reference to Exhibit
           2.1 to Cox's Registration Statement on Form S-4, File No. 33-80152,
           filed with the Commission on December 16, 1994.)
   2.2   -- Amendment No. 1, dated as of December 16, 1994, to Agreement and
           Plan of Merger by and among The Times Mirror Company, New TMC Inc.,
           Cox Communications, Inc. and Cox Enterprises, Inc. (Incorporated by
           reference to Exhibit 2.2 to Cox's Registration Statement on Form S-
           4, File No. 33-80152, filed with the Commission on December 16,
           1994.)
   2.3   -- Amendment No. 2, dated as of January 30, 1995, to Agreement and
           Plan of Merger by and among The Times Mirror Company, New TMC Inc.,
           Cox Communications, Inc., and Cox Enterprises, Inc. (Incorporated by
           reference to Exhibit 2.3 to Cox's Current Report on Form 8-K filed
           with the Commission on February 15, 1995.)
   3.1   -- Amended Certificate of Incorporation of Cox Communications, Inc.
           (Incorporated by reference to Exhibit 3.1 to Cox's Annual Report on
           Form 10-K for the fiscal year ended December 31, 1994.)
   3.2   -- Certificate of Amendment to Certificate of Incorporation of Cox
           Communications, Inc. (Incorporated by reference to Exhibit 3.3 to
           Cox's Form 10-Q filed with the Commission on May 14, 1997.)
   3.3   -- Bylaws of Cox Communications, Inc. (Incorporated by reference to
           Exhibit 3.2 to Cox's Registration Statement on Form S-4, File No.
           33-80152, filed with the Commission on December 16, 1994.)
   4.1   -- Indenture dated as of June 27, 1995 between Cox Communications,
           Inc. and The Bank of New York, as Trustee, relating to the 6 3/8%
           Notes due 2000, 6 1/2% Notes due 2002, 6 7/8 Notes due 2005, 7 1/4%
           Debentures due 2015 and the 7 5/8% Debentures due 2025 of Cox
           Communications, Inc. (Incorporated by reference to Exhibit 4.1 to
           Cox's Registration Statement on Form S-1, File No. 33-99116, filed
           with the Commission on November 8, 1995.)
  10.1   -- Amended and Restated Agreement of Limited Partnership of MajorCo,
           L.P., dated as of January 31, 1996, among Sprint Spectrum, L.P., TCI
           Network Services, Comcast Telephony Services and Cox Telephony
           Partnership. * (Incorporated by reference to Exhibit 10.1 to Cox's
           Current Report on Form 8-K filed with the Commission on February 9,
           1996.)
  10.2   -- Second Amended and Restated Joint Venture Formation Agreement,
           dated as of January 31, 1996, by and between Sprint Corporation,
           Tele-Communications, Inc., Comcast Corporation and Cox
           Communications, Inc. * (Incorporated by reference to Exhibit 10.2 to
           Cox's Current Report on Form 8-K filed with the Commission on
           February 9, 1996.)
  10.3   -- Parents Agreement, dated as of January 31, 1996 between Cox
           Communications, Inc and Sprint Corporation. * (Incorporated by
           reference to Exhibit 10.3 to Cox's Current Report on Form 8-K filed
           with the Commission on February 9, 1996.)
  10.4   -- Amended and Restated Agreement of Limited Partnership of PhillieCo,
           L.P., dated as of February 17, 1995, by and among Sprint Spectrum,
           Inc., TCI Network, Inc. and Cox Communications Wireless, Inc. *
           (Incorporated by reference to Exhibit 10.4 to the Annual Report on
           Form 10-K of Cox Communications, Inc., filed with the Commission on
           March 31, 1995.)
  10.5   -- Contribution Agreement, dated as of March 28, 1995, by and among
           TCI Network Services, Comcast Telephony Services, Cox Telephony
           Partnership, MajorCo, L.P. and Newtelco, L.P. * (Incorporated by
           reference to Exhibit 10.5 to the Annual Report on Form 10-K of Cox
           Communications, Inc., filed with the Commission on March 31, 1995.)
</TABLE>
 
                                       73
<PAGE>
 
<TABLE>
<CAPTION>
 EXHIBIT
 NUMBER  DESCRIPTION
 ------- -----------
 <C>     <S>
  10.6   -- Registration Rights Agreement, dated as of January 31, 1995, by and
           between Cox Communications, Inc., and Bank of America National Trust
           and Savings Association, Thomas Unterman, James F. Guthrie, James R.
           Simpson, Robert F. Erburu and David Laventhol, each as trustees for
           certain employee benefit plans of The Times Mirror Company.
           (Incorporated by reference to Exhibit 10.6 to the Annual Report on
           Form 10-K of Cox Communications, Inc., filed with the Commission on
           March 31, 1995.)
  10.7   -- Tax Allocation Agreement, dated as of February 1, 1995, by and
           between Cox Enterprises, Inc. and Cox Communications, Inc.
           (Incorporated by reference to Exhibit 10.7 to the Annual Report on
           Form 10-K of Cox Communications, Inc., filed with the Commission on
           March 31, 1995.)
  10.8   -- Asset Purchase Agreement, dated as of November 8, 1994, by and
           between Newport News Cablevision, Ltd. and Cox Cable Hampton Roads,
           Inc. (Incorporated by reference to Exhibit 10.8 to the Annual Report
           on Form 10-K of Cox Communications, Inc., filed with the Commission
           on March 31, 1995.)
  10.9   -- Cox Executive Supplemental Plan of Cox Enterprises, Inc.
           (Incorporated by reference to Exhibit 10.5 to Cox's Registration
           Statement on Form S-4, File No. 33-80152, filed with the Commission
           on December 16, 1994.)
  10.10  -- Cox Communications, Inc. Long-Term Incentive Plan. (Incorporated by
           reference to Exhibit 10.8 to Cox's Registration Statement on Form S-
           4, File No. 33-80152, filed with the Commission on December 16,
           1994.)
  10.11  -- Cox Communications, Inc. Restricted Stock Plan for Non-Employee
           Directors. (Incorporated by reference to Exhibit 10.9 to Cox's
           Registration Statement on Form S-4, File No. 33-80152, filed with
           the Commission on December 16, 1994.)
  10.12  -- 5-Year Credit Agreement, dated as of January 24, 1995, by and among
           Cox Communications, Inc., Texas Commerce Bank National Association
           and Chemical Bank, individually and as agents, and the other banks
           signatory thereto. * (Incorporated by reference to Exhibit 10.13 to
           the Annual Report on Form 10-K of Cox Communications, Inc., filed
           with the Commission on March 31, 1995.)
  10.13  -- 364-Day Credit Agreement, dated January 24, 1995, by and among Cox
           Communications, Inc., Texas Commerce Bank National Association and
           Chemical Bank, individually and as agents, and the other banks
           signatory. * (Incorporated by reference to Exhibit 10.14 to the
           Annual Report on Form 10-K of Cox Communications, Inc., filed with
           the Commission on March 31, 1995.)
  10.14  -- Assumption and Amendment Agreement, dated as of February 1, 1995,
           among Cox Communications, Inc., Texas Commerce Bank National
           Association, individually and as agent, and the other bank
           signatory. (Incorporated by reference to Exhibit 10.15 to the Annual
           Report on Form 10-K of Cox Communications, Inc., filed with the
           Commission on March 31, 1995.)
  10.15  -- Form of Letter Agreement between Cox Enterprises, Inc. and Cox
           Communications, Inc. relating to the CEI Purchase. (Incorporated by
           reference to Exhibit 10.16 to Cox's Amendment No. 2 to Registration
           Statement on Form S-1, File No. 33-92000, filed with the Commission
           on June 21, 1995.)
  10.16  -- Share Exchange Agreement, dated August 11, 1995, among Southwestern
           Bell International Holdings (UK-1) Corporation, Southwestern Bell
           International Holdings (UK-2) Corporation, Cox UK Communications,
           LP, TeleWest plc, TeleWest Communications plc, SBC International,
           Inc., Cox Communications, Inc. and SBC Cable Comms (UK) relating to
           the TeleWest Merger. (Incorporated by reference to Exhibit 10.1 on
           Form 10-Q of Cox Communications, Inc., filed with the Commission on
           November 8, 1995.)
</TABLE>
 
                                       74
<PAGE>
 
<TABLE>
<CAPTION>
 EXHIBIT
 NUMBER  DESCRIPTION
 ------- -----------
 <C>     <S>
  10.17  -- Form of Co-Operation Agreement among Cox U.K. Communications, LP,
           Cox Communications, Inc., Southwestern Bell International Holdings
           (UK-1) Corporation and Southwestern Bell International Holdings (UK-
           2) Corporation, SBC International, Inc. and TeleWest plc relating to
           the TeleWest Merger. (Incorporated by reference to Exhibit 10.2 on
           Form 10-Q of Cox Communications, Inc., filed with the Commission on
           November 8, 1995.)
  10.18  -- Form of Share Dealing Agreement among Cox Communications, Inc., Cox
           U.K. Communications, LP, SBC International, Inc., Southwestern Bell
           International Holdings (UK-1) Corporation and Southwestern Bell
           International Holdings (UK-2) Corporation, Telecommunications
           International Holdings, Inc., US West International Holdings, Inc.
           and TeleWest plc relating to the TeleWest Merger. (Incorporated by
           reference to Exhibit 10.3 on Form 10-Q of Cox Communications, Inc.,
           filed with the Commission on November 8, 1995.)
  10.19  -- Asset Exchange Agreement, dated December 31, 1996, by and among
           Heritage Cablevision of Southeast Massachusetts, Inc., Heritage
           Cablevue, Inc., TCI Cablevision of St. Bernard, Inc., TCI of Council
           Bluffs, Inc., TCI of Virginia, Inc., UA-Columbia Cablevision of
           Massachusetts, Inc., United Cable Television of Sarpy County, Inc.,
           United Cable Television of Scottsdale, Inc., and TCI American Cable
           Holdings, L.P., and CoxCom, Inc.* (Incorporated by reference to
           Exhibit 10.17 on Form 10-K of Cox Communications, Inc., filed with
           the Commission on March 28, 1997.)
  10.20  -- Subscription Agreement, dated March 21, 1997, between Cox
           Communications, Inc. and Flextech plc.* (Incorporated by reference
           to Exhibit 10.17 on Form 10-K of Cox Communications, Inc., filed
           with the Commission on March 28, 1997.)
  10.21  -- Letter Agreement, dated February 24, 1993, between Ajit M. Dalvi
           and Cox Communications, Inc.
  10.22  -- Amendment, dated December 16, 1997, to Letter Agreement between
           Ajit M. Dalvi and Cox Communications, Inc.
  10.23  -- Letter Agreement, dated December 16, 1997, between Ajit M. Dalvi
           and Cox Communications, Inc.
  10.24  -- Merger and Contribution Agreement, dated as of February 6, 1998,
           among TCI Satellite Entertainment, Inc., PrimeStar, Inc., Time
           Warner Entertainment Company L.P., Advance/Newhouse Partnership,
           Comcast Corporation, Cox Communications, Inc., MediaOne of Delaware,
           Inc., GE American Communications, Inc. *
  10.25  -- Agreement and Plan of Merger, dated as of February 6, 1998, between
           PrimeStar, Inc. and Cox Satellite, Inc. *
  13     -- Portions of the 1997 Annual Report to Stockholders (expressly
           incorporated by reference in Part II, Item 5 of this Report).
  21     -- Subsidiaries of Cox Communications, Inc.
  23.1   -- Consent of Deloitte & Touche LLP, Atlanta, Georgia
  23.2   -- Consent of Deloitte & Touche LLP, Kansas City, Missouri
  23.3   -- Consent of Deloitte & Touche LLP, New York, New York
  23.4   -- Consent of Deloitte & Touche LLP, Costa Mesa, California
  24     -- Power of Attorney (included on page 76)
  27     -- Financial data schedule
  99.1   -- Combined financial statements of Cox Communications PCS, L.P. and
           Cox California PCS, Inc.
  99.2   -- Financial statements of Sprint Spectrum Holding Company, L.P.
  99.3   -- Financial statements of Teleport Communications Group Inc.
           * Schedules and exhibits intentionally omitted.
</TABLE>
--------
(b) Current reports on Form 8-K
 
  None.
 
                                       75
<PAGE>
 
                                  SIGNATURES
 
  Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Cox Communications, Inc. has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
 
                                          COX COMMUNICATIONS, INC.
 
                                          By:       /s/ James O. Robbins
                                             ----------------------------------
                                                    James O. Robbins
                                              President and Chief Executive
                                                         Officer
 
Date: March 18, 1998
 
                               POWER OF ATTORNEY
 
  Cox Communications, Inc., a Delaware corporation, and each person whose
signature appears below, constitutes and appoints James O. Robbins and Jimmy
W. Hayes, and either of them, with full power to act without the other, such
person's true and lawful attorneys-in-fact, with full power of substitution
and resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign this Annual Report on Form 10-K and any and all amendments
to such Annual Report on Form 10-K and other documents in connection
therewith, and to file the same, and all exhibits thereto and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact, and each of them, full power and authority to do
and perform each and every act and thing necessary or desirable to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, thereby ratifying and confirming all that said attorneys-
in-fact, or any of them, or their or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
 
  PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF COX
COMMUNICATIONS, INC. AND IN THE CAPACITIES AND ON THE DATES INDICATED.
 
              SIGNATURE                           TITLE                 DATE
 
       /s/ James C. Kennedy            Chairman of the Board of     March 18,
-------------------------------------  Directors                    1998
          JAMES C. KENNEDY
 
       /s/ James O. Robbins            President and Chief          March 18,
-------------------------------------  Executive Officer; Director  1998
          JAMES O. ROBBINS
 
        /s/ Jimmy W. Hayes             Senior Vice President,       March 18,
-------------------------------------  Finance and Chief            1998
           JIMMY W. HAYES              Financial Officer
                                       (principal financial
                                       officer)
 
         /s/ John M. Dyer              Vice President of            March 18,
-------------------------------------  Accounting and Financial     1998
            JOHN M. DYER               Planning (principal
                                       accounting officer)
 
     /s/ Janet Morrison Clarke         Director                     March 18,
-------------------------------------                               1998
        JANET MORRISON CLARKE
 
        /s/ John R. Dillon             Director                     March 18,
-------------------------------------                               1998
           JOHN R. DILLON
 
       /s/ David E. Easterly           Director                     March 18,
-------------------------------------                               1998
          DAVID E. EASTERLY
 
       /s/ Robert F. Erburu            Director                     March 18,
-------------------------------------                               1998
          ROBERT F. ERBURU
 
        /s/ Andrew J. Young            Director                     March 18,
-------------------------------------                               1998
           ANDREW J. YOUNG
 
                                      76