<PAGE>


<PAGE>
________________________________________________________________________________
 
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
 
                            ------------------------
 
                                   FORM 10-K
                ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                      THE SECURITIES EXCHANGE ACT OF 1934
                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996.
                           REGISTRATION NO. 33-53742
 
                            ------------------------
 
                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 
<TABLE>
<S>                                                <C>                                 <C>
                     DELAWARE                                                                  13-3666692
 
   (STATE OR OTHER JURISDICTION OF INCORPORATION                                            (I.R.S. EMPLOYER
          OR ORGANIZATION OF REGISTRANT)                                                 IDENTIFICATION NUMBER)
 
AMERICAN TELEVISION AND COMMUNICATIONS CORPORATION              DELAWARE                       13-2922502
TIME WARNER OPERATIONS INC.                                     DELAWARE                       13-3544870
WARNER CABLE COMMUNICATIONS INC.                                DELAWARE                       13-3134949
WARNER COMMUNICATIONS INC.                                      DELAWARE                       13-2696809
(EXACT NAME OF REGISTRANT                             (STATE OR OTHER JURISDICTION          (I.R.S. EMPLOYER
AS SPECIFIED IN ITS CHARTER)                       OF INCORPORATION OR ORGANIZATION)     IDENTIFICATION NUMBER)
</TABLE>
 
                              75 ROCKEFELLER PLAZA
                            NEW YORK, NEW YORK 10019
                                 (212) 484-8000
  (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
                   REGISTRANTS' PRINCIPAL EXECUTIVE OFFICES)
 
                            ------------------------
 
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
 
<TABLE>
<CAPTION>
                  TITLE OF EACH CLASS                            NAME OF EACH EXCHANGE ON WHICH REGISTERED
                                                          --------------------------------------------------------
 
<S>                                                       <C>
           7 1/4% Senior Debentures due 2008                              New York Stock Exchange
</TABLE>
 
SECURITIES REGISTERED PURSUANT TO 12(g) OF THE ACT:
 
                                      NONE
 
     Indicate  by check  mark whether the  registrant (1) has  filed all reports
required to be filed by  Section 13 or 15(d) of  the Securities Exchange Act  of
1934  during the preceding  12 months, and  (2) has been  subject to such filing
requirements for the past 90 days. Yes [X]   No [ ]
 
     Indicate by check mark if disclosure of delinquent filers pursuant to  Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best  of registrant's knowledge,  in definitive proxy  or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [x]
 
                      DOCUMENTS INCORPORATED BY REFERENCE:
                                      NONE
 
________________________________________________________________________________


<PAGE>


<PAGE>

                     TIME WARNER ENTERTAINMENT COMPANY, L.P.

                               ORGANIZATION CHART


         Included in the Form 10-K for Time Warner Entertainment  Company,
         L.P.("TWE") is a chart illustrating TWE's organization, providing
         the following information:

         Time Warner Inc. owns 100% of the Time Warner General and Limited
         Partners.(1)

         Time Warner  General and Limited  Partners own 74.49% of TWE. TWE
         is also 25.51% owned by US West Limited Partner.(2)

         TWE owns 100% of Time  Warner  Cable,  Cable  Networks  - HBO and
         Filmed  Entertainment  - Warner Bros.,  and 66-2/3 % of the TWE -
         A/N  Partnership  (Cable).  The  TWE - A/N  Partnership  is  also
         33-1/3%-owned by Advance/Newhouse.









         -----------------
         (1) Time Warner Inc. directly  or  indirectly  owns 100% of the capital
stock of the Time Warner General and Limited Partners.

         (2)  Pro  rata priority  capital  and  residual  equity  interests.  In
addition,  the Time Warner  General  Partners own 100% of the  priority  capital
interest senior and junior to the pro rata priority capital interests. (See Note
2 to TWE's consolidated statements.)




<PAGE>


<PAGE>
                                     PART I
 
ITEM 1.  BUSINESS
 
TWE
 
     Time  Warner Entertainment Company, L.P.  ('TWE') is engaged principally in
three fundamental areas  of business: Entertainment,  consisting principally  of
interests   in   filmed   entertainment,   television   production,   television
broadcasting  and  theme  parks;  Cable  Networks,  consisting  principally   of
interests  in cable television programming; and Cable, consisting principally of
interests in cable  television systems. The  Time Warner Cable  division of  TWE
also  manages substantially  all of the  cable television systems  owned by Time
Warner Inc.,  a Delaware  corporation ('Time  Warner'), and  the combined  cable
television operations are conducted under the name of Time Warner Cable.
 
     TWE  was formed as  a Delaware limited  partnership in 1992  pursuant to an
Agreement of Limited Partnership, dated as of October 29, 1991, as amended  (the
'TWE Partnership Agreement'), and has, since its capitalization on June 30, 1992
(the 'TWE Capitalization'), owned and operated substantially all of the business
of  Warner  Bros., Home  Box  Office and  the  cable television  businesses, and
certain other businesses, previously owned and operated by Time Warner. Upon the
TWE Capitalization, certain wholly owned subsidiaries of Time Warner (the  'Time
Warner  General Partners') contributed such businesses, or assigned the net cash
flow derived  therefrom  (or  an amount  equal  to  the net  cash  flow  derived
therefrom),  to  TWE and  became  general partners  of  TWE. Also  upon  the TWE
Capitalization, wholly owned subsidiaries  of ITOCHU Corporation, a  corporation
organized  under  the  laws  of Japan  ('ITOCHU'),  and  Toshiba  Corporation, a
corporation  organized  under  the  laws  of  Japan  ('Toshiba'),   collectively
contributed $1 billion to TWE and became limited partners of TWE.
 
     On September 15, 1993, TWE consummated the transactions contemplated by the
Admission  Agreement,  dated as  of  May 16,  1993,  as amended  (the 'Admission
Agreement'), between TWE and US WEST, Inc., a Colorado corporation ('US  West').
Pursuant  to  the Admission  Agreement,  a wholly  owned  subsidiary of  US West
contributed to TWE $2.553 billion, and became a limited partner of TWE (the  'US
West  Transaction'). In connection  with the US West  Transaction, TWE issued an
option to US West to increase its pro rata priority capital and residual  equity
partnership  interests from 25.51% to up to 31.84%, depending on the performance
of TWE's Cable division. Such option is exercisable between January 1, 1999  and
on  or about May 31, 2005 at a maximum exercise price ranging from $1.25 billion
to $1.8 billion, depending on  the year of exercise. Either  TWE or US West  may
elect  that the exercise price for the option be paid with partnership interests
rather than cash.
 
     The Admission Agreement  provides that  TWE will  use its  best efforts  to
upgrade  a substantial  portion of its  cable systems to  'Full Service Network'
capacity by the  end of 1998.  As systems  are designated for  such upgrade  and
after  any required  approvals are  obtained, US West  and TWE  will share joint
control of those systems through a 50-50 management committee. The Full  Service
Network  business  is  expected  to include  substantially  all  of  TWE's cable
systems, subject to obtaining necessary  regulatory consents and approvals.  See
also  'Description of Certain  Provisions of the  TWE Partnership Agreement' for
additional information about the organization of TWE.
 
     Following the admission  of US West  into TWE, each  of ITOCHU and  Toshiba
owned  a 5.61% pro rata priority capital and residual equity interest in TWE and
a 6.25% residual equity interest  in TW Service Holding  I, L.P. and TW  Service
Holding  II,  L.P. (the  'Time Warner  Service  Partnerships'). The  Time Warner
Service Partnerships  owned certain  assets related  to the  TWE businesses.  On
September  5, 1995, and October 2,  1995, ITOCHU and Toshiba, respectively, each
exchanged its interest in TWE and  the Time Warner Service Partnerships for,  in
the case of ITOCHU, a total of 8 million shares of two new series of convertible
preferred  stock ('Series G Preferred Stock'  and 'Series H Preferred Stock') of
Time Warner and, in  the case of Toshiba,  7 million shares of  a new series  of
convertible  preferred stock of Time Warner ('Series I Preferred Stock') and $10
million in cash (the 'ITOCHU/Toshiba Transaction').
 
     As a result of the ITOCHU/Toshiba Transaction and the US West  Transaction,
subsidiaries  of Time Warner  and the Time  Warner General Partners collectively
own general and limited partnership interests in 74.49% of the pro rata priority
capital ('Series A Capital') and residual equity capital ('Residual Capital') of
TWE and
 
                                      I-1
 
<PAGE>


<PAGE>
100% of  the senior  priority  capital ('Senior  Capital') and  junior  priority
capital  ('Series B Capital')  of TWE. The  remaining 25.51% limited partnership
interest in the  Series A  Capital and  Residual Capital of  TWE are  held by  a
subsidiary of US West.
 
     On  April 1,  1995, TWE  formed a cable  television joint  venture with the
Advance/Newhouse  Partnership   ('Advance/Newhouse')   known  as   the   TWE-A/N
Partnership  to  which  Advance/Newhouse and  TWE  contributed  cable television
systems (or interest therein) serving approximately 4.5 million subscribers,  as
well  as certain foreign cable investments and programming investments. TWE owns
a two-thirds equity  interest in  the TWE-A/N  Partnership and  is the  managing
partner.  TWE  consolidates the  partnership and  the one-third  equity interest
owned  by  Advance/Newhouse  is   reflected  in  TWE's  consolidated   financial
statements as minority interest.
 
     On  October  10,  1996, Time  Warner  completed the  acquisition  of Turner
Broadcasting System, Inc. ('TBS'), thereby acquiring the remaining approximately
80%  interest  in  TBS  that  Time   Warner  did  not  already  own  (the   'TBS
Transaction'). TBS is not a part of TWE; however, as a result of the acquisition
of TBS, certain portions of TBS's filmed entertainment businesses are managed by
the  Warner Bros.  division of TWE.  As a result  of the TBS  Transaction, a new
parent company with the name 'Time Warner Inc.' replaced the old parent  company
of  the same  name and the  old parent company,  which changed its  name to Time
Warner  Companies,  Inc.  ('TWCI'),  and  TBS  became  separate,  wholly   owned
subsidiaries  of the new parent company. The assets of TWCI consist primarily of
investments in its consolidated and unconsolidated subsidiaries, including TWE.
 
THE TIME WARNER GENERAL PARTNERS
 
     At the time of the TWE  Capitalization, thirteen direct or indirect  wholly
owned  subsidiaries of Time Warner contributed the assets and liabilities or the
rights to the  cash flows of  substantially all of  Time Warner's Warner  Bros.,
Home  Box Office and cable television  businesses to TWE for general partnership
interests. During late 1993 through 1994, nine of the thirteen original  general
partners  were merged  or dissolved into  the other  four. Warner Communications
Inc.  ('WCI,'   a  subsidiary   of  Time   Warner),  American   Television   and
Communications  Corporation ('ATC,' a  subsidiary of Time  Warner), Warner Cable
Communications Inc. ('WCCI,' a consolidated  subsidiary of WCI) and Time  Warner
Operations  Inc. ('TWOI,' formerly Time Warner  Cable Inc., a subsidiary of Time
Warner) are the  four remaining general  partners of TWE  at December 31,  1996.
They  have succeeded  to the  general partnership  interests of  the nine former
general partners.
 
     The principal assets of the Time Warner General Partners currently include,
in addition to their interests in  TWE: WCI's ownership of substantially all  of
the  Warner Music Group  ('WMG'), which produces  and distributes recorded music
and owns and  administers music copyrights;  WCI's 50% interests  in each of  DC
Comics,  a New York general partnership which is 50% owned by TWE ('DC Comics'),
and  Cinamerica  Theatres,   L.P.;  WCI's   37.25%  interest   in  Time   Warner
Entertainment  Japan Inc., a corporation organized under the laws of Japan ('TWE
Japan'); certain securities of  TBS which in the  aggregate represent an  equity
interest of approximately 10.6% in TBS; 18,086,342 shares of the common stock of
Hasbro,  Inc., which may be  used to satisfy either  the obligations of (i) TWCI
under its  zero  coupon  exchangeable notes  due  2012  or (ii)  a  Time  Warner
subsidiary  under its mandatorily redeemable  preferred securities redeemable in
1997; and shares of common stock of  TWCI which represent an equity interest  of
approximately  8.6% in  TWCI. TWE  does not have  any ownership  interest in the
businesses or assets of the Time Warner General Partners.
 
     For financial information about TWE's industry segments and TWE's and WCI's
operations in different geographical areas with respect to each of the years  in
the   three-year  period  ended  December  31,   1996,  see  Note  11,  'Segment
Information,' to  the consolidated  financial  statements of  TWE and  Note  10,
'Geographical Information,' to the consolidated financial statements of the Time
Warner General Partners beginning at pages F-30 and F-72, respectively, herein.
 
                                      I-2
 
<PAGE>


<PAGE>
                                 ENTERTAINMENT
 
     TWE's  Entertainment  businesses produce  and distribute  theatrical motion
pictures, animation, television series and  films and other programming  through
an  expanding variety of media and markets, operate a televison network, license
rights to TWE's characters and operate  theme parks and retail stores  featuring
consumer products based on TWE's characters and brands.
 
                              FILMED ENTERTAINMENT
 
     TWE's  filmed entertainment business includes the production, financing and
distribution of  feature  motion  pictures for  theatrical  release,  television
series  and mini-series,  made-for-television movies,  first-run syndication and
cable  programming  and  animated  programming  for  theatrical  and  television
exhibition,  the ownership and operation of The WB national television broadcast
network and  the distribution  of  recorded video  product  for the  home  video
market. The filmed entertainment business is principally conducted by the Warner
Bros.  divisions of TWE.  Warner Bros. is  also, among other  things, engaged in
product licensing  and  merchandising, the  ownership  and operation  of  retail
stores,  movie theaters and worldwide theme parks (including management of TWE's
49% interest in Six Flags theme parks).
 
WARNER BROS. FEATURE FILMS
 
     Warner Bros.  produces feature  films  both wholly  on  its own  and  under
financing arrangements with independent motion picture producers in which Warner
Bros.  is generally  the principal  source of  financing for  such films. Warner
Bros. also  acquires  for  distribution  completed  films  produced  by  others.
Acquired  distribution rights may be limited to specified territories, specified
media and/or particular periods of time.  The terms of Warner Bros.'  agreements
with independent producers and other entities are separately negotiated and vary
depending upon the production, the amount and type of financing by Warner Bros.,
the  media and territories covered, the  distribution term and other factors. In
some cases, producers, directors, actors, writers and others participate in  the
proceeds generated by the motion pictures in which they are involved.
 
     Feature  films are licensed to exhibitors  under contracts that provide for
the length of the engagement, rental fees,  which may be either a percentage  of
box  office receipts, with or without a guarantee  of a fixed minimum, or a flat
sum, and other  relevant terms. The  number of feature  films that a  particular
theater  exhibits depends  upon its policy  of program  changes, the competitive
conditions in its area and the quality and appeal of the feature films available
to it. Warner  Bros. competes with  all other distributors  for playing time  in
theaters.
 
     Warner Bros. has entered into distribution servicing agreements with Morgan
Creek  Productions Inc. and its affiliates  ('Morgan Creek'), pursuant to which,
among other things, Warner Bros. provides domestic distribution services for all
Morgan Creek  pictures  through  June 1998,  and  certain  foreign  distribution
services  for selected pictures.  In 1996, Warner  Bros. released, among others,
'Diabolique,' starring Sharon  Stone and  Kathy Bates,  under this  arrangement.
Among  the releases anticipated for 1997  is 'Incognito,' starring Jason Patrick
and Rod Steiger.
 
     An affiliate  of Warner  Bros. is  a party  to an  agreement with  Monarchy
Enterprises  C.V. and its affiliate,  Regency Entertainment U.S.A. (collectively
'Monarchy/Regency'), for  the  distribution  of  major  motion  pictures.  Arnon
Milchan  produces  the  pictures  for  Monarchy/Regency  with  funding  provided
primarily by Monarchy/Regency. The Warner  Bros. affiliate makes a  distribution
advance  (which it has the  right to recoup, together  with its distribution fee
and distribution expenses) equal  to a portion of  the production costs for  the
film.  Warner Bros. has acquired all distribution rights in the U.S. and Canada,
and substantially all international  theatrical and home  video rights to  these
motion pictures. The 1996 Monarchy/Regency releases included 'Bogus,' 'Carpool,'
'Sunchaser'  and  'Heat,'  which opened  in  December 1995  but  had significant
revenue during 1996. Among the Monarchy/Regency productions to be distributed by
Warner Bros. in 1997 is 'L.A. Confidential' with Kevin Spacey and Kim  Basinger.
The Monarchy/Regency agreement will expire in 1998 unless extended or renewed.
 
     In  addition, an affiliate  of Warner Bros.  from time to  time enters into
single picture co-financing agreements  with Monarchy/Regency pursuant to  which
Warner    Bros.    acquires    all    distribution    rights    in    the   U.S.
 
                                      I-3
 
<PAGE>


<PAGE>
and Canada and substantially all international theatrical and home video rights.
Warner Bros. and Monarchy/Regency are each responsible for approximately 50%  of
production  costs. Warner  Bros. advances  marketing and  distribution costs and
receives a distribution fee  in connection with the  exploitation of the  films.
Co-financed  pictures released in 1996 included 'Tin  Cup' and 'A Time to Kill;'
co-financed pictures to be released in  1997 include 'Murder at 1600' and  'Free
Willy III.'
 
     During  1996,  Warner  Bros.  released 29  motion  pictures  for theatrical
exhibition, of which 16 were produced  by others. The following motion  pictures
released  in  1996  produced  substantial  domestic  gross  theatrical receipts:
'Twister,' 'A Time to Kill,' 'Eraser' and 'Space Jam.' During 1996, 60% of  film
rentals  from Warner Bros. theatrical distribution  were generated in the United
States and Canada and 40% in international territories.
 
     During 1997, Warner Bros. expects to release domestically approximately  30
motion  pictures, of which 12 are expected to be produced by others. In addition
to those previously mentioned, motion pictures  to be released in 1997  include:
'Batman  and  Robin,' starring  George  Clooney, Arnold  Schwarzenegger  and Uma
Thurman; 'Contact,' starring Jodie Foster, Matthew McConaughey and James  Woods;
'Conspiracy  Theory,' starring Mel Gibson and Julia Roberts; and 'Father's Day,'
starring Robin Williams and Billy Crystal.
 
TELEVISION
 
     Warner Bros., through  its various  divisions, is the  leading supplier  of
television programming in the world. Warner Bros. both develops and produces new
television  series, made-for-television movies,  mini-series, animation programs
and  reality-based  entertainment   shows,  and   also  distributes   television
programming  for  exhibition  on  all  national  networks,  syndicated  domestic
television, cable syndication and in a growing array of international television
distribution outlets.  Including  the product  owned  by TBS,  the  distribution
library  managed by  Warner Bros.  has grown to  more than  6,000 feature films,
28,500 television titles,  10,000 animated  titles plus  1,500 classic  animated
shorts.  Warner Bros. acts as distributor  of the material owned by subsidiaries
of TBS.
 
     Warner  Bros.'  television   programming  is  produced   by  Warner   Bros.
Television,  which produces  dramatic and  comedy programming,  and Telepictures
Productions, which  specializes in  reality-based and  talk/variety series,  and
also  by  Witt-Thomas-Harris Productions,  an independent  company which  has an
exclusive, long-term  feature film  and television  production and  distribution
agreement with Warner Bros.
 
     During  the  1996  season, Warner  Bros.  Television  successfully launched
several new  network  primetime series,  including  'The Jamie  Foxx  Show'  and
'Suddenly  Susan,' starring  Brooke Shields. Returning  network primetime series
include, among others, the  top-rated series 'ER' and  'Friends' (both in  their
third  season); 'Murphy Brown'  (in its ninth season);  'Family Matters' (in its
eighth season); 'Step by Step' (in its sixth season); 'Living Single' and  'Lois
&  Clark: The  New Adventures  of Superman'  (each in  its fourth  season); 'The
Parent 'Hood' and 'The Wayans  Bros.' (each in its  third season) and 'The  Drew
Carey Show' (in its second season).
 
     In  addition, Telepictures Productions launched  in 1996 the new syndicated
daytime television hit, 'The Rosie  O'Donnell Show.' Telepictures also  produces
for  syndicated television  such popular series  as 'Jenny Jones'  (in its sixth
season) and 'EXTRA' (in its third season).
 
     Warner Bros. Television Animation ('WBTA') is responsible for the creation,
development and  production  of  contemporary  animation, as  well  as  for  the
creative  use and production  of classic animated  characters from Warner Bros.'
extensive libraries, including 'Looney Tunes.'  Following the completion of  the
TBS  Transaction,  the Hanna-Barbera,  MGM  and Ruby-Spears  animation libraries
became managed  by  WBTA.  Animation  programming  is  important  to  TWE  as  a
foundation  for various product  merchandising and marketing  revenue streams as
well as being a  cost-effective source of initial  and on-going programming  for
various  distribution outlets, including  those owned by  TWE's subsidiaries and
divisions (including Kids' WB!).
 
     WBTA continues to be  a leading supplier  of original children's  animation
programming with such programs as 'Steven Spielberg Presents Animaniacs,' 'Pinky
& The Brain,' 'Tiny Toon Adventures,' 'Taz-Mania,' 'Batman' and 'Superman.'
 
                                      I-4
 
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<PAGE>
     The  rapid expansion of off-network, pay-per-view,  pay and basic cable and
satellite  broadcasting  has  increased   the  distribution  opportunities   for
already-produced  feature films and television programming of all varieties from
the Warner Bros.  and Turner Entertainment  libraries. A typical  sale of a  new
program  series produced by or  for Warner Bros. Television  to a major domestic
network grants that  network an  option to carry  such program  series for  four
years,  after which time  Warner Bros. Television  can enter into  a new license
agreement  with   that  or   any  other   network  as   well  as   license   the
already-broadcast   episodes  into  off-network  syndication  (broadcast  and/or
cable). New  series  are  also  licensed  concurrently  into  the  international
marketplace  and can, after a short period of  time, be sold in part or in whole
on home  video.  Warner  Bros.'  domestic  distribution  operation  handles  the
launching  and supporting of first-run series produced directly for syndication,
as well as the sale of movie packages, off-network syndication strips (in  which
shows  originally produced for weekly broadcast on a network are aired five days
a week),  and  reruns of  classic  television  series for  cable  and  satellite
broadcasting.
 
     Television  programs  currently in  off-network syndication  include, among
others, 'Murphy Brown,' 'Full  House,' 'Martin,' 'The Fresh  Prince of Bel  Air'
and  'Family Matters.' During 1996, the top-rated series 'ER' was sold to Turner
Network Television for syndication  commencing in 1998;  'Friends' was sold  for
syndication commencing in 1998 to stations covering over 85% of the country, and
'The  Dukes of Hazzard,' which ceased original  production in 1985, became a hit
all over again on The Nashville  Network. This renewed popularity has, in  turn,
spawned a resurgence of popular interest in 'The Dukes of Hazzard' and generated
a two-hour network television movie.
 
     International television distribution opportunities expanded during 1996 as
a  result of  the increased privatization  of terrestrial  broadcast in European
markets and the introduction of new technologies and platforms around the world.
Internationally, Warner  Bros. licenses  more than  35,000 hours  of  television
programming   and   feature  films   originally   produced  for   United  States
distribution. This product is dubbed or subtitled in more than 40 languages  and
seen  in  more than  175 countries.  In 1996,  Warner Bros.  completed five-year
multi-faceted distribution agreements with Taurus  in Germany and Canal Plus  in
France.
 
     Warner  Bros.' backlog, representing  the amount of  future revenue not yet
recorded from  cash contracts  for the  licensing of  theatrical and  television
product   for  pay  cable,  network,   basic  cable  and  syndicated  television
exhibition, amounted to $1.5  billion at December 31,  1996, compared to  $1.056
billion  at December 31,  1995, (including amounts relating  to the licensing of
product  to  TWE's cable television networks of $189 million as of December  31,
1996  and  $175  million  as  of  December  31, 1995, respectively). The backlog
excludes advertising barter contracts.
 
HOME VIDEO
 
     Warner Home  Video  ('WHV') distributes  for  home video  use  pre-recorded
videocassettes  and laser optical  videodiscs containing film  product of Warner
Bros., Home Box Office, WarnerVision Entertainment and TBS. WHV also distributes
(or services the  distribution of)  other companies'  product for  which it  has
acquired home video distribution or servicing rights.
 
     During  1996, WHV released five titles  in the North American rental market
with sales exceeding 450,000 units each: 'Executive Decision,' 'Eraser,' 'A Time
to Kill,'  'Goldeneye' and  'Birdcage.'  Internationally, the  following  titles
generated  substantial home video revenue in  1996: 'Goldeneye,' 'Under Siege 2:
Dark Territory,'  'Free  Willy  2: The  Adventure  Home,'  'Assassins,'  'Batman
Forever'  and 'The  Bridges of Madison  County.' Additionally,  the Warner Bros.
Family Entertainment label was expanded through affordably-priced North American
video releases  which generated  combined  videocassette sales  in excess  of  8
million units. Also, WHV released for home sale in North America 'Twister,' 'Ace
Ventura  2: When Nature Calls' and, under the MGM/UA family entertainment label,
'All Dogs  Go to  Heaven 2,'  which generated  combined sales  of more  than  18
million units.
 
     WHV  sells  its product  in the  United States  and in  major international
territories through  its  own  sales force,  with  warehousing  and  fulfillment
handled  by  divisions  of  Warner  Music  Group  and  third  parties.  In  some
international  markets,  WHV's   product  is   distributed  through   licensees.
Videocassette and laser optical videodisc
 
                                      I-5
 
<PAGE>


<PAGE>
product  is generally  manufactured under contract  with independent duplicators
and replicators. During 1996, approximately 63% of WHV's revenues were generated
in North America and approximately 37% in other territories.
 
     In  December  1995,  a  consortium  of  nine  major  consumer   electronics
manufacturers  and  TWE announced  agreement on  a standard  for a  high density
digital optical disc technology,  named the 'digital  versatile disc' or  'DVD,'
that  is capable  of storing  large volumes  of digitized  information -- enough
storage capacity for two full-length feature  films on a double-sided disc.  The
DVD  technology offers picture  quality significantly superior  to existing home
video  technology  as  well  as  premium  features  such  as  multiple  language
soundtracks. WHV, along with several other studios will release a limited number
of  software titles in  the DVD format  commencing in spring  1997 in the United
States. DVD product will be manufactured by Warner Advanced Media Operations,  a
Warner Music Group company, and third parties.
 
CONSUMER PRODUCTS AND WARNER BROS. STUDIO STORES
 
     Warner  Bros.  Consumer  Products  licenses  rights  in  both  domestic and
international markets to the names, photographs, logos and other representations
of characters  and copyrighted  material from  the films  and television  series
produced  or  distributed by  Warner Bros.,  including the  superhero characters
owned by DC Comics. During 1996, Warner Bros. Consumer Products launched a major
program in conjunction with the theatrical release of the motion picture  'Space
Jam.'
 
     In  1996,  Warner  Bros. Studio  Stores  continued its  expansion  with the
opening of 16  outlets in  the United States  and eight  in major  international
cities  in Europe and the Asia Pacific region.  Of the total of 161 stores as of
the end of 1996,  149 are wholly  owned and 12 are  operated outside the  United
States by franchisees. Approximately 25 stores are planned to be opened in 1997,
of which 18 will be operated by franchisees.
 
THEATERS
 
     Warner  Bros. International  Theatres, through joint  ventures, operates 57
multiplex  cinema  complexes  with  464  screens  in  seven  foreign  countries,
including  17 complexes in the United Kingdom, four in Germany, 22 in Australia,
eight in Japan, two in Denmark, three in Portugal and one in Spain. Warner Bros.
will expand into two new countries  through joint ventures during the  remainder
of  1997, Taiwan and Italy,  and plans to open one  new multiplex cinema each in
Portugal and Spain,  two in Germany,  three in Italy,  six in Japan  and six  in
Australia.
 
                           THE WB TELEVISION NETWORK
 
     The WB Television Network was launched by Warner Bros. in 1995, the year of
the repeal of the Financial Interest and Syndication Rules ('fin-syn') which had
prohibited  networks from owning a financial interest in or participating in the
syndication of shows broadcast by that network.  As of January 1997, the end  of
the  network's  second year,  The  WB reaches  approximately  84% of  total U.S.
households through its 98 affiliates and its coverage on Tribune  Broadcasting's
WGN superstation.
 
     During  the  1996/97  broadcast  season,  The  WB's  primetime  programming
schedule was  expanded to  a third  night, broadcasting  on Sunday,  Monday  and
Wednesday  nights.  A  fourth  night  of  prime  time  programming  is currently
scheduled to be added in the first quarter of 1998, and it is currently  planned
that  an additional night of programming will be added each year thereafter. The
network's philosophy is to offer  family-oriented programming in family  viewing
hours (7 p.m.-9 p.m. on Sunday and 8 p.m.-9 p.m. on Monday and Wednesday). Kids'
WB!  carries  eight  half-hour  animated series  on  Saturday  mornings  and two
half-hour weekday morning strips. In September  1997 Kids' WB! will expand to  a
total  of  19 hours  of programming  per week  with the  addition of  a two-hour
weekday afternoon programming block.
 
     In 1996 The WB announced plans to distribute a satellite-delivered  program
service  for smaller markets  in partnership with  local broadcasters (The WeB),
creating WB affiliates on local cable systems.
 
                                      I-6
 
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     Tribune Broadcasting  owns an  11.125%  interest in  The WB,  has  recently
exercised  an option  to acquire an  additional 8.375% interest  and has another
option exercisable over the next year that could increase Tribune Broadcasting's
ownership to 22.25% of the network. Key employees of The WB hold an 11% interest
in the network.
 
                           OTHER ENTERTAINMENT ASSETS
 
WARNER BROS. THEME PARKS
 
     Through joint  ventures with  local partners,  Warner Bros.  has  developed
theme parks in select international locations which feature Warner Bros.' movie,
cartoon  and superhero  characters. In  the summer  of 1996,  Warner Bros. Movie
World, a  new  regional  theme  park  and studio  complex,  was  opened  in  the
Rhine/Ruhr area of Germany. The park complex is modeled after Warner Bros. Movie
World  in Australia which owns and  operates a 400-acre movie-related theme park
(including a movie studio) and water  park complex near Brisbane, Australia,  as
well as Sea World of Australia.
 
SIX FLAGS THEME PARKS
 
     TWE  has a 49%  indirect ownership interest  in Six Flags  Theme Parks Inc.
('Six Flags'). Six Flags  operates 12 theme parks  in eight locations making  it
the  second largest operator of theme parks in the United States and the leading
operator of a national  system of regional theme  parks. Six Flags' theme  parks
include eight major ride-based theme parks, three separate-gated water parks and
one  wildlife safari park. Each of the theme parks is located in or near a major
metropolitan area. All of the theme parks operated by Six Flags are owned by Six
Flags, except for Six Flags Over Texas,  which is managed by Six Flags  pursuant
to  a partnership agreement which is scheduled to expire at the end of 1997, Six
Flags Over  Georgia,  which is  managed  by Six  Flags  pursuant to  a  recently
renegotiated  partnership agreement  which extends  through 2026,  and Six Flags
Fiesta Texas which is managed by Six  Flags pursuant to a lease arrangement  and
which Six Flags has the option to purchase.
 
DC COMICS
 
     TWE and WCI each owns a 50% interest in DC Comics. DC Comics publishes more
than  60 regularly issued comics magazines, among  the most popular of which are
'Superman,' 'Batman,'  'Wonder  Woman'  and  'The Sandman,'  as  well  as  story
collections sold as books. DC Comics also derives revenues from motion pictures,
television  syndication, product licensing, books for juvenile and adult markets
and foreign publishing. Trademarks in DC Comics' principal characters have  been
registered  in  the United  States Patent  and Trademark  Office and  in certain
foreign countries.
 
                           REGULATION AND LEGISLATION
 
     On February  8, 1996,  President Clinton  signed into  law a  comprehensive
reform  of  the nation's  communications  laws, entitled  the Telecommunications
Competition and Deregulation  Act of 1996  (the '1996 Telecommunications  Act'),
which  substantially revises the Communications Act of 1934, as amended. The new
law contains  certain  provisions  relating to  violent  and  sexually  explicit
programming.  First, the statute requires manufacturers to build television sets
with the  capability  of  blocking  certain  coded  programming  (the  so-called
'V-chip').  The effective date for any Federal Communications Commission ('FCC')
rule regarding the manufacture of such sets  may not occur before March 8,  1998
and  may occur  at a  later date if,  after consultation  with the manufacturing
industry, the  FCC  determines  that  more time  is  needed.  Second,  the  1996
Telecommunications  Act gave the  cable and broadcasting  industries one year to
develop voluntary  ratings for  video programming  containing violent,  sexually
explicit  or other indecent content and to agree voluntarily to transmit signals
containing such  ratings. Principal  representatives from  both industries  have
agreed upon a system of parental guidelines, which is now being implemented on a
voluntary  basis by broadcast stations and  networks, program producers, as well
as   cable   systems   and    networks.   The   1996   Telecommunications    Act
 
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authorizes  the FCC to prescribe guidelines of  its own, in consultation with an
advisory committee, if the  industry guidelines are not  acceptable to the  FCC.
The  FCC has sought public comment  on whether the voluntary industry guidelines
comply with the requirements of the 1996 Telecommunications Act.
 
     The 1996 Telecommunications Act eliminated  the restrictions on the  number
of  television  stations that  one  entity may  own  and increased  the national
audience reach  limitation by  one entity  from 25%  to 35%  of U.S.  television
households.  As required by the 1996 Telecommunications Act, the FCC has revised
its dual  network  rule to  allow  a TV  station  to affiliate  with  an  entity
maintaining  two or more networks, unless certain limited circumstances pertain.
The FCC has also amended  its rules to permit common  ownership or control of  a
broadcast network and cable systems.
 
     The  FCC rules  currently prohibit  an entity  from having  an attributable
interest in two local TV stations with overlapping specified signal contours. In
an ongoing rulemaking  proceeding, the FCC  has proposed to  relax this rule  in
certain  circumstances and  sought comment  on a  possible waiver  mechanism. In
another rulemaking,  the FCC  has  sought comment  on  possible changes  to  its
attribution  rules, which  define the type  of interests  in television stations
that are  recognizable for  purposes  of its  ownership  rules. Under  one  such
proposal,  certain currently  nonattributable debt  or passive  equity interests
would become attributable if held in conjunction with certain other interests in
or relationships with  the TV licensee,  such as the  provision of  programming.
Such  a proposal, if adopted, could adversely affect the WB's efforts to add new
television stations as affiliates.
 
     Effective on August 30, 1996, the FCC eliminated a regulation limiting  the
number  of hours  of network  (including off-network)  programs which television
stations affiliated with the  networks and located in  the top 50 markets  could
broadcast during the four-hour primetime period.
 
     Warner  Bros.  cannot at  this time  predict the  effect on  its television
businesses of the passage of the 1996 Telecommunications Act and the changes, or
proposed changes, to the FCC rules discussed above.
 
                                  COMPETITION
 
     The production and distribution  of theatrical motion pictures,  television
and  animation  product  and  videocassettes/videodiscs  are  highly competitive
businesses, as each  competes with the  other, as  well as with  other forms  of
entertainment  and leisure  time activities  (including video  games and on-line
services, including the Internet).  Furthermore, there is increased  competition
in  the television  industry evidenced by  the increasing number  and variety of
broadcast networks, basic cable and pay television services now available. There
is active competition among all production companies in these industries for the
services of producers, directors, actors and  others and for the acquisition  of
literary  properties. With  respect to  the distribution  of television product,
there is significant competition from independent distributors as well as  major
studios.  The  increased number  of theatrical  films released  in the  U.S. has
resulted in  increased competition  for theater  space and  audience  attention.
Revenues  for filmed entertainment product depend  in part upon general economic
conditions, but the competitive position of  a producer or distributor is  still
greatly  affected by the  quality of, and public  response to, the entertainment
product it makes available to  the marketplace. The television network  industry
is  extremely  competitive  as  networks  seek  to  attract  audience  share and
television stations  for  affiliation  and to  obtain  advertising  revenue  and
distribution  rights  to  television programming.  There  is  strong competition
throughout the home video industry, both from home video subsidiaries of several
major motion picture studios and from independent companies, as well as from new
film viewing opportunities, such as  pay-per-view. Warner Bros. competes in  its
character  merchandising and  other licensing  and retail  activities with other
licensors and retailers of character,  brand and celebrity names. Warner  Bros.'
operation  of theaters is subject to varying degrees of competition with respect
to obtaining new  theater sites  and attracting  patrons, including  competition
from  a  number  of motion  picture  exhibition  delivery systems,  such  as pay
television and home video  systems. Competition within  the theme park  industry
exists on a regional rather than a national basis. Principal competitive factors
within  the theme park  industry generally include  the uniqueness and perceived
quality of the rides and attractions in a particular park, ease of access to the
park from major metropolitan  areas, the atmosphere and  cleanliness of a  park,
and the quality of its food and entertainment.
 
                                      I-8
 
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                             CABLE NETWORKS -- HBO
 
     TWE's  Cable Networks business  consists of the  domestic and international
HBO and Cinemax pay  television programming services, operated  by the Home  Box
Office  division of  TWE ('Home  Box Office'). HBO  is the  nation's most widely
distributed pay  television service,  which together  with its  sister  service,
Cinemax, had approximately 32.4 million subscribers as of December 31, 1996. TWE
also  has  a  partial  interest  in  certain  other  domestic  and international
programming networks.
 
                                    GENERAL
 
     Through Home Box Office, TWE  distributes HBO, the leading pay-TV  service,
as well as Cinemax. HBO and Cinemax offer uncut, commercial-free motion pictures
and  high-quality documentaries. In addition,  HBO offers exclusive sporting and
special entertainment events (such  as concerts and  comedy shows), and  feature
motion pictures and television series produced specifically by or for HBO.
 
     Each  of the pay  cable networks distributes its  programming via cable and
other distribution  technologies,  including  satellite  distribution.  The  pay
television   programming  services  generally  enter  into  separate  multi-year
agreements, known as affiliation agreements, with operators of cable  television
systems  and  direct-to-home  satellite ('DTH')  distribution  companies  in the
United States that  have agreed to  carry such networks.  In the United  States,
cable  operators elect to carry networks and  services on an individual, and not
packaged, basis.  With the  proliferation of  new cable  networks and  services,
competition  for cable  carriage on the  limited available  channel capacity has
intensified.
 
     The programming produced for HBO  and Cinemax is generally transmitted  via
C-band  or  Ku-band communications  satellites  from an  uplinking  terminus and
received on receivers located  at local operations  centers for each  affiliated
cable  company,  or on  home satellite  dish  receivers. Individual  dish owners
wishing to receive programming from one of the satellite distribution  companies
must  purchase  a consumer  decoder  from a  local  source and  arrange  for its
activation.
 
     The  pay-TV  services,  being  commercial  free,  generate  their   revenue
principally from receipt of monthly per subscriber fees for each of the services
carried,  paid by cable system operators, DTH distribution companies, hotels and
other customers  (known  as  affiliates)  who have  contracted  to  receive  and
distribute such networks, which are generally charged on a per subscriber basis.
Individual  subscribers to HBO and Cinemax  are then generally billed monthly by
their local cable  company or DTH  packager for each  service purchased and  are
free to cancel a service at any time.
 
     As a result of acquisitions and mergers in the cable television industry in
recent  years, the percentage of Home  Box Office's revenue from affiliates that
are large multiple  system cable  operators has  increased. As  of December  31,
1996,  the largest  single multiple  system cable  operator with  which Home Box
Office does business is Tele-Communications,  Inc. ('TCI'), which accounted  for
approximately  20% of HBO's  and Cinemax's combined  subscribers. As of December
31, 1996, Time  Warner Cable (see  'Cable') accounted for  an additional 15%  of
HBO's  and Cinemax's  combined subscribers. Home  Box Office  attempts to assure
continuity in its relationships with affiliates and has entered into  multi-year
contracts  with affiliates, whenever possible. Although Home Box Office believes
the prospects of continued carriage and marketing of its programming services by
the larger affiliates are good, the loss of one or more of them as  distributors
of any individual service could have a material adverse effect on its business.
 
PROGRAMMING
 
     A  majority of  HBO's programming  and a large  portion of  that on Cinemax
consists of recently  released, uncut  and uncensored  feature motion  pictures.
Home Box Office's practice has been to negotiate licensing agreements of varying
duration  for such programming with major motion picture studios and independent
producers and  distributors. These  agreements  typically grant  pay  television
exhibition  rights to  recently released  and certain  older films  owned by the
particular studio, producer  or distributor  in exchange for  a negotiated  fee,
which  may be  a function  of, among  other things,  HBO and  Cinemax subscriber
levels and the films' box office performances.
 
                                      I-9
 
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<PAGE>
     Home Box Office attempts to ensure access  to future movies in a number  of
ways.  In addition to its  exhibition of movies distributed  by Warner Bros. and
its regular licensing agreements with numerous distributors, it has entered into
agreements  with  DreamWorks  SKG,  Sony  Pictures  Entertainment,  Inc.  ('Sony
Pictures'),  Paramount Pictures Corporation  ('Paramount') and Twentieth Century
Fox Film Corporation  ('Fox') pursuant  to which  Home Box  Office has  acquired
exclusive and non-exclusive rights to exhibit on its pay television services all
or  a substantial  portion of  the films  produced, acquired  and/or released by
these entities  during the  term of  each agreement.  Home Box  Office has  also
entered into non-exclusive license agreements with Fox, Paramount, Sony Pictures
and  Walt Disney Pictures for older,  library films. Home Box Office's exclusive
distribution agreement with Paramount, the parent company of which also owns the
Showtime Network, expires as to new theatrical releases on December 31, 1997 and
is not expected to be renewed.
 
     HBO has  also increasingly  defined itself  by the  exhibition of  sporting
events,  such  as  boxing  matches  and  Wimbledon,  contemporary  and sometimes
controversial, pay  television premiere  movies, dramatic  and comedy  specials,
television  series, and  documentaries that are  produced by HBO  or for initial
exhibition on HBO. Examples of such shows include 'The Larry Sanders Show,'  now
in its fifth season, 'Dennis Miller Live,' in its fourth season and 'Real Sports
with Bryant Gumbel,' in its third season.
 
OTHER INTERESTS
 
     Time  Warner Sports, a division of Home  Box Office, operates TVKO and TVKO
Entertainment, entities  that distribute  pay-per-view  prize fights  and  other
pay-per-view programming.
 
     In  1996,  Home  Box  Office's  own  production  company,  HBO  Independent
Productions, produced the series  'Martin,' now in its  fifth season on the  Fox
network, and 'Everybody Loves Raymond' under a 'first look' production agreement
with  CBS. Divisions of Home Box Office also produce comedy programming for HBO,
Comedy Central, broadcast networks and syndication.  Home Box Office owns a  50%
interest  in  Citadel Entertainment,  L.P., which  produces motion  pictures and
other programs for broadcast, basic cable and pay television networks, including
HBO. Home Box Office  is also co-owner of  a U.K. television production  company
and  a  separate  joint  venture for  the  foreign  distribution  of programming
produced by that production company.
 
     When it controls the  rights, Home Box  Office also distributes  theatrical
films  and  made-for-pay television  programming  to other  cable  television or
pay-per-view  services,  and  distributes  original  programming  into  domestic
syndication and foreign television.
 
INTERNATIONAL
 
     HBO  Ole, a  37.6%-owned partnership comprised  of TWE  (acting through its
Home Box Office and Warner Bros. divisions), a Venezuelan company and two  other
motion  picture companies,  operates two Spanish-language  pay television motion
picture services,  HBO  Ole and  Cinemax,  which are  currently  distributed  in
Central  and  South  America,  Mexico and  the  Caribbean.  HBO  Brasil, another
partnership in which  TWE has an  interest, distributes Portuguese-language  pay
television movie services in Brazil. TWE also has a 40% interest in HBO Asia, an
English-language,  movie-based  pay  television  service  which,  together  with
Cinemax, is currently distributed to various countries in Southeast Asia.
 
     In addition to the Latin American  and Asian ventures, Home Box Office  has
interests  in pay television services in Hungary, the Czech Republic and Poland.
TWE also has a 6.6% interest in  TV-1000, a pay television service operating  in
Scandinavia,  a 20.5% interest in PulsTV, a general interest regional television
broadcaster serving the Berlin  and Brandenberg areas of  Germany, as well as  a
26.5% interest in Hamburg 1, also a regional broadcaster in Germany.
 
     n-tv, a German language news network currently reaching 40 million homes in
Germany  and contiguous  countries in  Europe, primarily  via cable  systems and
satellite, is 24.27%-owned by the Home  Box Office division of TWE. n-tv  relies
principally  on advertising revenues and receives no compensation for its signal
from cable systems.
 
                                      I-10
 
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<PAGE>
                         BASIC CABLE NETWORK INTERESTS
 
     TWE holds a 50% interest  in Comedy Central, an advertiser-supported  basic
cable  television service, which provides comedy programming. Comedy Central was
available in 42 million homes at year-end 1996.
 
     TWE and the TWE-A/N Partnership, as  of December 31, 1996 held an  interest
of  approximately 58% in E! Entertainment  Television, a Los Angeles-based basic
cable channel specializing in promoting  the entertainment industry and  serving
approximately  43 million subscribers as of year-end 1996. In December 1996, the
other owners of E! triggered contractual buy-sell provisions, pursuant to  which
TWE expects to sell its interest in E! in March 1997.
 
     TWE  holds a 33 1/3% interest in Court TV. Court TV, launched in 1991, is a
24-hour cable network covering  actual courtroom trials  from around the  United
States  and abroad with  approximately 28 million  subscribers at year-end 1996.
During prime time,  Court TV features  live analyses of  the day's coverage  and
other programming exploring aspects of the legal system.
 
                           REGULATION AND LEGISLATION
 
     In   April  1993,  the  FCC  released  regulations  designed  to  implement
provisions  of  the  1992  Cable  Act,  which  generally  prohibits   vertically
integrated  programmers, which currently  include the program  services owned by
Home Box  Office,  from  offering  different prices,  terms,  or  conditions  to
competing multichannel video programming distributors unless the differential is
justified by certain permissible factors set forth in the regulations. The rules
also  place  certain  restrictions  on  the  ability  of  vertically  integrated
programmers  to  enter  into  exclusive  distribution  arrangements  with  cable
operators.  Although  the HBO  and Cinemax  services  are currently  provided to
subscribers by means of a number of different technologies including cable, MMDS
and DTH, the 1992 Cable Act and the FCC's implementing regulations could have  a
material  adverse effect on their businesses.  See 'Cable Systems Regulation and
Legislation.'
 
     The 1996 Telecommunications Act contains provisions concerning manufacturer
insertion of a 'V-chip'  into television sets and  industry implementation of  a
ratings  system for  violent, sexually  explicit and  indecent programming. (See
'Filmed Entertainment --  Regulation and  Legislation.') TWE  cannot predict  at
this time the effect of this legislation on its cable network business.
 
                                  COMPETITION
 
     Home   Box  Office's  businesses  face  strong  competition.  Each  of  the
programming services compete  with other cable  television programming  services
for  distribution on the limited number of channels available on cable operating
systems. The networks also compete for  viewers' attention with all other  forms
of   programming  provided  to  viewers,  including  broadcast  networks,  local
over-the-air television stations, other pay and basic cable television services,
home video,  pay-per-view  services and  on-line  activities. In  addition,  the
pay-TV  services  face  competition  for  programming  product  with  those same
commercial television networks,  independent stations, and  pay and basic  cable
television  services, some of which have exclusive contracts with motion picture
studios and independent motion picture distributors.
 
     Home Box Office's  production divisions  compete with  other producers  and
distributors  of  programs  for  air  time  on  broadcast  networks, independent
commercial television stations, and pay and basic cable television networks.
 
                                     CABLE
 
     TWE's Cable business consists principally of interests in cable  television
systems that are operated under the name Time Warner Cable. Of the approximately
12.3 million subscribers managed by Time Warner Cable, approximately 2.3 million
are in systems owned by TWI Cable Inc., a wholly owned subsidiary of Time Warner
which is not a part of TWE, and approximately 10 million are in systems owned by
TWE,  including approximately 4.5 million subscribers in a joint venture between
TWE and Advance/Newhouse known as the
 
                                      I-11
 
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TWE-A/N Partnership. Time Warner  Cable generally manages  all such systems  and
receives  a fee  from Time  Warner for  management of  the systems  owned by TWI
Cable.
 
                            CABLE TELEVISION SYSTEMS
 
GENERAL
 
     Time Warner Cable is the  second-largest multiple system cable operator  in
the United States. As of January 1, 1997, Time Warner Cable's 12.3 million cable
subscribers  were  geographically  concentrated  in 34  groupings  of  more than
100,000  subscribers  each.   This  includes  the   approximately  2.3   million
subscribers   in  the  cable   television  systems  formerly   owned  by  Summit
Communications Group,  Inc.,  KBLCOM  Incorporated  and  Cablevision  Industries
Corporation, which were acquired by Time Warner in 1995 and early 1996 (the 'TWI
Cable  Systems'), and the  approximately 4.5 million  subscribers in the TWE-A/N
Partnership, in which TWE owns a 66 2/3%  interest and is paid a fee to  manage.
More  than 55% of Time Warner Cable's  aggregate subscribers are located in five
states: Florida, New York, North Carolina, Ohio and Texas.
 
     Through a network of coaxial and fiber-optic cable, TWE's cable  television
system subscribers generally receive more than 50 channels of video programming,
including  local broadcast  television signals,  locally produced  or originated
video programming, distant broadcast television  signals (such as WTBS or  WGN),
advertiser-supported  video  programming  (such  as ESPN  and  CNN)  and premium
programming services (such as HBO, Cinemax, Showtime and The Movie Channel).  In
most  systems,  Time Warner  Cable  also offers  movies  and other  events  on a
pay-per-view basis, as well as audio and other entertainment services.
 
     Pursuant to the Admission  Agreement under which US  West became a  limited
partner of TWE, TWE has agreed to use its best efforts to complete upgrades to a
substantial  portion of its cable systems  to Full Service Network capability by
the end of 1998. Time  Warner Cable expects that by  the end of 1997, more  than
half of its systems will be upgraded. Such upgrades include the broad deployment
of  fiber and electronics. As systems are  designated for such upgrade and after
any required approvals are  obtained, US West and  TWE share joint control  over
the direction of those systems through a 50-50 management committee.
 
     Time  Warner Cable has also  agreed with the FCC  under the Social Contract
described below  to  invest a  total  of $4  billion  in capital  costs  over  a
five-year period ending December 31, 2000. The agreement with the FCC covers all
Time  Warner Cable systems, including  those owned by TWI  Cable and the TWE-A/N
Partnership.
 
     Time Warner  Cable  intends to  use  a portion  of  the band-width  in  its
upgraded  systems to  support its on-line  service for  home personal computers,
called Road  Runner.  Road Runner,  developed  in partnership  with  Time  Inc.,
delivers  Internet  access  and proprietary  local,  national  and international
content through the cable network to customers' home computers. During 1996, the
service was launched commercially in Time Warner Cable's Akron/Canton, Ohio  and
TWE-A/N's  Binghamton, NY systems. In early 1997  it was launched in the TWE-A/N
San Diego system. A number of other launches are planned for 1997.
 
     The number of  cable subscribers  managed by  Time Warner  Cable has  grown
primarily as a result of the acquisition of the TWI Cable Systems, the formation
of  the TWE-A/N Partnership, increases in the number of subscribers to its cable
television systems  and  the  development  of  geographically-clustered  systems
through  the exchange or purchase of cable television systems. Any future growth
in subscribers is expected to come from  the exchange of certain of Time  Warner
Cable's  unclustered  cable  television  systems  for  geographically  strategic
systems, increased penetration  of existing homes  passed (through rebuilds  and
the  introduction of new services), population growth and extensions of existing
systems. (See also, 'Business -- TWE.')
 
     Most of the  TWE's cable television  revenue is derived  from monthly  fees
paid  by subscribers for cable video programming services. Additional revenue is
generated  by  selling   time  on  cable   television  systems  for   commercial
advertisements  to  local, regional  and, in  some cases,  national advertisers.
Advertising time is sold as inserts into certain non-broadcast cable programming
and local origination programming  shown on TWE's  cable television systems.  In
addition,  pay-per-view  service is  offered in  most cable  television systems,
which allows
 
                                      I-12
 
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subscribers to choose to view specific  movies and events, such as concerts  and
sporting events, and to pay on a per-event basis.
 
     TWE   also  owns  a  31.3%  equity   interest  in  Primestar,  a  satellite
distribution company  offering packages  of  programming services  to  customers
owning  DTH receiving dishes.  Time Warner Satellite  Services generally has the
non-exclusive right to distribute Primestar to customers in Time Warner  Cable's
service  areas (including  TWI Cable  and the  TWE-A/N Partnership)  and also in
certain adjacent areas. Time Warner  Satellite Services currently has more  than
500,000 Primestar customers.
 
PROGRAMMING
 
     Time Warner Cable provides video programming to its subscribers pursuant to
multi-year contracts with program suppliers who generally are paid a monthly fee
per  subscriber. Many  of these  contracts contain  price escalation provisions;
however, in most cases the cable operator has a right to cancel the contract  if
the supplier raises its price beyond agreed limits. The loss of any one supplier
would not have a material adverse effect on Time Warner Cable's operations.
 
SERVICE AND PROGRAMMING CHARGES
 
     Subscribers to TWE's cable systems generally are charged monthly fees based
on the level of service selected. The monthly prices for various levels of cable
television  services (excluding services offered on a per-channel or per-program
basis) range generally from $5 to $25 for residential customers. Other  services
offered  include  equipment  rentals,  usually for  an  additional  monthly fee.
Systems offering  pay-per-view movies  generally charge  between $4  and $6  per
movie,  and systems offering pay-per-view events generally charge between $6 and
$50, depending on the  event. A one-time installation  fee is generally  charged
for connecting subscribers to TWE's cable television system.
 
     Subscribers  may  purchase  premium programming  services  and,  in certain
systems, other per-channel services, for an additional monthly fee for each such
service, with discounts generally  available for the purchase  of more than  one
service.
 
     Commercial  subscribers are  charged rates  for cable  programming services
that vary depending on the nature of the contract.
 
INTERNATIONAL
 
     TWE has a 53.75%  interest in a joint venture established to invest in, and
further  develop, cable television systems and  programming in Hungary. TWE also
owns a  13%  indirect  interest  in  Sky  Network  Television,  an  over-the-air
subscription service in New Zealand. In France, TWE owns 100% of Cite Reseau and
49.88%  of Rhone Vision Cable both  established to acquire new franchises, build
and operate cable systems in France. In China, TWE owns 75% of the  Beijing-Time
Warner  Cable Television Engineering Company and, in Japan has acquired a 15.44%
interest in two cable television companies, Titus Communications and Chofu Cable
Television.
 
                           REGULATION AND LEGISLATION
 
     The cable television  industry is  regulated by  the FCC,  some states  and
substantially  all  local  governments.  In  addition,  various  legislative and
regulatory proposals under consideration from time  to time by the Congress  and
various  federal  agencies  may  in  the  future  materially  affect  the  cable
television industry. The following discussion summarizes certain federal,  state
and local laws and regulations affecting cable television.
 
     Federal  Laws. The  Cable Communications  Policy Act  of 1984  ('1984 Cable
Act'), the 1992 Cable Act and the 1996 Telecommunications Act are the  principal
federal statutes governing the cable industry. These statutes regulate the cable
industry,  among other things, with respect to:  (i) cable system rates for both
basic and certain  nonbasic services;  (ii) programming  access and  exclusivity
arrangements;  (iii)  access  to  cable  channels  by  unaffiliated  programming
services; (iv) leased access terms  and conditions; (v) horizontal and  vertical
ownership
 
                                      I-13
 
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<PAGE>
of  cable systems; (vi)  consumer protection and  customer service requirements;
(vii) franchise  renewals;  (viii)  television  broadcast  signal  carriage  and
retransmission  consent; (ix) technical  standards; and (x)  privacy of customer
information.
 
     Federal Regulations. The FCC, the principal federal regulatory agency  with
jurisdiction over cable television, has promulgated regulations implementing the
federal statutes.
 
     Rate  Regulation. Under  the 1992  Cable Act,  nearly all  cable television
systems are subject  to local  rate regulation of  basic service  pursuant to  a
formula  established by the  FCC and enforced  by local franchising authorities.
Additionally, the  legislation required  the FCC  to review  rates for  nonbasic
service  tiers (other than  per-channel or per-program  services) in response to
complaints filed by franchising  authorities and/or cable customers;  prohibited
cable  television systems from  requiring subscribers to  purchase service tiers
above basic  service in  order to  purchase  premium service  if the  system  is
technically  capable  of doing  so;  required the  FCC  to adopt  regulations to
establish, on the  basis of actual  costs, the price  for installation of  cable
service   and  rental  of  cable  equipment;  and  allowed  the  FCC  to  impose
restrictions on the retiering and rearrangement of basic and non-basic  services
under certain limited circumstances.
 
     Under the 1996 Telecommunications Act, regulation of nonbasic tier rates is
scheduled  to terminate on March 31, 1999. Regulation of both basic and nonbasic
tier cable  rates  also  ceases  for any  cable  system  subject  to  'effective
competition.'   The  1996  Telecommunications  Act  expands  the  definition  of
'effective competition' to cover situations  where a local telephone company  or
its  affiliate,  or  any  multichannel video  provider  using  telephone company
facilities, offers comparable video service by any means except DTH.
 
     The FCC's  rate regulations  employ a  benchmark system  for measuring  the
reasonableness  of  existing basic  and  nonbasic service  rates. Alternatively,
cable operators have the opportunity to make cost-of-service showings which,  in
some  cases, may justify rates above  the applicable benchmarks. The regulations
also provide  that future  rate increases  may not  exceed an  inflation-indexed
amount,  plus increases  in certain costs  beyond the  cable operator's control,
such as taxes, franchise fees and costs. Cost-based adjustments to these  capped
rates can also be made in the event a cable operator adds or deletes channels or
significantly  upgrades its system. In addition, new product tiers consisting of
services new to the cable system can be created free of rate regulation as  long
as  certain conditions are  met, e.g., services  may not be  moved from existing
tiers to  the  new  product  tier.  The rules  also  require  that  charges  for
cable-related  equipment (e.g., converter boxes  and remote control devices) and
installation be unbundled  from the provision  of cable service  and based  upon
actual costs plus a reasonable profit.
 
     Local  franchising  authorities and/or  the FCC  are  empowered to  order a
reduction of existing rates which exceed the maximum permitted level for  either
basic  and/or nonbasic cable services and  associated equipment, and refunds can
be required.
 
     On November 30, 1995,  the FCC adopted a  Social Contract with Time  Warner
Cable which resolved all of the cable television rate complaints pending against
Time  Warner Cable and requires Time Warner  Cable to upgrade its domestic cable
television systems. The Social  Contract was negotiated  in accordance with  the
FCC's  authority to  consider and  adopt 'social  contracts' as  alternatives to
other regulatory approaches applicable to cable television rates.  Specifically,
the  Social Contract  provides for  an estimated  $4.7 million  plus interest in
refunds in the form  of bill credits to  subscribers of certain designated  Time
Warner  Cable systems, a commitment by Time Warner Cable to establish a lifeline
basic service priced at 10% below Time Warner Cable's benchmark regulated  rates
with an adjustment to the nonbasic tier to recoup the reduced basic service tier
revenue;  and a commitment by Time Warner  Cable to upgrade its domestic systems
by December 31, 2000. Court appeals filed  by the city of Austin, Texas and  the
Intercommunity  Cable  Regulatory  Commission  (which  represents  28 Cincinnati
suburbs served by Time Warner Cable) seeking review of the FCC decision adopting
the Social Contract  as well  as certain  FCC staff  decisions implementing  the
Social  Contract are pending. The appeals  contend, among other things, that the
terms of the  Social Contract and  the process  by which it  was negotiated  and
implemented  are contrary to the  1992 Cable Act, and  are inconsistent with the
FCC's own  rules.  These  parties  also  filed  a  petition  with  the  FCC  for
reconsideration of the Social Contract, which is currently pending.
 
                                      I-14
 
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<PAGE>
     A  purported nationwide class action has been brought in a federal court in
New York alleging that any charges  imposed by Time Warner Cable for  additional
outlet  connections violate  the 1992  Cable Act  and the  FCC's rate regulation
rules to the extent those charges exceed Time Warner Cable's costs. Time  Warner
Cable has opposed this claim.
 
     Carriage  of  Broadcast  Television  Signals.  The  1992  Cable  Act allows
commercial television broadcast stations which are 'local' to a cable system  to
elect every three years either to require the cable system to carry the station,
subject  to certain exceptions, or to  negotiate for 'retransmission consent' to
carry the station.  Broadcast stations typically  seek monetary compensation  or
the  carriage of  additional programming  in return  for granting retransmission
consent. Local  non-commercial  television  stations are  also  given  mandatory
carriage  rights,  subject to  certain  exceptions. Unlike  commercial stations,
noncommercial stations  are  not given  the  option to  require  negotiation  of
retransmission  consent. In  addition, cable systems  must obtain retransmission
consent for the carriage of all 'distant' commercial broadcast stations,  except
for  certain 'superstations,'  i.e., commercial  satellite-delivered independent
stations such as  WTBS and  WGN. Time Warner  Cable has  obtained any  necessary
retransmission  consents from all stations  carried, which consents have varying
expiration dates. The  next three-year election  between mandatory carriage  and
retransmission  consent for local  commercial television stations  will occur on
October 1, 1999. The  mandatory carriage rule is  presently under review by  the
United States Supreme Court.
 
     Deletion  of Certain Programming. Cable television systems that serve 1,000
or more  customers  must  delete the  simultaneous  or  nonsimultaneous  network
programming  of  a  distant station  upon  the  appropriate request  of  a local
television station  holding  local exclusive  rights  to such  programming.  FCC
regulations  also  enable  television  broadcast  stations  that  have  obtained
exclusive distribution  rights for  syndicated programming  in their  market  to
require  a cable  system to  delete or 'black  out' such  programming from other
television stations which are carried by the cable system.
 
     Public and  Leased  Access  Channels.  The 1984  Cable  Act  permits  local
franchising  authorities to require operators to  set aside certain channels for
public, educational  and governmental  access programming.  The 1984  Cable  Act
further  requires  cable television  systems with  thirty-six or  more activated
channels to designate a portion of their channel capacity for commercial  leased
access  by unaffiliated third parties. The 1992 Cable Act requires leased access
rates to be set according to a formula determined by the FCC.
 
     Ownership. The 1996  Telecommunications Act repealed  the 1984 Cable  Act's
restrictions on local exchange telephone companies ('LECs') from providing video
programming  directly to customers within their local exchange telephone service
areas. With certain limited exceptions,  a LEC may not  acquire more than a  10%
equity  interest in an existing cable  system operating within the LEC's service
area. The 1996 Telecommunications Act also authorized LECs and others to operate
'open video systems' without  obtaining a local  cable franchise, although  LECs
operating  such systems can  be required to make  payments to local governmental
bodies in lieu of cable franchise fees. A number of separate entities have  been
certified  to operate  open video systems  in New  York City and  in other areas
where Time Warner Cable operates cable systems.
 
     The 1996 Telecommunications Act eliminated the FCC rule prohibiting  common
ownership  between a cable  system and a  national broadcast television network,
and the statutory ban covering certain common ownership interests, operation  or
control between a television station and cable system within the station's Grade
B  signal coverage area. However, the parallel FCC rule against cable/television
station cross-ownership remains in  place, subject to review  by the FCC  within
two  years. Finally, the  1992 Cable Act prohibits  common ownership, control or
interest in cable television systems and multichannel MDS ('MMDS') facilities or
satellite master antenna television ('SMATV') systems having overlapping service
areas, except in limited circumstances. The 1996 Telecommunications Act  exempts
cable   systems  facing  'effective   competition'  from  the   MMDS  and  SMATV
cross-ownership restrictions.
 
     Pursuant to  the 1992  Cable Act,  the FCC  has adopted  rules which,  with
certain  exceptions, preclude a cable television  system from devoting more than
40% of its first 75 activated channels to national video programming services in
which the cable system owner has an attributable interest. The FCC also has  set
a  limit  of 30%  of total  nationwide cable  homes  that can  be served  by any
multiple cable system operator.
 
                                      I-15
 
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<PAGE>
     Other FCC Regulations  and FTC Consent  Decree. Additional FCC  regulations
relate  to a  cable system's  carriage of  local sports  programming; privacy of
customer information;  equipment compatibility,  franchise transfers;  franchise
fees;   equal   employment  opportunity;   pole  attachments;   restrictions  on
origination and cablecasting by cable system operators; application of the rules
governing political  broadcasts;  customer service;  technical  standards,  home
wiring  and  limitations  on advertising  contained  in  nonbroadcast children's
programming. The  1996  Telecommunications  Act changes  the  formula  for  pole
attachment fees which could result in substantial increases in payments by cable
operators to utilities for pole attachment rights when services other than cable
services are delivered by cable systems.
 
     Under  the terms of  a Consent Decree  entered into with  the Federal Trade
Commission in  connection with  the consummation  of the  TBS Transaction,  Time
Warner Cable is required to carry on a significant number of its cable systems a
24-hour per day news and information channel that is not owned, controlled by or
affiliated with Time Warner.
 
     Copyright.  Cable  television  systems  are  subject  to  federal copyright
licensing covering  carriage  of  broadcast  signals.  In  exchange  for  making
semi-annual  payments to  a federal copyright  royalty pool  and meeting certain
other obligations,  cable operators  obtain a  statutory license  to  retransmit
broadcast  signals. The amount of this  royalty payment varies, depending on the
amount of system revenues  from certain sources, the  number of distant  signals
carried,  and  the location  of the  cable system  with respect  to over-the-air
television stations.
 
     State and Local Regulation.  Because a cable  television system uses  local
streets  and  rights-of-way,  cable  television  systems  are  subject  to local
regulation, typically  imposed  through  the franchising  process,  and  certain
states  have also  adopted cable  television legislation  and regulations. Cable
franchises are nonexclusive, granted for  fixed terms and usually terminable  if
the  cable operator  fails to  comply with  material provisions.  No Time Warner
Cable franchise has been terminated due  to breach. Franchises usually call  for
the  payment of fees  (which are limited under  the 1984 Cable Act  to 5% of the
system's gross revenues from cable service) to the granting authority. The terms
and  conditions  of  cable  franchises  vary  materially  from  jurisdiction  to
jurisdiction,  and even  from city to  city within the  same state, historically
ranging from reasonable to highly restrictive or burdensome.
 
     The 1992 Cable  Act prohibits exclusive  franchises and allows  franchising
authorities  to operate their own multichannel video distribution system without
having to obtain  a franchise. Moreover,  franchising authorities are  immunized
from  monetary damage awards arising from regulation of cable television systems
or decisions made on franchise grants, renewals, transfers and amendments.
 
     The 1996 Telecommunications Act provides that local franchising authorities
may not condition the grant or renewal of a cable franchise on the provision  of
telecommunications service or facilities (other than institutional networks) and
clarifies  that  the calculation  of franchise  fees  is to  be based  solely on
revenues derived from the provision of cable services, not revenues derived from
telecommunications services.
 
     Renewal of Franchises.  The 1984 Cable  Act established renewal  procedures
and criteria designed to protect incumbent franchisees against arbitrary denials
of  renewal.  While  these formal  procedures  are not  mandatory  unless timely
invoked by either  the cable  operator or  the franchising  authority, they  can
provide  substantial  protection to  incumbent franchisees.  The 1992  Cable Act
makes several changes to the renewal process which could make it easier in  some
cases for a franchising authority to deny renewal.
 
     In  the renewal process, a franchising authority may seek to impose new and
more onerous  requirements,  such  as  upgraded  facilities,  increased  channel
capacity  or enhanced services, although the municipality must take into account
the cost of meeting such requirements. Time Warner Cable may be required to make
significant additional investments in  its cable television  systems as part  of
the  franchise renewal process. Of Time Warner Cable's franchises, as of January
1, 1997,  800  franchises  serving approximately  3,600,000  subscribers  expire
during  the period ending December 31, 1999. Although Time Warner Cable has been
successful in the past in negotiating new franchise agreements, there can be  no
assurance as to the renewal of franchises in the future.
 
                                      I-16
 
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<PAGE>
     In  October  1996,  the  New  York  City  Franchise  Concession  and Review
Committee (the 'Committee') met to consider whether the consummation of the  TBS
Transaction  constituted a 'change in control' within the meaning of Time Warner
Cable's New York City franchise agreements. The Committee took no action on this
matter at the  meeting and has  not considered  the matter since  then. The  TBS
Transaction  was consummated on October 10,  1996. Effecting a change in control
within the meaning of such franchise agreements without the City's consent could
give the City  various rights, which  could include the  right to terminate  the
franchise  agreements. Time Warner Cable does not  believe there has been such a
change in control. For further information  regarding this matter and a  related
legal proceeding, see Item 3 -- 'Legal Proceedings.'
 
     The foregoing does not describe all present and proposed federal, state and
local  regulations and  legislation relating  to the  cable television industry.
Other  existing   federal  regulations,   copyright  licensing   and,  in   many
jurisdictions, state and local franchise requirements, currently are the subject
of  a variety of  judicial proceedings, legislative  hearings and administrative
and legislative proposals which could change, in varying degrees, the manner  in
which cable television systems operate. Neither the outcome of these proceedings
nor  their impact upon the cable television industry or Time Warner Cable can be
predicted at this time.
 
                                  COMPETITION
 
     Cable television systems face strong competition for viewer attention  from
a  wide variety of  established providers and  new entrants, including broadcast
television, DTH, MMDS, SMATV systems  and telephone companies. Cable  television
systems also compete with these and other media for advertising dollars.
 
     DTH.  The  FCC has  awarded conditional  permits  to several  companies for
orbital slots from  which high-power Ku-Band  DTH service can  be provided.  DTH
services offer pre-packaged programming that can be received by relatively small
and inexpensive receiving dishes. As of the end of 1996, satellite-delivered DTH
services  including Echostar, DirecTV, USSB  and Primestar, a medium-powered DTH
service partially owned by TWE, were  reported to be serving approximately  five
million  subscribers.  In addition,  News  Corp. is  scheduled  to launch  a DTH
service later in 1997, and recently announced a plan to merge that service  with
Echostar's.  If consummated, the  combined venture would  have greater satellite
transponder, and hence channel, capacity than other DTH services. News Corp. has
also announced that unlike other DTH services, the new venture will deliver some
local broadcast  stations  in  some  areas.  In  addition  to  DTH,  most  cable
programming  is available to  owners of larger,  more expensive C-Band satellite
dishes ('TVROs'), either  directly from the  programmers or through  third-party
packagers.
 
     MMDS/Wireless  Cable. Wireless cable operators  use microwave technology to
distribute video  programming.  Wireless  cable has  grown  rapidly,  reportedly
servicing  over  one million  subscribers nationwide  as  of September  1996. In
recent years, the FCC has adopted rules to facilitate the use of greater numbers
of channels by wireless cable operators.
 
     SMATV. Additional  competition  may  come  from  private  cable  television
systems  servicing condominiums, apartment complexes  and certain other multiple
unit residential developments. The operators of these private systems, known  as
SMATV  systems, often  enter into  exclusive agreements  with apartment building
owners or homeowners'  associations which preclude  franchised cable  television
operators  from  serving residents  of such  private  complexes. Under  the 1996
Telecommunications Act a SMATV system is not  a cable system as long as it  uses
no  public right-of-way.  SMATV systems offer  both improved  reception of local
television stations and many of the same satellite-delivered program services as
offered by franchised cable television systems.
 
     Overbuilds.  Under  the  1992   Cable  Act,  franchising  authorities   are
prohibited  from unreasonably refusing to award additional franchises. There are
an increasing number of overlapping cable systems operating in Time Warner Cable
franchise areas.  Municipalities  themselves  are authorized  to  operate  cable
systems  without a franchise. No such municipally-owned systems are presently in
operation in Time Warner Cable franchise areas, although several  municipalities
have indicated an interest in doing so.
 
     Telephone   Companies.  The  1996  Telecommunications  Act  eliminated  the
restriction against ownership and operation of cable systems by local  telephone
companies within their local exchange service areas. Telephone companies are now
free  to enter the retail video distribution business through any means, such as
DTH, MMDS,
 
                                      I-17
 
<PAGE>


<PAGE>
SMATV or as  traditional franchised cable  system operators. Alternatively,  the
1996  Telecommunications  Act authorizes  local  telephone companies  to operate
'open video  systems'  without  obtaining  a  local  cable  franchise,  although
telephone  companies operating such systems can  be required to make payments to
local governmental bodies in lieu of cable franchise fees. Where demand  exceeds
available  channel capacity, up to two-thirds of  the channels on an 'open video
system' must be available to  programmers unaffiliated with the local  telephone
company. The open video system concept replaces the FCC's video dialtone rules.
 
     Other   Competition.   Cable   television   systems   compete   with  other
communications and entertainment media,  including off-air television  broadcast
signals  which  a viewer  is able  to  receive directly  using the  viewer's own
television set and antenna. Cable systems also face competition from alternative
methods of distributing and receiving television signals and from other  sources
of  entertainment such  as live sporting  events, movie theaters  and home video
products, including  videocassette  recorders.  In recent  years,  the  FCC  has
adopted  policies providing  for authorization  of new  technologies and  a more
favorable operating environment for certain existing technologies that  provide,
or may provide, substantial additional competition for cable television systems.
 
                                   TELEPHONY
 
     Time Warner Cable's wireline telephony operations are conducted through the
Time  Warner Communications division of TWE, which has wholly or partially owned
competitive  local  exchange  carrier  ('LEC')  businesses  targeting   business
customers  in  18 cities.  Time Warner  Communications  has an  advanced network
management center in Denver  to monitor and manage  operations of its  networks.
These  operations  generally  provide  fiber  optic  connections  between  large
businesses  and  their  long  distance  telephone  providers,  between  multiple
business  locations of  a large  business, and  between long  distance telephone
company locations. In addition, switched services are being introduced. Revenues
to date have been insignificant.
 
     Residential telephone service  is being provided  over Time Warner  Cable's
system  in the Rochester, NY  area. Time Warner Cable  has announced that it has
suspended any further roll out of  the residential telephone business until  the
various   rulemakings  required   to  be  made   by  the  FCC   under  the  1996
Telecommunications Act are final and the  Company is able to assess whether  the
resulting economic framework will allow a profitable entry into this business.
 
       DESCRIPTION OF CERTAIN PROVISIONS OF THE TWE PARTNERSHIP AGREEMENT
 
     The   following  description  summarizes  certain  provisions  of  the  TWE
Partnership  Agreement  relating  to  the   ongoing  operations  of  TWE.   Such
description  does not purport to be complete and is subject to, and is qualified
in its  entirety  by  reference  to,  the  provisions  of  the  TWE  Partnership
Agreement.
 
MANAGEMENT AND OPERATIONS OF TWE
 
     Partners. Upon the capitalization of TWE in June 1992, certain subsidiaries
of  Time Warner became the general partners (the 'Class B Partners' or the 'Time
Warner General Partners') of TWE and  subsidiaries of ITOCHU and Toshiba  became
limited  partners of  TWE (the 'Class  A Partners').  US West was  admitted as a
Class A Partner  in September 1993.  In 1995, Time  Warner acquired the  limited
partnership   interests  of  ITOCHU  and   Toshiba.  Consequently,  the  limited
partnership interests in TWE are held by  the Class A Partners consisting of  US
West  and wholly owned  subsidiaries of Time Warner  and the general partnership
interests in TWE are  held by the  Class B Partners  consisting of wholly  owned
subsidiaries of Time Warner.
 
     Board  of Representatives. Subject  to certain authority  of the Management
Committee (as described below) with respect to the Cable division, the  business
and affairs of TWE are managed under the direction of a board of representatives
(the   'Board  of  Representatives'  or  the   'Board')  that  is  comprised  of
representatives appointed  by  subsidiaries of  Time  Warner (the  'Time  Warner
Representatives')  and  representatives  appointed  by  US  West  (the  'US West
Representatives').
 
     The Time  Warner Representatives  control all  Board decisions  except  for
certain  matters including (i) the merger or consolidation of TWE; (ii) the sale
or  other  disposition   of  assets  of   TWE  generating  in   excess  of   10%
 
                                      I-18
 
<PAGE>


<PAGE>
of  the  consolidated  revenues  of  TWE  during  the  previous  fiscal  year or
representing in excess of 10%  of the fair market value  of the total assets  of
TWE  (in each  case, other  than in connection  with certain  joint ventures and
'cable asset  swaps'  as  to  which  the  thresholds  are  greater);  (iii)  any
acquisition  by  TWE, other  than in  the  ordinary course  of business,  if the
consideration paid by TWE in connection  with such acquisition would exceed  the
greater  of (1) $750 million and (2) 10% of the consolidated revenues of TWE for
the most recently ended fiscal  year of TWE; (iv) the  engagement by TWE in  any
business  other than  the businesses  then being conducted  by TWE,  as they may
evolve from time to time and  any business related to such businesses  (provided
that  TWE may not  engage in the  manufacturing, sale or  servicing of hardware,
other than as may be incidental to TWE's businesses); (v) the incurrence by  TWE
of  indebtedness for money borrowed if,  after giving effect to such incurrence,
the ratio of total indebtedness for money borrowed to cash flow would exceed the
greater of (x)  5.00 to  1.00 and (y)  .5 over  the analogous ratio  in the  TWE
credit  agreement as in effect from time  to time; (vi) cash distributions other
than as provided  in the  TWE Partnership  Agreement; (vii)  the dissolution  or
voluntary  bankruptcy of  TWE; and (viii)  any amendment to  the TWE Partnership
Agreement,  which   matters  also   require  the   approval  of   the  US   West
Representatives.
 
     The  managing general partners, both of which are wholly owned subsidiaries
of Time Warner, may take any action without the approval or consent of the Board
if such action may be authorized by the Time Warner Representatives without  the
approval  of the  US West  Representatives. However,  see 'Full  Service Network
Management Committee,' below.
 
     Full Service Network Management Committee. In connection with the admission
of US West as a limited partner  of TWE, the Board established the Full  Service
Network  business,  which, subject  to obtaining  necessary franchise  and other
approvals, is comprised of the businesses and operations of the cable television
systems of TWE and TWE-A/N that have been from time to time designated to become
a part thereof. Subject to obtaining  such approvals relating to the  designated
systems,  the business and affairs of the  Full Service Network business will be
governed by  a  Full  Service  Network  Management  Committee  (the  'Management
Committee').  The Management Committee is comprised of six voting members, three
designated by US West and three designated by  TWE. If US West at any time  owns
less  than  50%  of  the  partnership  interest  which  it  owned,  directly  or
indirectly, as of  September 15, 1993  or if a  'change in control'  of US  West
occurs,  US West's  right to designate  any members of  the Management Committee
will terminate. The  Full Service Network  business is managed  on a  day-to-day
basis  by the officers of  Time Warner Cable. The approval  of a majority of the
members  of  the  Management  Committee  is  required  for  certain  significant
transactions  relating to  the Full  Service Network  business, including, among
other things, the  sale, pledge  or encumbrance of  assets of  the Full  Service
Network  business, the acquisition of cable assets, the making of commitments or
expenditures relating to the Full Service Network business, in each case subject
to  agreed  upon   thresholds,  certain  decisions   with  respect  to   design,
architecture  and designation of  cable systems for upgrade  and the adoption of
the annual business plan.
 
     Non-Voting Representatives  and  Committee  Members.  Each  of  ITOCHU  and
Toshiba  has  the  right  to  designate  non-voting  members  to  the  Board  of
Representatives and the Management Committee. In addition, Advance/Newhouse  has
the right to designate a non-voting member to the Management Committee.
 
     Day-to-Day Operations. TWE is managed on a day-to-day basis by the officers
of  TWE, and each of TWE's three principal partnership divisions is managed on a
day-to-day basis by the officers of such division. Upon the TWE  Capitalization,
the  officers of Time Warner also became officers of TWE and the officers of the
Time  Warner  General  Partners  became   the  officers  of  the   corresponding
partnership divisions and the subdivisions thereof.
 
CERTAIN COVENANTS
 
     Covenant  Not to Compete. For  so long as any  partner (or affiliate of any
partner) owns in excess of 5% of TWE and in the case of any Time Warner  General
Partner,  for one  year thereafter, such  partner (including  its affiliates) is
generally prohibited from competing or owning an interest in the three principal
lines of business of  TWE -- cable, cable  programming and filmed  entertainment
(including the ownership and operation of theme parks) -- as such businesses may
evolve,  subject  to certain  agreed  upon exceptions  (including  TBS), limited
passive investments and inadvertent violations. The covenant not to compete does
not prohibit (i) US West from
 
                                      I-19
 
<PAGE>


<PAGE>
conducting cable and  certain regional  programming businesses  in the  14-state
region  in which it provides telephone service,  (ii) any party from engaging in
the cable business in a  region in which TWE is  not then engaging in the  cable
business,  subject to TWE's  right of first  refusal with respect  to such cable
business, or  (iii) any  party from  engaging in  the telephone  or  information
services  business. ITOCHU and Toshiba continue to  be bound by and benefit from
the non-compete provisions but only as they relate to Japan.
 
     Transactions  with  Affiliates.  Subject  to  agreed  upon  exceptions  for
existing  arrangements, TWE will not enter into any transaction with any partner
or any of its affiliates other than on an arm's-length basis.
 
REGISTRATION RIGHTS
 
     Beginning on  June 30,  2002  (or as  early as  June  30, 1999  if  certain
threshold  cash distributions are not made to the Class A Partners), the Class A
Partners holding, individually or in the aggregate, at least 10% of the residual
equity of TWE will have the right  to request that TWE reconstitute itself as  a
corporation  and register for sale in a public offering an amount of partnership
interests held by such Class A Partners determined by an investment banking firm
so as to  maximize trading liquidity  and minimize the  initial public  offering
discount,  if any. Upon any  such request, the parties  will cause an investment
banker to determine  the price at  which the interests  sought to be  registered
could  be sold in a public  offering (the 'Appraised Value'). Upon determination
of the  Appraised Value,  TWE may  elect either  to register  such interests  or
purchase  such interests at the Appraised Value, subject to certain adjustments.
If TWE elects to register the  interests and the proposed public offering  price
(as  determined  immediately prior  to the  time  the public  offering is  to be
declared effective) is less than 92.5% of  the Appraised Value, TWE will have  a
second  option to  purchase such  interests immediately  prior to  the time such
public offering would otherwise have  been declared effective by the  Securities
and  Exchange Commission at the proposed public offering price less underwriting
fees and discounts. If TWE exercises its purchase option, it will be required to
pay the fees and expenses of the underwriters. Upon exercise of either  purchase
option,  TWE may also elect to purchase  the entire partnership interests of the
Class A  Partners requesting  registration  at the  relevant price,  subject  to
certain adjustments.
 
     In  addition to the foregoing,  US West will have  the right to exercise an
additional demand registration right (in which the other Class A Partners  would
be  entitled to participate) beginning 18 months following the date on which TWE
reconstitutes itself  as a  corporation  and registers  the sale  of  securities
pursuant to a previously exercised demand registration right.
 
     At the request of any Time Warner General Partner, TWE will effect a public
offering  of the  partnership interests of  the Time Warner  General Partners or
reconstitute TWE  as a  corporation and  register the  shares held  by the  Time
Warner  General  Partners. In  any such  case,  the Class  A Partners  will have
standard 'piggy-back' registration rights.
 
     Upon any  reconstitution  of TWE  into  a corporation,  each  partner  will
acquire  preferred and  common equity in  the corporation  corresponding in both
relative value, rate of return and priority to the partnership interests it held
prior to such reconstitution, subject  to certain adjustments to compensate  the
partners  for the effects of converting their partnership interests into capital
stock.
 
CERTAIN PUT RIGHTS OF THE CLASS A PARTNERS
 
     Change in Control Put. Upon the occurrence  of a change in control of  Time
Warner,  at the request  of any Class A  Partner, TWE will  be required to elect
either to liquidate TWE within a two-year period or to purchase the interest  of
such  partner at fair market value (without any minority discount) as determined
by investment bankers. A 'change in control'  of Time Warner shall be deemed  to
have occurred:
 
     (x)  whenever, in any three-year  period, a majority of  the members of the
Board of Directors of  Time Warner elected during  such three-year period  shall
have been so elected against the recommendation of the management of Time Warner
or  the Board  of Directors  shall be  deemed to  have been  elected against the
recommendation of such Board of Directors  of Time Warner in office  immediately
prior  to such election; provided, however, that for purposes of this clause (x)
a member of such Board of Directors shall be deemed to have been elected against
the recommendation of  such Board of  Directors if his  or her initial  election
occurs  as a result of either an  actual or threatened election contest (as such
terms are used in Rule 14a-11 of Regulation
 
                                      I-20
 
<PAGE>


<PAGE>
14A promulgated under the Securities Exchange Act of 1934, as amended) or  other
actual  or threatened solicitation of  proxies or consents by  or on behalf of a
person other than such Board of Directors; or
 
     (y) whenever any  person shall acquire  (whether by merger,  consolidation,
sale,  assignment,  lease,  transfer or  otherwise,  in one  transaction  or any
related  series  of  transactions),   or  otherwise  beneficially  owns   voting
securities of Time Warner that represent in excess of 50% of the voting power of
all  outstanding voting securities of Time Warner generally entitled to vote for
the election of  directors, if such  person acquires or  publicly announces  its
intention  to initially acquire ten percent or more of such voting securities in
a transaction that has not been approved by the management of Time Warner within
30 days after the date of such acquisition or public announcement.
 
     Assignment of Put Rights, etc. TWE, with the consent of such assignee,  may
assign to Time Warner, any general partner or any third party, the obligation to
pay  the applicable  put price in  connection with  the exercise of  a change in
control put right by a Class A Partner and the right to receive the  partnership
interests in payment therefor.
 
     With  respect to any of the put rights of the Class A Partners, TWE may pay
the applicable put price in cash  or Marketable Securities (defined as any  debt
or equity securities that are listed on a national securities exchange or quoted
on  NASDAQ) issued by TWE (or if TWE assigns its obligation to pay the put price
to Time  Warner,  by Time  Warner).  The  amount of  any  Marketable  Securities
comprising  the applicable  put price  shall be  determined based  on the market
price of such securities during the  seven months following the closing of  such
put transaction.
 
RESTRICTIONS ON TRANSFER BY TIME WARNER GENERAL PARTNERS
 
     Time  Warner General Partners. Any Time Warner General Partner is permitted
to dispose of any partnership interest (and any Time Warner General Partner  and
any  parent of any Time Warner General Partner  may issue or sell equity) at any
time so long as, immediately after giving effect thereto, (i) Time Warner  would
not  own, directly or indirectly, less than (a) 43.75% of the residual equity of
TWE, if such disposition occurs prior to the later of December 31, 1997 and  the
date  on which  the Class  A Partners have  received cash  distributions of $500
million per $1 billion of investment, and (b) 35% of the residual equity of  TWE
if  such disposition occurs after such date, (ii) no person or entity would own,
directly or indirectly, a partnership interest greater than that owned, directly
or indirectly, by Time Warner, and (iii) a subsidiary of Time Warner would be  a
managing general partner of TWE.
 
     No  other dispositions are permitted, except  that Time Warner may sell its
entire partnership interest  subject to the  Class A Partners'  rights of  first
refusal  and 'tag-along' rights  pursuant to which Time  Warner must provide for
the concurrent sale  of the  partnership interests of  the Class  A Partners  so
requesting.
 
                         CURRENCY RATES AND REGULATIONS
 
     Approximately  20% of TWE's  revenues are derived  from export sales, which
are subject  to  the risk  of  fluctuation in  currency  exchange rates  and  to
exchange  controls. TWE  cannot predict  the extent  to which  such controls and
fluctuations in currency exchange rates may affect its results of operations  in
the future or its ability to remit dollars from abroad. See Note 1 'Organization
and  Summary of Significant Accounting Policies -- Foreign Currency' and Note 10
'Financial Instruments -- Foreign Exchange Risk Management' to the  consolidated
financial  statements  of  TWE  set  forth  at  page  F-16  and  at  page  F-30,
respectively, herein.
 
                                   EMPLOYEES
 
     At December 31, 1996, TWE employed a total of approximately 30,300 persons.
 
                                      I-21
 
<PAGE>


<PAGE>
                 BUSINESSES OF THE TIME WARNER GENERAL PARTNERS
 
     WCI, under the umbrella name Warner Music Group, conducts substantially all
of Time Warner's  vertically integrated  worldwide recorded  music business  and
worldwide  music  publishing business.  The  remaining General  Partners  do not
conduct operations independent of their  ownership interests in TWE and  certain
other investments.
 
                                     MUSIC
 
     In  the United States and  around the world, WCI,  through its wholly owned
Warner Music  Group division  ('WMG'), is  in the  business of  discovering  and
signing musical artists and manufacturing, packaging, distributing and marketing
their recorded music.
 
     WMG also operates Warner/Chappell, a music publishing business with offices
around  the world, is a  partner in music video channels  in Germany and the Far
East, and is a joint venture partner of music and video clubs in North America.
 
RECORDED MUSIC
 
     In  the  United  States,  WMG's  recorded  music  business  is  principally
conducted   through  WMG's  Warner  Bros.   Records,  Inc.,  Atlantic  Recording
Corporation and Elektra Entertainment Group and their affiliated labels, as well
as  through  the  WEA  Inc.  companies.  The  WEA  Inc.  companies  include  WEA
Manufacturing   Inc.,  which   manufactures  compact  discs   (CDs),  audio  and
videocassettes, CD-ROMs and, commencing in 1997, digital versatile discs (DVDs),
both for  WMG's  record  labels as  well  as  for outside  companies;  Ivy  Hill
Corporation,  which produces printed  material and packaging  for WMG's recorded
music products as well  as for a  wide variety of  other consumer products;  and
Warner-Elektra-Atlantic Corporation ('WEA Corp.'), which markets and distributes
WMG's  recorded music products to retailers and wholesale distributors. WMG also
owns a  majority  interest  in  Alternative  Distribution  Alliance  ('ADA'),  a
so-called  'independent' distribution  company specializing  in alternative rock
music with a focus on new artists and smaller retailers.
 
     These activities are conducted in more than 70 countries outside the United
States by  Warner  Music  International and  its  subsidiaries,  affiliates  and
non-affiliated  licensees.  In  1996,  more than  58%  of  WMG's  recorded music
revenues came from outside the United States.
 
DOMESTIC
 
     WMG's record labels  in the  United States  -- Warner  Bros., Atlantic  and
Elektra -- each with a distinct identity, discover and sign musical artists. The
labels  scout and sign  talent in many different  musical genres, including pop,
rock, jazz, country, hip hop, reggae,  folk, blues, gospel and Christian  music.
Artists  generally receive  royalties based upon  a percentage  of the suggested
retail or wholesale price of their recordings and music videos, and most receive
non-returnable advance payments against such royalties.
 
     WMG is a vertically-integrated music  company. After an artist has  entered
into  a contract with a  WMG label, a master recording  of the artist's music is
produced and provided to WMG's manufacturing operation, WEA Manufacturing, which
replicates the  music primarily  on CDs  and audio  cassettes. Ivy  Hill  prints
material that is included with CDs and audio cassettes and creates packaging for
them.  WEA Corp. and ADA, WMG's distribution  arms, sell product and deliver it,
either directly or  through sub-distributors  and wholesalers,  to thousands  of
record stores, mass merchants and other retailers throughout the country. At the
same  time  these  activities  take  place,  the  label's  promotion, marketing,
advertising  and  publicity  departments  place  advertisements  in  print   and
electronic  media, work to get  the new album played  on the radio, reviewed and
mentioned in publications  and the artist  booked for appearances  on radio  and
television. If a music video featuring an artist has been produced, the video is
distributed  and promoted to music video television programmers. Label personnel
may also help organize a tour that will further promote a new album.
 
                                      I-22
 
<PAGE>


<PAGE>
     In addition to  newly released records,  each of WMG's  labels markets  and
sells  albums from  their extensive catalogues  of prior releases,  in which the
labels generally continue to own the copyright. Rhino Records, in which WMG owns
a 50% equity interest, specializes  in compilations and re-issues of  previously
released music.
 
     WMG  also has entered into joint venture arrangements pursuant to which WMG
companies manufacture, distribute  and market (in  most cases, domestically  and
internationally)  recordings  owned  by  the  joint  ventures.  Such  agreements
typically provide a WMG label with an equity interest and a profit participation
in the  venture,  with financing  furnished  either solely  by  WMG or  by  both
parties.  Included among these arrangements are  the labels Maverick, Rhino, Sub
Pop and Qwest. WMG  labels also enter into  agreements with unaffiliated  third-
party  record  labels  such  as  Curb and  Scotti  Brothers  to  manufacture and
distribute recordings that  are marketed  under the  owner's proprietary  label.
Through  a joint venture, WMG and  Sony Music Entertainment operate The Columbia
House Company, the leading direct marketer  of CDs, audio and videocassettes  in
the United States and Canada.
 
     Among the artists whose albums resulted in significant sales for WMG record
companies  during  1996  were Tracy  Chapman,  Hootie &  the  Blowfish, Madonna,
Metallica, Alanis Morissette, LeAnn Rimes, and Keith Sweat, as well as the Space
Jam soundtrack.
 
INTERNATIONAL
 
     Operating in  more  than  70  countries  around  the  world,  Warner  Music
International  ('WMI') engages in the same  activities as WMG's domestic labels,
discovering and signing artists  and manufacturing, packaging, distributing  and
marketing  their recorded  music. The artists  signed to WMI  and its affiliates
number more than a thousand. In most cases, WMI also markets and distributes the
recordings  of  those  artists  for  whom  WMG's  domestic  record  labels  have
international  rights.  In  certain  countries,  WMI  licenses  to  unaffiliated
third-party record labels the right to distribute its recordings.
 
     WMI operates a  plant in  Germany that  manufactures CDs,  laser discs  and
vinyl  records for  its affiliated companies,  as well as  for outside companies
and, as  part of  a  joint venture,  operates a  plant  in Australia  that  also
manufactures   CDs.  WMI   operates  a   video  company   that  coordinates  the
international release of music and non-music video titles.
 
     During 1996,  WMI strengthened  its operations  with the  establishment  of
Warner  Music Colombia; PT Warner Music Indonesia,  a joint venture with PT Hema
Giatama Records; the creation of Continental East West in Brazil, and the buyout
of a joint venture partner in the London-based label PWL International.
 
     Among the artists  whose albums resulted  in significant sales  for WMI  in
1996  were Phil Collins,  Enya, Madonna, Luis  Miguel, Alanis Morissette, Simply
Red and R.E.M.
 
MUSIC PUBLISHING
 
     WMG's music publishing companies own or control the rights to more than one
million musical  compositions,  including  numerous  pop  music  hits,  American
standards,  folk  songs, and  motion  picture and  theatrical  compositions. The
catalogue includes  works  from  a  diverse  range  of  artists  and  composers,
including  Phil  Collins,  Comden  & Green,  George  and  Ira  Gershwin, Michael
Jackson, Leiber  &  Stoller,  Madonna  and  Cole  Porter.  Warner/Chappell  also
administers  the  music  of  several television  and  motion  picture companies,
including  Lucasfilm,   Ltd.,  Samuel   Goldwyn  Productions,   Aaron   Spelling
Productions and New World.
 
     Warner/Chappell's  printed music  division markets  publications throughout
the world containing the  works of such artists  as Alabama, The Grateful  Dead,
Led  Zeppelin, Madonna,  Bob Seger  and many  others. Warner/Chappell  also owns
CPP/Belwin, one of the world's largest publishers of printed music.
 
     The principal source of revenues  to Warner/Chappell are license fees  paid
for the use of its musical compositions on radio, television, in motion pictures
and  in other public performances; royalties for  the use of its compositions on
CDs, audio cassettes, music videos and  in television commercials; and sales  of
published sheet music and song books.
 
                                      I-23
 
<PAGE>


<PAGE>
COMPETITION
 
     The  recorded  music  business is  highly  competitive. The  revenues  of a
company in the recording industry depend upon public acceptance of the company's
recording artists and their music. Although  WMG is one of the largest  recorded
music  companies  in the  world, its  competitive position  is dependent  on its
continuing ability to attract and develop talent that can achieve a high  degree
of  public acceptance. Overexpansion  of retail outlets for  music over the past
several years led  to the closing  of many  such stores during  1996, which  has
further  increased  competition  among  recorded music  companies  for  sales of
music-related product. Competition also intensified  during 1996 as a result  of
the  start-up of a number of new labels  and the continuing growth in the number
of albums released  by independent  record labels. The  recorded music  business
continues to be adversely affected by counterfeiting of both audio cassettes and
CDs, piracy, parallel imports and the home taping of music and may in the future
be  affected by consumers' ability to  download quality sound reproductions from
the  Internet.  In  addition,  the  recorded  music  business  also  meets  with
competition  from other forms of entertainment, such as television, pre-recorded
videocassettes, the Internet and  computer and video  games. Competition in  the
music  publishing business is intense.  Although WMG's music publishing business
is the  largest  on  a worldwide  basis,  it  competes with  every  other  music
publishing company in acquiring musical compositions and in having them recorded
and performed.
 
                                     OTHER
 
DC COMICS AND MAD MAGAZINE
 
     TWE and WCI each owns a 50% interest in DC Comics. DC Comics publishes more
than  60 regularly issued comics magazines, among  the most popular of which are
'Superman,' 'Batman,'  'Wonder  Woman'  and  'The Sandman,'  as  well  as  story
collections sold as books. DC Comics also derives revenues from motion pictures,
television  syndication, product licensing, books for juvenile and adult markets
and foreign publishing. Trademarks in DC Comics' principal characters have  been
registered  in  the United  States Patent  and Trademark  Office and  in certain
foreign countries.
 
     WCI owns 100% of E.C. Publications, Inc., the publisher of MAD, a  magazine
featuring  articles  of  humorous  and satirical  interest,  which  is regularly
published nine times a year and also in periodic special editions.
 
CINAMERICA THEATRES, L.P.
 
     WCI owns a  50% interest  in Cinamerica Theatres,  L.P., an  unconsolidated
joint  venture with  Viacom Inc. which  owns and operates  two theatre circuits:
Mann Theatres and Festival Cinemas. The joint venture operates approximately 400
screens in 67 theatres, principally located in California and Colorado.
 
TURNER BROADCASTING SYSTEM, INC.
 
     In October  1996,  Time  Warner  consummated  the  acquisition  of  TBS  by
acquiring  the remaining approximately 80% interest  in TBS not already owned by
Time Warner. The Time Warner General Partners collectively own a 10.6%  economic
interest  in TBS.  TBS is a  diversified information  and entertainment company.
Through its  subsidiaries, TBS  owns and  operates four  domestic  entertainment
networks:  WTBS (commonly known as  TBS Superstation), Turner Network Television
(TNT), Cartoon  Network  and Turner  Classic  Movies (TCM);  four  international
entertainment  networks: TNT Latin America, Cartoon Network Latin America, TNT &
Cartoon Network Europe, and TNT &  Cartoon Network Asia; and five news  networks
Cable  News  Network  (CNN),  Headline News,  Cable  News  Network International
(CNNI), CNN  Financial Network  (CNNfn) and  the recently  launched sports  news
network, CNN/SI. TBS produces and distributes entertainment and news programming
worldwide,  and also has operations in  motion picture, animation and television
production, home video, television syndication, licensing and merchandising.

TWE JAPAN

     WCI owns a 37.25% interest in, US West owns a 12.75% interest in,  and each
of Toshiba and ITOCHU owns a 25% interest in, Time  Warner  Entertainment  Japan
Inc. ('TWE Japan'). TWE Japan  was organized  to  conduct  TWE's  businesses  in
Japan,  including  home  video  distribution,  theatrical  film  and  television
distribution and  merchandising  businesses,  and  to  expand  and  develop  new
business opportunities.  Pursuant  to  distribution and merchandising agreements
entered into between TWE and TWE Japan,  TWE Japan  receives  distribution  fees
generally  comparable  to  those  currently   received  by  TWE  for  performing
distribution services for unaffiliated third parties.
 
                                      I-24
 
<PAGE>


<PAGE>
AMERICAN LAWYER MEDIA
 
     WCI owns a 90% interest in American Lawyer Media, L.P. ('ALM'). Time Warner
has announced its intention to sell substantially all of the assets of ALM.  ALM
operates  a chain of metropolitan and regional legal and business newspapers and
also  publishes  THE  AMERICAN  LAWYER,  a  national  monthly  magazine  with  a
subscription-only readership among lawyers across the United States and owns and
operates  COUNSEL CONNECT ('CC'),  an on-line service  connecting lawyers in law
firms and  corporate  legal departments  worldwide.  ALM also  provides  certain
services   to   Courtroom   Television   Network   ('Court   TV').   See  'Cable
Networks -- Basic Cable Interests.'
 
HASBRO
 
     WCI owns approximately 14% of the outstanding common stock of Hasbro, Inc.,
one  of  the  world's  largest  toy  companies.  TWCI  has  issued  zero  coupon
exchangeable  notes  due 2012  that are  exchangeable for  the shares  of Hasbro
common stock owned by WCI (the 'Hasbro Stock') and a TWCI subsidiary has  issued
mandatorily redeemable preferred securities that are redeemable in 1997 for cash
or  Hasbro Stock, which together have  effectively monetized WCI's investment in
Hasbro.
 
ITEM 2.  PROPERTIES
 
PROPERTIES OF TWE
 
     The following table sets forth certain information as of December 31,  1996
with respect to principal properties (over 250,000 square feet in area) owned or
leased by TWE's Filmed Entertainment, Cable Networks -- HBO and cable television
businesses,  all of which TWE considers adequate  for its present needs, and all
of which were substantially used by TWE.
 
<TABLE>
<CAPTION>
                                                            APPROXIMATE
                                                            SQUARE FEET            TYPE OF OWNERSHIP;
        LOCATION          PRINCIPAL USE                  FLOOR SPACE/ACRES      EXPIRATION DATE OF LEASE
------------------------  -----------------------------  ------------------   -----------------------------
<S>                       <C>                            <C>                  <C>
New York, New York        Business offices               335,000 sq. ft.      Leased by TWE.
  1100 and 1114           (HBO)                          and 237,000 sq.      Leases expire in 2004
  Avenue of the                                          ft.                  and 2006.
  Americas
Baltimore, Maryland       Warehouse (Filmed              387,000 sq. ft.      Owned by TWE.
  White Marsh             Entertainment)
Burbank, California       Sound stages,                  3,303,000            Owned by TWE.
  The Warner Bros.        administrative, technical and  sq. ft. of
  Studio                  dressing room structures,      improved
                          screening theaters, machinery  space on 158
                          and equipment facilities,      acres(a)
                          back lot and parking lot and
                          other Burbank properties
                          (Filmed Entertainment)
West Hollywood,           Sound stages,                  350,000              Owned by TWE.
  California              administrative,                sq. ft. of
  The Warner              technical and dressing         improved
  Hollywood Studio        room structures, screening     space on 11
                          theaters, machinery and        acres
                          equipment facilities (Filmed
                          Entertainment)
Valencia, California      Location filming (Filmed       232 acres            Owned by TWE.
  Undeveloped Land        Entertainment)
</TABLE>
 
------------
 
(a)  Ten acres consist  of various  parcels adjoining The  Warner Bros.  Studio,
     with mixed commercial, office and residential uses.
 
                                      I-25
 
<PAGE>


<PAGE>
PROPERTIES OF THE TIME WARNER GENERAL PARTNERS
 
     The  following table sets forth certain information as of December 31, 1996
with respect  to the  principal properties  of WCI  and its  subsidiaries  (over
250,000  square  feet in  area), all  of  which WCI  considers adequate  for its
present needs, and all of which were substantially used by WCI. The Time  Warner
General  Partners other than  WCI and its  subsidiaries do not  own or lease any
properties material to their businesses.
 
<TABLE>
<CAPTION>
                                                                                APPROXIMATE     TYPE OF OWNERSHIP;
                                                                                SQUARE FEET     EXPIRATION DATE OF
         LOCATION                             PRINCIPAL USE                     FLOOR SPACE            LEASE
--------------------------  -------------------------------------------------   -----------   -----------------------
 
<S>                         <C>                                                 <C>           <C>
Olyphant,                   Manufacturing, warehouses, distribution and          1,058,000    Owned and occupied by
  Pennsylvania              office space (Music)                                              WCI.
  1400 and 1444 East
  Lackawanna
  Avenue
Nortorf, Germany            Manufacturing, distribution and office space           334,000    Owned and occupied by
  Niedernstrasse 3-7        (Music)                                                           WCI.
Alsdorf, Germany            Manufacturing, distribution and office space           269,000    Owned and occupied by
  Max-Planck Strasse 1-9    (Music)                                                           WCI.
Terre Haute, Indiana        Manufacturing and office space (Music)                 269,000    Leased by WCI. Lease
  Building 102, Fort                                                                          expires in 2001.
  Harrison Industrial Park
</TABLE>
 
ITEM 3.  LEGAL PROCEEDINGS
 
     TWE and its divisions and the Time Warner General Partners are parties,  in
the  ordinary course  of business,  to litigations  involving property, personal
injury and contract claims. The amounts that TWE believes may be recoverable  in
these matters are either covered by insurance or are not material.
 
     In  November 1992, TWE filed  a federal lawsuit in  the U.S. District Court
for the District of Columbia  against the FCC and  the United States of  America
seeking  to overturn the  must carry provisions  of the 1992  Cable Act on First
Amendment grounds. The TWE complaint also challenges the provisions of the  1992
Cable  Act relating to rate regulation, retransmission consent, terms of dealing
by vertically integrated  programmers, uniform  pricing and  operation of  cable
systems  by  municipal  authorities,  the number  of  subscribers  that  a cable
operator could serve nationwide, free  previews of certain premium channels  and
educational  channel  set-aside  requirements  for  direct  broadcast  satellite
service. In addition, the TWE complaint  seeks to overturn several parts of  the
1984   Cable  Act  relating   to  public,  educational   and  government  access
requirements and  commercial leased  channels. The  plaintiffs seek  injunctions
against  the enforcement  or implementation  of these  provisions. Several other
parties have also filed  similar lawsuits and these  actions have been at  least
partially consolidated with the actions filed by TWE. On April 8, 1993, in a 2-1
decision,  the District  Court upheld  the constitutionality  of the  must carry
provisions of the 1992  Cable Act. On  May 3, 1993,  plaintiffs filed an  appeal
from this decision directly to the U.S. Supreme Court. The U.S. Supreme Court on
June  27,  1994  vacated  the  judgment  of  the  District  Court  regarding the
must-carry provisions and remanded  the case to that  court for further  factual
findings  after ruling  that cable  systems were  entitled to  significant First
Amendment protection.  In  December 1995,  that  panel upheld  the  'must-carry'
requirements  by 2-1  vote. The Supreme  Court decided to  review that decision.
Argument was held  in the Supreme  Court on  October 7, 1996.  On September  16,
1993, a one-judge District Court upheld the constitutionality on First Amendment
grounds of all the other challenged provisions except restrictions on the number
of  subscribers  that  a cable  operator  could  serve nationwide,  free  pay TV
previews and direct broadcast channel usage.  TWE appealed this decision to  the
U.S. Court of Appeals for the D.C. Circuit on November 12, 1993. Briefing on the
appeal,  and argument took place, on November  20, 1995. On August 30, 1996, the
D.C. Circuit Court of Appeals rejected TWE's challenges to certain provisions of
the 1984 and 1992 Cable Acts, held unripe the challenge to the program  creation
provision of Section 11(c) of the 1992 Cable Act, and consolidated the remaining
challenges to Section 11(c) with Time Warner Entertainment Company, L.P. v. FCC.
On October 29, 1996, TWE and the other plaintiffs filed a Petition for Rehearing
and  Suggestion for Rehearing En  Banc with the Court.  On February 7, 1997, the
Court denied the
 
                                      I-26
 
<PAGE>


<PAGE>
petition for rehearing. For  a description of  the 1984 Cable  Act and the  1992
Cable   Act,  see  Item  1  'Business   --  Cable  Division  --  Regulation  and
Legislation.'
 
     In October,  1993,  15  music performers  or  representatives  of  deceased
performers,  on behalf of an alleged similarly-situated class, filed suit in the
United States  District  Court for  the  Northern District  of  Georgia  against
approximately  50 record companies, including  four WCI subsidiaries. (Samuel D.
Moore, et al. v.  American Federation of Television  and Radio Artists, et  al.,
No.  93-Civ-2358). Plaintiffs claimed that the recording companies, the American
Federation of  Television and  Radio Artists  ('AFTRA') (their  union), and  the
AFTRA  Health and Retirement Fund  ('Fund') under-reported and under-contributed
to the Fund, in violation  of ERISA, in breach  of contract and fiduciary  duty,
through  fraud and  embezzlement, and  in violation  of RICO.  Plaintiffs sought
substantial, but unquantified, monetary damages, treble damages, attorneys' fees
and costs  and  the  imposition  of  a  constructive  trust  over  their  master
recordings.  Following  a  series  of  motions, on  August  2,  1994,  the court
dismissed the claims against the Fund and the Fund's trustees, and dismissed all
claims against  the defendant  recording companies  except the  RICO claim.  The
record  company defendants  then answered the  RICO claim,  denying its material
allegations and alleging defenses. After  certain discovery, the defendants,  on
January  29,  1997, moved  for  summary judgment,  and  that motion  is pending.
Plaintiffs' motion  to  certify various  classes  of plaintiffs  is  pending.  A
second,  similar lawsuit, commenced by the  same plaintiffs in the United States
District Court for the  Southern District of New  York, alleging a class  action
and  derivative  claims  on behalf  of  the  Fund against  essentially  the same
defendants has,  after various  motions by  defendants, been  combined with  the
first  action in the Northern District of Georgia. Defendants' December 18, 1996
motion to dismiss the newly-added counts is pending. If defendants'  dispositive
motions  are  not  granted, discovery  is  likely  to continue,  in  a  class or
individual actions, with a trial following.
 
     On July 14, 1994,  Time Warner received a  civil investigative demand  from
the  United States Department of Justice in furtherance of an investigation into
certain worldwide activities of  WMG and other companies  in the recorded  music
industry  principally related to  cable, wire and  satellite-delivered music and
music video programmers. Time Warner  has complied with the civil  investigative
demand  to the extent that  it sought information and  documents with respect to
domestic activities  of WMG  and  has objected  to  responding with  respect  to
foreign   activities  on  the  ground  that  the  Department  of  Justice  lacks
jurisdiction  to  inquire  into  such  activities.  On  November  3,  1994,  the
Department  of Justice filed a petition in  the United States District Court for
the District of Columbia seeking to  compel Time Warner and the other  companies
to  provide  documents from  their files  in  the United  States that  deal with
overseas activities. On January 22, 1997, the court granted the petition.
 
     On May 30, 1995, a purported class action was filed with the United  States
District  Court  for  the  Central  District  of  California,  entitled  Digital
Distribution Inc. d/b/a Compact Disc Warehouse v. CEMA Distribution, Sony  Music
Entertainment,  Inc.,  Warner  Elektra  Atlantic  Corporation,  UNI Distribution
Corporation, Bertelsmann  Music Group,  Inc.  and PolyGram  Group  Distribution,
Inc.,  No.  95-3536  (JSL).  The  plaintiff,  representing  a  class  of  direct
purchasers of recorded music compact discs ('CDs'), alleged that Warner  Elektra
Atlantic  Corporation  ('WEA'),  along  with  five  other  distributors  of CDs,
violated the  federal antitrust  laws by  engaging in  a conspiracy  to fix  the
prices  of CDs, and sought an injunction and treble damages. On January 9, 1996,
the defendants' motion  to dismiss  the amended  complaint was  granted and  the
action  was dismissed, with  prejudice. Plaintiff appealed  the dismissal to the
United States Court of Appeals for  the Ninth Circuit, No. 96-55264. The  appeal
has been fully briefed and no date for oral argument has yet been set.
 
     On July 8, 1996, a purported class action was filed in the Circuit Court of
Blount County, Tennessee at Maryville, entitled Robinson and Silvey v. EMI Music
Distribution,  Inc.,  Sony Music  Entertainment,  Inc., Warner  Elektra Atlantic
Corporation, UNI  Distribution Corporation,  Bertelsmann Music  Group, Inc.  and
PolyGram  Group Distribution, Inc., No. L-10462. The action is brought on behalf
of persons who, from June 26, 1992 to the present, purchased CDs indirectly from
defendants in Tennessee, Alabama, California, Florida, Kansas, Maine,  Michigan,
Minnesota,  Mississippi, New Mexico, North  Dakota, South Dakota, West Virginia,
Wisconsin and District of Columbia, and alleges that the defendants are  engaged
in  a conspiracy to fix the prices of CDs, in violation of the antitrust, unfair
trade practices and consumer protection statutes of each of those jurisdictions.
Also on July 8, the Circuit  Court issued an order conditionally granting  class
certification, subject to defendants'
 
                                      I-27
 
<PAGE>


<PAGE>
right  to move to decertify the class.  On February 25, 1997, defendants filed a
motion to dismiss the complaint. On February 26, 1997, the Circuit Court  stayed
all proceedings pending consideration of the motion to dismiss.
 
     On  July 25,  1996, WEA  was served  with an  antitrust civil investigative
demand from the  Office of the  Attorney General  of the State  of Florida  that
calls  for the  production of documents  in connection with  an investigation to
determine whether there is, has been or may be a conspiracy to fix the prices of
CDs or  conduct consisting  of unfair  methods of  competition or  unfair  trade
practices in the sale and marketing of CDs. WEA produced documents in compliance
with the investigative demand.
 
     On  October  8,  1996,  the  New  York  State  Attorney  General  began  an
investigation by serving a subpoena duces tecum  on Time Warner. In re New  York
State Attorney General's Investigation. The subpoena seeks information regarding
whether  Time Warner and Time Warner Cable  may have violated Section 340 of the
General Business Law  of New  York and/or  Sections 1  and/or 2  of the  Sherman
Antitrust  Act  in  making certain  decisions  regarding the  carriage  of video
programming services on Time Warner's  cable systems, including its decision  to
carry  the MSNBC news service and not  the Fox News Channel ('FNC'). On November
22, 1996, the  subpoena was modified  by agreement between  Time Warner and  the
Attorney  General  and  on December  12,  1996, Time  Warner  produced documents
pursuant to  the  subpoena,  as  modified. On  January  10,  1997,  Time  Warner
responded to the interrogatory requests of the subpoena, as modified.
 
     On  October 9, 1996, an action was  commenced in the United States District
Court for the Eastern District of New York entitled Fox News Network, L.L.C.  v.
Time  Warner Inc., Time Warner  Entertainment Company, L.P., Turner Broadcasting
System, Inc., and R.E. 'Ted' Turner III. The plaintiff seeks to have Time Warner
divest the TBS assets acquired alleging that the TBS Transaction is violative of
Section 7 of  the Clayton  Act. The plaintiff  also seeks  damages flowing  from
alleged  violations of Section 1 of the  Sherman Act, the Donnelly Act, New York
State's antitrust statute, as well as alleged breach of contract and  fraudulent
misrepresentations regarding carriage of the FNC on defendants' cable television
systems.  In total, the plaintiff seeks $1.75 billion in damages. On October 30,
1996, plaintiff  filed an  amended complaint.  On November  15, 1996  defendants
filed a motion to dismiss the amended complaint. On December 11, 1996, the court
orally  denied defendants' motion. On December  31, 1996, defendants filed their
answer to plaintiff's amended complaint and their counterclaims, naming both Fox
News  and  News  Corp.  as   counterclaim-defendants.  The  answer  denies   all
substantive  allegations of the  amended complaint and  the counterclaims allege
that Fox News  and News Corp.  conspired with various  unnamed officials of  the
City  of New York to  deprive Time Warner of  its First and Fourteenth Amendment
rights, as  well  as  its  rights under  Federal  cable  legislation,  and  that
counterclaim-defendants  tortiously interfered  with Time  Warner's rights under
its franchise agreements  with the City  of New  York. Fox News  and News  Corp.
filed a motion to dismiss Time Warner's counterclaims. Argument on the motion to
dismiss  the counterclaims was held  on February 27, 1997,  and the parties have
submitted additional briefs on the issues presented by the motion. On March  14,
1997,  FNC conceded its  inability to sustain  its breach of  contract claim and
withdrew it.
 
     On October  10, 1996,  the holders  of Time  Warner's New  York City  cable
franchises  filed a complaint against the City  of New York in the United States
District Court for the  Southern District of New  York alleging that the  City's
announced  plan to  carry two  commercial cable  programs, Bloomberg Information
Television ('BIT') and the FNC, over  the City's municipal access channels is  a
violation  of the Franchise Agreements, the 1984 Cable Act, the First Amendment,
New York Public Service Law and certain  other legal rights of such holders.  In
addition  to  seeking  to enjoin  the  City's  activity, the  complaint  seeks a
declaratory judgment  that the  TBS  Transaction does  not  effect a  change  in
control  for the purposes of the Franchise  Agreements. On October 11, 1996, the
judge in this action  issued a temporary restraining  order preventing the  City
from  carrying either BIT or the FNC over its municipal access channels. After a
hearing on October  28, 1996, the  judge on  November 6, 1996  granted the  Time
Warner  plaintiffs a  preliminary injunction that  will continue  to prevent the
City from carrying these services on its municipal access channels until a trial
on the  matter  is completed.  The  City and  BIT,  which had  intervened  as  a
defendant  in the  action, appealed  the judge's  decision to  the United States
Court of Appeals for the  Second Circuit. Argument on  the appeal took place  on
February  19, 1997. Thus  far, all activity  in this action  has related to Time
Warner's request  for  an  injunction,  and  proceedings  with  respect  to  the
declaratory  judgment  that the  TBS  Transaction does  not  effect a  change in
control for the purposes of the Franchise Agreements have not as yet commenced.
 
                                      I-28
 
<PAGE>


<PAGE>
     TWE and its divisions and the Time Warner General Partners are also subject
to industry  investigations by  certain government  agencies and/or  proceedings
under  the antitrust laws that  have been filed by  private parties in which, in
some cases,  other  companies  in  the  same  or  related  industries  are  also
defendants.  TWE and the Time  Warner General Partners have  denied or will deny
liability in all of these  actions. In all but a  few similar past actions,  the
damages,  if any, recovered from TWE and the Time Warner General Partners or the
amounts, if any, for  which the actions  were settled were  small or nominal  in
relation  to the damages sought; and it is  the opinion of the management of TWE
that any  settlements or  adverse  judgments in  the similar  actions  currently
pending will not involve the payment of amounts or have other results that would
have  a material adverse effect  on the financial condition  of TWE and the Time
Warner General Partners.
 
ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
     Not applicable.
 
                                      I-29

<PAGE>


<PAGE>
                                    PART II
 
ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
 
     Not Applicable.
 
ITEM 6.  SELECTED FINANCIAL DATA
 
     The  selected  financial information  of TWE  and  the Time  Warner General
Partners set forth at pages F-36 and F-76, respectively, herein, is incorporated
herein by reference.
 
ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
 
     The information set  forth under the  caption 'Management's Discussion  and
Analysis'  at pages F-2 through  F-10 and at pages  F-39 through F-43 herein, is
incorporated herein by reference.
 
ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
     The consolidated financial statements set forth at pages F-11 through  F-34
of  TWE and the  report of independent  auditors thereon set  forth at page F-35
herein, and  the  consolidated financial  statements  set forth  at  pages  F-44
through  F-74 of the TWE General Partners and the report of independent auditors
thereon set forth at page F-75 herein, are incorporated herein by reference.
 
     Quarterly  Financial  Information  set  forth  at  page  F-37  herein,   is
incorporated herein by reference.
 
ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
 
     Not Applicable.
 
                                      II-1

<PAGE>


<PAGE>
                                    PART III
 
ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTS
 
REPRESENTATIVES AND DIRECTORS
 
     Set  forth below is  the name and age  of each person who  is a member with
voting rights of the Board  of Representatives of TWE and  each person who is  a
director  of one  or more  of the  Time Warner  General Partners,  such person's
present principal occupation or employment, the name of the corporation or other
organization in which such  occupation or employment is  conducted and the  name
and  principal business of  any corporation or other  organization in which such
person held a material position or office or engaged in a material occupation or
employment during the last five years  and such position, office, occupation  or
employment.   Messrs.  Levin   and  Haje   became  members   of  the   Board  of
Representatives of TWE  on June 30,  1992, Messrs. McCormick  and Lillis  became
members  of  such Board  of Representatives  on September  15, 1993  and Messrs.
Parsons, Bressler and  Lochner became members  on February 1,  1995, January  1,
1996 and March 7, 1997, respectively. Mr. Lochner also served as a member of the
Board  of  Representatives from  January 2,  1995 until  December 31,  1995. The
selection of TWE's Board of Representatives  is governed by the TWE  Partnership
Agreement.  See  'Description  of  Certain  Provisions  of  the  TWE Partnership
Agreement -- Management and Operations of  TWE.' Mr. Levin became a director  of
WCI on July 24, 1989, of ATC and WCCI on September 24, 1992 and of TWOI on April
15, 1993. Mr. Haje became a director of each of the Time Warner General Partners
other  than WCI  on September  24, 1992  and has  been a  director of  WCI since
January 25, 1994.  Mr. Parsons  became a director  of each  Time Warner  General
Partner  on February 1, 1995.  Mr. Bressler became a director  of ATC and WCI on
March 2, 1996. Mr. Haje agreed to an order entered on September 27, 1993 by  the
U.S.  Office of  Thrift Supervision  ('OTS') that, for  a period  of five years,
suspends him from practicing before  the OTS and requires  him not to engage  in
the legal representation of a federally insured depository institution. Mr. Haje
also  agreed,  for such  period, not  to  participate in  any unsafe  or unsound
banking practices or the submission  of any materially misleading statements  to
any  federal banking authority. Such order relates to events that occurred while
Mr. Haje  was a  partner in  a law  firm that  represented a  federally  insured
depository  institution, prior  to his  employment by  Time Warner  and TWE, and
places no limits on his services for Time Warner or TWE.
 
     For a  general discussion  of  the duties  of  the executive  officers  and
representatives  of  TWE,  see 'Description  of  Certain Provisions  of  the TWE
Partnership Agreement -- Management and Operations of TWE.'
 
<TABLE>
<CAPTION>
                                  DIRECTOR AND/OR                           PRINCIPAL OCCUPATIONS OR
            NAME                 REPRESENTATIVE OF       AGE          POSITIONS DURING THE PAST FIVE YEARS
----------------------------  ------------------------   ---   ---------------------------------------------------
<S>                           <C>                        <C>   <C>
Gerald M. Levin.............  TWE and each Time Warner   57    Chairman  of  the  Board  of  Directors  and  Chief
                              General                          Executive  Officer  of  TWE and  Time  Warner since
                              Partner                          January 21, 1993,  having served  as President  and
                                                               Co-Chief  Executive  Officer of  TWE from  June 30,
                                                               1992 and of Time Warner from February 20, 1992.  He
                                                               is also a director of Time Warner.
 
Richard D. Parsons..........  TWE and each Time Warner   48    President  of TWE and Time Warner since February 1,
                              General Partner                  1995. Prior  to that,  Mr.  Parsons served  as  the
                                                               Chairman  and Chief  Executive Officer  of The Dime
                                                               Savings Bank of New York, FSB from January 1991. He
                                                               served as  a director  of  ATC, then  an  82%-owned
                                                               subsidiary of Time Warner, from 1989 until 1991 and
                                                               is  currently  also  a  director  of  Citicorp, the
                                                               Federal  National   Mortgage  Association,   Philip
                                                               Morris Companies Inc. and Time Warner.
</TABLE>
 
                                     III-1
 
<PAGE>


<PAGE>
<TABLE>
<CAPTION>
                                  DIRECTOR AND/OR                           PRINCIPAL OCCUPATIONS OR
            NAME                 REPRESENTATIVE OF       AGE          POSITIONS DURING THE PAST FIVE YEARS
----------------------------  ------------------------   ---   ---------------------------------------------------
<S>                           <C>                        <C>   <C>
Peter R. Haje...............  TWE and each Time Warner   62    Executive Vice President and General Counsel of TWE
                              General Partner                  since  June  30,  1992  and  of  Time  Warner since
                                                               October 1,  1990  and  Secretary of  TWE  and  Time
                                                               Warner since May 20, 1993.
 
Richard J. Bressler.........  TWE, WCI and ATC           39    Senior  Vice President and  Chief Financial Officer
                                                               of TWE and Time Warner since March 16, 1995, having
                                                               served  as  Senior  Vice  President,  Finance  from
                                                               January  2, 1995. Prior to  that, he served as Vice
                                                               President of TWE  from June  30, 1992  and of  Time
                                                               Warner from January 1990.
 
Philip R. Lochner, Jr.......  TWE                        54    Senior  Vice President of TWE since January 2, 1995
                                                               and of Time Warner since July 18, 1991.
 
Richard D. McCormick........  TWE                        56    Chairman of the Board of Directors of US West since
                                                               May 1992 and President and Chief
                                                               Executive  Officer  of  US  West  since  1991.  Mr.
                                                               McCormick has been a director of US West since 1986
                                                               and   is  currently  also  a  director  of  Norwest
                                                               Corporation and UAL Corporation.
 
Charles M. Lillis...........  TWE                        55    President and Chief Executive Officer of the  Media
                                                               Group  of US West since  May 25, 1995 and Executive
                                                               Vice President of US West since 1985. Mr. Lillis is
                                                               a director of Commercial Federal Savings & Loan and
                                                               Super Valu Stores, Inc.
</TABLE>
 
EXECUTIVE OFFICERS
 
     Set forth below  is the name  and age of  each person who  is an  executive
officer of TWE and each person who is an executive officer of one or more of the
Time  Warner  General Partners,  such person's  present principal  occupation or
employment, the name  of the  corporation or  other organization  in which  such
occupation or employment is conducted and the name and principal business of any
corporation  or other organization in which such person held a material position
or office or engaged in a material occupation or employment during the last five
years and  such  position,  office,  occupation  or  employment.  The  executive
officers  of TWE  indicated below became  executive officers of  the Time Warner
General Partners on September  25, 1992 or,  if later, on  the date they  became
executive officers of TWE.
 
<TABLE>
<CAPTION>
                               EXECUTIVE OFFICER                           PRINCIPAL OCCUPATIONS OR
           NAME                        OF              AGE           POSITIONS DURING THE PAST FIVE YEARS
--------------------------  ------------------------   ---   ----------------------------------------------------
<S>                         <C>                        <C>   <C>
Gerald M. Levin...........  TWE and each Time Warner   57    See ' -- Representatives and Directors.'
                            General Partner
Richard D. Parsons........  TWE and each Time Warner   48    See ' -- Representatives and Directors.'
                            General Partner
Peter R. Haje.............  TWE and each Time Warner   62    See ' -- Representatives and Directors.'
                            General Partner
</TABLE>
 
                                     III-2
 
<PAGE>


<PAGE>
 
<TABLE>
<CAPTION>
                               EXECUTIVE OFFICER                           PRINCIPAL OCCUPATIONS OR
           NAME                        OF              AGE           POSITIONS DURING THE PAST FIVE YEARS
--------------------------  ------------------------   ---   ----------------------------------------------------
<S>                         <C>                        <C>   <C>
Timothy A. Boggs..........  TWE                        46    Senior  Vice President of TWE  and Time Warner since
                                                             November 19, 1992. Prior to that, he served as  Vice
                                                             President  of Public  Affairs of  TWE from  June 30,
                                                             1992 and of Time Warner from January 1990.
Richard J. Bressler.......  TWE and each Time Warner   39    See ' -- Representatives and Directors.'
                            General Partner
Philip R. Lochner, Jr.....  TWE and each Time Warner   54    See ' -- Representatives and Directors.'
                            General Partner
</TABLE>
 
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
 
     Not Applicable.
 
ITEM 11.  EXECUTIVE COMPENSATION
 
     The executive officers  of TWE  and the  Time Warner  General Partners  are
compensated  by Time  Warner for  services provided  to Time  Warner pursuant to
employment agreements with  Time Warner and  receive no additional  compensation
from  TWE or any of  the Time Warner General  Partners. Time Warner provides the
services of such executive officers to  TWE and is reimbursed for such  services
pursuant to arrangements set forth in the TWE Partnership Agreement. See Item 13
'Certain  Relationships and Related Transactions -- Corporate Services.' Members
of the Board of Representatives of TWE and directors of the Time Warner  General
Partners are not additionally compensated for such activities.
 
EXECUTIVE COMPENSATION SUMMARY TABLE
 
     The  following table  sets forth information  concerning total compensation
paid to the Chief Executive Officer and each of the four most highly compensated
executive officers of Time Warner who  served in such capacities at Time  Warner
and  TWE  on December  31, 1996  (the 'named  executive officers')  for services
rendered to Time  Warner during each  of the  last three fiscal  years in  their
capacities as executive officers.
 
                           SUMMARY COMPENSATION TABLE
 
<TABLE>
<CAPTION>
                                                                                             LONG-TERM
                                                           ANNUAL COMPENSATION            COMPENSATION(5)
                                                 ---------------------------------------  ---------------
                                                                              OTHER         SECURITIES
            NAME AND PRINCIPAL                                               ANNUAL         UNDERLYING        ALL OTHER
             POSITION IN 1996              YEAR  SALARY(3)     BONUS     COMPENSATION(4)  OPTIONS AWARDED  COMPENSATION(6)
------------------------------------------ ----  ----------  ----------  ---------------  ---------------  ---------------
<S>                                        <C>   <C>         <C>         <C>              <C>              <C>
Gerald M. Levin........................... 1996  $1,050,000  $4,000,000     $ 209,624          350,000        $ 109,773
  Chairman of the Board and                1995   1,050,000   4,000,000       153,930          --               107,039
  Chief Executive Officer                  1994   1,050,000   4,000,000       130,390          --               150,667
Richard D. Parsons........................ 1996  $  900,000  $2,000,000     $  98,627          300,000        $ 104,019
  President (1)                            1995     825,000   2,000,000        92,000          300,000           77,628
Peter R. Haje............................. 1996  $  825,000  $1,000,000     $  56,500           45,000        $ 119,105
  Executive Vice President                 1995     675,000   1,000,000        56,500           40,000          114,102
  and General Counsel                      1994     675,000     975,000        51,500          --               129,377
Richard J. Bressler....................... 1996  $  525,000  $  900,000     $  50,500          100,000        $  44,421
  Senior Vice President and                1995     450,000     750,000        50,500          100,000           42,755
  Chief Financial Officer (2)
Tod R. Hullin............................. 1996  $  525,000  $  550,000       --                30,000        $  58,055
  Senior Vice President-                   1995     525,000     550,000       --                35,000           56,279
  Communications and                       1994     487,500     550,000       --                40,000           75,344
  Public Affairs
</TABLE>
 
                                                        (footnotes on next page)
 
                                     III-3
 
<PAGE>


<PAGE>
(1) Mr.  Parsons became President on February 1,  1995. Prior to that, he served
    as a director of  Time Warner and  was not an employee  of Time Warner.  Mr.
    Parsons's  1995 stock options were awarded at  the end of 1994 in connection
    with his anticipated employment by Time Warner.
 
(2) Mr. Bressler became  Senior Vice  President and Chief  Financial Officer  on
    March 16, 1995, having served as Senior Vice President, Finance from January
    2, 1995, and as a Vice President (not an executive officer) prior to that.
 
(3) Amounts shown in the table include credits to each named executive officer's
    deferred  compensation account equal  to one third of  the total shown under
    the 'salary' column for each of 1996, 1995 and 1994.
 
(4) In accordance with rules of the Securities and Exchange Commission,  amounts
    totalling  less  than $50,000  have been  omitted.  The amounts  of personal
    benefits shown in this column for 1996  that represent more than 25% of  the
    applicable  executive's  total Other  Annual Compensation  include financial
    services of $80,000 to Mr. Levin, $70,000 to Mr. Parsons and $32,500 to each
    of Messrs. Haje and Bressler, transportation-related benefits (including  an
    automobile  allowance) of $129,624  to Mr. Levin and  $28,627 to Mr. Parsons
    and automobile  allowances  of  $24,000  to Mr.  Haje  and  $18,000  to  Mr.
    Bressler.
 
(5) None  of the  options indicated was  awarded with  tandem stock appreciation
    rights. Of such executive officers, only Mr. Parsons was awarded  restricted
    stock during the relevant period and, as of December 31, 1996, held any such
    shares.  These shares were awarded in or prior to 1994 under the Time Warner
    Inc. 1988 Restricted Stock Plan  for Non-Employee Directors in his  capacity
    then as a non-employee director. The value of Mr. Parsons's 4,213 restricted
    shares  based on the  closing price of  Time Warner Common  Stock on the New
    York Stock Exchange Composite Listing on December 31, 1996 was $157,988. Mr.
    Parsons receives the dividends paid in cash on such shares.
 
(6) The amounts shown in this column for 1996 include the following:
 
         (a) Pursuant to the  Time Warner Savings Plan  (the 'Savings Plan'),  a
    defined  contribution plan available generally  to employees of Time Warner,
    for the 1996 plan  year, each executive named  above, deferred a portion  of
    his  annual compensation  and Time Warner  contributed $2,000  for the first
    $3,000  so  deferred  by  the  executive  ('Matching  Contribution').  These
    Matching Contributions were invested under the Savings Plan in a Time Warner
    Common  Stock fund. In  addition, pursuant to  a profit-sharing component of
    the Savings Plan, Time Warner may make annual contributions for the  benefit
    of eligible employees of up to 12% of total eligible compensation; for 1996,
    Time  Warner  contributed  8%, including  $12,000  for the  account  of each
    executive named above. Because the Internal Revenue Code of 1986, as amended
    (the 'Code'), limits the amount  of eligible compensation under the  Savings
    Plan  to $150,000  for 1996  for any  employee, Time  Warner has  adopted an
    unfunded, non-qualified  supplemental  deferred compensation  plan  covering
    otherwise  eligible  compensation  between $150,000  and  $275,625  for 1996
    (increased 5% per year thereafter, to a maximum of $350,000). Time  Warner's
    accrual for this supplemental plan, $10,050 in 1996 for each named executive
    officer,  is deemed to earn interest  at a long-term applicable federal rate
    announced by the Internal Revenue Service.
 
         (b) Time Warner  maintains a program of  life and disability  insurance
    generally  available  to  all  salaried  employees  on  the  same  basis. In
    addition, during 1996, Time Warner maintained for certain members of  senior
    management,  including  the named  executive officers,  certain supplemental
    life insurance benefits and paid premiums for this supplemental coverage  of
    approximately  $250  each.  Time Warner  also  maintained  split-dollar life
    insurance policies on the lives of the named executive officers and paid the
    following amounts allocated to the term portion of the split-dollar coverage
    for 1996: Mr.  Levin, $13,467; Mr.  Parsons, $3,840; Mr.  Haje, $8,264;  Mr.
    Bressler,  $941; and  Mr. Hullin,  $2,839. The  actuarial equivalent  of the
    value of  the  premiums  paid by  Time  Warner  for 1996  based  on  certain
    assumptions regarding interest rates and periods of coverage are: Mr. Levin,
    $85,473; Mr. Parsons, $79,719; Mr. Haje, $94,805; Mr. Bressler, $20,121; and
    Mr. Hullin, $33,755. It is anticipated that Time Warner will recover the net
    after-tax cost of the premiums on these policies or the cash surrender value
    thereof.  For a description of life insurance coverage for certain executive
    officers provided pursuant to the terms of their employment agreements,  see
    'Employment Arrangements.'
 
STOCK OPTION GRANTS DURING 1996
 
     The following table sets forth certain information with respect to employee
options  to  purchase shares  of Time  Warner  Common Stock  ('options') awarded
during 1996 to the named executive officers. All such options were  nonqualified
options.  No stock appreciation  rights ('SARs'), alone or  in tandem with stock
options, were awarded in 1996.
 
                                     III-4
 
<PAGE>


<PAGE>
                          STOCK OPTION GRANTS IN 1996
 
<TABLE>
<CAPTION>
                                                                     INDIVIDUAL GRANTS(1)
                                                   ---------------------------------------------------------
                                                                    PERCENT
                                                   NUMBER OF        OF TOTAL
                                                   SECURITIES       OPTIONS        EXERCISE
                                                   UNDERLYING      GRANTED TO       OR BASE
                                                    OPTIONS        EMPLOYEES         PRICE        EXPIRATION         GRANT DATE
                     NAME                           GRANTED         IN 1996         ($/SH)           DATE         PRESENT VALUE(2)
----------------------------------------------     ----------      ----------      ---------      ----------      -----------------
 
<S>                                                <C>             <C>             <C>            <C>             <C>
Gerald M. Levin...............................       175,000           1.8%         $ 42.63         3/19/06          $ 2,831,500
                                                      87,500            .9            53.29         3/19/06            1,091,125
                                                      87,500            .9            63.95         3/19/06              840,000
Richard D. Parsons............................       150,000           1.6%         $ 42.63         3/19/06          $ 2,427,000
                                                      75,000            .8            53.29         3/19/06              935,250
                                                      75,000            .8            63.95         3/19/06              720,000
Peter R. Haje.................................        45,000            .5%         $ 42.63         3/19/06          $   728,100
Richard J. Bressler...........................       100,000           1.1%         $ 42.63         3/19/06          $ 1,618,000
Tod R. Hullin.................................        30,000            .3%         $ 42.63         3/19/06          $   485,400
</TABLE>
 
------------
 
(1) Options for  executive  officers are  generally  awarded pursuant  to  plans
    approved  by Time  Warner's stockholders and  the terms are  governed by the
    plans and the recipient's option agreement. The option exercise price is the
    fair market value  of the  Time Warner  Common Stock  on the  date of  grant
    except  for the awards to Messrs. Levin  and Parsons of which one quarter of
    the total award has an exercise price 25% above the fair market value of the
    Time Warner Common Stock on the date  of grant and one quarter of which  has
    an exercise price 50% above such fair market value. The options shown in the
    table  become exercisable  in installments of  one-third on  the first three
    anniversaries of  the  date  of  grant, subject  to  acceleration  upon  the
    occurrence of certain events. Payment of the exercise price of an option may
    be  made in  cash or, in  whole or  in part, in  full shares  of Time Warner
    Common Stock  already owned  by the  holder of  the option.  The payment  of
    withholding  taxes due upon exercise of an option may generally be made with
    shares of Time Warner Common Stock.
 
(2) These amounts represent the estimated present value of stock options at  the
    date of grant calculated using the Black-Scholes option pricing model, based
    upon  the following assumptions used in  developing the grant valuations: an
    expected volatility of 21.7% based on a three-year period ending October 31,
    1996; an  expected term  to exercise  of eight  years; a  risk-free rate  of
    return  based on the interest rate of  a U.S. Government zero-coupon bond in
    effect on  the date  of the  award with  an eight-year  maturity (March  20,
    1996 -- 6.37%); and a dividend yield of 1%. The actual value of the options,
    if any, realized by an officer will depend on the extent to which the market
    value  of the  Time Warner  Common Stock exceeds  the exercise  price of the
    option on  the date  the  option is  exercised.  Consequently, there  is  no
    assurance that the value realized by an officer will be at or near the value
    estimated  above.  These  amounts  should  not  be  used  to  predict  stock
    performance.
 
OPTION EXERCISES AND VALUES IN 1996
 
     The following table sets forth as  to each of the named executive  officers
information  on option exercises  during 1996 and  the status of  his options on
December 31,  1996:  (i)  the number  of  shares  of Time  Warner  Common  Stock
underlying  options  exercised  during  1996; (ii)  the  aggregate  dollar value
realized upon exercise of such options; (iii) the total number of shares of Time
Warner Common Stock underlying exercisable and nonexercisable stock options held
on December  31, 1996;  and  (iv) the  aggregate  dollar value  of  in-the-money
exercisable and nonexercisable stock options on December 31, 1996.
 
                     AGGREGATE OPTION EXERCISES DURING 1996
                                      AND
                       OPTION VALUES ON DECEMBER 31, 1996
 
<TABLE>
<CAPTION>
                                         NUMBER OF                          NUMBER OF SHARES                  DOLLAR VALUE OF
                                           SHARES        DOLLAR          UNDERLYING UNEXERCISED          UNEXERCISED IN-THE-MONEY
                                         UNDERLYING       VALUE            OPTIONS ON 12/31/96             OPTIONS ON 12/31/96*
                                          OPTIONS       REALIZED      -----------------------------    -----------------------------
                 NAME                    EXERCISED     ON EXERCISE    EXERCISABLE    NONEXERCISABLE    EXERCISABLE    NONEXERCISABLE
--------------------------------------   ----------    -----------    -----------    --------------    -----------    --------------
 
<S>                                      <C>           <C>            <C>            <C>               <C>            <C>
Gerald M. Levin (1)...................     48,000      $ 1,003,680     2,485,600          350,000      $23,664,040        --
Richard D. Parsons....................      --             --            200,000          400,000      $   374,000       $187,000
Peter R. Haje.........................      --             --            691,954           71,666      $12,012,131        --
Richard J. Bressler (1)...............      --             --            132,804          181,332      $   977,588       $ 18,700
Tod R. Hullin.........................      --             --            278,058           66,666      $ 3,606,302        --
</TABLE>
 
------------
 
* Calculated  using the closing price  of $37.50 per share  on December 31, 1996
  minus the option exercise price.
 
(1) The options exercised by Mr. Levin  were awarded in 1986. Messrs. Levin  and
    Bressler  are the only executive officers listed above who have been awarded
    SARs in  tandem with  any of  their stock  options. 265,600  of Mr.  Levin's
    options  and 9,644 of Mr. Bressler's options  held on December 31, 1996 were
    awarded with tandem SARs; they all were awarded on or prior to September 22,
    1989 and are  currently exercisable; and  at December 31,  1996, they had  a
    value  of $2,074,640  and $68,102, respectively,  but no  separate value has
    been attributed to these  SARs. These SARs are  exercisable for Time  Warner
    Common Stock or cash, subject to a $250,000 limit on the amount of cash that
    may be received upon their exercise.
 
                                     III-5
 
<PAGE>


<PAGE>
     The  option exercise price of  all the options held  by the named executive
officers is the fair market value of the Time Warner Common Stock on the date of
grant except  for options  awarded to  Messrs. Levin  and Parsons  in 1996  (see
'Stock Option Grants During 1996') and 500,000 of Mr. Levin's options awarded in
1993,  half of which have  an exercise price 25% above  the fair market value of
the Time Warner Common Stock  on the date of grant  and the other half of  which
have an exercise price 50% above such fair market value. All options held by the
named  executive  officers  become  immediately  exercisable  in  full  upon the
occurrence of certain  events, including the  death or total  disability of  the
option  holder, certain change-of-control transactions  and, in most cases, Time
Warner's breach of the holder's  employment agreement and all such  nonqualified
options  permit a portion  of each award  to be transferred  by gift directly or
indirectly to members of the holder's immediate family.
 
     The options held by executive officers remain exercisable for the full term
of their employment  agreements in the  event their employment  terminates as  a
result  of Time  Warner's breach.  For some executive  officers, some  or all of
their options  remain exercisable  for the  full term  of the  options if  their
employment  is terminated for any reason  other than for cause, including death.
Otherwise, options may generally be exercised for one year after death or  total
disability.  All  options terminate  immediately if  the holder's  employment is
terminated for cause. The terms of the options shown in the chart are  generally
ten  years, although 320,000 options  held by Mr. Levin have  a term of 15 years
from the date of their award in 1989.
 
EMPLOYMENT ARRANGEMENTS
 
     Time Warner is, and during 1996 was, a party to employment agreements  with
the  five named executive  officers and certain  directors or representatives of
the Time Warner General Partners and TWE. These agreements have been filed  with
the  Securities and  Exchange Commission as  exhibits to  Time Warner's periodic
filings. In addition, each  such person participates  in Time Warner's  employee
benefit plans available to its employees generally.
 
     Among  other things, the  agreements with Time  Warner's executive officers
typically provide for: a fixed term of employment in a specified executive post;
annual salary; deferred compensation, generally  equal to 50% of annual  salary,
which is invested and paid out as described below under 'Deferred Compensation';
an  annual bonus  in the  discretion of the  Compensation Committee  of the Time
Warner Board of  Directors, all or  a portion of  which may be  deferred at  the
election of the executive officer; and life insurance benefits to be provided by
split  dollar policies, generally for the life  of the executive and pursuant to
which Time Warner recovers  an amount equal  to the net  after-tax cost to  Time
Warner  of the premiums on  such policy or the  cash surrender value thereof, as
well as  any group  life insurance  generally  provided by  Time Warner  to  its
employees.
 
     Generally,  such agreements include a narrow  definition of the 'cause' for
which an  executive's  employment may  be  terminated  and in  that  event,  the
executive  will  only  receive  earned  and  unpaid  base  salary  and  deferred
compensation accrued through such date of termination.
 
     These agreements  typically provide  that  in the  event of  Time  Warner's
material  breach  or  wrongful  termination of  an  executive's  employment, the
executive will be  entitled to elect  either (a) to  receive a lump-sum  payment
equal  to the present value  of the base salary,  projected bonuses and deferred
compensation otherwise payable during the  remaining portion of the  executive's
term  of employment or (b) to remain an  employee of Time Warner through the end
of the term of employment and, without performing any services, receive the base
salary, bonuses and deferred compensation payable as if there had been no breach
or wrongful  termination.  Executives are  not  generally required  to  mitigate
damages after such a termination, other than as necessary to prevent Time Warner
from  losing any tax deductions  to which it otherwise  would have been entitled
for any  payments deemed  to be  'contingent on  a change'  under the  Code.  In
addition,  these agreements  typically provide  that if  an executive thereafter
obtains other employment, the total cash salary and bonus received therefrom for
services prior to the expiration of  the executive's employment term (up to  the
amount  of compensation paid  to the executive  by Time Warner  for such period)
must be paid over to Time Warner as received. Except for Mr. Levin's  agreement,
the  provisions of the  employment agreements relating  to payments described in
the preceding sentence provide that the executive officer may retain and not pay
over to Time
 
                                     III-6
 
<PAGE>


<PAGE>
Warner an amount  equal to the  severance he would  have received in  accordance
with Time Warner's personnel policies if he had been job eliminated.
 
     In  addition, if Mr. Bressler's or  Mr. Hullin's employment terminates as a
result of Time Warner's material breach or wrongful termination, or Time  Warner
terminates  such  executive's  employment  after  the  term  of  his  employment
agreement, such  executive is  entitled  to a  severance  payment equal  to  the
greater  of the amount described in the preceding paragraph or the present value
of three times the  sum of his  annual base salary,  average bonus and  deferred
compensation.  If  his  employment  terminates  under  these  circumstances, Mr.
Parsons is entitled to a  severance payment equal to  the greater of the  amount
described  in the  preceding paragraph or  the present  value of the  sum of one
year's annual salary and deferred compensation and an average bonus.
 
     If an  executive  becomes  disabled  during  the  term  of  his  employment
agreement  the executive typically will receive  full salary, bonus and deferred
compensation for six months  and 75% thereof through  the end of the  employment
term  or, in some cases, for three  years, if longer. Deferred compensation will
be maintained and paid after giving effect to the executive's base salary  after
disability.  Any such payments will be reduced by amounts received from Worker's
Compensation, Social Security  and disability insurance  policies maintained  by
Time Warner.
 
     If  an executive dies during the term of an employment agreement, generally
the executive's beneficiaries  will receive  the executive's  earned and  unpaid
salary and deferred compensation to the last day of the month in which the death
occurs  and a  pro rata  portion of the  executive's bonus  for the  year of his
death.
 
     The  minimum  annual  salaries   and  deferred  compensation  under   these
agreements for the named executive officers are as shown for 1996 in the Summary
Compensation  Table. The expiration dates of these agreements and the amounts of
the individual life insurance coverage for the lifetime of such persons are: Mr.
Levin -- January 10, 2000 and $6  million; Mr. Parsons -- December 31, 1999  and
$4  million; Mr. Haje  -- December 31,  1999 (not including  a two-year advisory
period) and $4 million; Mr.  Bressler -- December 31,  1999 and $2 million;  and
Mr.  Hullin -- December  31, 1998 and  $2 million. Effective  March 7, 1997, Mr.
Hullin  ceased  to  be  an  executive  officer  and  member  of  the  Board   of
Representatives  or  Board  of Directors  of  TWE  and the  Time  Warner General
Partners, as the case may be. Time Warner also has an employment agreement  with
Mr.  Lochner who currently serves as a member of the Board of Representatives of
TWE. The terms  of this  agreement are substantially  the same  as Mr.  Hullin's
agreement.
 
DEFERRED COMPENSATION
 
     Deferred  compensation for  executive officers  is deposited  into separate
accounts maintained  by Time  Warner  for each  of  such officers.  Time  Warner
appoints  an investment advisor for each such account subject to approval by the
relevant executive.  Funds  are  invested  in  securities  as  directed  by  the
investment advisor, with the assumed after-tax effect upon Time Warner of gains,
losses  and  income, and  distributions thereof,  and  of interest  expenses and
brokerage commissions  and  other  direct  expenses  attributed  thereto,  being
credited  or charged to the account. Payments  are generally made to the officer
from the account in installments to liquidate the account over a period of three
to five  years commencing  on the  date employment  was to  terminate under  the
employment  agreement, or at such other times as the officer might have elected.
Such payments include an amount equal to the assumed tax benefit to Time  Warner
of  the compensation deduction available for tax purposes for the portion of the
account represented by the  net appreciation in such  account, even though  Time
Warner might not actually receive such tax benefit.
 
     Amounts  paid by Time  Warner to the deferred  compensation accounts of the
named executive officers for 1996  and the portion, if  any, of the 1996  annual
bonus  elected to be  deferred by any  such officer are  included in the amounts
shown in the Summary Compensation Table above.
 
TIME WARNER EMPLOYEES' PENSION PLAN
 
     The Time Warner Employees' Pension  Plan, as amended (the 'Pension  Plan'),
provides  benefits to eligible employees, including officers, of Time Warner and
certain of its subsidiaries. Directors who are not also employees of Time Warner
are not eligible to participate in the Pension Plan.
 
                                     III-7
 
<PAGE>


<PAGE>
     A participant accrues  benefits under the  Pension Plan on  the basis of  1
2/3%  of the average annual compensation (defined  as the average of the highest
five consecutive full or partial  years of compensation, which includes  regular
salary,  overtime and shift differential payments, and non-deferred bonuses paid
according to a regular program) for each year of service up to 30 years and 1/2%
for each  year of  service over  30. Compensation  for purposes  of  calculating
average  annual compensation under  the Pension Plan is  limited to $200,000 per
year for 1988 through 1993 and $150,000  per year for 1994 and thereafter  (each
subject  to adjustments provided in the  Code). Eligible employees become vested
in all benefits under the Pension Plan  on the earlier of five years of  service
or certain other events.
 
     Annual  pension benefits are reduced by a Social Security offset determined
by a formula that takes  into account credited service  up to 35 years,  covered
compensation  up to the average Social Security wage base and a disparity factor
based on the  age at  which Social Security  benefits are  payable (the  'Social
Security  Offset'). The pension benefit of  participants on December 31, 1977 in
the former  Time Employees'  Profit-Sharing Savings  Plan (the  'Profit  Sharing
Plan')  is further reduced  by a fixed  amount attributable to  a portion of the
employer contributions  and  investment  earnings credited  to  such  employees'
account balances in the Profit Sharing Plan as of such date (the 'Profit Sharing
Plan Offset').
 
     Under  the Pension Plan, employees  who are at least  60 years old and have
completed at least ten years of  service may elect early retirement and  receive
the  full  amount  of  their  annual  pension  ('early  retirement').  An  early
retirement supplement is payable to an employee terminating employment at age 55
and before age 60, after 20 years of service, equal to the actuarial  equivalent
of  such person's accrued benefit, or, if greater, an annual amount equal to 35%
of such person's  average compensation  determined under the  Pension Plan.  The
supplement ceases when the regular pension commences at age 60 or upon the death
of the retiree.
 
     Federal law limits both the amount of compensation that is eligible for the
calculation  of  benefits  and  the amount  of  benefits  derived  from employer
contributions that may be paid to participants under the Pension Plan.  However,
as  permitted by the Employee Retirement Income Security Act of 1974, as amended
('ERISA'), Time Warner has adopted the  Time Warner Excess Benefit Pension  Plan
(the  'Excess  Plan'), which  provides for  payments by  Time Warner  of certain
amounts which employees  of Time Warner  would have received  under the  Pension
Plan if eligible compensation were limited to $250,000 in 1994 (increased 5% per
year   thereafter,  to  a  maximum  of  $350,000)  and  there  were  no  payment
restrictions. For purposes of  the Excess Plan, the  $200,000 limit (as  indexed
for  years after 1989) on eligible  compensation will only apply to compensation
received in 1988 through  1993; the $250,000 limit  (as adjusted) will apply  to
compensation received in 1994 and thereafter.
 
     The  following  table  shows  the  estimated  annual  pension  payable upon
retirement  to  employees   in  specified   remuneration  and   years-of-service
classifications. The amounts shown in the table do not reflect the effect of the
previously-described (i) Social Security Offset, (ii) Profit Sharing Plan Offset
or  (iii)  early  retirement supplements.  The  amount of  the  estimated annual
pension is based  upon a pension  formula which applies  to all participants  in
both  the Pension Plan and  the Excess Plan. The  estimated amounts are based on
the assumption that payments  under the Pension Plan  will commence upon  normal
retirement  (generally age 65)  or early retirement, that  the Pension Plan will
continue in force in  its present form  and that no  joint and survivor  annuity
will  be  payable (which  would on  an  actuarial basis  reduce benefits  to the
employee but provide  benefits to a  surviving beneficiary). Amounts  calculated
under  the pension  formula which  exceed ERISA  limits will  be paid  under the
Excess Plan from Time Warner's assets and  are included in the amounts shown  in
the following table.
 
<TABLE>
<CAPTION>
                                                               ESTIMATED ANNUAL PENSION FOR
HIGHEST CONSECUTIVE                                             YEARS OF CREDITED SERVICE
FIVE YEAR AVERAGE                          --------------------------------------------------------------------
COMPENSATION                                  10          15          20          25          30          35
---------------------                      --------    --------    --------    --------    --------    --------
<S>                                        <C>         <C>         <C>         <C>         <C>         <C>
$100,000................................   $ 16,667    $ 25,000    $ 33,334    $ 41,668    $ 50,001    $ 52,501
 200,000................................     33,334      50,001      66,668      83,335     100,002     105,002
 400,000................................     66,668     100,002     133,336     166,670     200,004     210,004
 600,000................................    100,002     150,003     200,004     250,005     300,006     315,006
 800,000................................    133,336     200,004     266,672     333,340     400,008     420,008
</TABLE>
 
                                     III-8
 
<PAGE>


<PAGE>
     The  amount  of  covered  compensation  that  would  be  considered  in the
determination  of  the  highest  five  consecutive  full  or  partial  years  of
compensation  under the  Pension Plan  and the Excess  Plan for  each of Messrs.
Levin, Parsons,  Haje,  Bressler  and Hullin  is  limited  as a  result  of  the
imposition  of  the  limitations  on  eligible  compensation.  However,  because
combined payments under the Pension  Plan and the Excess  Plan are based on  the
average  of the highest  five consecutive full or  partial years of compensation
(taking into account the compensation limits only for 1988 and thereafter),  the
compensation  used for determining benefits under  such Plans for Mr. Levin (and
employees who  participated in  the Pension  Plan prior  to 1988)  will  include
eligible  compensation in years  prior to 1988 which  exceeded these limits. The
estimated annual benefits payable under the Pension Plan and the Excess Plan, as
of February 1, 1997, would be based on average compensation of $729,248 for  Mr.
Levin;  $269,000  for  Mr. Parsons;  $250,565  for  Mr. Haje;  $250,565  for Mr.
Bressler; and $250,565 for Mr. Hullin, with 24.8, 2.0, 6.4, 8.2 and 6.1 years of
credited service,  respectively.  In  addition,  pursuant  to  their  employment
agreements,  Messrs. Parsons and Hullin will be entitled to receive supplemental
payments from Time Warner that will achieve a total retirement benefit equal  to
what  each  of them  would  have received  if he  had  five additional  years of
credited service under the Pension Plan.
 
ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
OWNERSHIP BY PARTNERS OF TWE
 
     The table below sets  forth, as of  March 15, 1997,  the pro rata  priority
capital  and residual equity  interests of each Time  Warner General Partner and
each Limited Partner  in TWE. Subsidiaries  of Time Warner  and the Time  Warner
General  Partners collectively own  74.49% of the pro  rata priority capital and
residual equity  partnership interests  and certain  priority capital  interests
senior and junior to the pro rata priority capital interests. TW/TAE, Inc., Time
Warner  Companies, Inc.  and each  Time Warner  General Partner  is a  direct or
indirect  wholly  owned  subsidiary  of   Time  Warner.  U  S  WEST   Multimedia
Communications, Inc. is a wholly owned subsidiary of US West.
<TABLE>
<CAPTION>
                                                                                       RESIDUAL
                                                                                        EQUITY
                            TIME WARNER GENERAL PARTNERS                               INTEREST
------------------------------------------------------------------------------------   --------
 
<S>                                                                                    <C>
American Television and Communications Corporation..................................     25.77%
Warner Communications Inc...........................................................     21.00%
Warner Cable Communications Inc.....................................................      9.10%
Time Warner Operations Inc..........................................................      7.40%
 
<CAPTION>
 
                                  LIMITED PARTNERS
------------------------------------------------------------------------------------
<S>                                                                                    <C>
 
U S WEST Multimedia Communications, Inc.............................................     25.51%
Time Warner Companies, Inc..........................................................      5.61%
TW/TAE, Inc.........................................................................      5.61%
                                                                                       --------
                                                                                        100.00%
                                                                                       --------
                                                                                       --------
</TABLE>
 
     The  address of  the principal executive  offices of each  of the companies
listed above is as follows: Time Warner Companies, Inc., TW/TAE, Inc. and Warner
Communications Inc.: 75 Rockefeller  Plaza, New York,  New York 10019;  American
Television  and  Communications  Corporation, Time  Warner  Operations  Inc. and
Warner  Cable  Communications   Inc.:  300  First   Stamford  Place,   Stamford,
Connecticut  06902; and  U S WEST  Multimedia Communications,  Inc.: 9785 Maroon
Circle, Suite 400, Englewood, CO 80112.
 
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
 
     Set forth below is the name, address and stock ownership of each person  or
group  of persons known by TWE to own  beneficially securities  of  Time  Warner
having  more than 5% of the voting power of Time Warner's voting securities and,
unless otherwise indicated,  is based  on information  provided  to  Time Warner
as of  January 31, 1997  by the beneficial owner.  Subsidiaries  of Time  Warner
collectively  own 74.49%  of the  pro  rata priority capital and residual equity
partnership interests in TWE.
 
                                     III-9
 
<PAGE>


<PAGE>
 
<TABLE>
<CAPTION>
                                                                               SHARES OF
                                                                                 STOCK                     PERCENT OF
NAME AND ADDRESS                                                               BENEFICIALLY  PERCENT OF      VOTING
OF BENEFICIAL OWNER                                                              OWNED        CLASS(1)      POWER(2)
----------------------------------------------------------------------------   ----------    ----------    ----------
<S>                                                                            <C>           <C>           <C>
TIME WARNER COMMON STOCK
The Capital Group Companies, Inc. (3) ......................................   46,828,480         9.2%          7.9%
  333 South Hope Street
  Los Angeles, CA 90071
The Seagram Company Ltd. (4) ...............................................   56,763,349        11.2           9.9
  1430 Peel Street
  Montreal, Quebec
  Canada H3A 1S9
R.E. Turner (5) ............................................................   61,672,233        12.1          10.7
  c/o Turner Broadcasting
  System, Inc.
  One CNN Center
  Atlanta, GA 30303
SERIES LMCN-V COMMON STOCK
Tele-Communications, Inc. (6) ..............................................   50,642,172       100.0         *
  5619 DTC Parkway
  Englewood, CO 80111

</TABLE>

------------
 
* Less than 1%.
 
 (1) Under certain  circumstances, each share  of  Series  LMCN-V  Common  Stock
     is   convertible   into  one  share  of  Time  Warner  Common  Stock;  such
     circumstances are not currently present.
 
 (2) Each  share of Series LMCN-V Common Stock  currently has 1/100 of a vote on
     certain limited matters.

                                              (footnotes continued on next page)
 
                                     III-10
 
<PAGE>


<PAGE>
  
 (footnotes continued from previous page)

 (3) Beneficial ownership  is  as  of  December  31,  1996.  The  Capital  Group
     Companies,  Inc.,  a holding  company, has  filed  with the  Securities and
     Exchange Commission  Amendment  No. 9,  dated  February 14,  1997,  to  its
     statement  on  Schedule  13G  to  the  effect  that  (a)  it  (directly  or
     indirectly) has sole dispositive  power over all these  shares, (b) it  has
     sole voting power over 8,983,360 of these shares, (c) these shares are held
     principally  by  Capital  Research and  Management  Company,  an investment
     adviser,  (d)  the  shares  of   Time  Warner  Common  Stock  reported   as
     beneficially  owned include  1,349,290 shares  of Time  Warner Common Stock
     issuable upon conversion of $173,900,000 principal amount of Time  Warner's
     Liquid  Yield OptionTM  Notes due  2013 and  719,020 shares  of Time Warner
     Common Stock issuable  upon conversion of  $75,000,000 principal amount  of
     TBS's Liquid Yield OptionTM Notes due 2007 (which were redeemed for cash on
     February 13, 1997) (these shares have been excluded from the calculation of
     voting  power), (e) all of the reported  shares are held for the benefit of
     its clients and  (f) it and  each of its  subsidiary investment  management
     companies  acts  separately in  exercising  investment discretion  over its
     managed accounts.
 
 (4) The Seagram  Company  Ltd.  has  filed with  the  Securities  and  Exchange
     Commission  Amendment  No. 7,  dated April  13, 1994,  to its  statement on
     Schedule 13D and a statement of  Changes in Beneficial Ownership on Form  4
     dated  May 9,  1994 to  the effect that  through its  indirect wholly owned
     subsidiary, Seagram Inc.,  it has  sole voting and  sole dispositive  power
     over all these shares.
 
 (5) Includes  (a)  839,942  shares  of  Time Warner  Common  Stock  owned  by a
     corporation wholly owned by Mr. Turner, (b) 1,488,690 shares of Time Warner
     Common Stock held  by a trust  over which  Mr. Turner has  sole voting  and
     dispositive  control, (c) 4,500,000 shares of Time Warner Common Stock held
     by a limited partnership of which  Mr. Turner is the sole general  partner,
     (d)  386,000 shares of Time Warner Common  Stock owned by Mr. Turner's wife
     and (e) 3,450,000  shares of Time  Warner Common Stock  held by the  Turner
     Foundation,  Inc., of which Mr.  Turner is one of  six trustees. Mr. Turner
     disclaims beneficial ownership of shares held by his spouse and the  Turner
     Foundation, Inc.
 
 (6) Consists  of  shares controlled  by  Tele-Communications, Inc.  through its
     direct and indirect  subsidiaries; excludes 279,533  shares of Time  Warner
     Common  Stock  held by  TCI  TKR of  Southern  Kentucky, Inc.  as  to which
     Tele-Communications, Inc. disclaims beneficial ownership.

 
SECURITY OWNERSHIP OF MANAGEMENT
 
     The  following table  sets forth  as of January  31, 1997  for each current
representative of TWE and each current member  of the board of directors of  one
or  more of the Time  Warner General Partners, the  five most highly compensated
executive officers of TWE and the Time  Warner General Partners in 1996 and  for
all current
 
                                     III-11
 
<PAGE>


<PAGE>
representatives,  directors and  executive officers of  TWE and  the Time Warner
General Partners as a group, information concerning the beneficial ownership  of
Time Warner Common Stock.
 
<TABLE>
<CAPTION>
                                                                       COMMON STOCK BENEFICIALLY OWNED(1)
                                                                 ----------------------------------------------
                                                                  NUMBER OF            OPTION          PERCENT
                             NAME                                   SHARES           SHARES(2)         OF CLASS
--------------------------------------------------------------   ------------      --------------      --------
 
<S>                                                              <C>               <C>                 <C>
Richard J. Bressler (5).......................................         5,560              204,137         *
Peter R. Haje (5).............................................         9,931              720,287         *
Tod R. Hullin (5).............................................         2,470              313,058         *
Gerald M. Levin (3)(5)........................................       400,905            2,602,268         *
Philip R. Lochner, Jr. (4)(5).................................        62,857              370,496         *
Richard D. Parsons (5)........................................        11,262              300,000         *
Richard D. McCormick..........................................       --                  --               *
Charles M. Lillis.............................................       --                  --               *
All current representatives, directors and executive officers
  (8 persons) as a group (3)-(5)..............................       495,466            4,318,353       .94%
</TABLE>
 
------------
 
 * Represents  beneficial  ownership  of less  than  one percent  of  issued and
   outstanding stock on January 31, 1997.
 
(1) Beneficial ownership as reported in the  above table has been determined  in
    accordance  with  Rule  13d-3  under  the  Exchange  Act.  Unless  otherwise
    indicated,  beneficial  ownership  includes   both  sole  voting  and   sole
    investment  power. This table does not  include any Time Warner Common Stock
    which may be held by the Time  Warner General Partners or other Time  Warner
    subsidiaries  or pension and  profit-sharing plans of  other corporations or
    endowment funds of educational and charitable institutions for which various
    directors and officers may serve as directors or trustees. As of January 31,
    1997, the only equity  securities of Time Warner  beneficially owned by  the
    named  persons or group were shares of  Time Warner Common Stock and options
    to purchase Time Warner Common Stock.
 
(2) Reflects shares of Time Warner Common  Stock subject to options to  purchase
    Time  Warner Common Stock issued by Time  Warner which, on January 31, 1997,
    were unexercised but were exercisable within  a period of 60 days from  that
    date. These shares are excluded from the column headed 'Number of Shares.'
 
(3) Includes 15,000 shares of Time Warner Common Stock held by Mr. Levin's wife,
    as to which Mr. Levin disclaims any beneficial ownership.
 
(4) Includes  400 shares of Time Warner Common Stock held by Mr. Lochner's wife,
    as to which Mr. Lochner disclaims any beneficial ownership.
 
(5) Includes an aggregate of approximately  34,352 shares of Time Warner  Common
    Stock  held by a trust  under an employee stock plan  of Time Warner and its
    subsidiaries for  the  benefit  of current  representatives,  directors  and
    executive  officers (including 4,425  shares for Mr.  Bressler, 3,443 shares
    for Mr. Haje, 10,900 shares for Mr. Levin, 11,334 shares for Mr. Lochner and
    99 shares for Mr. Parsons). Mr. Hullin's shares are held by the trust  under
    such employee stock plan.
 
ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
CORPORATE SERVICES
 
     Time  Warner provides  TWE with  corporate support  services and facilities
(including, without limitation, internal  accounting, financial, tax, legal  and
similar  administrative and other  services) as may  be necessary or appropriate
for TWE to conduct  the businesses that  were contributed to  TWE in the  manner
that such businesses were conducted by Time Warner and its subsidiaries prior to
the  TWE  Capitalization.  As compensation  and  reimbursement for  the  cost of
providing such services and facilities, TWE has paid to Time Warner on a monthly
basis in arrears an amount equal to $5 million per month through June 30,  1995.
This  monthly fee was adjusted at June 30, 1995, February 1, 1996 and January 1,
1997, based on increases in the Consumer  Price Index since January 1, 1991,  to
$5.6  million,  $5.8  million,  and $5.9  million,  respectively.  The corporate
support services agreement expires on June  30, 1997, subject to the  obligation
of both parties to negotiate, in good faith, any extension thereto.
 
US WEST ADVISORY FEE
 
     In  consideration of US West's making available to TWE its expertise in the
areas  of   telecommunications,  telephony   and  information   technology   and
participating  in the management and upgrade of the cable systems comprising the
Full Service Network  business and  to reimburse US  West for  providing to  TWE
certain  services and overhead  costs related to US  West's participation on the
Management Committee, TWE has paid or will pay to U S West fees aggregating $130
million payable  over the  five years  following the  closing of  the U  S  West
Transaction on September 15, 1993.
 
                                     III-12
 
<PAGE>


<PAGE>
OPTION REIMBURSEMENT
 
     Upon  the exercise of options to purchase  securities of Time Warner by any
officer or  other  employee  of  TWE  or of  any  'strategic  venture'  of  TWE,
including,  without  limitation, TWE  Japan, or  of  Time Warner  or any  of its
subsidiaries who  in such  capacity performs  substantially all  of his  or  her
duties  on behalf of TWE or any such 'strategic venture,' TWE or such 'strategic
venture' must reimburse Time Warner for the amount by which the market price  of
such securities on the exercise date exceeds the exercise price, or with respect
to  options granted prior to the TWE Capitalization, the greater of the exercise
price and the market price of such securities as of the TWE Capitalization (such
reimbursement amount is  hereinafter called a  'Stock Option Distribution').  At
December 31, 1996, TWE  had  accrued  $93  million of Stock Option Distributions
payable to Time Warner. Such amount, which is not payable  until the  underlying
options are exercised and then only subject to limitations on cash distributions
in accordance with the TWE credit agreement,  will  be  adjusted  in  subsequent
accounting periods  based  on  changes in  the  quoted  market  prices  for  the
underlying  securities.  Such  amount would increase (decrease) by approximately
$18 million for each one dollar increase (decrease) in the closing price of Time
Warner  Common  Stock.  See  Notes 7  and 8  to the TWE  consolidated  financial
statements, which are presented herein at pages F-24 and F-27, respectively.

TWE JAPAN DISTRIBUTION AGREEMENTS
 
     Concurrently with the  closing of the  TWE Japan transaction,  TWE and  TWE
Japan  entered into distribution and  merchandising agreements pursuant to which
TWE granted to TWE Japan the  right to engage in theatrical and  non-theatrical,
television  and home video distribution in Japan  as well as the right to engage
in the licensing and merchandising of TWE's copyrights and trademarks in  Japan.
Such  agreements provide that TWE Japan will receive distribution fees generally
comparable to  those  currently  received by  TWE  for  performing  distribution
services for unaffiliated third parties.
 
TWE JAPAN BUSINESS DEVELOPMENT FUND
 
     Pursuant   to   the   distribution  agreements   described   above,  annual
distribution servicing fees aggregating  $2 million per year  have been paid  by
TWE  and  TWE  Japan during  the  first  five years  of  TWE  Japan's operation.
 
                                     III-13
 
<PAGE>


<PAGE>
Such fees are in addition to  the basic distribution fees described above  under
'  -- TWE  Japan Distribution  Agreements' and  Item I  'Businesses of  the Time
Warner General Partner --  Other.' The last  such fee will be  paid on April  1,
1997.
 
OTHER ARRANGEMENTS AND TRANSACTIONS
 
     The  TWE Partnership  Agreement expressly  permits Time  Warner and  TWE to
continue  certain  arrangements   and  transactions  that   prior  to  the   TWE
Capitalization  existed between Time  Warner and certain  of the subsidiaries of
Time Warner that  contributed assets to  TWE at the  TWE Capitalization, to  the
extent  that such  arrangements and transactions  relate to  the businesses that
were contributed.  The TWE  Partnership Agreement  also permits  Time Warner  to
enter  into additional  similar arrangements  and transactions  with TWE  in the
ordinary course of  business consistent with  past practice as  well as any  new
arrangements  and transactions with TWE on an arm's-length basis. For additional
information regarding  such  arrangements, see  Note  13 to  TWE's  consolidated
financial  statements included herein at pages F-33  and F-34 and Note 13 to the
TWE General Partners' consolidated financial statements included herein at  page
F-73.
 
     For information with respect to WCl's payment of a special dividend to Time
Warner  and the establishment of a revolving credit agreement, see Note 4 to the
TWE General Partners' consolidated financial  statements at pages F-65 and  F-66
herein.
 
                                     III-14

<PAGE>


<PAGE>
                                    PART IV
 
ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
 
     (a)(1)-(2) Financial Statements and Schedules:
 
          The  list of consolidated financial statements and schedules set forth
     in the accompanying  Index to Consolidated  Financial Statements and  Other
     Financial  Information  at  page  F-1  herein  is  incorporated  herein  by
     reference. Such consolidated financial  statements and schedules are  filed
     as part of this report.
 
     All  other financial statement  schedules are omitted  because the required
information is not applicable, or  because the information required is  included
in the consolidated financial statements and notes thereto.
 
     (3) Exhibits:
 
          The  exhibits listed  on the accompanying  Exhibit Index  are filed or
     incorporated by reference as part of this report and such Exhibit Index  is
     incorporated herein by reference.
 
     (b) Reports on Form 8-K:
 
          No  Current Report  on Form  8-K was filed  by TWE  during the quarter
     ended December 31, 1996.
 
                                      IV-1

<PAGE>


<PAGE>
                                   SIGNATURES
 
     PURSUANT  TO  THE REQUIREMENTS  OF SECTION  13 OR  15(d) OF  THE SECURITIES
EXCHANGE ACT OF 1934, EACH OF THE REGISTRANTS HAS DULY CAUSED THIS REPORT TO  BE
SIGNED  ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY
OF NEW YORK, STATE OF NEW YORK, ON MARCH 25, 1997.
 
                                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
                                    By: Warner Communications Inc.,
                                    as General Partner
 
                                    By: /S/ RICHARD J. BRESSLER
                                         .......................................
                                       NAME: RICHARD J. BRESSLER
                                       TITLE: SENIOR VICE PRESIDENT AND CHIEF
                                              FINANCIAL OFFICER
 
                                    AMERICAN TELEVISION AND COMMUNICATIONS
                                    CORPORATION
                                    TIME WARNER OPERATIONS INC.
                                    WARNER CABLE COMMUNICATIONS INC.
                                    WARNER COMMUNICATIONS INC.
 
                                    By: /S/ RICHARD J. BRESSLER
                                         .......................................
                                       NAME: RICHARD J. BRESSLER
                                       TITLE: SENIOR VICE PRESIDENT AND CHIEF
                                              FINANCIAL OFFICER
 
     PURSUANT TO THE REQUIREMENTS OF THE  SECURITIES EXCHANGE ACT OF 1934,  THIS
REPORT  HAS BEEN SIGNED BELOW BY THE  FOLLOWING PERSONS IN THE CAPACITIES AND ON
THE DATES INDICATED.
 
<TABLE>
<CAPTION>
                SIGNATURE                                       TITLE                              DATE
------------------------------------------  ---------------------------------------------   -------------------
<C>                                         <S>                                             <C>
           /S/ GERALD M. LEVIN              Director of each Registrant and Chairman of       March 25, 1997
 .........................................    the Board and Chief Executive Officer of
            (GERALD M. LEVIN)                 each Registrant (Principal Executive
                                              Officer)
 
         /S/ RICHARD J. BRESSLER            Director of ATC and WCI, Senior Vice              March 25, 1997
 .........................................    President and Chief Financial Officer of
          (RICHARD J. BRESSLER)               each Registrant (Principal Financial
                                              Officer)
 
           /S/ JOHN A. LABARCA              Vice President and Controller of each             March 25, 1997
 .........................................    Registrant (Principal Accounting Officer)
            (JOHN A. LABARCA)
 
            /S/ PETER R. HAJE               Director of each Registrant                       March 25, 1997
 .........................................
             (PETER R. HAJE)
 
          /S/ RICHARD D. PARSONS            Director of each Registrant                       March 25, 1997
 .........................................
           (RICHARD D. PARSONS)
</TABLE>
 
                                      IV-2

<PAGE>
<PAGE>
        TIME WARNER ENTERTAINMENT COMPANY L.P. AND TWE GENERAL PARTNERS
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
                        AND OTHER FINANCIAL INFORMATION
 
<TABLE>
<CAPTION>
                                                                                                         PAGE
                                                                                                   ----------------
                                                                                                             TWE
                                                                                                           GENERAL
                                                                                                   TWE     PARTNERS
                                                                                                   ----    --------
 
<S>                                                                                                <C>     <C>
Management's Discussion and Analysis of Results of Operations and Financial Condition...........    F-2      F-39
Consolidated Financial Statements:
     Balance Sheets.............................................................................   F-11      F-44
     Statements of Operations...................................................................   F-12      F-46
     Statements of Cash Flows...................................................................   F-13      F-49
     Statements of Partnership Capital and Shareholders' Equity.................................   F-14      F-52
     Notes to Consolidated Financial Statements.................................................   F-15      F-56
Report of Independent Auditors..................................................................   F-35      F-75
Selected Financial Information..................................................................   F-36      F-76
Quarterly Financial Information.................................................................   F-37
Financial Statement Schedule II -- Valuation and Qualifying Accounts............................   F-38      F-77
</TABLE>
 
                                      F-1



<PAGE>

<PAGE>
                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
 
     TWE  classifies  its  business  interests  into  three  fundamental  areas:
Entertainment, consisting  principally  of interests  in  filmed  entertainment,
television  production, television broadcasting and theme parks; Cable Networks,
consisting principally of interests in cable television programming; and  Cable,
consisting  principally  of  interests  in cable  television  systems.  TWE also
manages the  cable  properties owned  by  Time  Warner and  the  combined  cable
television  operations  are  conducted  under the  name  of  Time  Warner Cable.
Capitalized terms are as defined and described in the accompanying  consolidated
financial statements, or elsewhere herein.
 
STRATEGIC INITIATIVES
 
SIGNIFICANT TRANSACTIONS
 
     During  the past two  years, TWE and Time  Warner have pursued significant,
strategic initiatives that have resulted in the expansion of their interests  in
the  cable television  business. These  initiatives were  part of  a strategy to
expand the operation of large geographic clusters of cable television systems in
an effort to achieve economies of  scale in the development and distribution  of
new  and expanded services. Over  the same period, management  also engaged in a
program to improve the financial  condition of TWE, as  well as to increase  its
overall  financial  flexibility,  through  the initiation  of  a  debt reduction
program and the refinancing of its bank debt. In connection with these strategic
objectives, TWE and Time Warner completed a number of transactions in 1996  that
have  had an effect on TWE's results of operations and financial condition. Such
transactions include:
 
      The acquisition by Time Warner  of Cablevision Industries Corporation  and
      related  companies  ('CVI') on  January 4,  1996 (the  'CVI Acquisition'),
      which strengthened  Time  Warner  Cable's  geographic  clusters  of  cable
      television  systems  and  substantially  increased  the  number  of  cable
      subscribers managed by Time  Warner Cable. As of  December 31, 1996,  Time
      Warner Cable served approximately 12.3 million subscribers, passing nearly
      20% of the television homes in the U.S.
 
      The   1996  closing  of  certain  previously-announced  sales  by  TWE  of
      unclustered cable  television  systems  which  raised  approximately  $150
      million of net proceeds for debt reduction. Including the 1995 sale of 51%
      of  its interest in Six Flags  Entertainment Corporation ('Six Flags') and
      the expected 1997  sale of  its interest in  E! Entertainment  Television,
      Inc., TWE has raised over $1 billion for debt reduction.
 
     The  nature  of  these transactions  and  their  impact on  the  results of
operations and financial condition of TWE are further discussed below.
 
CABLE STRATEGY
 
     Over the past two years, TWE and Time Warner have combined with or acquired
cable television systems serving  approximately 3.7 million subscribers,  which,
along  with internal growth, has increased the total number of subscribers under
the management of Time Warner Cable to 12.3 million from 7.5 million subscribers
at the  end of  1994. This  expansion  strategy has  also extended  Time  Warner
Cable's  reach of cable  television systems to  neighborhoods passing 19 million
homes or close to 20% of television homes in the U.S. In addition, there are now
34  geographic  clusters  of  cable  television  systems  serving  over  100,000
subscribers each, including key markets such as New York City, northern New York
State,  central Florida and North Carolina. Excluding Time Warner's systems, TWE
owns or manages cable television systems serving 10 million subscribers, with 31
geographic clusters serving over  100,000 subscribers each. Management  believes
that  the  improved  concentration  of  its  subscriber  base  will  provide for
sustained revenue growth  from new  and expanded services,  and provide  certain
economies  of scale relating to the upgrade of the technological capabilities of
Time Warner Cable's cable television systems.
 
     TWE and  Time  Warner's current  strategy  is to  restructure  their  cable
television  systems,  so far  as practicable  and on  a tax-efficient  basis, to
enable such interests  to be self-financed.  As part of  this strategy, TWE  and
Time  Warner  are  seeking  to  reduce their  economic  interests  in  the cable
television business in order to
 
                                      F-2
 


<PAGE>

<PAGE>
                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
        OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
 
reduce existing debt and their share  of future funding requirements related  to
the  cable operations. The primary alternative  being pursued is a restructuring
of TWE that  would decrease Time  Warner's cable interests  in TWE and  increase
Time  Warner's  interests in  TWE's entertainment  and  cable networks.  Any TWE
restructuring depends, among other things, upon successful negotiations with U S
WEST and other third  parties, a renegotiation  of certain credit  arrangements,
including  the  1995  Credit Agreement,  and  consents or  approvals  from cable
television franchise and  other regulatory  authorities. In addition  to, or  in
lieu of, a TWE restructuring, other alternatives remain available to Time Warner
to  advance these goals,  some of which would  not require U  S WEST consent but
would still require other third party, franchise and regulatory approvals. There
is no assurance that any of these efforts will succeed.
 
USE OF EBITDA
 
     The following  comparative  discussion of  the  results of  operations  and
financial condition of TWE includes, among other factors, an analysis of changes
in  the  operating  income  of the  business  segments  before  depreciation and
amortization ('EBITDA')  in  order to  eliminate  the effect  on  the  operating
performance  of  the filmed  entertainment and  cable businesses  of significant
amounts of amortization  of intangible  assets recognized in  Time Warner's  $14
billion  acquisition of  WCI in  1989, the $1.3  billion acquisition  of the ATC
minority interest in 1992 and other  business combinations accounted for by  the
purchase method. Financial analysts generally consider EBITDA to be an important
measure of comparative operating performance for the businesses of TWE, and when
used  in comparison  to debt levels  or the  coverage of interest  expense, as a
measure of liquidity. However, EBITDA should  be considered in addition to,  not
as  a substitute for, operating income, net income, cash flow and other measures
of financial performance  and liquidity  reported in  accordance with  generally
accepted accounting principles.
 
TRANSACTIONS AFFECTING COMPARABILITY OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
 
     In  connection  with management's  strategic  initiatives, TWE  completed a
number of transactions  in 1995  which have  affected the  comparability of  its
results  of operations and  financial condition. These  transactions include the
formation of the TWE-Advance/Newhouse Partnership, the consolidation of Paragon,
the refinancing of its bank debt,  the reacquisition of the Time Warner  Service
Partnership  Assets and certain asset sales, including  the sale of 51% of TWE's
interest in  Six Flags,  all of  which  are more  fully discussed  herein.  Such
transactions are collectively referred to herein as the 'TWE Transactions'.
 
     In  order to enhance comparability, the  following discussion of results of
operations for TWE is supplemented by pro forma financial information that gives
effect to  the TWE  Transactions as  if such  transactions had  occurred at  the
beginning  of  1995.  The  pro forma  results  are  presented  for informational
purposes only and are not necessarily  indicative of the operating results  that
would  have occurred had the transactions  actually occurred at the beginning of
1995, nor are they necessarily indicative of future operating results.
 
                                      F-3
 


<PAGE>

<PAGE>
                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
        OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
 
RESULTS OF OPERATIONS
 
1996 VS. 1995
 
     EBITDA and operating income for TWE in 1996 and 1995 are as follows:
 
<TABLE>
<CAPTION>
                                                                                 YEARS ENDED DECEMBER 31,
                                                                           -------------------------------------
                                                                                                    OPERATING
                                                                                EBITDA               INCOME
                                                                           -----------------     ---------------
                                                                            1996       1995       1996      1995
                                                                           ------     ------     ------     ----
                                                                                        (MILLIONS)
 
<S>                                                                        <C>        <C>        <C>        <C>
Filmed Entertainment....................................................   $  525     $  459     $  242     $228
Six Flags Theme Parks(1)................................................       --         60         --       29
Broadcasting-The WB Network.............................................      (98)       (66)       (98)     (66)
Cable Networks-HBO......................................................      350        291        328      274
Cable...................................................................    1,536      1,255        606      495
                                                                           ------     ------     ------     ----
Total...................................................................   $2,313     $1,999     $1,078     $960
                                                                           ------     ------     ------     ----
                                                                           ------     ------     ------     ----
</TABLE>
 
------------
 
(1)  Deconsolidated as a  result of  the sale  of a  51% interest  in Six  Flags
     effective as of June 23, 1995.
 
     TWE  had revenues of $10.852 billion and net income of $210 million for the
year ended December 31, 1996, compared to revenues of $9.517 billion, income  of
$97  million before  an extraordinary  loss on  the retirement  of debt  and net
income of $73 million for the year ended December 31, 1995.
 
     On a pro forma basis, giving effect  to the TWE Transactions as if each  of
such transactions had occurred at the beginning of 1995, TWE would have reported
for  the year  ended December  31, 1995, revenues  of $9.682  billion, EBITDA of
$2.031 billion, operating  income of $962  million, income before  extraordinary
item  of $172  million and net  income of  $148 million. No  pro forma financial
information has been  presented for  TWE for the  year ended  December 31,  1996
because  all  of  such  transactions  are  already  reflected,  in  all material
respects, in the historical financial statements of TWE.
 
     As discussed more fully  below, TWE's historical net  income was higher  in
1996  as compared  to pro forma  results in 1995  due to an  overall increase in
operating income generated  by its  business segments, interest  savings due  to
lower  floating interest  rates and the  absence of a  $24 million extraordinary
loss on the retirement of debt recognized in 1995, offset in part by a  decrease
in  investment-related  income  and  an increase  in  minority  interest expense
related to the  TWE-Advance/Newhouse Partnership.  On a  historical basis,  such
underlying  operating trends were enhanced by favorable comparisons as 1996 more
fully benefited from the interest savings  on lower average debt levels  related
to management's ongoing debt reduction program.
 
     As  a U.S. partnership, TWE is not subject to U.S. federal and state income
taxation. Income and withholding taxes of $70 million in the year ended December
31, 1996,  and $86  million  in the  year ended  December  31, 1995,  have  been
provided   for  the  operations   of  TWE's  domestic   and  foreign  subsidiary
corporations.
 
     Filmed Entertainment-Warner Bros.   Revenues increased  to $5.639  billion,
compared  to $5.069 billion in 1995. EBITDA  increased to $525 million from $459
million. Depreciation and  amortization, including amortization  related to  the
purchase  of WCI,  amounted to $283  million in  1996 and $231  million in 1995.
Operating income increased to $242 million from $228 million. Revenues benefited
from increases in  worldwide home  video, television  distribution and  consumer
products  operations, offset in part by lower international theatrical revenues.
EBITDA and operating income benefited principally from the revenue gains, offset
in part,  with respect  to operating  income only,  by higher  depreciation  and
amortization  principally related to the 1996 summer opening of an international
theme park in Germany.
 
                                      F-4
 


<PAGE>

<PAGE>
                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
        OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
 
     Six Flags Theme Parks.  As a result of TWE's sale of 51% of its interest in
Six Flags, the operating results of Six Flags have been deconsolidated effective
as of June 23, 1995 and TWE's  remaining 49% interest in Six Flags is  accounted
for under the equity method of accounting.
 
     Broadcasting  -- The WB Network.  The WB Network recorded an operating loss
of $98 million on $87 million of revenues in 1996, compared to an operating loss
of $66 million on $33 million of revenues in 1995. The increase in revenues  and
operating  losses  primarily resulted  from the  expansion  of the  WB Network's
primetime programming schedule (now at three nights) and the expansion of  Kids'
WB!,  the  network's  animated  programming  lineup  on  Saturday  mornings  and
weekdays. In addition, operating losses for  1995 were mitigated by a  favorable
legal  settlement.  Due  to  the  start-up  nature  of  this  national broadcast
operation, losses are expected to continue.
 
     Cable Networks-HBO.  Revenues increased to $1.763 billion in 1996, compared
to $1.593 billion in 1995. EBITDA  increased to $350 million from $291  million.
Depreciation and amortization amounted to $22 million in 1996 and $17 million in
1995.  Operating income  increased to $328  million from  $274 million. Revenues
benefited primarily from a significant increase in subscriptions to 32.4 million
from 29.7  million at  the end  of 1995.  EBITDA and  operating income  improved
principally as a result of the revenue gains.
 
     Cable.   Revenues increased  to $3.851 billion in  1996, compared to $3.005
billion in  1995.  EBITDA  increased  to $1.536  billion  from  $1.255  billion.
Depreciation and amortization, including amortization related to the purchase of
WCI  and the acquisition of the ATC  minority interest, amounted to $930 million
in 1996 and  $760 million in  1995. Operating income  increased to $606  million
from $495 million. The 1996 Cable operating results increased as a result of the
full  year  effect from  the formation  of the  TWE-Advance/Newhouse Partnership
effective as of April  1, 1995 and the  consolidation of Paragon  Communications
effective as of July 6, 1995.
 
     On  a pro  forma basis,  TWE's Cable division  had 1995  revenues of $3.368
billion, EBITDA of $1.346 billion, depreciation and amortization of $818 million
and operating income of $528 million.  In comparison to 1995 pro forma  results,
1996   revenues  benefited  from  an  aggregate  increase  in  basic  cable  and
Primestar-related,  direct   broadcast  satellite   subscribers,  increases   in
regulated  cable rates as permitted under  Time Warner Cable's 'social contract'
with the FCC and increases in pay-per-view and advertising revenues. EBITDA  and
operating  income increased principally as a  result of revenue gains, offset in
part, with  respect  to  operating  income  only,  by  higher  depreciation  and
amortization relating to increased capital spending.
 
     Interest  and  Other, Net.    Interest and  other,  net, decreased  to $522
million in 1996, compared to $580 million in 1995. Interest expense decreased to
$475 million,  compared to  $571 million  in 1995,  principally as  a result  of
interest  savings  on lower  average debt  levels  related to  management's debt
reduction program  and  lower short-term,  floating-rates  of interest  paid  on
borrowings  under TWE's  former and existing  bank credit  agreements. There was
other expense, net, of $47 million in 1996 compared to other expense, net, of $9
million in 1995, principally  due to an  overall decrease in  investment-related
income.  The decrease in investment-related income  resulted from a reduction in
interest income, and lower  aggregate gains on the  sale of certain  unclustered
cable systems and other investments. The reduction in interest income related to
lower  average cash balances  and lower average principal  amounts due under the
note receivable from U S WEST that was fully collected as of June 1996.
 
                                      F-5
 


<PAGE>

<PAGE>
                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
        OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
 
1995 VS. 1994
 
     EBITDA and operating income for TWE in 1995 and 1994 are as follows:
 
<TABLE>
<CAPTION>
                                                                                  YEARS ENDED DECEMBER 31,
                                                                             -----------------------------------
                                                                                                     OPERATING
                                                                                  EBITDA              INCOME
                                                                             -----------------     -------------
                                                                              1995       1994      1995     1994
                                                                             ------     ------     ----     ----
                                                                                         (MILLIONS)
 
<S>                                                                          <C>        <C>        <C>      <C>
Filmed Entertainment-Warner Bros..........................................   $  459     $  407     $228     $201
Six Flags Theme Parks(1)..................................................       60        135       29       56
Broadcasting-the WB Network...............................................      (66)        --      (66)      --
Cable Network-HBO.........................................................      291        255      274      236
Cable.....................................................................    1,255        994      495      355
                                                                             ------     ------     ----     ----
Total.....................................................................   $1,999     $1,791     $960     $848
                                                                             ------     ------     ----     ----
                                                                             ------     ------     ----     ----
</TABLE>
 
------------
 
(1)  Deconsolidated as a  result of  the sale  of a  51% interest  in Six  Flags
     effective as of June 23, 1995.
 
     TWE  had  revenues  of $9.517  billion,  income  of $97  million  before an
extraordinary loss on the retirement of debt  and net income of $73 million  for
the year ended December 31, 1995, compared to revenues of $8.460 billion and net
income of $161 million for the year ended December 31, 1994. The decrease in net
income  in 1995 was principally  related to a $24  million extraordinary loss on
the retirement  of debt  and higher  depreciation and  amortization relating  to
increased capital spending.
 
     As  discussed more fully below, TWE's  operating results in 1995 reflect an
overall  increase  in  operating  income  generated  by  its  business  segments
(including  the  contribution by  the  TWE-Advance/Newhouse Partnership)  and an
increase in  investment-related  income resulting  from  gains on  the  sale  of
certain  unclustered  cable systems  and other  investments,  offset in  part by
minority interest expense related to the consolidation of the operating  results
of the TWE-Advance/Newhouse Partnership effective as of April 1, 1995.
 
     As  a U.S. partnership, TWE is not subject to U.S. federal and state income
taxation. Income and withholding taxes of $86 million in the year ended December
31, 1995,  and $40  million  in the  year ended  December  31, 1994,  have  been
provided   for  the  operations   of  TWE's  domestic   and  foreign  subsidiary
corporations.
 
     Filmed Entertainment-Warner Bros.   Revenues increased  to $5.069  billion,
compared  to $4.476 billion in 1994. EBITDA  increased to $459 million from $407
million. Depreciation and  amortization, including amortization  related to  the
purchase  of WCI,  amounted to $231  million in  1995 and $206  million in 1994.
Operating income increased to $228 million from $201 million. Revenues benefited
from increases  in  worldwide  theatrical, home  video,  consumer  products  and
television distribution operations. Worldwide theatrical and domestic home video
revenues in 1995 were led by the success of Batman Forever. EBITDA and operating
income  benefited from  the revenue  gains and  increased income  from licensing
operations.
 
     Six Flags Theme Parks.  As a result of TWE's sale of 51% of its interest in
Six Flags, the operating results of Six Flags have been deconsolidated effective
as of  June 23,  1995 and  TWE's  remaining 49%  interest in  Six Flags  is  now
accounted  for  under the  equity  method of  accounting.  Accordingly, revenues
decreased to $227 million, compared to $557 million in 1994. EBITDA decreased to
$60 million from  $135 million.  Depreciation and amortization  amounted to  $31
million  in 1995  and $79  million in  1994. Operating  income decreased  to $29
million from $56 million.
 
     Broadcasting-The WB Network.  The WB Network was launched in January  1995,
and  generated $66 million of  operating losses on $33  million of revenues. The
operating loss was mitigated by a favorable legal
 
                                      F-6
 


<PAGE>

<PAGE>
                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
        OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
 
settlement, as well as by funding from  a limited partner admitted as of  August
1995.  Due to the  start-up nature of this  national broadcast operation, losses
are expected to continue.
 
     Cable Networks-HBO.   Revenues  increased to  $1.593 billion,  compared  to
$1.494  billion in  1994. EBITDA  increased to  $291 million  from $255 million.
Depreciation and amortization amounted to $17 million in 1995 and $19 million in
1994. Operating income  increased to  $274 million from  $236 million.  Revenues
benefited  primarily from an  increase in subscriptions to  29.7 million from 27
million at the  end of 1994,  as well as  from higher pay-TV  rates. EBITDA  and
operating income improved principally as a result of the revenue gains.
 
     Cable.    The 1995  Cable operating  results reflect  the formation  of the
TWE-Advance/Newhouse  Partnership  effective  as  of  April  1,  1995  and   the
consolidation  of Paragon  effective as of  July 6, 1995.  Revenues increased to
$3.005 billion, compared to $2.220 billion  in 1994. EBITDA increased to  $1.255
billion from $994 million. Depreciation and amortization, including amortization
related to the purchase of WCI and the acquisition of the ATC minority interest,
amounted  to $760  million in  1995 and $639  million in  1994. Operating income
increased to  $495 million  from $355  million. Revenues  and operating  results
benefited  from the  formation of  the TWE-Advance/Newhouse  Partnership and the
consolidation of Paragon.  Excluding such  effects, revenues  benefited from  an
increase  in  basic cable  subscribers and  increases in  nonregulated revenues,
including  pay-TV,  pay-per-view   and  advertising.   Excluding  the   positive
contributions from the TWE-Advance/Newhouse Partnership and the consolidation of
Paragon, EBITDA and operating income increased as a result of the revenue gains,
offset  in  part by  the full  year impact  of  the second  round of  cable rate
regulations that  went into  effect  in July  1994,  higher start-up  costs  for
telephony  operations  and,  with  respect  to  operating  income  only,  higher
depreciation and amortization relating to increased capital spending.
 
     Interest and  Other, Net.    Interest and  other,  net, decreased  to  $580
million in 1995, compared to $587 million in 1994. Interest expense increased to
$571  million, compared  to $563  million in  1994, principally  as a  result of
higher short-term, floating-rates  of interest  paid on  borrowings under  TWE's
former  and existing bank credit agreements,  offset in part by interest savings
in the last quarter of 1995 on  lower debt levels related to management's  asset
sales  program. Other  expense, net,  decreased to $9  million in  1995 from $24
million in 1994, principally because of an increase in investment-related income
related to gains  on the  sale of certain  unclustered cable  systems and  other
investments.
 
FINANCIAL CONDITION AND LIQUIDITY
DECEMBER 31, 1996
 
1996 FINANCIAL CONDITION
 
     At  December 31, 1996, TWE  had $5.7 billion of  debt, $1.5 billion of Time
Warner General Partners' Senior  Capital and $6.6  billion of partners'  capital
compared  to $6.2 billion of debt, $1.4 billion of Time Warner General Partners'
Senior Capital and $6.5  billion of partners' capital  (net of the $169  million
uncollected  portion of the note receivable from U S WEST) at December 31, 1995.
Cash and equivalents increased to $216 million at December 31, 1996, compared to
$209 million at December 31, 1995, reducing the debt-net-of-cash amounts for TWE
to $5.5 billion and $6 billion, respectively.
 
DEBT REDUCTION PROGRAM
 
     In conjunction with  Time Warner and  as part of  a continuing strategy  to
enhance  the financial  position and  credit statistics  of TWE,  an asset sales
program was initiated by Time Warner and TWE in 1995. Including the sale of  51%
of  TWE's interest in  Six Flags in  June 1995, the  sale of certain unclustered
cable systems and the
 
                                      F-7
 


<PAGE>

<PAGE>
                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
        OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
 
expected 1997 sale of TWE's interest  in E! Entertainment Television, Inc.,  TWE
has raised over $1 billion for debt reduction.
 
CREDIT STATISTICS
 
     The  combination of  asset sales  and the  debt refinancing  is intended to
strengthen the financial position  of TWE and, when  taken together with  EBITDA
growth,  is  expected  to  continue  the  improvement  of  TWE's  overall credit
statistics. These credit statistics consist of commonly-used liquidity  measures
such as leverage and coverage ratios. The leverage ratio represents the ratio of
total  debt,  less cash  ('Net  debt') to  total  business segment  EBITDA, less
corporate expenses ('Adjusted EBITDA'). The coverage ratio represents the  ratio
of  Adjusted EBITDA  to total  interest expense.  Those ratios,  on a historical
basis for 1996  and 1994 and  on a  pro forma basis  for 1995 are  as set  forth
below:
 
<TABLE>
<CAPTION>
                                                                                HISTORICAL    PRO FORMA     HISTORICAL
                                                                                   1996        1995(a)         1994
                                                                                ----------    ---------     ----------
 
<S>                                                                             <C>           <C>           <C>
Net debt/Adjusted EBITDA.....................................................      2.4x          3.0x          3.5x
Adjusted EBITDA/Interest.....................................................      4.7x          3.7x          3.1x
</TABLE>
 
------------
 (a)  Pro  forma ratios for 1995 give effect  to the TWE Transactions as if each
      of such transactions  had occurred  at the beginning  of 1995.  Historical
      ratios  for 1995  are not meaningful  and have not  been presented because
      they reflect the operating  results of acquired  or disposed entities  for
      only a portion of the year in comparison to year-end Net debt levels.
 
CASH FLOWS
 
     In  1996, TWE's cash provided by  operations amounted to $1.912 billion and
reflected $2.313 billion of EBITDA  from the Filmed Entertainment-Warner  Bros.,
Broadcasting-The  WB Network, Cable  Networks-HBO and Cable  businesses and $255
million related to a  reduction in working  capital requirements, other  balance
sheet  accounts and noncash  items, less $513 million  of interest payments, $74
million of income taxes and $69 million of corporate expenses. Cash provided  by
operations  of  $1.519  billion in  1995  reflected $1.999  billion  of business
segment EBITDA  and $230  million  related to  a  reduction in  working  capital
requirements,  other balance sheet accounts and noncash items, less $571 million
of interest payments, $75 million of  income taxes and $64 million of  corporate
expenses.
 
     Cash  used by  investing activities  increased to  $1.253 billion  in 1996,
compared to $688  million in 1995,  principally as  a result of  a $438  million
decrease  in investment proceeds realized in  1995 relating to management's debt
reduction  program  and  higher   capital  expenditures.  Capital   expenditures
increased  to  $1.719  billion in  1996,  compared  to $1.535  billion  in 1995,
principally as a result of higher capital spending by the Cable Division.
 
     Cash used by  financing activities was  $652 million in  1996, compared  to
$1.693  billion  in 1995,  principally  as a  result of  a  lower level  of debt
reduction realized  in  1996  in connection  with  management's  debt  reduction
program and a $860 million decrease in distributions paid to Time Warner, offset
in  part by a $433 million decrease in collections on the note receivable from U
S WEST.
 
     Management believes that  TWE's operating cash  flow, cash and  equivalents
and  additional  borrowing  capacity  are sufficient  to  fund  its  capital and
liquidity needs for the foreseeable future.
 
CABLE CAPITAL SPENDING
 
     Since the beginning of 1994, Time Warner  Cable has been engaged in a  plan
to  upgrade the technological capability and reliability of its cable television
systems  and   develop   new  services,   which   it  believes   will   position
 
                                      F-8
 


<PAGE>

<PAGE>
                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
        OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
 
the  business for sustained,  long-term growth. Capital  spending by TWE's Cable
division amounted to $1.348 billion in 1996, compared to $1.178 billion in 1995,
and was financed in  part through collections  on the note  receivable from U  S
WEST of $169 million in 1996 and $602 million in 1995. Capital spending by TWE's
Cable  division for 1997 is budgeted to  be steady at approximately $1.4 billion
and is  expected to  be funded  principally  by cable  operating cash  flow.  In
exchange  for certain flexibility in  establishing cable rate pricing structures
for regulated services that went into  effect on January 1, 1996 and  consistent
with  Time Warner Cable's long-term strategic plan, Time Warner Cable has agreed
with the FCC to invest a total of $4 billion in capital costs in connection with
the upgrade of its cable infrastructure,  which is expected to be  substantially
completed  over a five-year period ending  December 31, 2000. The agreement with
the FCC covers all of the cable  operations of Time Warner Cable, including  the
owned  or  managed cable  television  systems of  TWE,  the TWE-Advance/Newhouse
Partnership and  Time Warner.  Management expects  to continue  to finance  such
level  of investment principally through the growth in cable operating cash flow
derived from increases  in subscribers  and cable rates,  bank credit  agreement
borrowings  and the development of new revenue streams from expanded programming
options, high speed data transmission and other services.
 
OFF-BALANCE SHEET ASSETS
 
     As discussed  below, TWE  believes that  the value  of certain  off-balance
sheet  assets should be considered, along with other factors discussed elsewhere
herein, in evaluating TWE's financial condition and prospects for future results
of operations, including its ability to meet its capital and liquidity needs.
 
INTANGIBLE ASSETS
 
     As a  creator  and distributor  of  branded information  and  entertainment
copyrights,  TWE  has a  significant  amount of  internally-generated intangible
assets whose value  is not fully  reflected in the  consolidated balance  sheet.
Such intangible assets extend across TWE's principal business interests, but are
best exemplified by its interest in Warner Bros.' and HBO's copyrighted film and
television product libraries, and the creation or extension of brands. Generally
accepted accounting principles do not recognize the value of such assets, except
at  the time they may be acquired in a business combination accounted for by the
purchase method of accounting.
 
     Because TWE owns the copyrights  to such creative material, it  continually
generates  revenue through the sale of  such products across different media and
in  new  and  existing  markets.  The  value  of  film  and   television-related
copyrighted  product and trademarks is continually  realized by the licensing of
films  and  television  series  to  secondary  markets  and  the  licensing   of
trademarks,  such  as the  Looney  Tunes characters  and  Batman, to  the retail
industry and other  markets. In  addition, technological advances,  such as  the
introduction of the home videocassette in the 1980's and potentially the digital
video  disc  in  the  future, have  historically  generated  significant revenue
opportunities through the repackaging and  sale of such copyrighted products  in
the   new  technological  format.  Accordingly,   such  intangible  assets  have
significant off-balance sheet asset value that  is not fully reflected in  TWE's
consolidated balance sheet.
 
WARNER BROS. BACKLOG
 
     Warner  Bros.' backlog, representing  the amount of  future revenue not yet
recorded from  cash contracts  for the  licensing of  theatrical and  television
product   for  pay  cable,  network,   basic  cable  and  syndicated  television
exhibition, amounted to $1.502 billion at December 31, 1996, compared to  $1.056
million  at  December  31,  1995  (including  amounts  relating  to  TWE's cable
television networks of $189 million and $175 million, respectively, and to  Time
Warner's cable television networks of $274 million at December 31, 1996). Warner
Bros.'  backlog increased principally  as a result  of the licensing  of the hit
television series Friends and ER for
 
                                      F-9
 


<PAGE>

<PAGE>
                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
        OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
 
domestic  syndication,  as  well  as  for  exhibition  on  Time  Warner's  cable
television  networks  beginning in  1998. Because  backlog generally  relates to
contracts for  the licensing  of theatrical  and television  product which  have
already  been produced, the recognition of revenue for such completed product is
principally only dependent upon the commencement of the availability period  for
telecast under the terms of the related licensing agreement. Cash licensing fees
are  collected periodically over  the term of  the related licensing agreements.
Accordingly, the portion  of backlog for  which cash advances  have not  already
been  received  has significant  off-balance sheet  asset value  as a  source of
future funding. The  backlog excludes  advertising barter  contracts, which  are
also  expected to result in the future  realization of revenues and cash through
the sale of advertising spots received under such contracts.
 
FOREIGN CURRENCY RISK MANAGEMENT
 
     Time Warner uses  foreign exchange  contracts primarily to  hedge the  risk
that  unremitted or future license  fees owed to TWE  domestic companies for the
sale or anticipated sale  of U.S. copyrighted products  abroad may be  adversely
affected  by changes in foreign currency exchange  rates. As part of its overall
strategy to  manage  the level  of  exposure to  the  risk of  foreign  currency
exchange rate fluctuations, Time Warner hedges a portion of its foreign currency
exposures  anticipated  over the  ensuing twelve  month period,  including those
related to  TWE.  At December  31,  1996,  Time Warner  had  effectively  hedged
approximately   half  of   TWE's  estimated  foreign   currency  exposures  that
principally relate to anticipated cash flows to be remitted to the U.S. over the
ensuing twelve month  period, using  foreign exchange  contracts that  generally
have  maturities of  three months  or less, which  generally are  rolled over to
provide continuing  coverage  throughout  the  year. TWE  is  reimbursed  by  or
reimburses  Time Warner  for Time  Warner contract  gains and  losses related to
TWE's foreign  currency  exposure. Time  Warner  often closes  foreign  exchange
contracts  by purchasing an offsetting purchase  contract. At December 31, 1996,
Time Warner had contracts for the sale of $447 million and the purchase of  $104
million  of foreign currencies at fixed rates. Of Time Warner's $343 million net
sale contract position, none of the foreign exchange purchase contracts and $102
million of the foreign exchange sale contracts related to TWE's foreign currency
exposure, compared  to  contracts  for  the sale  of  $113  million  of  foreign
currencies at December 31, 1995.
 
     See  Note 10  to the accompanying  consolidated financial  statements for a
more  comprehensive  description  of  TWE's  foreign  currency  risk  management
activities.
 
                                      F-10



<PAGE>

<PAGE>
                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
                           CONSOLIDATED BALANCE SHEET
                                  DECEMBER 31,
                                   (MILLIONS)
 
<TABLE>
<CAPTION>
                                                                                                  1996         1995
                                                                                                 -------      -------
 
<S>                                                                                              <C>          <C>
ASSETS
CURRENT ASSETS
Cash and equivalents..........................................................................   $   216      $   209
Receivables, including $383 and $354 million due from Time Warner,
  less allowances of $373 and $365 million....................................................     1,637        1,635
Inventories...................................................................................     1,134          904
Prepaid expenses..............................................................................       159          161
                                                                                                 -------      -------
Total current assets..........................................................................     3,146        2,909
 
Noncurrent inventories........................................................................     2,263        1,909
Loan receivable from Time Warner..............................................................       400          400
Investments...................................................................................       351          383
Property, plant and equipment, net............................................................     5,999        5,205
Cable television franchises...................................................................     3,054        3,360
Goodwill......................................................................................     3,996        4,119
Other assets..................................................................................       764          620
                                                                                                 -------      -------
Total assets..................................................................................   $19,973      $18,905
                                                                                                 -------      -------
                                                                                                 -------      -------
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES
Accounts payable..............................................................................   $   935      $   697
Participations and programming costs payable..................................................     1,393        1,090
Debt due within one year......................................................................         7           47
Other current liabilities, including $82 million in 1996 due to Time Warner...................     1,740        1,380
                                                                                                 -------      -------
Total current liabilities.....................................................................     4,075        3,214
 
Long-term debt................................................................................     5,676        6,137
Other long-term liabilities, including $138 and $198 million due to Time Warner...............     1,085          924
Minority interests............................................................................     1,020          726
Time Warner General Partners' Senior Capital..................................................     1,543        1,426
 
PARTNERS' CAPITAL
Contributed capital...........................................................................     7,537        7,522
Undistributed partnership earnings (deficit)..................................................      (963)        (875)
Note receivable from U S WEST.................................................................        --         (169)
                                                                                                 -------      -------
Total partners' capital.......................................................................     6,574        6,478
                                                                                                 -------      -------
Total liabilities and partners' capital.......................................................   $19,973      $18,905
                                                                                                 -------      -------
                                                                                                 -------      -------
</TABLE>
 
See accompanying notes.
 
                                      F-11
 


<PAGE>

<PAGE>
                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
                      CONSOLIDATED STATEMENT OF OPERATIONS
                            YEARS ENDED DECEMBER 31,
                                   (MILLIONS)
 
<TABLE>
<CAPTION>
                                                                                         1996         1995        1994
                                                                                        -------      ------      ------
 
<S>                                                                                     <C>          <C>         <C>
Revenues (a).........................................................................   $10,852      $9,517      $8,460
                                                                                        -------      ------      ------
 
Cost of revenues (a)(b)..............................................................     7,441       6,597       5,976
Selling, general and administrative (a)(b)...........................................     2,333       1,960       1,636
                                                                                        -------      ------      ------
 
Operating expenses...................................................................     9,774       8,557       7,612
                                                                                        -------      ------      ------
 
Business segment operating income....................................................     1,078         960         848
Interest and other, net (a)..........................................................      (522)       (580)       (587)
Minority interest....................................................................      (207)       (133)         --
Corporate services (a)...............................................................       (69)        (64)        (60)
                                                                                        -------      ------      ------
 
Income before income taxes...........................................................       280         183         201
Income taxes.........................................................................       (70)        (86)        (40)
                                                                                        -------      ------      ------
 
Income before extraordinary item.....................................................       210          97         161
Extraordinary loss on retirement of debt.............................................        --         (24)         --
                                                                                        -------      ------      ------
 
Net income...........................................................................   $   210      $   73      $  161
                                                                                        -------      ------      ------
                                                                                        -------      ------      ------
</TABLE>
 
------------
(a) Includes  the following  income (expenses) resulting  from transactions with
    the partners of TWE and other related companies for the years ended December
    31, 1996, 1995  and 1994, respectively:  revenues-$198 million, $56  million
    and  $112 million; cost  of revenues-$(95) million,  $(54) million and $(70)
    million; selling, general  and administrative-$(38)  million, $(61)  million
    and  $(72) million; interest and other, net-$30 million, $24 million and $21
    million; and  corporate  expenses-$(69)  million, $(64)  million  and  $(60)
    million (Note 13).
 
<TABLE>
<S>                                                                                     <C>          <C>         <C>
(b) Includes depreciation and amortization expense of:...............................   $1,235       $1,039      $  943
                                                                                        -------      ------      ------
                                                                                        -------      ------      ------
</TABLE>
 
See accompanying notes.
 
                                      F-12
 


<PAGE>

<PAGE>
                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
                      CONSOLIDATED STATEMENT OF CASH FLOWS
                            YEARS ENDED DECEMBER 31,
                                   (MILLIONS)
 
<TABLE>
<CAPTION>
                                                                                        1996         1995         1994
                                                                                       -------      -------      -------
 
<S>                                                                                    <C>          <C>          <C>
OPERATIONS
Net income..........................................................................   $   210      $    73      $   161
Adjustments for noncash and nonoperating items:
Extraordinary loss on retirement of debt............................................        --           24           --
Depreciation and amortization.......................................................     1,235        1,039          943
Equity in (income) losses of investee companies, net of distributions...............        38           84           58
Changes in operating assets and liabilities:
    Receivables.....................................................................       (50)        (159)        (192)
    Inventories.....................................................................      (637)        (118)         (76)
    Accounts payable and other liabilities..........................................       970          679          400
    Other balance sheet changes.....................................................       146         (103)           2
                                                                                       -------      -------      -------
 
Cash provided by operations.........................................................     1,912        1,519        1,296
                                                                                       -------      -------      -------
 
INVESTING ACTIVITIES
Investments and acquisitions........................................................      (146)        (203)        (156)
Capital expenditures................................................................    (1,719)      (1,535)      (1,153)
Investment proceeds.................................................................       612        1,050           50
Loan to Time Warner.................................................................        --           --         (400)
                                                                                       -------      -------      -------
 
Cash used by investing activities...................................................    (1,253)        (688)      (1,659)
                                                                                       -------      -------      -------
 
FINANCING ACTIVITIES
Borrowings..........................................................................       215        2,484          977
Debt repayments.....................................................................      (716)      (3,596)        (945)
Collections on note receivable from U S WEST........................................       169          602          234
Capital distributions...............................................................      (228)      (1,088)        (170)
Other...............................................................................       (92)         (95)          --
                                                                                       -------      -------      -------
 
Cash provided (used) by financing activities........................................      (652)      (1,693)          96
                                                                                       -------      -------      -------
 
INCREASE (DECREASE) IN CASH AND EQUIVALENTS.........................................         7         (862)        (267)
 
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD.........................................       209        1,071        1,338
                                                                                       -------      -------      -------
 
CASH AND EQUIVALENTS AT END OF PERIOD...............................................   $   216      $   209      $ 1,071
                                                                                       -------      -------      -------
                                                                                       -------      -------      -------
</TABLE>
 
See accompanying notes.
 
                                      F-13
 


<PAGE>

<PAGE>
                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
                 CONSOLIDATED STATEMENT OF PARTNERSHIP CAPITAL
                                   (MILLIONS)
 
<TABLE>
<CAPTION>
                                                                                    PARTNERS' CAPITAL
                                                  TIME WARNER    -------------------------------------------------------
                                                    GENERAL                     UNDISTRIBUTED       U S
                                                   PARTNERS'                     PARTNERSHIP        WEST         TOTAL
                                                    SENIOR       CONTRIBUTED      EARNINGS          NOTE       PARTNERS'
                                                    CAPITAL        CAPITAL        (DEFICIT)      RECEIVABLE     CAPITAL
                                                  -----------    -----------    -------------    ----------    ---------
 
<S>                                               <C>            <C>            <C>              <C>           <C>
BALANCE AT DECEMBER 31, 1993...................     $ 1,536        $ 7,398          $(393)        $ (1,005)     $ 6,000
Net income.....................................                                       161                           161
Distributions (a)..............................                                       (46)                          (46)
Allocation of income...........................         127                          (127)                         (127)
Collections....................................                                                        234          234
Other..........................................                                        11                            11
                                                  -----------    -----------        -----        ----------    ---------
BALANCE AT DECEMBER 31, 1994...................       1,663          7,398           (394)            (771)       6,233
Net income.....................................                                        73                            73
Distributions (a)..............................        (366)                         (421)                         (421)
Reacquisition of Time Warner Service
  Partnership Assets (b).......................                        124                                          124
Allocation of income...........................         129                          (129)                         (129)
Collections....................................                                                        602          602
Other..........................................                                        (4)                           (4)
                                                  -----------    -----------        -----        ----------    ---------
BALANCE AT DECEMBER 31, 1995...................       1,426          7,522           (875)            (169)       6,478
Net income.....................................                                       210                           210
Distributions (a)..............................                                      (199)                         (199)
Capital contributions..........................                         15                                           15
Allocation of income...........................         117                          (117)                         (117)
Collections....................................                                                        169          169
Other..........................................                                        18                            18
                                                  -----------    -----------        -----        ----------    ---------
BALANCE AT DECEMBER 31, 1996...................     $ 1,543        $ 7,537          $(963)        $     --      $ 6,574
                                                  -----------    -----------        -----        ----------    ---------
                                                  -----------    -----------        -----        ----------    ---------
</TABLE>
 
------------
(a) Distributions in 1996, 1995 and 1994 included $215 million, $346 million and
    $173   million,   respectively,   of   accrued   tax-related  distributions.
    Previously-accrued stock  option  distributions  of  $16  million  and  $177
    million  were reversed  in 1996  and 1994 because  the market  price of Time
    Warner  common  stock   declined  during   the  period   and  stock   option
    distributions  of $50 million were accrued in 1995 because of an increase in
    the market price of Time Warner common stock. Distributions in 1995 and 1994
    included $25  million and  $50 million  of cash  distributions to  the  Time
    Warner  Service Partnerships, respectively. In addition, Time Warner General
    Partners' Senior Capital was reduced in 1995 by a $366 million  distribution
    of partnership income previously allocated to such interest.
 
(b) Time  Warner General Partners' Series B Capital was increased in 1995 by the
    $124 million historical cost of  the Time Warner Service Partnership  Assets
    reacquired by TWE.
 
See accompanying notes.
 
                                      F-14



<PAGE>

<PAGE>
                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
1.  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
DESCRIPTION OF BUSINESS
 
     Time  Warner Entertainment  Company, L.P.,  a Delaware  limited partnership
('TWE'),  classifies  its  business  interests  into  three  fundamental  areas:
Entertainment,  consisting  principally  of interests  in  filmed entertainment,
television production, television broadcasting and theme parks; Cable  Networks,
consisting  principally of interests in cable television programming; and Cable,
consisting principally of interests in cable television systems.
 
     Each of the  business interests  within Entertainment,  Cable Networks  and
Cable  is important to  TWE's objective of increasing  partner value through the
creation, extension  and  distribution  of recognizable  brands  and  copyrights
throughout  the world.  Such brands  and copyrights  include (1)  the unique and
extensive  film,  television  and  animation  libraries  of  Warner  Bros.   and
trademarks such as the Looney Tunes characters and Batman, (2) The WB Network, a
national  broadcasting network  launched in 1995  as an extension  of the Warner
Bros.  brand  and  as  an  additional  distribution  outlet  for  Warner  Bros.'
collection of children's cartoons and television programming, (3) Six Flags, the
largest  regional theme park operator in the  United States, in which TWE owns a
49% interest, (4) HBO and Cinemax,  the leading pay television services and  (5)
Time  Warner Cable, the  second largest operator of  cable television systems in
the U.S.
 
     The operating results  of TWE's  various business  interests are  presented
herein  as an indication of financial performance (Note 11). Except for start-up
losses incurred  in connection  with The  WB Network,  TWE's principal  business
interests  generate significant operating income  and cash flow from operations.
The  cash  flow  from  operations  generated  by  such  business  interests   is
significantly  greater than their operating income due to significant amounts of
noncash amortization of intangible assets recognized principally in Time  Warner
Companies,   Inc.'s  ('Time   Warner')*  $14   billion  acquisition   of  Warner
Communications Inc. ('WCI') in 1989 and $1.3 billion acquisition of the minority
interest in American Television and Communications Corporation ('ATC') in  1992,
a  portion of  which cost was  allocated to  TWE upon the  capitalization of the
partnership.  Noncash  amortization  of  intangible  assets  recorded  by  TWE's
businesses  amounted to  $436 million  in 1996,  $444 million  in 1995  and $478
million in 1994.
 
     Subsidiaries of Time Warner are the  general partners of TWE ('Time  Warner
General  Partners').  During 1995,  Time  Warner acquired  the  aggregate 11.22%
limited partnership interests previously held by subsidiaries of each of  ITOCHU
Corporation and Toshiba Corporation. As a result, Time Warner and certain of its
wholly  owned  subsidiaries  collectively own  general  and  limited partnership
interests in TWE consisting of 74.49% of the pro rata priority capital  ('Series
A  Capital') and residual  equity capital ('Residual Capital'),  and 100% of the
senior priority capital ('Senior Capital') and junior priority capital  ('Series
B  Capital'). The remaining 25.51% limited partnership interests in the Series A
Capital and Residual Capital of TWE are held  by a subsidiary of U S WEST,  Inc.
('U  S WEST'), which acquired such interests  in 1993 for $1.532 billion of cash
and a $1.021 billion 4.4% note (the  'U S WEST Note Receivable') that was  fully
collected during 1996.
 
BASIS OF PRESENTATION
 
     The  consolidated financial statements of TWE  reflect (i) the formation by
TWE of the TWE-Advance/Newhouse Partnership effective as of April 1, 1995,  (ii)
the  deconsolidation  of  Six  Flags  Entertainment  Corporation  ('Six  Flags')
effective  as  of  June  23,  1995  and  (iii)  the  consolidation  of   Paragon
 
------------
 
* On  October 10, 1996, Time Warner Inc.  acquired the remaining 80% interest in
  Turner Broadcasting System,  Inc. ('TBS') that  it did not  already own. As  a
  result  of this transaction, a  new parent company with  the name 'Time Warner
  Inc.' replaced the old parent company of the same name ('Old Time Warner', now
  known as Time  Warner Companies,  Inc.), and Old  Time Warner  and TBS  became
  separate,  wholly owned  subsidiaries of  the new  parent company.  Unless the
  context indicates otherwise, references herein  to 'Time Warner' refer to  Old
  Time Warner.
 
                                      F-15
 


<PAGE>

<PAGE>
                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
Communications   ('Paragon')   effective   as   of   July   6,   1995.   Certain
reclassifications have been  made to  the prior years'  financial statements  to
conform to the 1996 presentation.
 
     In   lieu  of  contributing  certain  assets  to  the  partnership  at  its
capitalization in  1992  (the  'Beneficial Assets'),  the  Time  Warner  General
Partners assigned to TWE the net cash flow generated by such assets or agreed to
pay  an amount equal to the net cash  flow generated by such assets. TWE has the
right to receive from the Time Warner General Partners, at the limited partners'
option, an amount  equal to  the fair  value of  the Beneficial  Assets, net  of
associated  liabilities,  that have  not been  contributed  to TWE,  rather than
continuing to receive  the net cash  flow, or an  amount equal to  the net  cash
flow, generated by such Beneficial Assets. The consolidated financial statements
include  the assets  and liabilities of  the businesses contributed  by the Time
Warner  General  Partners,  including  the  Beneficial  Assets  and   associated
liabilities, all at Time Warner's historical cost basis of accounting.
 
BASIS OF CONSOLIDATION AND
ACCOUNTING FOR INVESTMENTS
 
     The   consolidated  financial  statements  include   100%  of  the  assets,
liabilities, revenues, expenses,  income, loss  and cash  flows of  TWE and  all
companies  in which  TWE has a  direct and indirect  controlling voting interest
('subsidiaries'), as  if  TWE  and  its  subsidiaries  were  a  single  company.
Significant  intercompany  accounts  and transactions  between  the consolidated
companies have been  eliminated. Significant accounts  and transactions  between
TWE  and its partners and affiliates are disclosed as related party transactions
(Note 13).
 
     Investments in companies in  which TWE has  significant influence but  less
than  a controlling voting  interest are accounted for  using the equity method.
Under the equity method, only  TWE's investment in and  amounts due to and  from
the  equity investee are included in  the consolidated balance sheet, only TWE's
share of  the investee's  earnings  is included  in the  consolidated  operating
results,  and  only  the  dividends, cash  distributions,  loans  or  other cash
received  from  the  investee,  less  any  additional  cash  investments,   loan
repayments  or other cash paid to the  investee are included in the consolidated
cash flows.
 
FOREIGN CURRENCY
 
     The financial position and  operating results of  substantially all of  the
foreign  operations  of TWE  are consolidated  using the  local currency  as the
functional currency. Local currency assets and liabilities are translated at the
rates of exchange  on the balance  sheet date, and  local currency revenues  and
expenses  are  translated  at  average  rates  of  exchange  during  the period.
Resulting translation  gains  or  losses,  which have  not  been  material,  are
included  in partners' capital.  Foreign currency transaction  gains and losses,
which have not been material, are included in operating results.
 
USE OF ESTIMATES
 
     The preparation  of  financial  statements  in  conformity  with  generally
accepted  accounting  principles  requires  management  to  make  estimates  and
assumptions that affect  the amounts  reported in the  financial statements  and
footnotes thereto. Actual results could differ from those estimates.
 
     Significant  estimates  inherent  in the  preparation  of  the accompanying
consolidated financial statements include  management's forecast of  anticipated
revenues  from the distribution of theatrical and television product in order to
evaluate the ultimate recoverability of accounts receivables and film  inventory
recorded  as assets in the consolidated  balance sheet. Accounts receivables and
sales  related  to  the  distribution  of  home  video  product  in  the  filmed
entertainment  industry are subject to customers' rights to return unsold items.
Management periodically reviews  such estimates  and it  is reasonably  possible
that management's assessment of recoverability
 
                                      F-16
 


<PAGE>

<PAGE>
                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
of  accounts receivables and individual films  and television product may change
based on actual results and other factors.
 
REVENUES AND COSTS
 
     Feature films are produced or  acquired for initial exhibition in  theaters
followed  by distribution in  the home video, pay  cable, basic cable, broadcast
network and  syndicated  television  markets.  Generally,  distribution  to  the
theatrical,   home  video  and  pay  cable  markets  (the  primary  markets)  is
principally completed within eighteen months  of initial release and  thereafter
with  respect  to  distribution  to  the  basic  cable,  broadcast  network  and
syndicated television markets (the  secondary markets). Theatrical revenues  are
recognized as the films are exhibited. Home video revenues, less a provision for
returns,  are  recognized  when the  home  videos  are sold.  Revenues  from the
distribution of theatrical  product to cable,  broadcast network and  syndicated
television markets are recognized when the films are available to telecast.
 
     Television  films and  series are  initially produced  for the  networks or
first-run television syndication (the primary  markets) and may be  subsequently
licensed  to foreign  or domestic cable  and syndicated  television markets (the
secondary markets). Revenues  from the  distribution of  television product  are
recognized when the films or series are available to telecast, except for barter
agreements  where  the  recognition of  revenue  is deferred  until  the related
advertisements are exhibited.
 
     License agreements for the telecast of theatrical and television product in
the cable, broadcast  network and  syndicated television  markets are  routinely
entered  into well  in advance  of their available  date for  telecast, which is
generally determined by the telecast  privileges granted under previous  license
agreements.  Accordingly, there  are significant  contractual rights  to receive
cash and barter upon which revenues will not be recognized until such product is
available for  telecast  under the  contractual  terms of  the  related  license
agreement.  Such contractual rights for which revenue is not yet recognizable is
referred to as 'backlog.' Excluding advertising barter contracts, Warner  Bros.'
backlog  amounted to $1.502 billion and $1.056  billion at December 31, 1996 and
1995, respectively (including amounts relating to the licensing of film  product
to   TWE's  cable  television  networks  of   $189  million  and  $175  million,
respectively, and to Time Warner's cable television networks of $274 million  at
December 31, 1996).
 
     Inventories of theatrical and television product are stated at the lower of
amortized  cost or  net realizable  value. Cost  includes direct  production and
acquisition costs, production  overhead and capitalized  interest. A portion  of
the  cost to acquire WCI in 1989  was allocated to its theatrical and television
product, including an  allocation to product  that had been  exhibited at  least
once  in all  markets ('Library'). The  Library is amortized  on a straight-line
basis over twenty  years. Individual  films and  series are  amortized, and  the
related  participations and residuals are accrued,  based on the proportion that
current revenues from the film or series  bear to an estimate of total  revenues
anticipated  from  all markets.  These  estimates are  revised  periodically and
losses, if  any, are  provided in  full. Current  film inventories  include  the
unamortized  cost of completed  feature films allocated  to the primary markets,
television films and series in production  pursuant to a contract of sale,  film
rights acquired for the home video market and advances pursuant to agreements to
distribute third-party films in the primary markets. Noncurrent film inventories
include  the  unamortized  cost  of completed  theatrical  and  television films
allocated to  the secondary  markets,  theatrical films  in production  and  the
Library.
 
     A  significant portion of  cable system and  cable programming revenues are
derived from subscriber  fees. Subscriber fees  are recorded as  revenue in  the
period  the service is provided. The cost of rights to exhibit feature films and
other programming on pay cable services during one or more availability  periods
('programming  costs') generally is  recorded when the  programming is initially
available for  exhibition,  and is  allocated  to the  appropriate  availability
periods and amortized as the programming is exhibited.
 
                                      F-17
 


<PAGE>

<PAGE>
                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
ADVERTISING
 
     In  accordance  with  the  Financial  Accounting  Standards  Board ('FASB')
Statement No. 53, 'Financial Reporting  by Producers and Distributors of  Motion
Picture  Films,'  advertising costs  for theatrical  and television  product are
capitalized and amortized over  the related revenue streams  in each market  for
which  such costs are intended to benefit, which generally does not exceed three
months. Other advertising costs  are expensed upon the  first exhibition of  the
advertisement. Advertising expense, excluding theatrical and television product,
amounted to $332 million in 1996, $241 million in 1995 and $190 million in 1994.
 
CASH AND EQUIVALENTS
 
     Cash equivalents consist of commercial paper and other investments that are
readily  convertible into cash, and have  original maturities of three months or
less.
 
PROPERTY, PLANT AND EQUIPMENT
 
     Property, plant  and  equipment are  stated  at cost.  Additions  to  cable
property,  plant and equipment  generally include material,  labor, overhead and
interest. Depreciation is  provided generally on  the straight-line method  over
useful lives ranging up to thirty years for buildings and improvements and up to
fifteen  years  for furniture,  fixtures, cable  television equipment  and other
equipment. Property, plant and equipment consists of:
 
<TABLE>
<CAPTION>
                                                                                                  DECEMBER 31,
                                                                                               -------------------
                                                                                                1996        1995
                                                                                               -------     -------
                                                                                                   (MILLIONS)
 
<S>                                                                                            <C>         <C>
Land and buildings..........................................................................   $   780     $   732
Cable television equipment..................................................................     6,602       5,859
Furniture, fixtures and other equipment.....................................................     2,129       1,752
                                                                                               -------     -------
                                                                                                 9,511       8,343
Less accumulated depreciation...............................................................    (3,512)     (3,138)
                                                                                               -------     -------
Total.......................................................................................   $ 5,999     $ 5,205
                                                                                               -------     -------
                                                                                               -------     -------
</TABLE>
 
     Effective January 1, 1996, TWE adopted FASB Statement No. 121,  'Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of,' ('FAS 121') which established standards for the recognition and measurement
of  impairment losses  on long-lived assets  and certain  intangible assets. The
adoption of  FAS  121  did  not  have  a  material  effect  on  TWE's  financial
statements.
 
INTANGIBLE ASSETS
 
     As  a  creator and  distributor  of branded  information  and entertainment
copyrights, TWE  has a  significant  and growing  amount of  intangible  assets,
including  goodwill, cable television franchises  and other copyrighted products
and trademarks. In accordance with generally accepted accounting principles, TWE
does not recognize  the fair  value of  internally-generated intangible  assets.
Costs  incurred to create and produce copyrighted product, such as feature films
and television series, are generally either expensed as incurred, or capitalized
as tangible assets, as  in the case of  cash advances and inventoriable  product
costs.  However, accounting  recognition is  not given  to any  increasing asset
value that may be associated with  the collection of the underlying  copyrighted
material.  Additionally, costs incurred to create  or extend brands, such as the
start-up of  The  WB  Network,  generally result  in  losses  over  an  extended
development  period and  are recognized  as a  reduction of  income as incurred,
while any corresponding brand value created  is not recognized as an  intangible
asset  in the consolidated  balance sheet. On the  other hand, intangible assets
acquired in  business  combinations accounted  for  by the  purchase  method  of
accounting  are capitalized and  amortized over their expected  useful life as a
noncash
 
                                      F-18
 


<PAGE>

<PAGE>
                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
charge against future results of operations. Accordingly, the intangible  assets
reported  in the  consolidated balance  sheet do not  reflect the  fair value of
TWE's  internally-generated  intangible  assets,  but  rather  are  limited   to
intangible  assets resulting from certain acquisitions  in which the cost of the
acquired companies exceeded the fair value of their tangible assets at the  time
of acquisition.
 
     TWE   amortizes  goodwill  over  periods  up   to  forty  years  using  the
straight-line method. Cable  television franchises and  other intangible  assets
are amortized over periods up to twenty years using the straight-line method. In
1996,  1995 and  1994, amortization of  goodwill amounted to  $123 million, $127
million  and  $129  million,  respectively;  amortization  of  cable  television
franchises   amounted  to   $225  million,   $223  million   and  $208  million,
respectively; and  amortization  of  other intangible  assets  amounted  to  $88
million, $94 million and $141 million, respectively. Accumulated amortization of
intangible  assets at December 31, 1996 and  1995 amounted to $2.623 billion and
$2.337 billion, respectively.
 
     TWE separately reviews the carrying value of acquired intangible assets for
each acquired entity on a quarterly basis to determine whether an impairment may
exist. TWE considers relevant cash flow and profitability information, including
estimated future operating results, trends  and other available information,  in
assessing whether the carrying value of intangible assets can be recovered. Upon
a  determination  that  the carrying  value  of  intangible assets  will  not be
recovered from the undiscounted future cash flows of the acquired business,  the
carrying  value of such intangible assets  would be considered impaired and will
be reduced  by a  charge  to operations  in the  amount  of the  impairment.  An
impairment  charge is measured as any  deficiency in estimated discounted future
cash flows of the acquired business to recover the carrying value related to the
intangible assets.
 
INCOME TAXES
 
     As a Delaware limited partnership, TWE  is not subject to U.S. federal  and
state  income taxation.  However, certain of  TWE's operations  are conducted by
subsidiary corporations that are subject to domestic or foreign taxation. Income
taxes are provided on the income of such corporations using the liability method
of accounting for income taxes prescribed by FASB Statement No. 109, 'Accounting
for Income Taxes.'
 
2.  ACQUISITIONS AND DISPOSITIONS
 
TWE-ADVANCE/NEWHOUSE PARTNERSHIP
 
     On April 1,  1995, TWE  formed a cable  television joint  venture with  the
Advance/Newhouse  Partnership ('Advance/Newhouse') to which Advance/Newhouse and
TWE  contributed  cable  television  systems  (or  interests  therein)   serving
approximately  4.5  million  subscribers,  as  well  as  certain  foreign  cable
investments and  programming investments  that included  Advance/Newhouse's  10%
interest in Primestar Partners, L.P. ('Primestar'). TWE owns a two-thirds equity
interest  in the TWE-Advance/Newhouse  Partnership and is  the managing partner.
TWE consolidates  the partnership  and the  one-third equity  interest owned  by
Advance/Newhouse  is  reflected in  TWE's  consolidated financial  statements as
minority   interest.   In   accordance    with   the   partnership    agreement,
Advance/Newhouse can require TWE to purchase its equity interest for fair market
value  at  specified intervals  following  the death  of  both of  its principal
shareholders. Beginning  on  April  1,  1998,  either  partner  can  initiate  a
dissolution  in which  TWE would  receive two-thirds  and Advance/Newhouse would
receive one-third of the partnership's net assets. The assets contributed by TWE
and Advance/Newhouse to  the partnership  were recorded  at their  predecessor's
historical  cost, which, with  respect to Advance/Newhouse,  consisted of assets
contributed to the  partnership of  approximately $338  million and  liabilities
assumed  by the partnership of approximately  $9 million. No gain was recognized
by TWE upon the capitalization of the partnership.
 
                                      F-19
 


<PAGE>

<PAGE>
                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
SIX FLAGS
 
     On June  23,  1995, TWE  sold  51%  of its  interest  in Six  Flags  to  an
investment  group  led by  Boston Ventures  for $204  million and  received $640
million in additional proceeds from  Six Flags, representing payment of  certain
intercompany  indebtedness and licensing  fees. As a  result of the transaction,
Six Flags has been deconsolidated and TWE's remaining 49% interest in Six  Flags
is  accounted for  under the  equity method of  accounting. TWE  reduced debt by
approximately $850 million  in 1995 in  connection with the  transaction, and  a
portion of the income on the transaction has been deferred by TWE principally as
a  result of its  guarantee of certain  third-party, zero-coupon indebtedness of
Six Flags due in 1999.
 
PRO FORMA FINANCIAL INFORMATION
 
     The  accompanying  consolidated  statement   of  operations  includes   the
operating   results  of  the  Advance/Newhouse   businesses  from  the  date  of
contribution to the partnership. On a pro forma basis, giving effect to (i)  the
formation  of  the  TWE-Advance/Newhouse Partnership,  (ii)  the  refinancing of
approximately $2.6 billion  of bank debt  (Note 5), (iii)  the consolidation  of
Paragon,  (iv) the reacquisition  of the Time  Warner Service Partnership Assets
(Note 7), (v) the sale of 51% of  TWE's interest in Six Flags and (vi) the  sale
or  transfer of certain unclustered cable television systems owned by TWE, as if
each of such transactions had occurred at the beginning of 1995, TWE would  have
reported  for  the year  ended December  31, 1995,  revenues of  $9.682 billion,
depreciation and  amortization  of  $1.069 billion,  operating  income  of  $962
million, income before extraordinary item of $172 million and net income of $148
million.  No pro forma  information has been  presented for 1996  because all of
such transactions  are  already reflected,  in  all material  respects,  in  the
historical financial statements of TWE.
 
3.  INVENTORIES
 
    TWE's inventories consist of:
 
<TABLE>
<CAPTION>
                                                                                     DECEMBER 31,
                                                                   -------------------------------------------------
                                                                            1996                       1995
                                                                   ----------------------     ----------------------
                                                                   CURRENT     NONCURRENT     CURRENT     NONCURRENT
                                                                   -------     ----------     -------     ----------
                                                                                      (MILLIONS)
<S>                                                                <C>         <C>            <C>         <C>
Film costs:
     Released, less amortization................................   $  544        $  535       $  529        $  437
     Completed and not released.................................      168            42           74            22
     In process and other.......................................       21           704           11           396
     Library, less amortization.................................       --           664           --           717
Programming costs, less amortization............................      319           318          219           337
Merchandise.....................................................       82            --           71            --
                                                                   -------       ------       -------       ------
Total...........................................................   $1,134        $2,263       $  904        $1,909
                                                                   -------       ------       -------       ------
                                                                   -------       ------       -------       ------
</TABLE>
 
     Excluding  the  Library,  the  total cost  incurred  in  the  production of
theatrical and  television films  amounted  to $2.543  billion in  1996,  $2.011
billion  in  1995 and  $1.667  billion in  1994;  and the  total  cost amortized
amounted to  $1.998  billion,  $2  billion  and  $1.640  billion,  respectively.
Excluding  the Library, the unamortized cost  of completed films at December 31,
1996 amounted  to $1.289  billion, more  than 90%  of which  is expected  to  be
amortized within three years after release.
 
                                      F-20
 


<PAGE>

<PAGE>
                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
4.  INVESTMENTS
 
    TWE's investments consist of:
 
<TABLE>
<CAPTION>
                                                                                                   DECEMBER 31,
                                                                                                -------------------
                                                                                                 1996        1995
                                                                                                -------     -------
                                                                                                    (MILLIONS)
<S>                                                                                             <C>         <C>
Equity method investments....................................................................    $ 298       $ 335
Cost method investments......................................................................       53          48
                                                                                                 -----       -----
Total........................................................................................    $ 351       $ 383
                                                                                                 -----       -----
                                                                                                 -----       -----
</TABLE>
 
     Companies  accounted for using  the equity method  include Comedy Partners,
L.P. (50% owned),  certain cable  system joint ventures  (generally 50%  owned),
Primestar  (31% owned), Six  Flags (49% owned),  certain international cable and
programming joint  ventures  (generally  25%  owned)  and  Courtroom  Television
Network  (33%  owned  in  1996  and  1995).  A  summary  of  combined  financial
information as reported by the equity investees of TWE is set forth below:
 
<TABLE>
<CAPTION>
                                                                                       YEARS ENDED DECEMBER 31,
                                                                                     ----------------------------
                                                                                      1996       1995       1994
                                                                                     ------     ------     ------
                                                                                              (MILLIONS)
 
<S>                                                                                  <C>        <C>        <C>
Revenues..........................................................................   $1,823     $1,450     $  722
Depreciation and amortization.....................................................      197        195        125
Operating income (loss)...........................................................       62         (9)        11
Net loss..........................................................................     (138)      (168)       (53)
Current assets....................................................................      624        455        192
Total assets......................................................................    3,193      2,416      1,281
Current liabilities...............................................................      431        405        305
Long-term debt....................................................................    2,853      1,778        554
Total liabilities.................................................................    2,829      2,323        926
Total shareholders' equity or partners' capital...................................      340         93        355
</TABLE>
 
5.  LONG-TERM DEBT
 
    Long-term debt consists of:
 
<TABLE>
<CAPTION>
                                                                                                  DECEMBER 31,
                                                                                                -----------------
                                                                                                 1996       1995
                                                                                                ------     ------
                                                                                                   (MILLIONS)
 
<S>                                                                                             <C>        <C>
Credit agreement, weighted average interest rates of 6.1% and 6.4%...........................   $1,555     $2,185
Commercial paper, weighted average interest rates of 5.8% and 6.2%...........................      310        157
9 5/8% notes due May 1, 2002.................................................................      600        600
7 1/4% debentures due September 1, 2008......................................................      599        599
10.15% notes due May 1, 2012.................................................................      250        250
8 7/8% notes due October 1, 2012.............................................................      347        347
8 3/8% debentures due March 15, 2023.........................................................      991        991
8 3/8% debentures due July 15, 2033..........................................................      994        994
Other........................................................................................       30         14
                                                                                                ------     ------
Total........................................................................................   $5,676     $6,137
                                                                                                ------     ------
                                                                                                ------     ------
</TABLE>
 
     In June 1995, TWE, the TWE-Advance/Newhouse Partnership and a  wholly-owned
subsidiary  of Time Warner  ('TWI Cable') executed  a five-year revolving credit
facility (the '1995 Credit Agreement'). The 1995
 
                                      F-21
 


<PAGE>

<PAGE>
                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
Credit Agreement enabled such entities to refinance certain indebtedness assumed
in  certain  cable  acquisitions,  to  refinance  TWE's  indebtedness  under   a
pre-existing  bank credit agreement and to  finance the ongoing working capital,
capital expenditure and other corporate needs of each borrower.
 
     The 1995 Credit Agreement permits borrowings  in an aggregate amount of  up
to  $8.3 billion, with  no scheduled reductions in  credit availability prior to
maturity in June 2000. Borrowings are limited  to $4 billion in the case of  TWI
Cable,  $5 billion in the case  of the TWE-Advance/Newhouse Partnership and $8.3
billion in the  case of TWE,  subject in  each case to  certain limitations  and
adjustments.  Such borrowings  bear interest at  specific rates for  each of the
three borrowers, generally equal to LIBOR  plus a margin initially ranging  from
50  to 87.5 basis points,  which margin will vary based  on the credit rating or
financial leverage of the  applicable borrower. Unused  credit is available  for
general  business purposes and to support  any commercial paper borrowings. Each
borrower is required to pay a commitment fee initially ranging from .2% to  .35%
per  annum on the  unused portion of  its commitment. The  1995 Credit Agreement
contains certain covenants for  each borrower relating  to, among other  things,
additional  indebtedness;  liens  on  assets; cash  flow  coverage  and leverage
ratios; and loans, advances, distributions and other cash payments or  transfers
of assets from the borrowers to their respective partners or affiliates.
 
     In July 1995, TWE borrowed approximately $2.6 billion under the 1995 Credit
Agreement  to repay  and terminate  its pre-existing  bank credit  agreement. In
connection therewith, TWE  recognized an  extraordinary loss of  $24 million  to
write-off deferred financing costs related to the former credit agreement.
 
     As  a result of  the Six Flags  transaction, long-term debt  was reduced by
approximately $850 million in 1995, including the deconsolidation of Six  Flags'
9.25% zero coupon notes due in 1999. Such zero coupon notes have been guaranteed
by TWE.
 
     Each  Time  Warner General  Partner has  guaranteed a  pro rata  portion of
approximately $5.4 billion of TWE's debt  and accrued interest thereon based  on
the  relative fair  value of  the net  assets each  Time Warner  General Partner
contributed  to  TWE  (the  'Time  Warner  General  Partner  Guarantees').  Such
indebtedness  is recourse to each Time Warner General Partner only to the extent
of its guarantee.  The indenture pursuant  to which TWE's  notes and  debentures
have been issued (the 'Indenture') requires the unanimous consent of the holders
of  the  notes  and debentures  to  terminate  the Time  Warner  General Partner
Guarantees prior to June 30, 1997, and the consent of a majority of such holders
to effect a termination thereafter. There  are generally no restrictions on  the
ability  of  the Time  Warner General  Partner  guarantors to  transfer material
assets, other than TWE assets, to parties that are not guarantors.
 
     Interest expense was $475  million in 1996, $571  million in 1995 and  $563
million in 1994. The weighted average interest rate on TWE's total debt was 7.8%
and 7.7% at December 31, 1996 and 1995, respectively.
 
     TWE  has the  intent and  the ability  under the  1995 Credit  Agreement to
continue to refinance its commercial paper borrowings on a long-term basis.  TWE
is not obligated to repay any portion of its long-term debt until the year 2000,
when  the 1995 Credit Agreement expires and all borrowings thereunder, including
commercial paper supported  by the  1995 Credit  Agreement, are  required to  be
repaid.
 
6.  INCOME TAXES
 
    Domestic and foreign pretax income (loss) are as follows:
 
<TABLE>
<CAPTION>
                                  YEARS ENDED DECEMBER 31,
                                ----------------------------
                                  1996      1995      1994
                                --------  --------  --------
                                         (MILLIONS)
 
<S>                             <C>       <C>       <C>
Domestic......................  $   263   $   191   $    242
Foreign.......................       17        (8)       (41)
                                --------  --------  --------
Total.........................  $   280   $   183   $    201
                                --------  --------  --------
                                --------  --------  --------
</TABLE>
 
                                      F-22
 


<PAGE>

<PAGE>
                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     As a partnership, TWE is not subject to U.S. federal, state or local income
taxation.  However,  certain of  TWE's  operations are  conducted  by subsidiary
corporations that  are subject  to domestic  or foreign  taxation. Income  taxes
(benefits) of TWE and subsidiary corporations are as set forth below:
 
<TABLE>
<CAPTION>
                             YEARS ENDED DECEMBER 31,
                           ----------------------------
                             1996      1995      1994
                           --------  --------  --------
                                    (MILLIONS)
<S>                        <C>       <C>       <C>
Federal:
     Current(1)..........  $     4   $     7   $      6
     Deferred............       (3)       (5)        (2)
Foreign:
     Current(2)..........       86        74         53
     Deferred............      (21)        6        (16)
State and local:
     Current.............        5         7         14
     Deferred............       (1)       (3)       (15)
                           --------  --------  --------
Total income taxes.......  $    70   $    86   $     40
                           --------  --------  --------
                           --------  --------  --------
</TABLE>
 
------------
 
(1) Includes  utilization of Six  Flags' tax carryforwards in  the amount of $16
    million in 1995 and $35 million in 1994.
(2) Includes foreign withholding taxes  of $54 million in  1996, $60 million  in
    1995 and $44 million in 1994.
 
     The financial statement basis of TWE's assets exceeds the corresponding tax
basis  by  $8.1  billion  at  December 31,  1996,  principally  as  a  result of
differences in accounting for depreciable  and amortizable assets for  financial
statement and income tax purposes.
 
7.  TWE PARTNERS' CAPITAL
 
     Each partner's interest in TWE consists of the initial priority capital and
residual  equity amounts that  were assigned to that  partner or its predecessor
based on the  estimated fair value  of the  net assets each  contributed to  the
partnership, as adjusted for the fair value of certain assets distributed by TWE
to  the  Time  Warner  General  Partners in  1993  which  were  not subsequently
reacquired by TWE  in 1995 ('Contributed  Capital'), plus, with  respect to  the
priority  capital interests only, any undistributed priority capital return. The
priority capital return consists of net partnership income allocated to date  in
accordance with the provisions of the TWE partnership agreement and the right to
be  allocated additional partnership income  which, together with any previously
allocated net  partnership income,  provides for  the various  priority  capital
rates of return specified in the table below. The sum of Contributed Capital and
the  undistributed priority capital return is  referred to herein as 'Cumulative
Priority Capital.' Cumulative Priority Capital is not necessarily indicative  of
the  fair value of the underlying  priority capital interests principally due to
above-market rates of return on  certain priority capital interests as  compared
to securities of comparable credit risk and maturity, such as the 13.25% rate of
return  on  the Series  B  Capital interest  owned  by the  Time  Warner General
Partners. Furthermore, the ultimate  realization of Cumulative Priority  Capital
could be affected by the fair value of TWE, which is subject to fluctuation.
 
                                      F-23
 


<PAGE>

<PAGE>
                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     A  summary of the priority of Contributed Capital, ownership of Contributed
Capital and  Cumulative  Priority Capital  at  December 31,  1996  and  priority
capital rates of return thereon is set forth below:
 
<TABLE>
<CAPTION>
                                                                         PRIORITY       TIME       LIMITED PARTNERS
                                                          CUMULATIVE     CAPITAL       WARNER    ---------------------
                                            CONTRIBUTED    PRIORITY      RATES OF     GENERAL                     U S
PRIORITY OF CONTRIBUTED CAPITAL             CAPITAL(a)     CAPITAL      RETURN(b)     PARTNERS    TIME WARNER    WEST
------------------------------------------  -----------   ----------   ------------   --------   -------------   -----
                                                   (BILLIONS)          (% PER ANNUM            (OWNERSHIP %)
                                                                        COMPOUNDED
                                                                        QUARTERLY)
<S>                                         <C>           <C>          <C>            <C>        <C>             <C>
Senior Capital............................     $ 1.4         $1.5(c)        8.00%      100.00%          --          --
Series A Capital..........................       5.6          9.9          13.00%(d)    63.27%       11.22%      25.51%
Series B Capital..........................       2.9(g)       5.2          13.25%(e)   100.00%          --          --
Residual Capital..........................       3.3(g)       3.3(f)          -- (f)    63.27%       11.22%      25.51%
</TABLE>
 
------------
(a) Excludes partnership income or loss allocated thereto.
(b) Income  allocations related to priority capital rates of return are based on
    partnership income after any special tax allocations.
(c) Net of $366 million of  partnership income distributed in 1995  representing
    the priority capital return thereon through June 30, 1995.
(d) 11.00% to the extent concurrently distributed.
(e) 11.25% to the extent concurrently distributed.
(f) Residual  Capital is not entitled to stated priority rates of return and, as
    such, its Cumulative Priority Capital  is equal to its Contributed  Capital.
    However,  in  the  case  of  certain  events  such  as  the  liquidation  or
    dissolution of TWE, Residual Capital is  entitled to any excess of the  then
    fair  value of the net assets of TWE over the aggregate amount of Cumulative
    Priority Capital and special tax allocations.
(g) The Contributed Capital relating to the  Series B Capital has priority  over
    the  priority  returns  on the  Series  A Capital.  The  Contributed Capital
    relating to the Residual Capital has  priority over the priority returns  on
    the Series B Capital and the Series A Capital.
 
     Because  Contributed Capital is based  on the fair value  of the net assets
that each partner contributed to the partnership, the aggregate of such  amounts
is  significantly  higher  than  TWE's partners'  capital  as  reflected  in the
consolidated financial statements, which is based on the historical cost of  the
contributed net assets. For purposes of allocating partnership income or loss to
the  partners, partnership income or loss is based  on the fair value of the net
assets  contributed  to  the  partnership  and  results  in  significantly  less
partnership  income, or  results in partnership  losses, in contrast  to the net
income reported by TWE for financial statement purposes, which is also based  on
the historical cost of contributed net assets.
 
     Under  the  TWE partnership  agreement, partnership  income, to  the extent
earned, is  first  allocated to  the  partners'  capital accounts  so  that  the
economic  burden of  the income  tax consequences  of partnership  operations is
borne as  though the  partnership  were taxed  as  a corporation  ('special  tax
allocations'),  then  to  the Senior  Capital,  Series  A Capital  and  Series B
Capital, in order of priority, at rates of return ranging from 8% to 13.25%  per
annum,  and finally  to the Residual  Capital. Partnership  losses generally are
allocated first to  eliminate prior  allocations of partnership  income to,  and
then  to  reduce the  Contributed  Capital of,  the  Residual Capital,  Series B
Capital and Series  A Capital, in  that order,  then to reduce  the Time  Warner
General   Partners'  Senior  Capital,  including  partnership  income  allocated
thereto, and  finally to  reduce  any special  tax  allocations. To  the  extent
partnership  income  is insufficient  to satisfy  all  special allocations  in a
particular accounting period, the right to receive additional partnership income
necessary to provide for the various priority capital rates of return is carried
forward  until  satisfied  out  of  future  partnership  income,  including  any
partnership  income that may result from any liquidation, sale or dissolution of
TWE.
 
     The TWE partnership  agreement provides, under  certain circumstances,  for
the  distribution of partnership income allocated to the Senior Capital owned by
the Time Warner General  Partners. Pursuant to such  provision, $366 million  of
partnership  income was distributed to the Time Warner General Partners in 1995.
Beginning on July 1, 1997, the Senior Capital and, to the extent not  previously
distributed,  partnership income allocated thereto is required to be distributed
in three  annual installments,  with  the initial  distribution expected  to  be
approximately  $535 million. The Series B  Capital owned by subsidiaries of Time
Warner may be increased if
 
                                      F-24
 


<PAGE>

<PAGE>
                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
certain operating  performance  targets are  achieved  over a  five-year  period
ending  on December 31, 1996 and a  ten-year period ending on December 31, 2001.
Although  satisfaction  of   the  ten-year  operating   performance  target   is
indeterminable at this time, the five-year target was not attained.
 
     U  S WEST has  an option to  obtain up to  an additional 6.33%  of Series A
Capital  and   Residual  Capital   interests,  depending   on  cable   operating
performance.  The option is exercisable between January  1, 1999 and on or about
May 31, 2005  at a  maximum exercise  price of  $1.25 billion  to $1.8  billion,
depending  on the year  of exercise. Either U  S WEST or TWE  may elect that the
exercise price be paid with partnership interests rather than cash.
 
     Distributions and  loans to  the partners  are subject  to partnership  and
credit agreement limitations. Generally, TWE must be in compliance with the cash
flow  coverage  and leverage  ratios, restricted  payment limitations  and other
credit agreement covenants in order to make such distributions or loans.
 
     In September  1993, certain  assets of  TWE were  distributed to  the  Time
Warner  General Partners and were owned  and operated by other partnerships (the
'Time Warner  Service Partnerships')  in  order to  ensure compliance  with  the
Modification  of Final Judgment entered on August  24, 1982 by the United States
District Court for  the District  of Columbia  applicable to  U S  WEST and  its
affiliated  companies,  which  may  have  included  TWE.  This  distribution was
recorded for financial statement  purposes based on  the $95 million  historical
cost of such assets and, for partnership agreement purposes, Time Warner General
Partners' Series B Capital was reduced by approximately $300 million. In 1994, U
S  WEST received a judicial order that  TWE was no longer prohibited from owning
or operating substantially all of  such assets. Accordingly, in September  1995,
TWE  reacquired  substantially all  of  the assets  of  the Time  Warner Service
Partnerships, subject to  the liabilities  relating thereto,  (the 'Time  Warner
Service  Partnership Assets') in exchange for  Series B Capital interests in TWE
equal  to  approximately  $400  million.  The  reacquisition  was  recorded  for
financial  statement purposes based  on the $124 million  historical cost of the
Time Warner Service Partnership Assets. Prior  to the reacquisition of the  Time
Warner  Service Partnership Assets  in September 1995, TWE  was required to make
quarterly cash distributions of Series B Capital in the amount of $12.5  million
to  the Time Warner  General Partners ('TWSP  Distributions'), which the General
Partners  were  then  required  to   contribute  to  the  Time  Warner   Service
Partnerships. TWE paid TWSP Distributions to the Time Warner General Partners in
the  amount of $25 million and $50 million in 1995 and 1994, respectively, which
were recorded as reductions of Time Warner General Partners' Series B Capital.
 
     TWE reimburses Time Warner for the amount by which the market price on  the
exercise  date of Time Warner common stock options exercised by employees of TWE
exceeds the exercise price or, with respect to options granted prior to the  TWE
capitalization,  the greater of the exercise  price and $27.75, the market price
of the common  stock at  the time  of the TWE  capitalization on  June 30,  1992
('Stock  Option Distributions').  TWE accrues  Stock Option  Distributions and a
corresponding liability  with respect  to unexercised  options when  the  market
price  of Time Warner  common stock increases during  the accounting period, and
reverses previously-accrued  Stock Option  Distributions and  the  corresponding
liability  when the  market price  of Time  Warner common  stock declines. Stock
Option Distributions are paid  when the options are  exercised. At December  31,
1996  and 1995, TWE had  recorded a liability for  Stock Option Distributions of
$93 million and $122 million, respectively, based on the unexercised options and
the market prices at  such dates of $37.50  and $37.875, respectively, per  Time
Warner  common share. TWE paid Stock Option  Distributions to Time Warner in the
amount of  $13 million,  $17 million  and $5  million in  1996, 1995  and  1994,
respectively.
 
     Cash  distributions are required to be made  to the partners to permit them
to pay income taxes at statutory  rates based on their allocable taxable  income
from  TWE ('Tax Distributions'),  including any taxable  income generated by the
Beneficial Assets,  subject to  limitations referred  to herein.  The  aggregate
amount of such Tax Distributions is computed generally by reference to the taxes
that  TWE  would  have  been required  to  pay  if it  were  a  corporation. Tax
Distributions were previously subject  to restrictions until  July 1995 and  are
now paid to
 
                                      F-25
 


<PAGE>

<PAGE>
                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
the  Time Warner General Partners on a current basis. TWE paid Tax Distributions
to the Time Warner General Partners in the amount of $215 million, $680  million
and $115 million in 1996, 1995 and 1994, respectively.
 
     In  addition to  Stock Option  Distributions, Tax  Distributions and Senior
Capital Distributions, quarterly cash distributions may be made to the  partners
to  the  extent of  excess cash,  as  defined in  the TWE  partnership agreement
('Excess Cash Distribution'). Assuming that no additional partnership  interests
are  issued to  new partners and  that certain cash  distribution thresholds are
met, cash distributions other than Stock Option Distributions, Tax Distributions
and Senior Capital  Distributions will in  the aggregate be  made 63.27% to  the
Time Warner General Partners, 11.22% to Time Warner and 25.51% to U S WEST prior
to  June 30, 1998; thereafter, the Time Warner General Partners will be entitled
to additional  distributions with  respect  to Series  B Capital.  If  aggregate
distributions made to the limited partners, generally from all sources, have not
reached  approximately $800 million by June  30, 1997, cash distributions to the
Time Warner General Partners with respect  to the Time Warner General  Partners'
Series A Capital and Residual Capital, other than Stock Option Distributions and
Tax  Distributions, will be deferred until  such threshold is met. Similarly, if
such  aggregate  distributions  to  the   limited  partners  have  not   reached
approximately  $1.6 billion by June 30, 1998, cash distributions with respect to
Series B Capital  will be  deferred until  such threshold  is met.  If any  such
deferral  occurs, a portion of  the corresponding partnership income allocations
with respect  to such  deferred  amounts will  be made  at  a rate  higher  than
otherwise  would  have  been  the  case.  As  of  December  31,  1996,  no  cash
distributions have been made to the limited partners. In addition, if a division
of TWE or a substantial portion thereof is sold, the net proceeds of such  sale,
less  expenses and proceeds used to repay  outstanding debt, will be required to
be distributed  with respect  to the  partners' partnership  interests.  Similar
distributions are required to be made in the event of a financing or refinancing
of  debt.  Subject  to any  limitations  on  the incurrence  of  additional debt
contained in the TWE partnership and  credit agreements, and the Indenture,  TWE
may borrow funds to make distributions.
 
8.  STOCK OPTION PLANS
 
     Time  Warner has  various stock  option plans  under which  Time Warner may
grant options to purchase Time Warner  common stock to employees of Time  Warner
and TWE. Such options have been granted to employees of TWE at, or in excess of,
fair  market value at the date of  grant. Accordingly, in accordance with APB 25
and related interpretations, no  compensation cost has  been recognized by  Time
Warner,  nor charged to TWE, related to  such stock option plans. Generally, the
options become exercisable over a three-year vesting period and expire ten years
from the date  of grant. Had  compensation cost for  Time Warner's stock  option
plans  been determined based on the fair value at the grant dates for all awards
during 1995 and  1996 under  those plans consistent  with the  method set  forth
under  FASB Statement No.  123, 'Accounting for  Stock-Based Compensation' ('FAS
123'), TWE's allocable share of compensation  cost would have decreased its  net
income to the pro forma amounts indicated below:
 
<TABLE>
<CAPTION>
                            YEARS ENDED DECEMBER 31,
                           --------------------------
                               1996          1995
                           ------------  ------------
                                 (IN MILLIONS)
<S>                        <C>           <C>
Net income:
     As reported.........     $ 210       $ 73
                              -----       ----
                              -----       ----
     Pro forma...........     $ 193       $ 68
                              -----       ----
                              -----       ----
</TABLE>
 
     FAS  123 is applicable only to stock options granted subsequent to December
31, 1994. Accordingly,  since TWE's  compensation expense  associated with  such
grants  would  generally be  recognized over  a  three-year vesting  period, the
initial impact of applying FAS 123 on pro forma net income is not representative
of the potential impact on  pro forma net income in  future years, when the  pro
forma effect would be fully reflected.
 
                                      F-26
 


<PAGE>

<PAGE>
                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     The fair value of each option grant is estimated on the date of grant using
the  Black-Scholes  option-pricing  model  with  the  following weighted-average
assumptions used for  grants to TWE  employees in 1996  and 1995,  respectively:
dividend  yields of 1% in both periods;  expected volatility of 21.7% and 22.3%,
risk-free interest rates of 5.7% and 6.6%; and expected lives of 5 years in both
periods. The weighted average fair value  of an option granted to TWE  employees
during  the year was $10.43 and $11.46 for the years ended December 31, 1996 and
1995, respectively. The  weighted average exercise  price and fair  value of  an
option granted during the year at prices exceeding the market price of the stock
on the date of grant are $48.51 and $6.82, respectively.
 
     A  summary of stock option activity with  respect to employees of TWE is as
follows:
 
<TABLE>
<CAPTION>
                                                                                                      WEIGHTED-
                                                                                           THOUSANDS   AVERAGE
                                                                                              OF      EXERCISE
                                                                                            SHARES      PRICE
                                                                                           ---------  ---------
<S>                                                                                        <C>        <C>
Balance at January 1, 1994...............................................................    26,880   $   31.54
Granted..................................................................................     3,856       36.73
Exercised................................................................................      (437)      19.71
Cancelled(a).............................................................................      (101)      35.81
                                                                                           ---------
Balance at December 31, 1994.............................................................    30,198   $   32.36
Granted..................................................................................     2,141       38.13
Exercised................................................................................    (1,316)      27.31
Cancelled(a).............................................................................    (2,488)      29.69
                                                                                           ---------
Balance at December 31, 1995.............................................................    28,535   $   33.26
Granted..................................................................................     4,510       42.48
Exercised................................................................................    (1,242)      28.67
Cancelled(a).............................................................................    (1,492)      31.37
                                                                                           ---------
Balance at December 31, 1996.............................................................    30,311   $   34.91
                                                                                           ---------
                                                                                           ---------
</TABLE>
 
------------
 
(a) Includes all options  cancelled and forfeited  during the year,  as well  as
    options  related to employees who have been  transferred out of and into TWE
    to and from other Time Warner divisions.
 
<TABLE>
<CAPTION>
                                                                                            DECEMBER 31,
                                                                                           --------------
                                                                                        1996    1995    1994
                                                                                       ------  ------  ------
                                                                                             (THOUSANDS)
<S>                                                                                    <C>     <C>     <C>
Exercisable..........................................................................  22,772  21,846  21,318
</TABLE>
 
                                      F-27
 


<PAGE>

<PAGE>
                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     The following table summarizes information about stock options  outstanding
with respect to employees of TWE at December 31, 1996:
 
<TABLE>
<CAPTION>
                                                                 OPTIONS OUTSTANDING               OPTIONS EXERCISABLE
                                                        --------------------------------------   ------------------------
                                                                        WEIGHTED-
                                                                         AVERAGE     WEIGHTED-                  WEIGHTED-
                                                           NUMBER       REMAINING    AVERAGE       NUMBER       AVERAGE
                                                        OUTSTANDING    CONTRACTUAL   EXERCISE    EXERCISABLE    EXERCISE
               RANGE OF EXERCISE PRICES                 AT 12/31/96       LIFE         PRICE     AT 12/31/96      PRICE
------------------------------------------------------  ------------   -----------   ---------   ------------   ---------
                                                        (THOUSANDS)                              (THOUSANDS)
 
<S>                                                     <C>            <C>           <C>         <C>            <C>
Under $17.............................................        455       3 years       $ 16.61          455       $ 16.61
$17.00 to $25.00......................................      3,124       3 years       $ 21.80        3,124       $ 21.80
$25.01 to $35.00......................................      6,564       5 years       $ 28.89        6,402       $ 28.75
$35.01 to $40.00......................................     11,547       5 years       $ 36.65        8,619       $ 36.22
$40.01 to $45.00......................................      7,621       7 years       $ 42.15        4,172       $ 42.18
$45.01 to $48.51......................................      1,000       9 years       $ 48.51           --       $    --
                                                           ------                                   ------
Total.................................................     30,311       5 years       $ 34.91       22,772       $ 32.84
                                                           ------                                   ------
                                                           ------                                   ------
</TABLE>
 
     TWE  reimburses Time Warner for the use of Time Warner stock options on the
basis described in Note 7.
 
9.  BENEFIT PLANS
 
     TWE  and  its  divisions  have  defined  benefit  pension  plans   covering
substantially  all domestic  employees. Pension  benefits are  based on formulas
that reflect  the employees'  years of  service and  compensation levels  during
their  employment  period.  Qualifying  plans  are  funded  in  accordance  with
government pension  and income  tax  regulations. Plan  assets are  invested  in
equity  and  fixed  income  securities. Time  Warner's  common  stock represents
approximately 5%  and  6%  of  plan  assets  at  December  31,  1996  and  1995,
respectively.
 
     Pension expense included the following:
 
<TABLE>
<CAPTION>
                                            YEARS ENDED DECEMBER 31,
                                          ----------------------------
                                            1996      1995      1994
                                          --------  --------  --------
                                                   (MILLIONS)
 
<S>                                       <C>       <C>       <C>
Service cost............................  $    33   $    20   $     26
Interest cost...........................       28        21         24
Actual return on plan assets............      (27)      (55)         4
Net amortization and deferral...........        7        37        (21)
                                          --------  --------  --------
Total...................................  $    41   $    23   $     33
                                          --------  --------  --------
                                          --------  --------  --------
</TABLE>
 
                                      F-28
 


<PAGE>

<PAGE>
                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     The status of funded pension plans is as follows:
 
<TABLE>
<CAPTION>
                                                                                                           DECEMBER 31,
                                                                                                   ----------------------------
                                                                                                       1996            1995
                                                                                                   ------------    ------------
                                                                                                            (MILLIONS)
 
<S>                                                                                                <C>             <C>
Accumulated benefit obligation (90% vested).....................................................       $212            $213
Effect of future salary increases...............................................................        124             111
                                                                                                       ----            ----
Projected benefit obligation....................................................................        336             324
Plan assets at fair value.......................................................................        284             247
                                                                                                       ----            ----
Projected benefit obligation in excess of plan assets...........................................        (52)            (77)
Unamortized actuarial losses....................................................................          1              60
Unamortized plan changes........................................................................          3               5
Other...........................................................................................         (2)             (3)
                                                                                                       ----            ----
Accrued pension expense.........................................................................       $(50)           $(15)
                                                                                                       ----            ----
                                                                                                       ----            ----
</TABLE>
 
     The following assumptions were used in accounting for pension plans:
 
<TABLE>
<CAPTION>
                                                                                         1996      1995      1994
                                                                                         ----      ----      ----
 
<S>                                                                                      <C>       <C>       <C>
Weighted average discount rate........................................................   7.75%     7.25%      8.5%
Return on plan assets.................................................................      9%        9%        9%
Rate of increase in compensation levels...............................................      6%        6%        6%
</TABLE>
 
     Certain  domestic  employees of  TWE  participate in  multiemployer pension
plans as to which the  expense amounted to $30 million  in 1996, $21 million  in
1995  and $18  million in  1994. Employees  in foreign  countries participate to
varying degrees  in  local  pension  plans,  which  in  the  aggregate  are  not
significant.
 
     Certain  domestic employees also  participate in Time  Warner's savings and
profit sharing plans, as to which the  expense amounted to $28 million in  1996,
$25  million in 1995 and $23 million in 1994. Contributions to the savings plans
are  based  upon   a  percentage  of   the  employees'  elected   contributions.
Contributions   to  the  profit  sharing   plans  are  generally  determined  by
management.
 
10.  FINANCIAL INSTRUMENTS
 
     The carrying value of TWE's financial instruments approximates fair  value,
except  for differences with  respect to long-term,  fixed-rate debt and certain
differences related to cost method  investments and other financial  instruments
which  are not  significant. The  fair value  of financial  instruments, such as
long-term debt and investments, is  generally determined by reference to  market
values  resulting  from  trading on  a  national  securities exchange  or  in an
over-the-counter market. In cases where quoted market prices are not  available,
such  as for derivative financial instruments,  fair value is based on estimates
using present value or other valuation techniques.
 
LONG-TERM DEBT
 
     Based on the level of interest  rates prevailing at December 31, 1996,  the
fair  value of TWE's fixed-rate debt exceeded its carrying value by $181 million
which represents  an unrealized  loss.  Based on  the  level of  interest  rates
prevailing  at  December  31, 1995,  the  fair  value of  TWE's  fixed-rate debt
exceeded its  carrying value  by $386  million, which  represents an  unrealized
loss.  Unrealized gains or losses  related to the differences  in the fair value
and carrying value of TWE's long-term  debt are not recognized unless such  debt
is retired prior to its maturity.
 
                                      F-29
 


<PAGE>

<PAGE>
                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
FOREIGN EXCHANGE RISK MANAGEMENT
 
     Time  Warner uses  foreign exchange contracts  primarily to  hedge the risk
that unremitted or future  license fees owed to  TWE domestic companies for  the
sale  or anticipated sale  of U.S. copyrighted products  abroad may be adversely
affected by changes in foreign currency  exchange rates. As part of its  overall
strategy  to  manage the  level  of exposure  to  the risk  of  foreign currency
exchange rate fluctuations, Time Warner hedges a portion of its foreign currency
exposures anticipated  over the  ensuing twelve  month period,  including  those
related  to  TWE.  At December  31,  1996,  Time Warner  had  effectively hedged
approximately  half  of   TWE's  estimated  foreign   currency  exposures   that
principally relate to anticipated cash flows to be remitted to the U.S. over the
ensuing  twelve month  period, using  foreign exchange  contracts that generally
have maturities of  three months  or less, which  generally are  rolled over  to
provide  continuing  coverage  throughout  the year.  TWE  is  reimbursed  by or
reimburses Time Warner  for Time  Warner contract  gains and  losses related  to
TWE's  foreign currency exposure. Time Warner often closes foreign exchange sale
contracts by purchasing an offsetting  purchase contract. At December 31,  1996,
Time  Warner had contracts for the sale of $447 million and the purchase of $104
million of foreign currencies at fixed  rates and maturities of three months  or
less.  Of Time  Warner's $343  million net sale  contract position,  none of the
foreign exchange purchase  contracts and  $102 million of  the foreign  exchange
sale  contracts related to  TWE's foreign currency  exposure, primarily Japanese
yen (21% of net contract position  related to TWE), French francs (22%),  German
marks (11%) and Canadian dollars (19%), compared to a net sale contract position
of $113 million of foreign currencies at December 31, 1995.
 
     Unrealized  gains  or  losses  related to  foreign  exchange  contracts are
recorded in income as  the market value of  such contracts change;  accordingly,
the  carrying value of foreign exchange contracts approximates market value. The
carrying value of foreign  exchange contracts was not  material at December  31,
1996  and 1995. No cash is  required to be received or  paid with respect to the
realization of  such  gains  and  losses  until  the  related  foreign  exchange
contracts  are settled,  generally at their  respective maturity  dates. For the
years ended  December 31,  1996, 1995  and 1994,  TWE recognized  $6 million  in
gains, $11 million in losses and $20 million in losses, respectively, on foreign
exchange  contracts, which  were or are  expected to be  offset by corresponding
decreases and increases, respectively, in  the dollar value of foreign  currency
license  fee payments that have  been or are anticipated  to be received in cash
from the sale of  U.S. copyrighted products abroad.  Time Warner places  foreign
currency  contracts with  a number of  major financial institutions  in order to
minimize credit risk.
 
     Based on Time  Warner's outstanding foreign  exchange contracts related  to
TWE's  exposure at December 31, 1996, each  5% devaluation of the U.S. dollar as
compared to the level of foreign exchange rates for currencies under contract at
December 31, 1996 would result in approximately $5 million of unrealized  losses
on  foreign exchange contracts. Conversely, a 5% appreciation of the U.S. dollar
as compared to the level of foreign exchange rates for currencies under contract
at December  31,  1996  would  result  in $5  million  of  unrealized  gains  on
contracts.  Consistent with  the nature of  the economic hedge  provided by such
foreign exchange contracts, such unrealized gains  or losses would be offset  by
corresponding  decreases  or increases,  respectively,  in the  dollar  value of
future foreign currency  license fee  payments that  would be  received in  cash
within  the  ensuing  twelve month  period  from  the sale  of  U.S. copyrighted
products abroad.
 
11.  SEGMENT INFORMATION
 
     TWE  classifies  its  business  interests  into  three  fundamental  areas:
Entertainment,  consisting  principally  of interests  in  filmed entertainment,
television production, television broadcasting and theme parks; Cable  Networks,
consisting  principally of interests in cable television programming; and Cable,
consisting principally of interests in cable television systems.
 
     Information as to the operations of  TWE in different business segments  is
set  forth below.  The operating  results of  TWE reflect  the formation  of the
TWE-Advance/Newhouse  Partnership   effective  as   of   April  1,   1995,   the
deconsolidation of Six Flags effective as of June 23, 1995 and the consolidation
of Paragon effective as of
 
                                      F-30
 


<PAGE>

<PAGE>
                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
July  6, 1995.  The operating results  of Six Flags  prior to June  23, 1995 are
reported separately to facilitate comparability.
 
<TABLE>
<CAPTION>
                                                                                      YEARS ENDED DECEMBER 31,
                                                                                    -----------------------------
                                                                                     1996        1995       1994
                                                                                    -------     ------     ------
                                                                                             (MILLIONS)
<S>                                                                                 <C>         <C>        <C>
REVENUES(1)
Filmed Entertainment-Warner Bros. ...............................................   $ 5,639     $5,069     $4,476
Six Flags Theme Parks............................................................        --        227        557
Broadcasting-The WB Network......................................................        87         33         --
Cable Networks-HBO...............................................................     1,763      1,593      1,494
Cable............................................................................     3,851      3,005      2,220
Intersegment elimination.........................................................      (488)      (410)      (287)
                                                                                    -------     ------     ------
Total............................................................................   $10,852     $9,517     $8,460
                                                                                    -------     ------     ------
                                                                                    -------     ------     ------
</TABLE>
 
------------
 
(1) Substantially all operations outside of the United States support the export
    of domestic products.  Revenues include  export sales of  $2.134 billion  in
    1996,  $1.982 billion in 1995 and  $1.693 billion in 1994. Approximately 62%
    of export revenues are from sales to European customers.
 
<TABLE>
<CAPTION>
                                                                                         YEARS ENDED DECEMBER 31,
                                                                                         ------------------------
                                                                                          1996      1995     1994
                                                                                         ------     ----     ----
                                                                                                (MILLIONS)
<S>                                                                                      <C>        <C>      <C>
OPERATING INCOME
Filmed Entertainment-Warner Bros. ....................................................   $  242     $228     $201
Six Flags Theme Parks.................................................................       --       29       56
Broadcasting-The WB Network...........................................................      (98)     (66)      --
Cable Networks-HBO....................................................................      328      274      236
Cable.................................................................................      606      495      355
                                                                                         ------     ----     ----
Total.................................................................................   $1,078     $960     $848
                                                                                         ------     ----     ----
                                                                                         ------     ----     ----
</TABLE>
 
<TABLE>
<CAPTION>
                                                                                           YEARS ENDED DECEMBER 31,
                                                                                         ----------------------------
                                                                                           1996      1995      1994
                                                                                         --------  --------  --------
                                                                                                  (MILLIONS)
<S>                                                                                      <C>       <C>       <C>
DEPRECIATION OF PROPERTY, PLANT AND EQUIPMENT
Filmed Entertainment-Warner Bros.......................................................  $    158  $    107  $     71
Six Flags Theme Parks..................................................................        --        20        51
Broadcasting-The WB Network............................................................        --        --        --
Cable Networks-HBO.....................................................................        22        16        13
Cable..................................................................................       619       452       330
                                                                                         --------  --------  --------
Total..................................................................................  $    799  $    595  $    465
                                                                                         --------  --------  --------
                                                                                         --------  --------  --------
</TABLE>
 
                                      F-31
 


<PAGE>

<PAGE>
                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
<TABLE>
<CAPTION>
                                                                                         YEARS ENDED DECEMBER 31,
                                                                                         ------------------------
                                                                                          1996     1995     1994
                                                                                          ----     ----     ----
                                                                                                (MILLIONS)
<S>                                                                                       <C>      <C>      <C>
AMORTIZATION OF INTANGIBLE ASSETS(1)
Filmed Entertainment-Warner Bros. .....................................................   $125     $124     $135
Six Flags Theme Parks..................................................................     --       11       28
Broadcasting-The WB Network............................................................     --       --       --
Cable Networks-HBO.....................................................................     --        1        6
Cable..................................................................................    311      308      309
                                                                                          ----     ----     ----
Total..................................................................................   $436     $444     $478
                                                                                          ----     ----     ----
                                                                                          ----     ----     ----
</TABLE>
 
------------
 
(1) Amortization includes amortization  relating to the  acquisitions of WCI  in
    1989   and  the  ATC  minority  interest  in  1992  and  to  other  business
    combinations accounted for by the purchase method.
 
     Information as to the assets and capital expenditures of TWE is as follows:
 
<TABLE>
<CAPTION>
                                                                                          DECEMBER 31,
                                                                                 -------------------------------
                                                                                  1996        1995        1994
                                                                                 -------     -------     -------
                                                                                           (MILLIONS)
<S>                                                                              <C>         <C>         <C>
ASSETS
Filmed Entertainment-Warner Bros..............................................   $ 8,057     $ 7,334     $ 7,133
Six Flags Theme Parks.........................................................        --          --         814
Broadcasting-The WB Network...................................................        67          63          --
Cable Networks-HBO............................................................       997         935         895
Cable.........................................................................    10,202       9,842       8,191
Corporate(1)..................................................................       650         731       1,629
                                                                                 -------     -------     -------
Total.........................................................................   $19,973     $18,905     $18,662
                                                                                 -------     -------     -------
                                                                                 -------     -------     -------
</TABLE>
 
------------
 
(1) Consists principally of cash, cash equivalents and other investments.
 
<TABLE>
<CAPTION>
                                                                                    YEARS ENDED DECEMBER 31,
                                                                                 -------------------------------
                                                                                  1996        1995        1994
                                                                                 -------     -------     -------
                                                                                           (MILLIONS)
<S>                                                                              <C>         <C>         <C>
CAPITAL EXPENDITURES
Filmed Entertainment-Warner Bros..............................................   $   340     $   294     $   395
Six Flags Theme Parks.........................................................        --          43          46
Broadcasting-The WB Network...................................................         2          --          --
Cable Networks-HBO............................................................        29          20          13
Cable(1)......................................................................     1,348       1,178         699
                                                                                 -------     -------     -------
Total.........................................................................   $ 1,719     $ 1,535     $ 1,153
                                                                                 -------     -------     -------
                                                                                 -------     -------     -------
</TABLE>
 
------------
 
(1) Cable capital expenditures were funded in part through collections on the  U
    S  WEST Note Receivable in the amount  of $169 million in 1996, $602 million
    in 1995 and $234 million in 1994 (Note 1). The U S WEST Note Receivable  was
    fully collected during 1996.
 
12.  COMMITMENTS AND CONTINGENCIES
 
     Total  rent expense amounted to $205 million  in 1996, $176 million in 1995
and $143 million in  1994. The minimum  rental commitments under  noncancellable
long-term operating leases are: 1997-$177 million; 1998-$173 million; $1999-$167
million; 2000-$157 million; 2001-$151 million and after 2001-$893 million.
 
                                      F-32
 


<PAGE>

<PAGE>
                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     Minimum  commitments and  guarantees under  certain programming, licensing,
franchise and other agreements aggregated approximately $7.3 billion at December
31, 1996, which are payable principally over a five-year period.
 
     Pending  legal  proceedings   are  substantially   limited  to   litigation
incidental  to the businesses of TWE and the pending litigation with the City of
New York and Fox News Channel  ('FNC') relating to Time Warner's acquisition  of
Turner  Broadcasting System, Inc. and the carriage of FNC on Time Warner Cable's
New York  City  cable television  system.  In  the opinion  of  management,  the
ultimate  resolution of  these matters  will not have  a material  effect on the
consolidated financial statements.
 
13.  RELATED PARTY TRANSACTIONS
 
     In the normal  course of conducting  their businesses, TWE  units have  had
various transactions with Time Warner units, generally on terms resulting from a
negotiation  between the  affected units  that in  management's view  results in
reasonable allocations.  Employees of  TWE participate  in various  Time  Warner
medical,  stock option  and other  benefit plans  for which  TWE is  charged its
allocable share of plan expenses,  including administrative costs. In  addition,
Time  Warner provides TWE with  certain corporate services for  which TWE paid a
fee in the amount of $69 million, $64 million and $60 million in 1996, 1995  and
1994, respectively. The corporate support services agreement expires on June 30,
1997, subject to the obligation of both parties to negotiate, in good faith, any
extension  thereto.  Management  believes  that the  corporate  services  fee is
representative of the cost of corporate services that would be necessary for the
stand-alone operations of TWE.
 
     TWE is required  to pay  a $130 million  advisory fee  to U S  WEST over  a
five-year  period  ending  September  15,  1998  for  U  S  WEST's  expertise in
telecommunications, telephony and information technology, and its  participation
in  the management and  upgrade of the  cable systems to  Full Service NetworkTM
capacity.
 
     TWE has management services agreements  with Time Warner's Cable  division,
pursuant  to which  TWE manages, or  provides services to,  the cable television
systems owned by Time Warner. Such cable television systems also pay fees to TWE
for the right  to carry  cable television  programming provided  by TWE's  cable
networks.
 
     TWE's  Filmed  Entertainment-Warner  Bros.  division  has  various  service
agreements with  Time Warner's  Filmed Entertainment-TBS  division, pursuant  to
which   TWE's  Filmed  Entertainment-Warner   Bros.  division  provides  certain
management and distribution  services for Time  Warner's theatrical,  television
and  animated  product,  as  well as  certain  services  for  administrative and
technical support.
 
     Time Warner's Cable Networks-TBS division has license agreements with  TWE,
pursuant  to which the cable networks  have acquired broadcast rights to certain
film and television product. In addition, Time Warner's Music division  provides
home  videocassette distribution services to certain TWE operations, and certain
TWE units place advertising in  magazines published by Time Warner's  Publishing
division.
 
     Time  Warner and TWE  entered into a  credit agreement in  1994 that allows
Time Warner to borrow up  to $400 million from  TWE through September 15,  2000.
Outstanding  borrowings from TWE bear interest at  LIBOR plus 1% per annum. Time
Warner borrowed $400 million in 1994 under the credit agreement.
 
     Prior to TWE's reacquisition of the Time Warner Service Partnership  Assets
in  September  1995, TWE  had service  agreements with  the Time  Warner Service
Partnerships for  program signal  delivery and  transmission services,  and  TWE
provided  billing, collection and marketing services  to the Time Warner Service
Partnerships. TWE also has distribution  and merchandising agreements with  Time
Warner  Entertainment Japan Inc., a company owned by certain former and existing
partners of TWE to conduct TWE's businesses in Japan.
 
     In addition to  transactions with  its partners, TWE  has had  transactions
with  The Columbia House Company partnerships, Cinamerica Theatres, L.P., Comedy
Partners,   L.P.,   Six   Flags   and    other   equity   investees   of    Time
 
                                      F-33
 


<PAGE>

<PAGE>
                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
Warner  and the Entertainment Group, generally  with respect to sales of product
in the ordinary course of business.
 
14.  ADDITIONAL FINANCIAL INFORMATION
 
     Additional financial information with respect to cash flows is as follows:
 
<TABLE>
<CAPTION>
                                                                                          YEARS ENDED DECEMBER 31,
                                                                                          -----------------------
                                                                                          1996     1995     1994
                                                                                          ----     ----     ----
                                                                                                (MILLIONS)
<S>                                                                                       <C>      <C>      <C>
Cash payments made for interest........................................................   $513     $571     $521
Cash payments made for income taxes, net...............................................     74       75       69
Noncash capital contributions (distributions), net.....................................     (1)      50        4
</TABLE>
 
     Noncash  investing  activities  in  1995  included  the  formation  of  the
TWE-Advance/Newhouse Partnership in April 1995 (Note 2) and the reacquisition of
the Time Warner Service Partnership Assets in September 1995 (Note 7).
 
     Other current liabilities consist of:
 
<TABLE>
<CAPTION>
                                                                                                  DECEMBER 31,
                                                                                                -----------------
                                                                                                 1996       1995
                                                                                                ------     ------
                                                                                                   (MILLIONS)
<S>                                                                                             <C>        <C>
Accrued expenses.............................................................................   $1,200     $  937
Accrued compensation.........................................................................      247        216
Deferred revenues............................................................................      293        227
                                                                                                ------     ------
Total........................................................................................   $1,740     $1,380
                                                                                                ------     ------
                                                                                                ------     ------
</TABLE>
 
                                      F-34



<PAGE>

<PAGE>
                         REPORT OF INDEPENDENT AUDITORS
 
THE PARTNERS OF
TIME WARNER ENTERTAINMENT COMPANY, L.P.
 
We  have  audited the  accompanying consolidated  balance  sheet of  Time Warner
Entertainment Company, L.P. ('TWE')  as of December 31,  1996 and 1995, and  the
related  consolidated  statements  of  operations,  cash  flows  and partnership
capital for each of the three years  in the period ended December 31, 1996.  Our
audits  also included  the financial statement  schedule listed in  the Index at
Item 14(a). These financial  statements and schedule  are the responsibility  of
TWE's management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
 
We   conducted  our  audits  in  accordance  with  generally  accepted  auditing
standards. Those standards require that we plan and perform the audit to  obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also  includes
assessing  the  accounting principles  used  and significant  estimates  made by
management, as well as evaluating the overall financial statement  presentation.
We believe that our audits provide a reasonable basis for our opinion.
 
In  our opinion, the  financial statements referred to  above present fairly, in
all material respects, the  consolidated financial position  of TWE at  December
31,  1996 and 1995, and the consolidated  results of its operations and its cash
flows for each  of the three  years in the  period ended December  31, 1996,  in
conformity  with generally accepted accounting principles. Also, in our opinion,
the related financial  statement schedule,  when considered in  relation to  the
basic  financial statements  taken as a  whole, presents fairly  in all material
respects the information set forth therein.
 
                                          ERNST & YOUNG LLP
 
New York, New York
February 11, 1997
 
                                      F-35



<PAGE>

<PAGE>
                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
                         SELECTED FINANCIAL INFORMATION
 
     The selected financial information for each of the five years in the period
ended December 31, 1996 set forth below has been derived from and should be read
in  conjunction with the  consolidated financial statements  and other financial
information presented elsewhere  herein. Capitalized  terms are  as defined  and
described  in such consolidated  financial statements, or  elsewhere herein. The
selected historical financial information for 1995 reflects the consolidation by
TWE of the TWE-Advance/Newhouse Partnership resulting from the formation of such
partnership, effective as  of April 1,  1995, and the  consolidation of  Paragon
effective  as of  July 6,  1995. The  selected historical  financial information
gives effect to the consolidation of Six  Flags effective as of January 1,  1993
as  a result of an increase in TWE's ownership  of Six Flags from 50% to 100% in
September 1993, and the subsequent  deconsolidation of Six Flags resulting  from
the  disposition by TWE of a 51% interest  in Six Flags effective as of June 23,
1995.
 
     The selected historical financial information for 1993 also gives effect to
the admission  of U  S  WEST as  an  additional limited  partner  of TWE  as  of
September 15, 1993 and the issuance of $2.6 billion of TWE debentures during the
year  to reduce indebtedness under the former TWE credit agreement, and for 1992
gives effect to the initial capitalization of TWE and associated refinancings as
of the dates such transactions were consummated and Time Warner's acquisition of
the ATC minority  interest as of  June 30,  1992, using the  purchase method  of
accounting. Time Warner's cost to acquire the ATC minority interest is reflected
in  the consolidated  financial statements of  TWE under the  pushdown method of
accounting.
 
<TABLE>
<CAPTION>
                                                                           YEARS ENDED DECEMBER 31,
                                                              ---------------------------------------------------
SELECTED OPERATING STATEMENT INFORMATION                       1996       1995       1994       1993       1992
                                                              -------    -------    -------    -------    -------
                                                                                  (MILLIONS)
 
<S>                                                           <C>        <C>        <C>        <C>        <C>
Revenues...................................................   $10,852    $ 9,517    $ 8,460    $ 7,946    $ 6,761
Depreciation and amortization..............................     1,235      1,039        943        902        782
Business segment operating income..........................     1,078        960        848        883        795
Interest and other, net....................................       522        580        587        551        525
Income before extraordinary item...........................       210         97        161        208        160
Net income.................................................       210         73        161        198        160
</TABLE>
 
<TABLE>
<CAPTION>
                                                                                 DECEMBER 31,
                                                              ---------------------------------------------------
SELECTED BALANCE SHEET INFORMATION                             1996       1995       1994       1993       1992
                                                              -------    -------    -------    -------    -------
                                                                                  (MILLIONS)
 
<S>                                                           <C>        <C>        <C>        <C>        <C>
Total assets...............................................   $19,973    $18,905    $18,662    $17,963    $15,848
Debt due within one year...................................         7         47         32         24          7
Long-term debt.............................................     5,676      6,137      7,160      7,125      7,171
Time Warner General Partners' Senior Capital...............     1,543      1,426      1,663      1,536         --
Partners' capital..........................................     6,574      6,478      6,233      6,000      6,437
</TABLE>
 
                                      F-36
 


<PAGE>

<PAGE>
                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
                  QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
 
<TABLE>
<CAPTION>
                                                                                                 OPERATING
                                                                                                 INCOME OF     NET
                                                                                                 BUSINESS     INCOME
QUARTER                                                                              REVENUES    SEGMENTS     (LOSS)
----------------------------------------------------------------------------------   --------    ---------    ------
                                                                                               (MILLIONS)
 
<S>                                                                                  <C>         <C>          <C>
1996
1st...............................................................................   $  2,485     $   268      $ 94
2nd...............................................................................      2,608         297        74
3rd...............................................................................      2,718         271        45
4th...............................................................................      3,041         242        (3)
Year..............................................................................     10,852       1,078       210
 
1995
1st...............................................................................   $  2,046     $   191      $  4
2nd...............................................................................      2,392         266        56
3rd (a)...........................................................................      2,324         268        23
4th...............................................................................      2,755         235       (10)
Year (a)..........................................................................      9,517         960        73
</TABLE>
 
------------
 (a)  Net income for the third quarter of 1995 includes an extraordinary loss on
      the retirement of debt of $24 million.
 
                                      F-37
 


<PAGE>

<PAGE>
                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
                SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
                  YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
                                   (MILLIONS)
 
<TABLE>
<CAPTION>
                                                                                  ADDITIONS
                                                                    BALANCE AT    CHARGED TO                   BALANCE
                                                                    BEGINNING     COSTS AND                    AT END
                           DESCRIPTION                              OF PERIOD      EXPENSES     DEDUCTIONS    OF PERIOD
-----------------------------------------------------------------   ----------    ----------    ----------    ---------
 
<S>                                                                 <C>           <C>           <C>           <C>
1996:
Reserves deducted from accounts receivable:
     Allowance for doubtful accounts.............................      $196          $ 97         $  (98)(a)    $ 195
     Reserves for sales returns and allowances...................       169           278           (269)(b)      178
                                                                    ----------    ----------    ----------    ---------
          Total..................................................      $365          $375         $ (367)       $ 373
                                                                    ----------    ----------    ----------    ---------
                                                                    ----------    ----------    ----------    ---------
 
1995:
Reserves deducted from accounts receivable:
     Allowance for doubtful accounts.............................      $188          $104         $  (96)(a)    $ 196
     Reserves for sales returns and allowances...................       118           218           (167)(b)      169
                                                                    ----------    ----------    ----------    ---------
          Total..................................................      $306          $322         $ (263)       $ 365
                                                                    ----------    ----------    ----------    ---------
                                                                    ----------    ----------    ----------    ---------
 
1994:
Reserves deducted from accounts receivable:
     Allowance for doubtful accounts.............................      $161          $ 49         $  (22)(a)    $ 188
     Reserves for sales returns and allowances...................        96           164           (142)(b)      118
                                                                    ----------    ----------    ----------    ---------
          Total..................................................      $257          $213         $ (164)       $ 306
                                                                    ----------    ----------    ----------    ---------
                                                                    ----------    ----------    ----------    ---------
</TABLE>
 
------------
 (a)  Represents uncollectible receivables charged against the reserve.
 (b)  Represents returns or allowances applied against the reserve.
 
                                      F-38



<PAGE>

<PAGE>
                              TWE GENERAL PARTNERS
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
 
     Set  forth below is a discussion of the results of operations and financial
condition of WCI, the only General Partner with independent business operations.
The financial position  and results  of operations of  ATC, TWOI  and WCCI  (the
other  General  Partners of  TWE, as  described  in Note  1 to  the accompanying
consolidated  financial   statements)  are   principally  derived   from   their
investments  in  TWE,  Time  Warner  Companies,  Inc.  ('Time  Warner')*, Turner
Broadcasting System, Inc.  ('TBS') and  their revolving  credit agreements  with
Time  Warner. Capitalized terms are as defined and described in the accompanying
consolidated financial statements, or elsewhere herein.
 
     The following  comparative  discussion of  the  results of  operations  and
financial condition of WCI includes, among other factors, an analysis of changes
in  operating income before depreciation and amortization ('EBITDA') in order to
eliminate the effect on  WCI's operating performance  of significant amounts  of
amortization  of  intangible  assets  recognized in  Time  Warner's  $14 billion
acquisition of WCI in 1989 and other business combinations accounted for by  the
purchase method. Financial analysts generally consider EBITDA to be an important
measure  of  comparative  operating  performance  for  WCI,  and  when  used  in
comparison to debt levels or the coverage  of interest expense, as a measure  of
liquidity.  However,  EBITDA  should be  considered  in  addition to,  not  as a
substitute for, operating income,  net income, cash flow  and other measures  of
financial  performance  and  liquidity  reported  in  accordance  with generally
accepted accounting principles.
 
RESULTS OF OPERATIONS
 
1996 VS. 1995
 
     WCI had revenues of $3.949 billion and net income of $169 million in  1996,
compared  to  revenues  of $4.196  billion,  income  of $153  million  before an
extraordinary loss on the retirement of debt  and net income of $146 million  in
1995.  EBITDA  increased to  $702 million  from  $658 million.  Depreciation and
amortization, including amortization related  to the purchase  of WCI, was  $370
million  in 1996 and  $356 million in  1995. Operating income  increased to $332
million from $302 million.  Operating results for 1995  included an $85  million
charge  relating to certain start-up businesses  and joint ventures owned by WCI
which were restructured or closed. With regard to 1996, despite maintaining  its
leading  domestic  market  share  (over  22%),  WCI's  domestic  recorded  music
operating results were negatively affected by the industry-wide softness in  the
overexpanded  U.S. retail marketplace,  which has resulted in  a number of music
retail store  closings and  higher  returns of  music  product. The  decline  in
revenues  principally related  to (i) the  effects from the  current U.S. retail
environment, including  an  increase in  WCI's  provision for  returns,  (ii)  a
decline  in international recorded music sales and (iii) the absence of revenues
from certain start-up businesses which are no longer being operated by WCI.  The
increase in EBITDA and operating income principally resulted from the absence of
losses  from certain start-up businesses and  joint ventures, the absence of the
$85 million charge  recognized in  1995 and  the inclusion  of certain  one-time
gains, including gains on the sale of investments, offset in part by the decline
in  the  worldwide  recorded music  business  and  a related  increase  in WCI's
provision for bad debts. Management expects  that the current state of the  U.S.
retail environment will continue to affect 1997 operating results.
 
     WCI's equity in the pretax income of TWE was $133 million in 1996, compared
to  $87 million  in 1995. TWE's  operating results  in 1996 as  compared to 1995
reflect an overall increase in operating income generated
 
------------
 
* On October 10, 1996, Time Warner  Inc. acquired the remaining 80% interest  in
  TBS  that it did not already own (the  'TBS Transaction'). As a result of this
  transaction, a new parent  company with the name  'Time Warner Inc.'  replaced
  the  old parent company of the same name ('Old Time Warner', now known as Time
  Warner Companies, Inc.), and Old Time  Warner and TBS became separate,  wholly
  owned   subsidiaries  of  the  new   parent  company.  The  General  Partners'
  pre-existing ownership interests in Old Time Warner and TBS were unaffected by
  the TBS Transaction. Unless the context indicates otherwise, references herein
  to 'Time Warner' refer to Old Time Warner.
 
                                      F-39
 


<PAGE>

<PAGE>
                              TWE GENERAL PARTNERS
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
        OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
 
by its business  segments and  interest savings in  1996 on  lower average  debt
levels  related  to its  ongoing debt  reduction  program, offset  in part  by a
decrease in  investment-related  income and  an  increase in  minority  interest
expense   related  to  the  consolidation  of   the  operating  results  of  the
TWE-Advance/Newhouse Partnership for a full twelve month period.
 
     Interest and other, net was $58 million  in 1996 compared to $3 million  in
1995.  Interest expense decreased to $34  million from $88 million primarily due
to lower average debt  levels associated with the  recapitalization of WCI  that
occurred on April 1, 1995. There was other expense, net, of $24 million in 1996,
compared  to other income, net, of $85 million in 1995, principally because of a
decrease in  investment-related income  resulting from  gains on  certain  asset
sales recognized in 1995, increased losses from reductions in the carrying value
of  certain  investments  and a  reduction  in  interest income  related  to the
resolution of a corporate tax matter in 1995.
 
     The relationship between income before income taxes and income tax  expense
for the General Partners is principally affected by the amortization of goodwill
and  certain  other financial  statement expenses  that  are not  deductible for
income tax  purposes.  Income tax  expense  for  each of  the  General  Partners
includes  all income taxes related to  its allocable share of partnership income
and its equity in the income tax expense of corporate subsidiaries of TWE.
 
1995 VS. 1994
 
     WCI had  revenues of  $4.196  billion, income  of  $153 million  before  an
extraordinary  loss on the retirement of debt  and net income of $146 million in
1995, compared to revenues of  $3.986 billion and net  income of $70 million  in
1994.  EBITDA  increased to  $658 million  from  $647 million.  Depreciation and
amortization, including amortization related to  the purchase of WCI,  increased
to $356 million in 1995 from $341 million in 1994. Operating income decreased to
$302 million from $306 million. Operating results were adversely affected by $85
million  in losses recorded in 1995 that related to certain businesses and joint
ventures owned by WCI which were restructured or closed. Revenues for 1995  were
negatively  affected  by  certain  reclassifications  relating  to  third  party
pressing and distribution arrangements and changes in WCI's ownership  interests
in  certain  investments  and subsidiaries  that  resulted in  changes  from the
consolidation to the  equity method  of accounting. Excluding  the effects  from
such  reclassifications  and  changes, revenues  from  the  fundamental business
increased by approximately  6%, principally  as a  result of  increases in  both
domestic   and  international  recorded  music   revenues  and  increased  music
publishing  revenues.  Domestic  and   international  recorded  music   revenues
benefited from a number of popular releases and an increase in the percentage of
compact  disc to total unit  sales. Excluding the $85  million in losses, EBITDA
increased, and operating  income benefited, principally  from the revenue  gains
and  interest income on the resolution of a recorded music tax matter, offset in
part  by  expenses  incurred  in  connection  with  the  settlement  of  certain
employment contracts.
 
     The  losses in 1995 relating to  certain businesses and joint ventures that
were restructured or closed were primarily related to Warner Music  Enterprises,
one  of WCI's direct marketing efforts, and  the write off of its related direct
mail order assets that were not recoverable due to the closure of this business.
The activities that were not continued were not material to previous  historical
operating results.
 
     WCI's  equity in the pretax income of TWE was $87 million in 1995, compared
to $96  million in  1994. TWE's  operating results  in 1995  reflect an  overall
increase  in operating income generated by  its business segments (including the
contribution  by  the  TWE-Advance/Newhouse  Partnership)  and  an  increase  in
investment-related   income  resulting  from  gains   on  the  sale  of  certain
unclustered cable systems  and other  investments, offset  by minority  interest
expense  related  to the  consolidation  of the  operating  results of  the TWE-
Advance/Newhouse Partnership effective as of April 1, 1995.
 
                                      F-40
 


<PAGE>

<PAGE>
                              TWE GENERAL PARTNERS
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
        OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
 
     Interest and other, net was $3 million in 1995 compared to $126 million  in
1994. Interest expense decreased to $88 million from $222 million as a result of
lower  average  debt  levels  associated with  the  WCI  Recapitalization, which
occurred on April 1, 1995. Other income,  net, of $85 million in 1995  decreased
from   $96   million   in   1994,  principally   because   of   a   decrease  in
investment-related income, which was partially offset by the recognition in 1995
of interest income on the resolution of a corporate tax matter.
 
     On a pro forma basis, giving effect to the WCI Recapitalization and certain
transactions recently entered into  by TWE, including (i)  the formation of  the
TWE-Advance/Newhouse  Partnership,  (ii) the  refinancing of  approximately $2.6
billion of pre-existing bank debt, (iii) the  TWE sale of a 51% interest in  Six
Flags  (the  'Six Flags  Transaction') and  (iv)  the sale  or expected  sale or
transfer of certain unclustered cable television systems (collectively, the 'TWE
Transactions'), as if each of such transactions had occurred at the beginning of
the periods, WCI would have reported for  the years ended December 31, 1995  and
1994  income before extraordinary item of $188  million and $190 million and net
income of $181  million and  $190 million,  respectively. The  formation of  the
TWE-Advance/Newhouse  Partnership, the refinancing of approximately $2.6 billion
of pre-existing bank debt and the Six Flags Transaction are more fully described
in Note 2 to the  consolidated financial statements contained elsewhere  herein.
TWE's  reacquisition of  the Time Warner  Service Partnership Assets  has no pro
forma effect on the operating results  of WCI since the historical statement  of
operations of WCI for the years ended December 31, 1995 and 1994 already reflect
income  or losses from its interest in the Time Warner Service Partnerships. The
1995 to  1994 comparison  of pro  forma results  are similarly  affected by  any
underlying  trends  unrelated  to the  transactions  given pro  forma  effect to
therein. The increase in  pro forma over historical  net income for each  period
principally  results from the  pro forma effects  of interest savings associated
with the WCI Recapitalization and an increase in the equity in the pretax income
of TWE as a result of the TWE Transactions.
 
     The relationship between income before income taxes and income tax  expense
for the General Partners is principally affected by the amortization of goodwill
and  certain  other financial  statement expenses  that  are not  deductible for
income tax  purposes.  Income tax  expense  for  each of  the  General  Partners
includes  all income taxes related to  its allocable share of partnership income
and its equity in the income tax expense of corporate subsidiaries of TWE.
 
FINANCIAL CONDITION AND LIQUIDITY
DECEMBER 31, 1996
 
1996 FINANCIAL CONDITION
 
     WCI had $9 billion of equity at December 31, 1996, compared to $9.3 billion
of equity at December 31, 1995. Cash and equivalents decreased to $91 million at
December 31, 1996, compared  to $106 million  at December 31,  1995. WCI had  no
long-term debt due to Time Warner at the end of either period.
 
     The  total  capitalization  of ATC,  TWOI  and  WCCI at  December  31, 1996
consisted of equity  capital of  $2.3 billion,  $654 million  and $814  million,
respectively,  compared  to  $2.3  billion, $644  million  and  $803  million at
December 31,  1995,  respectively.  Although  these  General  Partners  have  no
independent  operations, it  is expected  that additional  tax-related and other
distributions from TWE,  as well  as availability under  each General  Partner's
revolving  credit agreement with Time Warner,  will continue to be sufficient to
satisfy the  General Partners'  obligations with  respect to  their tax  sharing
agreements with Time Warner for the foreseeable future.
 
                                      F-41
 


<PAGE>

<PAGE>
                              TWE GENERAL PARTNERS
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
        OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
 
CASH FLOWS
 
     In  1996, WCI's  cash provided by  operations amounted to  $707 million and
reflected $702 million  of EBITDA, $108  million of distributions  from TWE  and
$108  million  related to  a reduction  in  other working  capital requirements,
balance sheet accounts and noncash items, less $24 million of interest  payments
and  $187 million of income taxes ($77 million  of which was paid to Time Warner
under a  tax sharing  agreement).  Cash provided  by  WCI's operations  of  $762
million  in  1995  reflected  $658  million  of  EBITDA,  and  $518  million  of
distributions from TWE, less $78 million  of interest payments, $179 million  of
income  taxes ($41 million of which was paid  to Time Warner under a tax sharing
agreement) and $157  million related  to an  increase in  other working  capital
requirements, balance sheet accounts and noncash items. Management believes that
the  operating cash flow of WCI is  sufficient to meet its capital and liquidity
needs for the foreseeable future without cash distributions from TWE above those
permitted by existing agreements.
 
     WCI and the other General  Partners have no claims  on the assets and  cash
flows  of  TWE except  through the  payment of  certain reimbursements  and cash
distributions. In 1996, the General Partners received an aggregate $228  million
of  distributions, consisting of  $215 million of  tax-related distributions and
$13 million of stock option related distributions. In 1995, the General Partners
received an  aggregate  $1.088  billion of  distributions,  consisting  of  $366
million  of TWE  partnership income  allocated to  the General  Partners' senior
capital interest, $680 million of tax-related distributions, $25 million of Time
Warner Service Partnership distributions and $17 million of stock option related
distributions. Of such aggregate distributions in 1996 and 1995, WCI, ATC,  TWOI
and  WCCI received $108 million and  $518 million, respectively; $93 million and
$443 million, respectively; $27 million and $127 million, respectively; and  $33
million and $157 million, respectively.
 
OFF-BALANCE SHEET ASSETS
 
     WCI  believes that the value of  certain off-balance sheet assets should be
considered, along with other factors  discussed elsewhere herein, in  evaluating
its  financial  condition  and  prospects  for  future  results  of  operations,
including its ability to fund its capital and liquidity needs.
 
     As a  creator  and  distributor  of entertainment  copyrights,  WCI  has  a
significant  amount of internally-generated intangible assets whose value is not
fully reflected in  its respective consolidated  balance sheet. Such  intangible
assets   extend  across  WCI's  principal   business  interests,  but  are  best
exemplified by WCI's collection of copyrighted music product. Generally accepted
accounting principles do not recognize the  value of such assets, except at  the
time  they  may be  acquired  in a  business  combination accounted  for  by the
purchase method of accounting.
 
     Because WCI owns the copyrights  to such creative material, it  continually
generates  revenue through the sale of  such products across different media and
in new and existing markets. Technological advances, such as the introduction of
the compact  disc and  home  videocassette in  the  1980's and  potentially  the
digital  video  disc  in  the future,  have  historically  generated significant
revenue opportunities  through  the repackaging  and  sale of  such  copyrighted
products under the new technological format. Accordingly, such intangible assets
have  significant off-balance sheet  asset value that is  not fully reflected in
the consolidated balance sheet of WCI.
 
FOREIGN CURRENCY RISK MANAGEMENT
 
     Time Warner uses  foreign exchange  contracts primarily to  hedge the  risk
that  unremitted or future royalties owed to WCI domestic companies for the sale
or anticipated  sale  of  U.S.  copyrighted products  abroad  may  be  adversely
affected  by changes in foreign currency exchange  rates. As part of its overall
strategy to  manage  the level  of  exposure to  the  risk of  foreign  currency
exchange   rate   fluctuations,   Time   Warner  hedges   a   portion   of  its,
 
                                      F-42
 


<PAGE>

<PAGE>
                              TWE GENERAL PARTNERS
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
        OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
 
TWE's and WCI's combined foreign currency exposures anticipated over the ensuing
twelve month period. At  December 31, 1996, Time  Warner has effectively  hedged
approximately  half  of WCI's  total estimated  foreign currency  exposures that
principally relate to anticipated cash flows to be remitted to the U.S. over the
ensuing twelve month  period, using  foreign exchange  contracts that  generally
have  maturities of  three months  or less, which  are generally  rolled over to
provide continuing coverage throughout  the year. Time  Warner reimburses or  is
reimbursed  by  WCI  for contract  gains  and  losses related  to  WCI's foreign
currency exposure. Time Warner often  closes foreign exchange sale contracts  by
purchasing  an offsetting purchase  contract. At December  31, 1996, Time Warner
had contracts for the sale of $447  million and the purchase of $104 million  of
foreign  currencies  at fixed  rates.  Of Time  Warner's  $343 million  net sale
contract position,  $323 million  of foreign  exchange sale  contracts and  $102
million of foreign exchange purchase contracts related to WCI's foreign currency
exposure, compared to contracts for the sale of $372 million and the purchase of
$140 million of foreign currencies at December 31, 1995.
 
     See Note 9 to the accompanying consolidated financial statements for a more
comprehensive  description  of WCI's  interest  rate and  foreign  currency risk
management activities.
 
                                      F-43



<PAGE>

<PAGE>
                              TWE GENERAL PARTNERS
                          CONSOLIDATED BALANCE SHEETS
                               DECEMBER 31, 1996
                        (MILLIONS, EXCEPT SHARE AMOUNTS)
 
<TABLE>
<CAPTION>
                                                                                    WCI       ATC      TWOI     WCCI
                                                                                  -------    ------    ----    ------
 
<S>                                                                               <C>        <C>       <C>     <C>
ASSETS
CURRENT ASSETS
Cash and equivalents...........................................................   $    91    $   --    $--     $  --
Receivables, less allowances of $362 million...................................     1,013        --     --        --
Inventories....................................................................       165        --     --        --
Prepaid expenses...............................................................       510        --     --        --
                                                                                  -------    ------    ----    ------
Total current assets...........................................................     1,779        --     --        --
 
Investments in and amounts due to and from TWE.................................     1,998     1,980    555       701
Investments in Time Warner Service Partnerships................................       146       135     34        23
Investments in Time Warner.....................................................        86        64     17        21
Other investments..............................................................     1,549       210     59        82
 
Music catalogues, contracts and copyrights.....................................     1,035        --     --        --
Goodwill.......................................................................     3,704        --     --        --
Other assets, primarily property, plant and equipment..........................       537        --     --        --
                                                                                  -------    ------   ----     ------
Total assets...................................................................   $10,834    $2,389   $665     $ 827
                                                                                  -------    ------   ----     ------
                                                                                  -------    ------   ----     ------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable...............................................................   $   107    $   --    $--     $  --
Royalties payable..............................................................       827        --     --        --
Other current liabilities......................................................       518         2     --        --
                                                                                  -------    ------    ----    ------
Total current liabilities......................................................     1,452         2     --        --
 
Long-term liabilities, including $137, $55, $11 and $13 million due to Time
  Warner.......................................................................       395        56     11        13
 
SHAREHOLDERS' EQUITY
Common stock, no par value, 1,000; 20,000; 20,000; and 20,000 shares
  authorized, 100; 11,582; 11,466; and 10,812 shares issued and outstanding....         1         1      1         1
Paid-in capital................................................................    10,009     2,893    830     1,033
Retained earnings (accumulated deficit)........................................       390        27     (2)       (3)
                                                                                  -------    ------   ----     ------
                                                                                   10,400     2,921    829     1,031
 
Due from Time Warner, net......................................................      (923)     (254)   (79)      (98)
Reciprocal interest in Time Warner stock.......................................      (490)     (336)   (96)     (119)
                                                                                  -------    ------   ----     ------
Total shareholders' equity.....................................................     8,987     2,331    654       814
                                                                                  -------    ------   ----     ------
Total liabilities and shareholders' equity.....................................   $10,834    $2,389   $665     $ 827
                                                                                  -------    ------   ----     ------
                                                                                  -------    ------   ----     ------
</TABLE>
 
See accompanying notes.
 
                                      F-44
 


<PAGE>

<PAGE>
                              TWE GENERAL PARTNERS
                          CONSOLIDATED BALANCE SHEETS
                               DECEMBER 31, 1995
                        (MILLIONS, EXCEPT SHARE AMOUNTS)
 
<TABLE>
<CAPTION>
                                                                                    WCI       ATC      TWOI     WCCI
                                                                                  -------    ------    ----    ------
 
<S>                                                                               <C>        <C>       <C>     <C>
ASSETS
CURRENT ASSETS
Cash and equivalents...........................................................   $   106    $   --    $--     $  --
Receivables, less allowances of $308 million...................................     1,162        --     --        --
Inventories....................................................................       189        --     --        --
Prepaid expenses...............................................................       519        --     --        --
                                                                                  -------    ------    ----    ------
Total current assets...........................................................     1,976        --     --        --
 
Investments in and amounts due to and from TWE.................................     1,984     1,959    548       693
Investments in Time Warner Service Partnerships................................       143       132     33        22
Investments in Time Warner.....................................................        86        65     17        21
Other investments..............................................................     1,526       212     60        84
 
Music catalogues, contracts and copyrights.....................................     1,140        --     --        --
Goodwill.......................................................................     3,849        --     --        --
Other assets, primarily property, plant and equipment..........................       532        --     --        --
                                                                                  -------    ------   ----     ------
Total assets...................................................................   $11,236    $2,368   $658     $ 820
                                                                                  -------    ------   ----     ------
                                                                                  -------    ------   ----     ------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable...............................................................   $   169    $   --    $--     $  --
Royalties payable..............................................................       671        --     --        --
Other current liabilities......................................................       642         2     --        --
                                                                                  -------    ------    ----    ------
Total current liabilities......................................................     1,482         2     --        --
 
Long-term liabilities, including $140, $66, $14 and $17 million due to Time
  Warner.......................................................................       412        69     14        17
 
SHAREHOLDERS' EQUITY
Common stock, no par value, 1,000; 20,000; 20,000; and 20,000 shares
  authorized, 100; 11,582; 11,466; and 10,812 shares issued and outstanding....         1         1      1         1
Paid-in capital................................................................    10,009     2,893    830     1,034
Retained earnings (accumulated deficit)........................................       201       (47)   (25)      (30)
                                                                                  -------    ------    ----    ------
                                                                                   10,211     2,847    806     1,005
 
Due from Time Warner, net......................................................      (379)     (214)   (66)      (83)
Reciprocal interest in Time Warner stock.......................................      (490)     (336)   (96)     (119)
                                                                                  -------    ------    ----    ------
Total shareholders' equity.....................................................     9,342     2,297    644       803
                                                                                  -------    ------    ----    ------
Total liabilities and shareholders' equity.....................................   $11,236    $2,368   $658     $ 820
                                                                                  -------    ------    ----    ------
                                                                                  -------    ------    ----    ------
</TABLE>
 
See accompanying notes.
 
                                      F-45



<PAGE>

<PAGE>
                              TWE GENERAL PARTNERS
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                          YEAR ENDED DECEMBER 31, 1996
                                   (MILLIONS)
 
<TABLE>
<CAPTION>
                                                                                 WCI        ATC       TWOI      WCCI
                                                                                ------      ----      ----      ----
 
<S>                                                                             <C>         <C>       <C>       <C>
Revenues (a).................................................................   $3,949      $--       $--       $--
                                                                                ------      ----      ----      ----
 
Cost of revenues (a)(b)......................................................    2,765       --        --        --
Selling, general and administrative (a)(b)...................................      852       --        --        --
                                                                                ------      ----      ----      ----
 
Operating expenses...........................................................    3,617       --        --        --
                                                                                ------      ----      ----      ----
 
Business segment operating income............................................      332       --        --        --
Equity in pretax income of TWE (a)...........................................      133      114        33        40
Interest and other, net (a)..................................................      (58)      24         7         9
                                                                                ------      ----      ----      ----
 
Income before income taxes...................................................      407      138        40        49
Income taxes (a).............................................................     (238)     (76)      (22)      (27)
                                                                                ------      ----      ----      ----
 
Net income...................................................................   $  169      $62       $18       $22
                                                                                ------      ----      ----      ----
                                                                                ------      ----      ----      ----
</TABLE>
 
------------
(a) Includes  the following  income (expenses) resulting  from transactions with
    Time Warner, TWE or equity investees of the General Partners:
 
<TABLE>
<S>                                                                             <C>         <C>       <C>       <C>
    Revenues.................................................................   $  188      $--       $--       $--
    Cost of revenues.........................................................      (55)      --        --        --
    Selling, general and administrative......................................       45       --        --        --
    Equity in pretax income of TWE...........................................      (18)      --        --        --
    Interest and other, net..................................................       47       --        --        --
    Income taxes.............................................................      (77)     (47)      (14)      (17)
 
(b) Includes depreciation and amortization expense of:.......................   $  370      $--       $--       $--
                                                                                ------      ----      ----      ----
                                                                                ------      ----      ----      ----
</TABLE>
 
See accompanying notes.
 
                                      F-46
 


<PAGE>

<PAGE>
                              TWE GENERAL PARTNERS
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                          YEAR ENDED DECEMBER 31, 1995
                                   (MILLIONS)
 
<TABLE>
<CAPTION>
                                                                                 WCI         ATC       TWOI      WCCI
                                                                                ------      -----      ----      ----
 
<S>                                                                             <C>         <C>        <C>       <C>
Revenues (a).................................................................   $4,196      $  --      $--       $--
                                                                                ------      -----      ----      ----
 
Cost of revenues (a)(b)......................................................    2,918         --       --        --
Selling, general and administrative (a)(b)...................................      976         --       --        --
                                                                                ------      -----      ----      ----
 
Operating expenses...........................................................    3,894         --       --        --
                                                                                ------      -----      ----      ----
 
Business segment operating income............................................      302         --       --        --
Equity in pretax income of TWE (a)...........................................       87         75       21        26
Interest and other, net (a)..................................................       (3)       138       22        27
                                                                                ------      -----      ----      ----
 
Income before income taxes...................................................      386        213       43        53
Income taxes (a).............................................................     (233)      (112)     (25)      (31)
                                                                                ------      -----      ----      ----
Income before extraordinary item.............................................      153        101       18        22
Extraordinary loss on retirement of debt, net of $4, $4, $1 and
  $1 million income tax benefit..............................................       (7)        (6)      (2)       (2)
                                                                                ------      -----      ----      ----
 
Net income...................................................................   $  146      $  95      $16       $20
                                                                                ------      -----      ----      ----
                                                                                ------      -----      ----      ----
</TABLE>
 
------------
(a) Includes the following  income (expenses) resulting  from transactions  with
    Time Warner, TWE or equity investees of the General Partners:
 
<TABLE>
<S>                                                                             <C>         <C>        <C>       <C>
    Revenues.................................................................   $  196      $  --      $--       $--
    Cost of revenues.........................................................      (56)        --       --        --
    Selling, general and administrative......................................       29         --       --        --
    Equity in pretax income of TWE...........................................      (14)        --       --        --
    Interest and other, net..................................................      (23)        --       --        --
    Income taxes.............................................................      (41)       (77)     (15)      (19)
 
(b) Includes depreciation and amortization expense of:.......................   $  356      $  --      $--       $--
                                                                                ------      -----      ----      ----
                                                                                ------      -----      ----      ----
</TABLE>
 
See accompanying notes.
 
                                      F-47
 


<PAGE>

<PAGE>
                              TWE GENERAL PARTNERS
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                          YEAR ENDED DECEMBER 31, 1994
                                   (MILLIONS)
 
<TABLE>
<CAPTION>
                                                                                 WCI         ATC       TWOI      WCCI
                                                                                ------      -----      ----      ----
 
<S>                                                                             <C>         <C>        <C>       <C>
Revenues (a).................................................................   $3,986      $  --      $--       $--
                                                                                ------      -----      ----      ----
 
Cost of revenues (a)(b)......................................................    2,892         --       --        --
Selling, general and administrative (a)(b)...................................      788         --       --        --
                                                                                ------      -----      ----      ----
 
Operating expenses...........................................................    3,680         --       --        --
                                                                                ------      -----      ----      ----
 
Business segment operating income............................................      306         --       --        --
Equity in pretax income of TWE (a)...........................................       96         82       23        29
Interest and other, net (a)..................................................     (126)        26        7         8
                                                                                ------      -----      ----      ----
 
Income before income taxes...................................................      276        108       30        37
Income taxes (a).............................................................     (206)       (70)     (20)      (25)
                                                                                ------      -----      ----      ----
Net income...................................................................   $   70      $  38      $10       $12
                                                                                ------      -----      ----      ----
                                                                                ------      -----      ----      ----
</TABLE>
 
------------
(a) Includes  the following  income (expenses) resulting  from transactions with
    Time Warner, TWE or equity investees of the General Partners:
 
<TABLE>
<S>                                                                             <C>         <C>        <C>       <C>
    Revenues.................................................................   $  201      $  --      $--       $--
    Cost of revenues.........................................................      (67)        --       --        --
    Selling, general and administrative......................................       46         --       --        --
    Equity in pretax income of TWE...........................................      (13)        --       --        --
    Interest and other, net..................................................     (205)        --       --        --
    Income taxes.............................................................      (82)       (54)     (15)      (19)
 
(b) Includes depreciation and amortization expense of:.......................   $  341      $  --      $--       $--
                                                                                ------      -----      ----      ----
                                                                                ------      -----      ----      ----
</TABLE>
 
See accompanying notes.
 
                                      F-48



<PAGE>

<PAGE>
                              TWE GENERAL PARTNERS
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                          YEAR ENDED DECEMBER 31, 1996
                                   (MILLIONS)
 
<TABLE>
<CAPTION>
                                                                            WCI        ATC       TWOI       WCCI
                                                                           -----      -----      -----      -----
 
<S>                                                                        <C>        <C>        <C>        <C>
OPERATIONS
Net income..............................................................   $169       $ 62       $ 18       $ 22
Adjustments for noncash and nonoperating items:
Depreciation and amortization...........................................    370         --         --         --
Excess of equity in pretax income of TWE over distributions.............    (25)       (21)        (6)        (7)
Equity in income of other investee companies, net of distributions......    (38)        (2)        --         (1)
Changes in operating assets and liabilities:
    Receivables.........................................................     64         --         --         --
    Inventories.........................................................     16         --         --         --
    Accounts payable and other liabilities..............................     (2)        --         --         --
    Other balance sheet changes.........................................    153          6          3          3
                                                                           -----      -----      -----      -----
 
Cash provided by operations.............................................    707         45         15         17
                                                                           -----      -----      -----      -----
 
INVESTING ACTIVITIES
Investments and acquisitions............................................    (56)        --         --         --
Capital expenditures....................................................   (154)        --         --         --
Investment proceeds.....................................................     38         --         --         --
                                                                           -----      -----      -----      -----
 
Cash used by investing activities.......................................   (172)        --         --         --
                                                                           -----      -----      -----      -----
 
FINANCING ACTIVITIES
Dividends...............................................................     (6)        (5)        (2)        (2)
Increase in amounts due from Time Warner, net...........................   (544)       (40)       (13)       (15)
                                                                           -----      -----      -----      -----
 
Cash used by financing activities.......................................   (550)       (45)       (15)       (17)
                                                                           -----      -----      -----      -----
 
DECREASE IN CASH AND EQUIVALENTS........................................    (15)        --         --         --
 
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD.............................    106         --         --         --
                                                                           -----      -----      -----      -----
 
CASH AND EQUIVALENTS AT END OF PERIOD...................................   $ 91       $ --       $ --       $ --
                                                                           -----      -----      -----      -----
                                                                           -----      -----      -----      -----
</TABLE>
 
See accompanying notes.
 
                                      F-49
 


<PAGE>

<PAGE>
                              TWE GENERAL PARTNERS
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                          YEAR ENDED DECEMBER 31, 1995
                                   (MILLIONS)
 
<TABLE>
<CAPTION>
                                                                            WCI        ATC       TWOI       WCCI
                                                                           -----      -----      -----      -----
<S>                                                                        <C>        <C>        <C>        <C>
OPERATIONS
Net income..............................................................   $146       $ 95       $ 16       $ 20
Adjustments for noncash and nonoperating items:
Extraordinary loss on retirement of debt................................      7          6          2          2
Depreciation and amortization...........................................    356         --         --         --
Excess of distributions over equity in pretax income of TWE.............    431        369        106        131
Equity in income of other investee companies, net of distributions......   (103)       (96)        (9)       (12)
Changes in operating assets and liabilities:
    Receivables.........................................................   (200)        --         --         --
    Inventories.........................................................    (10)        --         --         --
    Accounts payable and other liabilities..............................     (1)        --         --         --
    Other balance sheet changes.........................................    136         16          1          3
                                                                           -----      -----      -----      -----
 
Cash provided by operations.............................................    762        390        116        144
                                                                           -----      -----      -----      -----
 
INVESTING ACTIVITIES
Investments and acquisitions............................................   (210)       (10)        (3)        (4)
Capital expenditures....................................................   (124)        --         --         --
Investment proceeds.....................................................    117         --         --         --
                                                                           -----      -----      -----      -----
 
Cash used by investing activities.......................................   (217)       (10)        (3)        (4)
                                                                           -----      -----      -----      -----
 
FINANCING ACTIVITIES
Borrowings..............................................................      9         48          7          9
Debt repayments.........................................................   (177)       (58)        (9)       (11)
Capital contributions...................................................    142         --         --         --
Dividends...............................................................   (182)      (156)       (45)       (55)
Increase in amounts due from Time Warner, net...........................   (379)      (214)       (66)       (83)
                                                                           -----      -----      -----      -----
 
Cash used by financing activities.......................................   (587)      (380)      (113)      (140)
                                                                           -----      -----      -----      -----
 
DECREASE IN CASH AND EQUIVALENTS........................................    (42)        --         --         --
 
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD.............................    148         --         --         --
                                                                           -----      -----      -----      -----
 
CASH AND EQUIVALENTS AT END OF PERIOD...................................   $106       $ --       $ --       $ --
                                                                           -----      -----      -----      -----
                                                                           -----      -----      -----      -----
</TABLE>
 
See accompanying notes.
 
                                      F-50
 


<PAGE>

<PAGE>
                              TWE GENERAL PARTNERS
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                          YEAR ENDED DECEMBER 31, 1994
                                   (MILLIONS)
 
<TABLE>
<CAPTION>
                                                                            WCI        ATC       TWOI       WCCI
                                                                           -----      -----      -----      -----
<S>                                                                        <C>        <C>        <C>        <C>
OPERATIONS
Net income..............................................................   $ 70       $ 38       $ 10       $ 12
Adjustments for noncash and nonoperating items:
Depreciation and amortization...........................................    341         --         --         --
Excess of equity in pretax income of TWE over distributions.............    (15)       (13)        (3)        (5)
Equity in (income) losses of other investee companies, net of
  distributions.........................................................     (2)        17          6          7
Changes in operating assets and liabilities:
    Receivables.........................................................     32         --         --         --
    Inventories.........................................................    (22)        --         --         --
    Accounts payable and other liabilities..............................    328         --         --         --
    Other balance sheet changes.........................................   (205)       (25)        (8)        (8)
                                                                           -----      -----      -----      -----
 
Cash provided by operations.............................................    527         17          5          6
                                                                           -----      -----      -----      -----
 
INVESTING ACTIVITIES
Investments and acquisitions............................................   (544)       (20)        (6)        (7)
Capital expenditures....................................................   (108)        --         --         --
Investment proceeds.....................................................    114         --         --         --
                                                                           -----      -----      -----      -----
 
Cash used by investing activities.......................................   (538)       (20)        (6)        (7)
                                                                           -----      -----      -----      -----
 
FINANCING ACTIVITIES
Borrowings..............................................................    280         55         15         19
Debt repayments.........................................................   (612)       (50)       (13)       (17)
Capital contributions...................................................    450         --         --         --
Dividends...............................................................     (2)        (2)        (1)        (1)
                                                                           -----      -----      -----      -----
 
Cash provided by financing activities...................................    116          3          1          1
                                                                           -----      -----      -----      -----
 
INCREASE IN CASH AND EQUIVALENTS........................................    105         --         --         --
 
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD.............................     43         --         --         --
                                                                           -----      -----      -----      -----
 
CASH AND EQUIVALENTS AT END OF PERIOD...................................   $148       $ --       $ --       $ --
                                                                           -----      -----      -----      -----
                                                                           -----      -----      -----      -----
</TABLE>
 
See accompanying notes.
 
                                      F-51



<PAGE>

<PAGE>
                                      WCI
                 CONSOLIDATED STATEMENT OF SHAREHOLDER'S EQUITY
                                   (MILLIONS)
 
<TABLE>
<CAPTION>
                                                               RETAINED                      RECIPROCAL
                                                               EARNINGS        DUE FROM      INTEREST IN
                                        COMMON    PAID-IN    (ACCUMULATED    TIME WARNER,    TIME WARNER    SHAREHOLDER'S
                                        STOCK     CAPITAL      DEFICIT)          NET            STOCK          EQUITY
                                        ------    -------    ------------    ------------    -----------    -------------
 
<S>                                     <C>       <C>        <C>             <C>             <C>            <C>
BALANCE AT DECEMBER 31, 1993.........   $  1      $ 6,910       $  179          $   --          $(490)         $ 6,600
Net income...........................     --           --           70              --             --               70
Contributions........................     --          457           --              --             --              457
Reduction of stock option
  distribution liability to Time
  Warner (a).........................     --           --           84              --             --               84
Unrealized losses on certain
  marketable equity investments......     --           --          (77)             --             --              (77)
Other................................     --           --          (29)             --             --              (29)
                                          --      -------        -----           -----          -----           ------
 
BALANCE AT DECEMBER 31, 1994.........      1        7,367          227              --           (490)           7,105
Net income...........................     --           --          146              --             --              146
Contributions........................     --        2,642           --              --             --            2,642
Increase in stock option distribution
  liability to Time Warner (a).......     --           --          (24)             --             --              (24)
Dividends............................     --           --         (174)             --             --             (174)
Transfers to Time Warner, net........     --           --           --            (379)            --             (379)
Unrealized gains on certain
  marketable equity investments......     --           --           10              --             --               10
Other................................     --           --           16              --             --               16
                                          --      -------        -----           -----          -----           ------
 
BALANCE AT DECEMBER 31, 1995.........      1       10,009          201            (379)          (490)           9,342
Net income...........................     --           --          169              --             --              169
Reduction of stock option
  distribution liability to Time
  Warner (a).........................     --           --            8              --             --                8
Transfers to Time Warner, net........     --           --           --            (544)            --             (544)
Unrealized gains on certain
  marketable equity investments......     --           --           16              --             --               16
Other................................     --           --           (4)             --             --               (4)
                                          --      -------        -----           -----          -----           ------
 
BALANCE AT DECEMBER 31, 1996.........   $  1      $10,009       $  390          $ (923)         $(490)         $ 8,987
                                          --      -------        -----           -----          -----           ------
                                          --      -------        -----           -----          -----           ------
</TABLE>
 
------------
(a) The General Partners record distributions to Time Warner and a corresponding
    receivable  from TWE  as a result  of the stock  option related distribution
    provisions of the TWE partnership agreement. Previously-accrued stock option
    distributions of $8 million and $84 million were reversed in 1996 and  1994,
    respectively,  because the market price of Time Warner common stock declined
    during the period and stock option distributions of $24 million were accrued
    in 1995 because of  an increase in  the market price  of Time Warner  common
    stock (Note 2).
 
See accompanying notes.
 
                                      F-52
 


<PAGE>

<PAGE>
                                      ATC
                 CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
                                   (MILLIONS)
 
<TABLE>
<CAPTION>
                                                               RETAINED                      RECIPROCAL
                                                               EARNINGS        DUE FROM      INTEREST IN
                                        COMMON    PAID-IN    (ACCUMULATED    TIME WARNER,    TIME WARNER    SHAREHOLDERS'
                                        STOCK     CAPITAL      DEFICIT)          NET            STOCK          EQUITY
                                        ------    -------    ------------    ------------    -----------    -------------
<S>                                     <C>       <C>        <C>             <C>             <C>            <C>
BALANCE AT DECEMBER 31, 1993.........   $  1      $2,901        $  (64)         $   --          $(336)         $ 2,502
Net income...........................     --          --            38              --             --               38
Reduction of stock option
  distribution liability to Time
  Warner (a).........................     --          --            72              --             --               72
Other................................     --          (8)            3              --             --               (5)
                                          --      -------        -----           -----          -----           ------
 
BALANCE AT DECEMBER 31, 1994.........      1       2,893            49              --           (336)           2,607
Net income...........................     --          --            95              --             --               95
Increase in stock option distribution
  liability to Time Warner (a).......     --          --           (20)             --             --              (20)
Dividends............................     --          --          (149)             --             --             (149)
Transfers to Time Warner, net........     --          --            --            (214)            --             (214)
Unrealized losses on certain
  marketable equity investments......     --          --           (22)             --             --              (22)
                                          --      -------        -----           -----          -----           ------
 
BALANCE AT DECEMBER 31, 1995.........      1       2,893           (47)           (214)          (336)           2,297
Net income...........................     --          --            62              --             --               62
Reduction of stock option
  distribution liability to Time
  Warner (a).........................     --          --             6              --             --                6
Transfers to Time Warner, net........     --          --            --             (40)            --              (40)
Unrealized gains on certain
  marketable equity investments......     --          --             1              --             --                1
Other................................     --          --             5              --             --                5
                                          --      -------        -----           -----          -----           ------
 
BALANCE AT DECEMBER 31, 1996.........   $  1      $2,893        $   27          $ (254)         $(336)         $ 2,331
                                          --      -------        -----           -----          -----           ------
                                          --      -------        -----           -----          -----           ------
</TABLE>
 
------------
(a) The General Partners record distributions to Time Warner and a corresponding
    receivable  from TWE  as a result  of the stock  option related distribution
    provisions of the TWE partnership agreement. Previously-accrued stock option
    distributions of $6 million and $72 million were reversed in 1996 and  1994,
    respectively,  because the market price of Time Warner common stock declined
    during the period and stock option distributions of $20 million were accrued
    in 1995 because of  an increase in  the market price  of Time Warner  common
    stock (Note 2).
 
See accompanying notes.
 
                                      F-53
 


<PAGE>

<PAGE>
                                      TWOI
                 CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
                                   (MILLIONS)
 
<TABLE>
<CAPTION>
                                                               RETAINED                      RECIPROCAL
                                                               EARNINGS        DUE FROM      INTEREST IN
                                        COMMON    PAID-IN    (ACCUMULATED    TIME WARNER,    TIME WARNER    SHAREHOLDERS'
                                        STOCK     CAPITAL      DEFICIT)          NET            STOCK          EQUITY
                                        ------    -------    ------------    ------------    -----------    -------------
 
<S>                                     <C>       <C>        <C>             <C>             <C>            <C>
BALANCE AT DECEMBER 31, 1993.........   $  1       $ 830         $(21)           $ --           $ (96)          $ 714
Net income...........................     --          --           10              --              --              10
Reduction of stock option
  distribution liability to Time
  Warner (a).........................     --          --           21              --              --              21
Other................................     --          --            1              --              --               1
                                          --      -------        -----           -----          ------          -----
BALANCE AT DECEMBER 31, 1994.........      1         830           11              --             (96)            746
Net income...........................     --          --           16              --              --              16
Increase in stock option distribution
  liability to Time Warner (a).......     --          --           (6)             --              --              (6)
Dividends............................     --          --          (43)             --              --             (43)
Transfers to Time Warner, net........     --          --           --             (66)             --             (66)
Unrealized losses on certain
  marketable equity investments......     --          --           (3)             --              --              (3)
                                          --      -------        -----           -----          ------          -----
BALANCE AT DECEMBER 31, 1995.........      1         830          (25)            (66)            (96)            644
Net income...........................     --          --           18              --              --              18
Reduction of stock option
  distribution liability to Time
  Warner (a).........................     --          --            2              --              --               2
Transfers to Time Warner, net........     --          --           --             (13)             --             (13)
Other................................     --          --            3              --              --               3
                                          --      -------        -----           -----          ------          -----
BALANCE AT DECEMBER 31, 1996.........   $  1       $ 830         $ (2)           $(79)          $ (96)          $ 654
                                          --      -------        ----            ----           -----           -----
                                          --      -------        ----            ----           -----           -----
</TABLE>
 
------------
(a) The General Partners record distributions to Time Warner and a corresponding
    receivable  from TWE  as a result  of the stock  option related distribution
    provisions of the TWE partnership agreement. Previously-accrued stock option
    distributions of $2 million and $21 million were reversed in 1996 and  1994,
    respectively,  because the market price of Time Warner common stock declined
    during the period and stock option distributions of $6 million were  accrued
    in  1995 because of  an increase in  the market price  of Time Warner common
    stock (Note 2).
 
See accompanying notes.
 
                                      F-54
 


<PAGE>

<PAGE>
                                      WCCI
                 CONSOLIDATED STATEMENT OF SHAREHOLDER'S EQUITY
                                   (MILLIONS)
 
<TABLE>
<CAPTION>
                                                               RETAINED                      RECIPROCAL
                                                               EARNINGS        DUE FROM      INTEREST IN
                                        COMMON    PAID-IN    (ACCUMULATED    TIME WARNER,    TIME WARNER    SHAREHOLDER'S
                                        STOCK     CAPITAL      DEFICIT)          NET            STOCK          EQUITY
                                        ------    -------    ------------    ------------    -----------    -------------
 
<S>                                     <C>       <C>        <C>             <C>             <C>            <C>
BALANCE AT DECEMBER 31, 1993.........   $  1      $1,034         $(28)           $ --           $(119)          $ 888
Net income...........................     --          --           12              --              --              12
Reduction of stock option
  distribution liability to Time
  Warner (a).........................     --          --           25              --              --              25
Other................................     --          --            4              --              --               4

                                          --      -------        -----           -----          -----           -----
BALANCE AT DECEMBER 31, 1994.........      1       1,034           13              --            (119)            929
Net income...........................     --          --           20              --              --              20
Increase in stock option distribution
  liability to Time Warner (a).......     --          --           (7)             --              --              (7)
Dividends............................     --          --          (53)             --              --             (53)
Transfers to Time Warner, net........     --          --           --             (83)             --             (83)
Unrealized losses on certain
  marketable equity investments......     --          --           (3)             --              --              (3)
                                          --      -------        -----           -----          -----           -----
BALANCE AT DECEMBER 31, 1995.........      1       1,034          (30)            (83)           (119)            803
Net income...........................     --          --           22              --              --              22
Reduction of in stock option
  distribution liability to Time
  Warner (a).........................     --          --            2              --              --               2
Transfers to Time Warner, net........     --          --           --             (15)             --             (15)
Other................................     --          (1)           3              --              --               2
                                        ----      -------        -----           -----          -----           -----
BALANCE AT DECEMBER 31, 1996.........   $  1      $1,033         $ (3)           $(98)          $(119)          $ 814
                                        ----      -------        ----            ----           -----           -----
                                        ----      -------        ----            ----           -----           -----
</TABLE>
 
------------
(a) The General Partners record distributions to Time Warner and a corresponding
    receivable from TWE  as a result  of the stock  option related  distribution
    provisions of the TWE partnership agreement. Previously-accrued stock option
    distributions  of $2 million and $25 million were reversed in 1996 and 1994,
    respectively, because the market price of Time Warner common stock  declined
    during  the period and stock option distributions of $7 million were accrued
    in 1995 because of  an increase in  the market price  of Time Warner  common
    stock (Note 2).
 
See accompanying notes.
 
                                      F-55



<PAGE>

<PAGE>
                              TWE GENERAL PARTNERS
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
 
     On  June 30, 1992, thirteen direct  or indirect subsidiaries of Time Warner
Companies, Inc. ('Time Warner')* contributed  the assets and liabilities or  the
rights  to  the  cash  flows  of  substantially  all  of  Time  Warner's  Filmed
Entertainment -- Warner Bros., Cable Networks  -- HBO and Cable businesses  to
Time Warner Entertainment Company, L.P., a Delaware limited partnership ('TWE'),
for  general partnership  interests, and each  general partner  guaranteed a pro
rata portion of substantially  all of TWE's debt  and accrued interest based  on
the  relative fair value of the net assets each contributed to TWE (the 'General
Partner Guarantees', see Note 5). Nine of the thirteen original general partners
have been merged or  dissolved into the other  four. Warner Communications  Inc.
('WCI,'  a subsidiary  of Time  Warner), American  Television and Communications
Corporation ('ATC,' a  subsidiary of Time  Warner), Warner Cable  Communications
Inc.  ('WCCI,' a consolidated subsidiary of WCI) and Time Warner Operations Inc.
('TWOI,' formerly Time Warner Cable Inc., a subsidiary of Time Warner), are  the
four  remaining  general partners  of TWE.  They have  succeeded to  the general
partnership interests and  have assumed  the General Partner  Guarantees of  the
nine  former general partners. WCI, ATC,  WCCI, TWOI and, where appropriate, the
former general partners are referred to herein as the 'General Partners.'
 
     In  lieu  of  contributing  certain  assets  to  the  partnership  at   its
capitalization  in 1992 (the 'Beneficial Assets'), the General Partners assigned
to TWE the net  cash flow generated by  such assets or agreed  to pay an  amount
equal  to the  net cash  flow generated  by such  assets. TWE  has the  right to
receive from the General  Partners, at the limited  partners' option, an  amount
equal to the fair value of the Beneficial Assets, net of associated liabilities,
that have not been contributed to TWE, rather than continuing to receive the net
cash flow, or an amount equal to the net cash flow, generated by such Beneficial
Assets.  The consolidated financial  statements of the  General Partners exclude
the Beneficial Assets.
 
     WCI conducts substantially  all of  Time Warner's  Music operations,  which
include  copyrighted music  from many of  the world's  leading recording artists
that is produced and distributed by  a family of established record labels  such
as  Warner  Bros. Records,  the Atlantic  and  Elektra Entertainment  Groups and
Warner Music  International.  The  remaining General  Partners  do  not  conduct
operations  independent of  their ownership interests  in TWE  and certain other
investments.
 
     Time Warner's $14 billion acquisition of  WCI as of December 31, 1989,  and
$1.3  billion acquisition of the minority interest  in ATC on June 26, 1992 were
accounted for by the purchase method of accounting. WCI subsequently contributed
filmed entertainment and cable assets  to TWE, and ATC subsequently  contributed
its  cable assets. The financial statements  of WCI reflect an allocable portion
of Time Warner's cost to acquire the Music business and certain other assets  of
WCI,  and each General Partner's investment in TWE (and the financial statements
of TWE) reflect an allocable portion of Time Warner's cost to acquire the filmed
entertainment and cable assets of WCI and the ATC minority interest.
 
     As a result  of a recapitalization  of WCI  effective as of  April 1,  1995
(Note  4) and cash  distributions received from  TWE during 1995  by each of the
General Partners  (Note 2),  certain amounts  due  from or  to Time  Warner  are
reflected  by  the General  Partners as  a  separate component  of shareholders'
equity under the caption 'Due from Time Warner, net.'
 
------------
 
* On October 10, 1996, Time Warner  Inc. acquired the remaining 80% interest  in
  TBS  that it did not already own (the  'TBS Transaction'). As a result of this
  transaction, a new parent  company with the name  'Time Warner Inc.'  replaced
  the  old parent company of the same name ('Old Time Warner', now known as Time
  Warner Companies, Inc.), and Old Time  Warner and TBS became separate,  wholly
  owned   subsidiaries  of  the  new   parent  company.  The  General  Partners'
  pre-existing ownership interests in Old Time Warner and TBS were unaffected by
  the TBS Transaction. Unless the context indicates otherwise, references herein
  to 'Time Warner' refer to Old Time Warner.
 
                                      F-56
 


<PAGE>

<PAGE>
                              TWE GENERAL PARTNERS
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     Certain reclassifications  have been  made to  the prior  years'  financial
statements to conform to the 1996 presentation.
 
BASIS OF CONSOLIDATION AND
ACCOUNTING FOR INVESTMENTS
 
     The   consolidated  financial  statements  include   100%  of  the  assets,
liabilities, revenues, expenses,  income, loss  and cash flows  of each  General
Partner  and all companies in which the General Partner has a controlling voting
interest ('subsidiaries'), as if the General Partner and its subsidiaries were a
single company. Significant intercompany  accounts and transactions between  the
consolidated companies have been eliminated.
 
     Investments  in  TWE,  and certain  other  companies in  which  the General
Partners have significant influence but less than a controlling voting interest,
are accounted for  using the equity  method. Under the  equity method, only  the
General  Partner's investment in and amounts due to and from the equity investee
are included in the consolidated balance sheet, only its share of the investee's
earnings is  included  in  the  consolidated operating  results,  and  only  the
dividends,  cash distributions, loans or other  cash received from the investee,
less any additional cash investment, loan  repayments or other cash paid to  the
investee, are included in the consolidated cash flows.
 
     Investments  in companies  in which  the General  Partners do  not have the
controlling interest or an  ownership and voting interest  so large as to  exert
significant  influence are accounted for at  market value if the investments are
publicly traded and there are no resale restrictions, or at cost, if the sale of
a publicly-traded investment is restricted or if the investment is not  publicly
traded. Unrealized gains and losses on investments accounted for at market value
are  reported net-of-tax in  retained earnings until the  investment is sold, at
which time the realized gain or loss is included in income. Dividends and  other
distributions of earnings from both market value and cost method investments are
included in income when declared.
 
     The  effect  of  changes  in  each  General  Partner's  ownership interests
resulting from the issuance  of equity capital  by consolidated subsidiaries  or
equity investees to unafilliated parties is included in income.
 
FOREIGN CURRENCY
 
     The  financial position and  operating results of  substantially all of the
foreign operations  of WCI  are consolidated  using the  local currency  as  the
functional currency. Local currency assets and liabilities are translated at the
rates  of exchange on  the balance sheet  date, and local  currency revenues and
expenses are  translated  at  average  rates  of  exchange  during  the  period.
Resulting  translation  gains  or  losses, which  have  not  been  material, are
included in retained  earnings. Foreign currency  transaction gains and  losses,
which have not been material, are included in operating results.
 
USE OF ESTIMATES
 
     The  preparation  of  financial  statements  in  conformity  with generally
accepted  accounting  principles  requires  management  to  make  estimates  and
assumptions  that affect  the amounts reported  in the  financial statements and
footnotes thereto. Actual results could differ from those estimates.
 
     Significant estimates  inherent  in  the preparation  of  the  accompanying
consolidated  financial statements include  management's forecast of anticipated
revenues from the sale of future and existing music-related products in order to
evaluate the ultimate recoverability of accounts receivables and artist advances
recorded as assets in the  WCI consolidated balance sheet. Accounts  receivables
and  sales in  the music  industry are  subject to  customers' rights  to return
unsold  items.  Management  periodically  reviews  such  estimates  and  it   is
reasonably  possible that management's assessment  of recoverability of accounts
receivables and individual artist  advances may change  based on actual  results
and other factors.
 
                                      F-57
 


<PAGE>

<PAGE>
                              TWE GENERAL PARTNERS
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
REVENUES AND COSTS
 
     Inventories  of WCI  consist of cassette  tapes, compact  discs and related
music and music publishing products. Inventories of cassettes and compact  discs
are  stated  at  the  lower  of cost  or  estimated  realizable  value.  Cost is
determined using  first-in,  first-out;  last-in, first-out;  and  average  cost
methods. In accordance with industry practice, certain products (such as compact
discs  and cassettes)  are sold  to customers  with the  right to  return unsold
items. Revenues  from such  sales represent  gross sales  less a  provision  for
future  returns. Returned  goods included in  inventory are  valued at estimated
realizable value but not in excess of cost.
 
ADVERTISING
 
     Advertising  costs  are   expensed  upon  the   first  exhibition  of   the
advertisement,  except for  certain direct-response  advertising, for  which the
costs are capitalized and amortized over the expected period of future benefits.
Direct-response  advertising   principally  consists   of  product   promotional
mailings,   catalogs   and   other   promotional   costs   incurred   in   WCI's
direct-marketing businesses. Deferred advertising costs are generally  amortized
using the straight-line method over a period of twelve months or less subsequent
to  the promotional  event. Deferred  advertising costs  for WCI  amounted to $4
million and $12 million at December 31, 1996 and 1995, respectively. Advertising
expense for WCI amounted to $185 million in 1996, $237 million in 1995 and  $186
million in 1994.
 
CASH EQUIVALENTS
 
     Cash equivalents consist of commercial paper and other investments that are
readily  convertible into cash, and have  original maturities of three months or
less.
 
PROPERTY, PLANT AND EQUIPMENT
 
     Property, plant and equipment are stated at cost. Depreciation is  provided
generally  on the  straight-line method over  useful lives ranging  up to thirty
years for buildings  and improvements  and up  to fifteen  years for  furniture,
fixtures and other equipment.
 
     Effective  January 1, 1996,  WCI adopted Statement  of Financial Accounting
Standards No. 121, 'Accounting for the  Impairment of Long-Lived Assets and  for
Long-Lived  Assets to Be  Disposed Of' ('FAS  121'), which established standards
for the recognition and  measurement of impairment  losses on long-lived  assets
and  certain intangible assets. The adoption of  FAS 121 did not have a material
effect on WCI's financial statements.
 
INTANGIBLE ASSETS
 
     As a  creator  and  distributor  of entertainment  copyrights,  WCI  has  a
significant  and  growing amount  of intangible  assets, including  goodwill and
music  catalogues,  contracts  and  copyrights.  In  accordance  with  generally
accepted  accounting  principles,  WCI  does not  recognize  the  fair  value of
internally-generated intangible  assets. Costs  incurred to  create and  produce
copyrighted  product, such as compact discs  and cassettes, are generally either
expensed as incurred, or capitalized as tangible  assets as in the case of  cash
advances and inventoriable product costs. However, accounting recognition is not
given  to any increasing asset value that  may be associated with the collection
of the underlying copyrighted material.  Additionally, costs incurred to  create
or  extend brands generally result in losses over an extended development period
and are recognized as a reduction of income as incurred, while any corresponding
brand value created is not recognized as an intangible asset in the consolidated
balance sheet.  On  the  other  hand, intangible  assets  acquired  in  business
combinations  accounted for by the purchase method of accounting are capitalized
and amortized over their expected useful life as a noncash charge against future
results of  operations.  Accordingly,  the intangible  assets  reported  in  the
 
                                      F-58
 


<PAGE>

<PAGE>
                              TWE GENERAL PARTNERS
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
consolidated   balance  sheet   do  not   reflect  the   fair  value   of  WCI's
internally-generated intangible  assets, but  rather are  limited to  intangible
assets  resulting from certain acquisitions, including Time Warner's acquisition
of WCI, in which the cost of  the acquired companies exceeded the fair value  of
their  tangible  assets  at the  time  of acquisition.  Time  Warner's allocable
portion of its cost to  acquire the Music business  and certain other assets  of
WCI  is  reflected in  the consolidated  financial statements  of WCI  under the
pushdown method of accounting.
 
     WCI  amortizes  goodwill  over  periods   up  to  forty  years  using   the
straight-line  method. Music catalogues, contracts  and copyrights are amortized
over periods up to twenty years using the straight-line method. Amortization  of
goodwill amounted to $133 million in 1996, $136 million in 1995 and $134 million
in 1994, and amortization of music catalogues, contracts and copyrights amounted
to  $137  million,  $118  million and  $115  million,  respectively. Accumulated
amortization of intangible  assets at  December 31,  1996 and  1995 amounted  to
$1.856 billion and $1.588 billion, respectively.
 
     WCI separately reviews the carrying value of acquired intangible assets for
each acquired entity on a quarterly basis to determine whether an impairment may
exist. WCI considers relevant cash flow and profitability information, including
estimated  future operating results, trends  and other available information, in
assessing whether the carrying value of intangible assets can be recovered. Upon
a determination  that  the carrying  value  of  intangible assets  will  not  be
recovered  from the undiscounted future cash flows of the acquired business, the
carrying value of such intangible assets  would be considered impaired and  will
be  reduced  by a  charge  to operations  in the  amount  of the  impairment. An
impairment charge is measured as  any deficiency in estimated discounted  future
cash flows of the acquired business to recover the carrying value related to the
intangible assets.
 
INCOME TAXES
 
     The  domestic operating results of the General Partners are included in the
consolidated U.S.  federal,  state  and  local income  tax  returns  of  WCI  or
subsidiaries  of  Time Warner.  The  foreign operations  of  WCI are  subject to
taxation  by  foreign  jurisdictions.  Both  domestic  and  foreign  income  tax
provisions  are reflected  in the consolidated  statements of  operations of the
General Partners on  a stand-alone  basis consistent with  the liability  method
prescribed  by FASB Statement No. 109,  'Accounting for Income Taxes.' Under the
liability method, deferred income  taxes reflect tax  carryforwards and the  net
tax  effects of temporary differences between  the carrying amount of assets and
liabilities for financial statement and income tax purposes, as determined under
enacted tax laws and rates. The financial effect of changes in tax laws or rates
is accounted for in the period of enactment.
 
     Under a tax-sharing agreement between the General Partners and Time Warner,
each General Partner pays to, or receives from, Time Warner amounts equal to the
total domestic income taxes, or tax  benefits, provided by, or attributable  to,
the  partner. Accordingly, no domestic income  tax balances are reflected in the
consolidated balance sheets of the General Partners.
 
     As a Delaware limited partnership, TWE  is not subject to U.S. federal  and
state  income taxation.  However, certain of  TWE's operations  are conducted by
subsidiary corporations that are subject to domestic or foreign taxation. Income
tax expense for each of the  General Partners includes all income taxes  related
to  its allocable share of  partnership income and its  equity in the income tax
expense of corporate subsidiaries of TWE.
 
     Realization of tax carryforwards acquired in acquisitions are accounted for
as a reduction of goodwill.
 
                                      F-59
 


<PAGE>

<PAGE>
                              TWE GENERAL PARTNERS
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
2. TWE
 
     The General  Partners' investment  in and  amounts due  to or  from TWE  at
December 31, 1996 and 1995 is as follows (millions):
 
<TABLE>
<CAPTION>
DECEMBER 31, 1996                                                         WCI        ATC        TWOI       WCCI
----------------------------------------------------------------------   ------     ------     ------     ------
 
<S>                                                                      <C>        <C>        <C>        <C>
Investment in TWE.....................................................   $2,242     $1,942     $  544     $  688
Stock option related distributions due from TWE.......................       44         38         11         13
Other net liabilities due to TWE, principally related to home video
  distribution........................................................     (288)        --         --         --
                                                                         ------     ------     ------     ------
Total.................................................................   $1,998     $1,980     $  555     $  701
                                                                         ------     ------     ------     ------
                                                                         ------     ------     ------     ------
</TABLE>
 
<TABLE>
<CAPTION>
DECEMBER 31, 1995                                                         WCI        ATC        TWOI       WCCI
----------------------------------------------------------------------   ------     ------     ------     ------
 
<S>                                                                      <C>        <C>        <C>        <C>
Investment in TWE.....................................................   $2,201     $1,909     $  534     $  675
Stock option related distributions due from TWE.......................       58         50         14         18
Other net liabilities due to TWE, principally related to home video
  distribution........................................................     (275)        --         --         --
                                                                         ------     ------     ------     ------
Total.................................................................   $1,984     $1,959     $  548     $  693
                                                                         ------     ------     ------     ------
                                                                         ------     ------     ------     ------
</TABLE>
 
     TWE  was capitalized on June 30, 1992  to own and operate substantially all
of the Filmed Entertainment -- Warner  Bros., Cable Networks -- HBO and  Cable
businesses previously owned by the General Partners. The General Partners in the
aggregate  hold, directly or indirectly, 63.27% of the pro rata priority capital
('Series A Capital') and residual equity capital ('Residual Capital') of TWE and
100% of  the senior  priority  capital ('Senior  Capital') and  junior  priority
capital  ('Series B  Capital') of  TWE. Time Warner  acquired the  11.22% of the
Series A Capital and Residual  Capital limited partnership interests  previously
held  by subsidiaries of  each of ITOCHU Corporation  and Toshiba Corporation in
1995. The remaining 25.51% limited partnership interests in the Series A Capital
and Residual Capital of  TWE are held by  a subsidiary of U  S WEST, Inc. ('U  S
WEST').
 
     Each partner's interest in TWE consists of the initial priority capital and
residual  equity amounts that  were assigned to that  partner or its predecessor
based on the estimated fair value of the net assets each contributed to TWE,  as
adjusted  for the fair  value of certain Time  Warner Service Partnership Assets
(as defined below) distributed by TWE to the General Partners in 1993 which were
not subsequently reacquired by TWE  in 1995 ('Contributed Capital'), plus,  with
respect  to  the priority  capital  interests only,  any  undistributed priority
capital return. The priority capital  return consists of net partnership  income
allocated  to  date in  accordance with  the provisions  of the  TWE partnership
agreement and the  right to  be allocated additional  partnership income  which,
together  with any previously allocated net partnership income, provides for the
various priority capital rates of return  specified in the table below. The  sum
of Contributed Capital and the undistributed priority capital return is referred
to  as  'Cumulative  Priority  Capital.'  Cumulative  Priority  Capital  is  not
necessarily indicative  of the  fair value  of the  underlying priority  capital
interests  principally due to  above-market rates of  return on certain priority
capital interests  as  compared to  securities  of comparable  credit  risk  and
maturity,  such as the  13.25% rate of  return on the  Series B Capital interest
owned  by  the  General  Partners.  Furthermore,  the  ultimate  realization  of
Cumulative  Priority Capital could be affected by the fair value of TWE which is
subject to fluctuation.
 
                                      F-60
 


<PAGE>

<PAGE>
                              TWE GENERAL PARTNERS
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     A summary of  the priority  of Contributed Capital,  the General  Partner's
ownership of Contributed Capital and Cumulative Priority Capital at December 31,
1996 and priority capital rates of return thereon is set forth below:
 
<TABLE>
<CAPTION>
                                                                                             PRIORITY       % OWNED
                                                                             CUMULATIVE       CAPITAL         BY
                                                              CONTRIBUTED     PRIORITY       RATES OF       GENERAL
PRIORITY OF CONTRIBUTED CAPITAL                               CAPITAL(a)      CAPITAL        RETURN(b)      PARTNERS
-----------------------------------------------------------   -----------    ----------    -------------    -------
                                                                     (BILLIONS)            (% PER ANNUM
                                                                                            COMPOUNDED
                                                                                            QUARTERLY)
 
<S>                                                           <C>            <C>           <C>              <C>
Senior Capital.............................................      $ 1.4          $1.5(c)         8.00%       100.00%
Series A Capital...........................................        5.6           9.9           13.00%(d)     63.27%
Series B Capital...........................................        2.9(g)        5.2           13.25%(e)    100.00%
Residual Capital...........................................        3.3(g)        3.3(f)           -- (f)     63.27%
</TABLE>
 
------------
 
(a) Excludes partnership income or loss allocated thereto.
 
(b) Income  allocations related to priority capital rates of return are based on
    partnership income after any special tax allocations.
 
(c) Net of $366 million of  partnership income distributed in 1995  representing
    the priority capital return thereon through June 30, 1995.
 
(d) 11.00% to the extent concurrently distributed.
 
(e) 11.25% to the extent concurrently distributed.
 
(f) Residual  Capital is not entitled to stated priority rates of return and, as
    such, its Cumulative Priority Capital  is equal to its Contributed  Capital.
    However,  in  the  case  of  certain  events  such  as  the  liquidation  or
    dissolution of TWE, Residual Capital is  entitled to any excess of the  then
    fair  value of the net assets of TWE over the aggregate amount of Cumulative
    Priority Capital and special tax allocations.
 
(g) The Contributed Capital relating to the  Series B Capital has priority  over
    the  priority  returns  on the  Series  A Capital.  The  Contributed Capital
    relating to the Residual Capital has  priority over the priority returns  on
    the Series B Capital and the Series A Capital.
 
     Because  Contributed Capital is based  on the fair value  of the net assets
that each partner contributed to the partnership, the aggregate of such  amounts
is  significantly  higher  than  TWE's partners'  capital  as  reflected  in the
consolidated financial statements, which is based on the historical cost of  the
contributed net assets. For purposes of allocating partnership income or loss to
the  partners, partnership income or loss is based  on the fair value of the net
assets  contributed  to  the  partnership  and  results  in  significantly  less
partnership  income, or  results in partnership  losses, in contrast  to the net
income reported by TWE for financial statement purposes, which is also based  on
the historical cost of contributed net assets.
 
     Under  the  TWE partnership  agreement, partnership  income, to  the extent
earned, is  first  allocated to  the  partners'  capital accounts  so  that  the
economic  burden of  the income  tax consequences  of partnership  operations is
borne as  though the  partnership  were taxed  as  a corporation  ('special  tax
allocations'),  then  to  the Senior  Capital,  Series  A Capital  and  Series B
Capital, in order of priority, at rates of return ranging from 8% to 13.25%  per
annum,  and finally  to the Residual  Capital. Partnership  losses generally are
allocated first to  eliminate prior  allocations of partnership  income to,  and
then  to  reduce the  Contributed  Capital of,  the  Residual Capital,  Series B
Capital and Series A  Capital, in that order,  then to reduce General  Partners'
Senior  Capital, including partnership income  allocated thereto, and finally to
reduce any  special  tax  allocations.  To  the  extent  partnership  income  is
insufficient  to  satisfy all  special  allocations in  a  particular accounting
period, the right to receive additional partnership income necessary to  provide
for  the  various priority  capital  rates of  return  is carried  forward until
satisfied out of  future partnership  income, including  any partnership  income
that may result from any liquidation, sale or dissolution of TWE.
 
     The  TWE partnership  agreement provides, under  certain circumstances, for
the distribution of partnership income allocated to the Senior Capital owned  by
the  General Partners. Pursuant  to such provision,  $366 million of partnership
income was distributed  to the General  Partners in 1995.  Beginning on July  1,
1997,  the  Senior  Capital  and,  to  the  extent  not  previously distributed,
partnership income  allocated thereto  is required  to be  distributed in  three
annual  installments, with the initial distribution expected to be approximately
$535 million.  The  Series  B Capital  owned  by  the General  Partners  may  be
increased if certain operating performance targets are achieved over a five-year
period   ending  on  December   31,  1996  and  a   ten-year  period  ending  on
 
                                      F-61
 


<PAGE>

<PAGE>
                              TWE GENERAL PARTNERS
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
December 31, 2001. Although satisfaction  of the ten-year operating  performance
target is indeterminable at this time, the five-year target was not attained.
 
     TWE  reported net income of  $210 million, $73 million  and $161 million in
1996, 1995 and  1994, respectively,  no portion of  which was  allocated to  the
limited  partners. The General  Partners did not  recognize a gain  when TWE was
capitalized. TWE recorded the assets contributed by the General Partners at  the
General  Partners' historical cost. The excess of the General Partners' interest
in the net assets of TWE over the  net book value of their investment in TWE  is
being amortized to income over a twenty-year period.
 
     U  S WEST has  an option to  obtain up to  an additional 6.33%  of Series A
Capital  and   Residual  Capital   interests,  depending   on  cable   operating
performance.  The option is exercisable between January  1, 1999 and on or about
May 31, 2005  at a  maximum exercise  price of  $1.25 billion  to $1.8  billion,
depending  on the year  of exercise. Either U  S WEST or TWE  may elect that the
exercise price be paid with partnership interests rather than cash.
 
     Set forth below is summarized financial information of TWE, which  reflects
the consolidation by TWE of the TWE-Advance/Newhouse Partnership effective as of
April  1, 1995, the deconsolidation of Six Flags Entertainment Corporation ('Six
Flags') effective  as  of  June  23,  1995  and  the  consolidation  of  Paragon
Communications effective as of July 6, 1995:
 
TIME WARNER ENTERTAINMENT COMPANY, L.P.
 
<TABLE>
<CAPTION>
                                                                                        YEARS ENDED DECEMBER 31,
                                                                                       ---------------------------
                                                                                        1996       1995      1994
                                                                                       -------    ------    ------
                                                                                               (MILLIONS)
 
<S>                                                                                    <C>        <C>       <C>
OPERATING STATEMENT INFORMATION
Revenues............................................................................   $10,852    $9,517    $8,460
Depreciation and amortization.......................................................     1,235     1,039       943
Business segment operating income...................................................     1,078       960       848
Interest and other, net.............................................................       522       580       587
Minority interest...................................................................       207       133        --
Income before income taxes..........................................................       280       183       201
Income before extraordinary item....................................................       210        97       161
Net income..........................................................................       210        73       161
</TABLE>
 
<TABLE>
<CAPTION>
                                                                                         YEARS ENDED DECEMBER 31,
                                                                                        --------------------------
                                                                                         1996      1995      1994
                                                                                        ------    ------    ------
                                                                                                (MILLIONS)
 
<S>                                                                                     <C>       <C>       <C>
CASH FLOW INFORMATION
Cash provided by operations..........................................................   $1,912    $1,519    $1,296
Capital expenditures.................................................................   (1,719)   (1,535)   (1,153)
Investments and acquisitions.........................................................     (146)     (203)     (156)
Investment proceeds..................................................................      612     1,050        50
Loan to Time Warner..................................................................       --        --      (400)
Borrowings...........................................................................      215     2,484       977
Debt repayments......................................................................     (716)   (3,596)     (945)
Collections on note receivable from U S WEST.........................................      169       602       234
Capital distributions................................................................     (228)   (1,088)     (170)
Other financing activities, net......................................................      (92)      (95)       --
Increase (decrease) in cash and equivalents..........................................        7      (862)     (267)
</TABLE>
 
                                      F-62
 


<PAGE>

<PAGE>
                              TWE GENERAL PARTNERS
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
<TABLE>
<CAPTION>
                                                                                                  DECEMBER 31,
                                                                                               ------------------
                                                                                                1996       1995
                                                                                               -------    -------
                                                                                                   (MILLIONS)
 
<S>                                                                                            <C>        <C>
BALANCE SHEET INFORMATION
Cash and equivalents........................................................................   $   216    $   209
Total current assets........................................................................     3,146      2,909
Total assets................................................................................    19,973     18,905
Total current liabilities...................................................................     4,075      3,214
Long-term debt..............................................................................     5,676      6,137
Minority interests..........................................................................     1,020        726
General Partners' Senior Capital, consisting of $1.364 billion Contributed Capital,
  plus an undistributed priority return.....................................................     1,543      1,426
Partners' capital...........................................................................     6,574      6,478
</TABLE>
 
     The  assets and cash flows of TWE are restricted by the TWE partnership and
credit agreements and are unavailable for use by the partners except through the
payment of certain fees, reimbursements, cash distributions and loans, which are
subject to limitations. At December 31, 1996 and 1995, the General Partners  had
recorded   $93  and  $122   million,  respectively,  of   stock  option  related
distributions due from TWE, based on closing prices of Time Warner common  stock
of  $37.50 and $37.875  respectively. Time Warner  is paid when  the options are
exercised. The General Partners also receive tax-related distributions from TWE.
The payment of such distributions  was previously subject to restrictions  until
July  1995 and is  now made to the  General Partners on  a current basis. During
1996, the General Partners received distributions from TWE in the amount of $228
million, consisting of $215 million of tax-related distributions and $13 million
of stock  option  related  distributions.  During  1995,  the  General  Partners
received  distributions from TWE in the  amount of $1.088 billion, consisting of
$366 million of TWE partnership income allocated to the General Partners' Senior
Capital, $680 million of tax-related  distributions, $25 million of Time  Warner
Service  Partnership  distributions  and  $17 million  of  stock  option related
distributions. During 1994, the General Partners received distributions from TWE
of $170 million, consisting  of $115 million  of tax-related distributions,  $50
million of Time Warner Service Partnership distributions and $5 million of stock
option  related distributions. Of such aggregate distributions in 1996, 1995 and
1994, WCI received $108 million, $518 million and $81 million, respectively; ATC
received $93 million, $443 million and $69 million, respectively; TWOI  received
$27  million, $127 million and $20  million, respectively; and WCCI received $33
million, $157 million, and  $24 million, respectively. In  addition to the  tax,
stock  option and General  Partners' senior priority  capital distributions, TWE
may make  other distributions,  generally depending  on excess  cash and  credit
agreement  limitations. The General  Partners' full share  of such distributions
may be deferred if the limited partners do not receive certain threshold amounts
by certain dates.
 
     In September 1995, TWE  reacquired substantially all of  the assets of  the
Time  Warner Service Partnerships,  subject to the  liabilities relating thereto
(the 'Time Warner Service Partnership Assets'), in exchange for Series B Capital
interests in  TWE equal  to approximately  $400 million.  The reacquisition  was
recorded  for  financial statement  purposes by  TWE based  on the  $124 million
historical cost of  the Time Warner  Service Partnership Assets.  Prior to  such
reacquisition,  the Time Warner Service  Partnerships owned and operated certain
assets of TWE which  had been distributed to  the General Partners in  September
1993  in  order to  ensure compliance  with the  Modification of  Final Judgment
entered on August 24, 1982 by the United States District Court for the  District
of  Columbia applicable to U S WEST and its affiliated companies, which may have
included TWE. Prior to September 1995,  TWE was required to make quarterly  cash
distributions  related to its Series B Capital in the amount of $12.5 million to
the  General  Partners,  which  the  General  Partners  were  then  required  to
contribute to the Time Warner Service Partnerships.
 
     On  April 1,  1995, TWE  formed a cable  television joint  venture with the
Advance/Newhouse Partnership ('Advance/Newhouse') to which Advance/Newhouse  and
TWE contributed cable television systems (or
 
                                      F-63
 


<PAGE>

<PAGE>
                              TWE GENERAL PARTNERS
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
interests  therein) serving  approximately 4.5  million subscribers,  as well as
certain foreign  cable investments  and  programming investments  that  included
Advance/Newhouse's   10%  interest  in  Primestar  Partners,  L.P.  TWE  owns  a
two-thirds equity interest  in the TWE-Advance/Newhouse  Partnership and is  the
managing  partner.  TWE consolidates  the partnership  and the  one-third equity
interest owned by Advance/Newhouse is reflected in TWE's consolidated  financial
statements  as minority interest. In  accordance with the partnership agreement,
Advance/Newhouse can require TWE to purchase its equity interest for fair market
value at  specified intervals  following  the death  of  both of  its  principal
shareholders.  Beginning  on  April  1,  1998,  either  partner  can  initiate a
dissolution in which  TWE would  receive two-thirds  and Advance/Newhouse  would
receive one-third of the partnership's net assets. The assets contributed by TWE
and  Advance/Newhouse to  the partnership  were recorded  at their predecessor's
historical cost. No gain  was recognized by TWE  upon the capitalization of  the
partnership.
 
     On  June  23,  1995, TWE  sold  51% of  its  interest  in Six  Flags  to an
investment group  led by  Boston Ventures  for $204  million and  received  $640
million  in additional proceeds from Six  Flags, representing payment of certain
intercompany indebtedness and licensing  fees. As a  result of the  transaction,
Six  Flags has been deconsolidated and TWE's remaining 49% interest in Six Flags
is now accounted for under the equity method of accounting. TWE reduced debt  by
approximately  $850 million in connection with the transaction, and a portion of
the income on the transaction has been  deferred by TWE principally as a  result
of  its guarantee of certain third-party,  zero-coupon indebtedness of Six Flags
due in 1999.
 
     In June 1995, TWE, the TWE-Advance/Newhouse Partnership and a wholly  owned
subsidiary  of  Time Warner  ('TWI Cable')  executed  a five-year,  $8.3 billion
revolving credit facility  (the '1995 Credit  Agreement'). Borrowings under  the
1995  Credit Agreement are  limited to $4 billion  in the case  of TWI Cable, $5
billion in the case of the TWE-Advance/Newhouse Partnership and $8.3 billion  in
the case of TWE, subject in each case to certain limitations and adjustments. In
July  1995,  TWE  borrowed  approximately $2.6  billion  under  the  1995 Credit
Agreement to  repay and  terminate its  pre-existing bank  credit agreement.  In
connection  therewith, TWE recognized an extraordinary  loss of $24 million as a
result of the write-off of deferred financing costs related to this former  bank
credit  agreement, of which  WCI, ATC, TWOI  and WCCI recognized  their pro rata
share, net of taxes, in the amount of $7 million, $6 million, $2 million and  $2
million, respectively.
 
     In  the normal course of conducting  their businesses, the General Partners
and their subsidiaries and  affiliates have had  various transactions with  TWE,
generally  on terms resulting from a negotiation between the affected units that
in management's view results in reasonable allocations. Time Warner provides TWE
with certain  corporate support  services for  which it  received a  fee in  the
amount  of $69  million, $64  million and  $60 million  in 1996,  1995 and 1994,
respectively.
 
3. OTHER INVESTMENTS
 
     WCI's other investments consist of:
 
<TABLE>
<CAPTION>
                                                                                                  DECEMBER 31,
                                                                                               ------------------
                                                                                                1996       1995
                                                                                               -------    -------
                                                                                                   (MILLIONS)
 
<S>                                                                                            <C>        <C>
Equity method investments...................................................................   $ 1,113    $ 1,123
Market value method investments.............................................................       410        375
Cost method investments.....................................................................        26         28
                                                                                               -------    -------
Total.......................................................................................   $ 1,549    $ 1,526
                                                                                               -------    -------
                                                                                               -------    -------
</TABLE>
 
     Market value method investments include 18.1 million shares of common stock
of Hasbro, Inc.  ('Hasbro'). Notwithstanding  the market value  per share,  such
shares  can  be used,  at  Time Warner's  option,  to fully  satisfy  either its
obligations with respect to its zero coupon exchangeable notes due December  17,
2012 or the Time
 
                                      F-64
 


<PAGE>

<PAGE>
                              TWE GENERAL PARTNERS
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
Warner-obligated  mandatorily redeemable preferred  securities of a wholly-owned
subsidiary due  December  23, 1997.  Because  the issuance  of  the  mandatorily
redeemable preferred securities provides Time Warner, and consequently WCI, with
protection against the risk of depreciation of the market price of Hasbro common
stock  and the zero coupon exchangeable notes  limit the ability to share in the
appreciation of the market price of Hasbro common stock, the combination thereof
has effectively monetized WCI's investment in Hasbro.
 
     In addition to TWE and its equity investees, companies accounted for  using
the  equity method include: Cinamerica Theatres,  L.P. (50% owned), The Columbia
House Company partnerships (10% to 50% owned by WCI; 50% owned in total by  Time
Warner),  other music joint ventures (generally 50%  owned) and in 1995 and 1994
only, TBS (2.8% owned by WCI and  10.6% owned in total by all General  Partners;
20%  owned in total by Time Warner). A summary of combined financial information
as reported by the equity investees of WCI is set forth below:
 
<TABLE>
<CAPTION>
                                                                                         YEARS ENDED DECEMBER 31,
                                                                                        --------------------------
                                                                                         1996      1995      1994
                                                                                        ------    ------    ------
                                                                                                (MILLIONS)
 
<S>                                                                                     <C>       <C>       <C>
Revenues.............................................................................   $1,773    $5,123    $4,444
Depreciation and amortization........................................................       29       219       182
Operating income.....................................................................      173       547       584
Income before extraordinary items and cumulative effect
  of a change in accounting principle................................................       61       188       281
Net income...........................................................................       61       188       256
Current assets.......................................................................    1,002     2,272     2,113
Total assets.........................................................................    1,616     5,851     5,194
Current liabilities..................................................................      517     1,318     1,136
Long-term debt.......................................................................    1,360     3,826     3,730
Total liabilities....................................................................    1,999     5,886     5,423
Total shareholders' deficit or partners' capital.....................................     (383)      (35)     (229)
</TABLE>
 
     WCI, ATC, TWOI and WCCI own 24.6 thousand, 14.8 thousand, 4.3 thousand  and
5.3  thousand  shares,  respectively,  of Old  Time  Warner  common  stock. Such
investments are accounted for at historical cost, less the portion (collectively
estimated at  85%)  attributable  to  Time Warner's  ownership  of  the  General
Partners,  which  is  deducted  from  shareholders'  equity  under  the  caption
'Reciprocal interest in  Time Warner stock.'  The Old Time  Warner common  stock
owned  by  the  General Partners  may  only  be sold  pursuant  to  an effective
registration  statement  or  in  a  transaction  exempt  from  the  registration
requirements  of the  Securities Act  of 1933.  In addition  to Old  Time Warner
common stock, ATC also owns certain Old Time Warner debt securities at a cost of
$5 million at December 31, 1996, which approximates market. Such debt securities
are held by ATC for  the purpose of satisfying  its obligations under its  stock
options  and restricted  stock awards subsequent  to the acquisition  of the ATC
minority interest.
 
4. BORROWING ARRANGEMENTS WITH TIME WARNER
 
     In 1993, WCI declared  and paid a  special dividend to  Time Warner in  the
form  of a  $3 billion subordinated  reset note due  2008 and entered  into a $1
billion revolving credit agreement  with Time Warner,  under which $500  million
was  borrowed and  used to  prepay a  corresponding portion  of the subordinated
reset note.  On  April  1, 1995,  such  debt  obligations to  Time  Warner  were
satisfied  as part  of a recapitalization  of WCI,  in which Time  Warner made a
capital contribution to  WCI, consisting  of a $2.5  billion subordinated  reset
note  receivable  due from  WCI  and cash  of $142  million.  WCI used  the cash
proceeds therefrom to repay its obligations to Time Warner under their revolving
credit agreement (collectively, the 'WCI Recapitalization').
 
                                      F-65
 


<PAGE>

<PAGE>
                              TWE GENERAL PARTNERS
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     In addition to WCI, the  General Partners have revolving credit  agreements
with  Time Warner,  which provide for  borrowings from  Time Warner of  up to $1
billion for ATC, and up to  $500 million for each of  TWOI and WCCI. All of  the
credit  agreements expire on December 31, 2008. Interest on any borrowings under
the credit agreements is payable quarterly at the prime rate. The obligations to
Time Warner under the credit agreements  are subordinate to the General  Partner
Guarantees.  In  July  1995,  the  other  General  Partners  also  repaid  their
obligations to Time Warner under  their revolving credit agreements using  funds
provided by tax-related distributions from TWE.
 
     Interest  expense for WCI was $34 million in 1996, $88 million in 1995 $222
million in  1994.  Interest expense  for  the  other General  Partners  was  not
material in each of the three years ended December 31, 1995.
 
5.  GENERAL PARTNER GUARANTEES
 
     Each  General Partner  has guaranteed a  pro rata  portion of approximately
$5.4 billion of TWE's debt and accrued  interest at December 31, 1996, based  on
the  relative fair value of  the net assets each  General Partner contributed to
TWE. Such indebtedness is recourse to each General Partner only to the extent of
its guarantee. The indenture pursuant to  which TWE's notes and debentures  have
been  issued (the 'Indenture') requires the  unanimous consent of the holders of
the notes and debentures  to terminate the General  Partner Guarantees prior  to
June  30,  1997, and  the consent  of a  majority  of such  holders to  effect a
termination thereafter; however, the Indenture  permits the General Partners  to
engage  in mergers and consolidations. There  are no restrictions on the ability
of the General Partner  guarantors to transfer material  assets, other than  TWE
assets,  to parties who are not guarantors, or to incur additional indebtedness,
except that the 1995  Credit Agreement restricts General  Partners that are  the
legal owners of material Beneficial Assets (currently ATC and WCCI).
 
     The  portion of TWE debt and accrued interest at December 31, 1996 that was
guaranteed by each General Partner, individually and on a consolidated basis for
each General Partner and its subsidiaries, is set forth below:
 
<TABLE>
<CAPTION>
                                                                                          TOTAL GUARANTEED BY
                                                                   TOTAL GUARANTEED BY    EACH GENERAL PARTNER
                                                                   EACH GENERAL PARTNER   AND ITS SUBSIDIARIES
                                                                   --------------------  ----------------------
                        GENERAL PARTNER                              %        AMOUNT         %        AMOUNT
----------------------------------------------------------------   ------   -----------  ---------  -----------
                                                                              (DOLLARS IN MILLIONS)
 
<S>                                                                <C>      <C>          <C>        <C>
WCI.............................................................    33.19    $   1,790       47.58   $   2,566
ATC.............................................................    40.73        2,197       40.73       2,197
TWOI............................................................    11.69          630       11.69         630
WCCI, a subsidiary of WCI.......................................    14.39          776       14.39         776
                                                                   ------    ---------
Total...........................................................   100.00    $   5,393       *           *
                                                                   ------    ---------
                                                                   ------    ---------
</TABLE>
 
------------
 
* Adds to  more than  100%  and $5.393  billion,  respectively, because  of  the
  parent-subsidiary relationship between WCI and WCCI.
 
                                      F-66
 


<PAGE>

<PAGE>
                              TWE GENERAL PARTNERS
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
6.  INCOME TAXES
 
    Domestic and foreign pretax income (loss) are as follows:
 
<TABLE>
<CAPTION>
                                                                               WCI     ATC     TWOI    WCCI
                                                                               ----    ----    ----    ----
                                                                                        (MILLIONS)
 
<S>                                                                            <C>     <C>     <C>     <C>
YEAR ENDED DECEMBER 31, 1996
Domestic....................................................................   $209    $136    $39     $ 48
Foreign.....................................................................   198        2      1        1
                                                                               ----    ----    ----    ----
Total.......................................................................   $407    $138    $40     $ 49
                                                                               ----    ----    ----    ----
                                                                               ----    ----    ----    ----
 
YEAR ENDED DECEMBER 31, 1995
Domestic....................................................................   $178    $216    $44     $ 55
Foreign.....................................................................   208       (3)    (1)      (2)
                                                                               ----    ----    ----    ----
Total.......................................................................   $386    $213    $43     $ 53
                                                                               ----    ----    ----    ----
                                                                               ----    ----    ----    ----
 
YEAR ENDED DECEMBER 31, 1994
Domestic....................................................................   $110    $125    $35     $ 43
Foreign.....................................................................   166      (17)    (5)      (6)
                                                                               ----    ----    ----    ----
Total.......................................................................   $276    $108    $30     $ 37
                                                                               ----    ----    ----    ----
                                                                               ----    ----    ----    ----
</TABLE>
 
     Income taxes (benefits) are as set forth below:
 
<TABLE>
<CAPTION>
                                                                               WCI     ATC     TWOI    WCCI
                                                                               ----    ----    ----    ----
                                                                                        (MILLIONS)
 
<S>                                                                            <C>     <C>     <C>     <C>
YEAR ENDED DECEMBER 31, 1996
Federal.....................................................................   $29     $35     $10     $ 12
State and local.............................................................    50      14       4        5
Foreign -- current(a).......................................................   177      35      10       13
        -- deferred.........................................................   (18)     (8)     (2)      (3)
                                                                               ----    ----    ----    ----
Total.......................................................................   $238    $76     $22     $ 27
                                                                               ----    ----    ----    ----
                                                                               ----    ----    ----    ----
 
YEAR ENDED DECEMBER 31, 1995
Federal.....................................................................   $ 2     $62     $12     $ 14
State and local.............................................................    42      22       5        6
Foreign -- current(a).......................................................   169      30       8       11
        -- deferred.........................................................    20      (2)     --       --
                                                                               ----    ----    ----    ----
Total.......................................................................   $233    $112    $25     $ 31
                                                                               ----    ----    ----    ----
                                                                               ----    ----    ----    ----
 
YEAR ENDED DECEMBER 31, 1994
Federal.....................................................................   $39     $41     $11     $ 14
State and local.............................................................    41      14       4        5
Foreign  -- current(a)......................................................   160      22       7        8
         -- deferred........................................................   (34)     (7)     (2)      (2)
                                                                               ----    ----    ----    ----
Total.......................................................................   $206    $70     $20     $ 25
                                                                               ----    ----    ----    ----
                                                                               ----    ----    ----    ----
</TABLE>
 
------------
 
(a) Includes foreign withholding taxes set forth elsewhere herein.
 
                                      F-67
 


<PAGE>

<PAGE>
                              TWE GENERAL PARTNERS
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     Foreign  withholding taxes  included in  the foreign  tax provision  are as
follows:
 
<TABLE>
<CAPTION>
                                                                          WCI    ATC    TWOI    WCCI
                                                                          ---    ---    ----    ----
                                                                                  (MILLIONS)
<S>                                                                       <C>    <C>    <C>     <C>
1996...................................................................   $62    $22     $6      $8
1995...................................................................   71      24      7       9
1994...................................................................   51      18      5       6
</TABLE>
 
     No U.S. income or  foreign withholding taxes have  been recorded by WCI  on
the   permanently  reinvested  earnings   of  foreign  subsidiaries  aggregating
approximately $671 million  at December 31,  1996. If such  earnings were to  be
repatriated,  it is expected that any additional U.S. income tax would be offset
by the utilization of the accompanying foreign tax credits.
 
     The differences between the income tax  or tax benefit expected for WCI  at
the  U.S. federal statutory income tax rate  and the total income taxes provided
are as follows:
 
<TABLE>
<CAPTION>
                                                      YEARS ENDED DECEMBER 31,
                                                    ----------------------------
                                                      1996      1995      1994
                                                    --------  --------  --------
                                                             (MILLIONS)
 
<S>                                                 <C>       <C>       <C>
Taxes on income at U.S. federal statutory rate....  $   140   $   135   $     97
Nondeductible expenses............................       69        66         69
Foreign income taxed at different rates, net of
  U.S. foreign tax credits........................      (10)       12          5
State and local taxes, net........................       32        27         27
Other.............................................        7        (7)         8
                                                    --------  --------  --------
Total.............................................  $   238   $   233   $    206
                                                    --------  --------  --------
                                                    --------  --------  --------
</TABLE>
 
     The relationship between income  taxes and income  before income taxes  for
the  other  General  Partners is  principally  affected by  the  amortization of
goodwill and certain other financial statement expenses that are not  deductible
for income tax purposes.
 
     U.S.  federal tax  carryforwards of  WCI included  in the  consolidated tax
return of Time  Warner at  December 31,  1996 consisted  of $36  million of  net
operating  losses,  $75 million  of  investment tax  credits  and $5  million of
alternative minimum tax  credits. The  utilization of  certain carryforwards  is
subject  to  limitations under  U.S.  federal income  tax  laws. Except  for the
alternative minimum tax credits which do not expire, the other U.S. federal  tax
carryforwards  expire in  varying amounts  as follows  for income  tax reporting
purposes:
 
<TABLE>
<CAPTION>
                                                                                      CARRYFORWARDS
                                                                                 -----------------------
                                                                                    NET       INVESTMENT
                                                                                 OPERATING       TAX
                                                                                  LOSSES       CREDITS
                                                                                 ---------    ----------
                                                                                       (MILLIONS)
<S>                                                                              <C>          <C>
1997..........................................................................      $--           $ 1
1998..........................................................................       --            --
1999..........................................................................        4            --
2000..........................................................................        1            --
Thereafter up to 2008.........................................................       31            74
                                                                                    ---           ---
                                                                                    $36           $75
                                                                                    ---           ---
                                                                                    ---           ---
</TABLE>
 
7. STOCK OPTION PLANS
 
     Time Warner has  various stock  option plans  under which  Time Warner  may
grant  options to purchase Time Warner common  stock to employees of Time Warner
and WCI. Such options have been granted to employees of WCI at, or in excess of,
fair market value at the date of  grant. Accordingly, in accordance with APB  25
and  related interpretations, no  compensation cost has  been recognized by Time
Warner, nor charged to WCI, related  to such stock option plans. Generally,  the
options   become  exercisable  over  a  three-year  vesting  period  and  expire
 
                                      F-68
 


<PAGE>

<PAGE>
                              TWE GENERAL PARTNERS
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
ten years from the date of grant. Had compensation cost for Time Warner's  stock
option  plans been determined based on the fair value at the grant dates for all
awards during 1995  and 1996 under  those plans consistent  with the method  set
forth  under FASB Statement  No. 123, 'Accounting  for Stock-Based Compensation'
('FAS 123'), WCI's allocable share of compensation cost would have decreased its
net income to the pro forma amounts indicated below:
 
<TABLE>
<CAPTION>
                                                                             YEARS ENDED
                                                                             DECEMBER 31,
                                                                             ------------
                                                                             1996    1995
                                                                             ----    ----
                                                                              (MILLIONS)
<S>                                                                          <C>     <C>
Net income:
     As reported..........................................................   $169    $146
                                                                             ----    ----
                                                                             ----    ----
     Pro forma............................................................   $163    $144
                                                                             ----    ----
                                                                             ----    ----
</TABLE>
 
     FAS 123 is applicable only to stock options granted subsequent to  December
31,  1994. Accordingly,  since WCI's  compensation expense  associated with such
grants would  generally be  recognized  over a  three-year vesting  period,  the
initial impact of applying FAS 123 on pro forma net income is not representative
of  the potential impact on  pro forma net income in  future years, when the pro
forma effect would be fully reflected.
 
     The fair value of each option grant is estimated on the date of grant using
the Black-Scholes  option-pricing  model  with  the  following  weighted-average
assumptions  used for  grants to WCI  employees in 1996  and 1995, respectively:
dividend yields of 1% in both  periods; expected volatility of 21.7% and  22.3%,
risk-free interest rates of 6.4% and 7.4%; and expected lives of 5 years in both
periods.  The weighted average fair value of  an option granted to WCI employees
during the year  was $10.97  ($6.48, net  of taxes)  and $12.25  ($7.23, net  of
taxes) for the years ended December 31, 1996 and 1995, respectively.
 
     A  summary of stock option activity with  respect to employees of WCI is as
follows:
 
<TABLE>
<CAPTION>
                                                                                                          WEIGHTED-
                                                                                             THOUSANDS     AVERAGE
                                                                                                OF        EXERCISE
                                                                                              SHARES        PRICE
                                                                                             ---------    ---------
<S>                                                                                          <C>          <C>
Balance at January 1, 1994................................................................     12,310      $ 27.92
Granted...................................................................................        447        35.32
Exercised.................................................................................       (231)       24.80
Cancelled(a)..............................................................................         (8)       35.67
                                                                                              -------
Balance at December 31, 1994..............................................................     12,518      $ 28.44
Granted...................................................................................      1,147        38.55
Exercised.................................................................................     (1,082)       30.16
Cancelled(a)..............................................................................      1,552        30.79
                                                                                              -------
Balance at December 31, 1995..............................................................     14,135      $ 29.21
Granted...................................................................................        987        37.65
Exercised.................................................................................       (403)       25.58
Cancelled(a)..............................................................................     (1,036)       25.47
                                                                                              -------
Balance at December 31, 1996..............................................................     13,683      $ 30.21
                                                                                              -------
                                                                                              -------
</TABLE>
 
------------
 
(a) Includes all options  cancelled and forfeited  during the year,  as well  as
    options  related to employees who have been  transferred out of and into WCI
    to and from other Time Warner divisions.
 
<TABLE>
<CAPTION>
                                                                                               DECEMBER 31,
                                                                                        --------------------------
                                                                                         1996      1995      1994
                                                                                        ------    ------    ------
                                                                                               (THOUSANDS)
 
<S>                                                                                     <C>       <C>       <C>
Exercisable..........................................................................   11,941    12,465    10,987
</TABLE>
 
                                      F-69
 


<PAGE>

<PAGE>
                              TWE GENERAL PARTNERS
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     The following table summarizes information about stock options  outstanding
with respect to employees of WCI at December 31, 1996:
 
<TABLE>
<CAPTION>
                                OPTIONS OUTSTANDING
                     -----------------------------------------        OPTIONS EXERCISABLE
                                      WEIGHTED-                    -------------------------
                                       AVERAGE       WEIGHTED-                     WEIGHTED-
                       NUMBER         REMAINING       AVERAGE        NUMBER         AVERAGE
RANGE OF EXERCISE    OUTSTANDING     CONTRACTUAL     EXERCISE      EXERCISABLE     EXERCISE
     PRICES          AT 12/31/96        LIFE           PRICE       AT 12/31/96       PRICE
-----------------    -----------     -----------     ---------     -----------     ---------
                     (THOUSANDS)                                   (THOUSANDS)
 
<S>                  <C>             <C>             <C>           <C>             <C>
    Under $17               43         3 years        $ 16.61             43        $ 16.61
$17.00 to $25.00         3,763         3 years        $ 21.64          3,763        $ 21.64
$25.01 to $35.00         3,960         4 years        $ 28.54          3,959        $ 28.54
$35.01 to $40.00         5,502         5 years        $ 36.56          4,101        $ 36.40
$40.01 to $41.75           415         8 years        $ 41.07             75        $ 40.69
                       -------                                       -------
      Total             13,683         4 years        $ 30.21         11,941        $ 29.10
                       -------                                       -------
                       -------                                       -------
</TABLE>
 
8.  BENEFIT PLANS
 
     WCI  and  its  subsidiaries  have defined  benefit  pension  plans covering
substantially all domestic  employees. Pension  benefits are  based on  formulas
that  reflect the  employees' years  of service  and compensation  levels during
their  employment  period.  Qualifying  plans  are  funded  in  accordance  with
government  pension  and income  tax regulations.  Plan  assets are  invested in
equity and fixed income securities.
 
     Pension expense included the following:
 
<TABLE>
<CAPTION>
                                                                                       YEARS ENDED DECEMBER 31,
                                                                                       ------------------------
                                                                                       1996      1995      1994
                                                                                       ----      ----      ----
                                                                                              (MILLIONS)
 
<S>                                                                                    <C>       <C>       <C>
Service cost........................................................................   $ 12      $  8      $  9
Interest cost.......................................................................     12         9         8
Actual return on plan assets........................................................    (17)      (26)       --
Net amortization and deferral.......................................................      8        16       (11)
                                                                                       ----      ----      ----
Total...............................................................................   $ 15      $  7      $  6
                                                                                       ----      ----      ----
                                                                                       ----      ----      ----
</TABLE>
 
     The status of WCI's funded pension plans is as follows:
 
<TABLE>
<CAPTION>
                                                                                                    DECEMBER 31,
                                                                                                    -------------
                                                                                                    1996     1995
                                                                                                    ----     ----
                                                                                                     (MILLIONS)
 
<S>                                                                                                 <C>      <C>
Accumulated benefit obligation (94% vested)......................................................   $ 96     $ 97
Effect of future salary increases................................................................     49       41
                                                                                                    ----     ----
 
Projected benefit obligation.....................................................................    145      138
Plan assets at fair value........................................................................    124      115
                                                                                                    ----     ----
Projected benefit obligation in excess of plan assets............................................    (21)     (23)
Unamortized actuarial losses.....................................................................     --       16
Unamortized plan changes.........................................................................      4        5
Other............................................................................................     (1)      (3)
                                                                                                    ----     ----
Accrued pension expense..........................................................................   $(18)    $ (5)
                                                                                                    ----     ----
                                                                                                    ----     ----
</TABLE>
 
                                      F-70
 


<PAGE>

<PAGE>
                              TWE GENERAL PARTNERS
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     The following assumptions were used in accounting for pension plans:
 
<TABLE>
<CAPTION>
                                                                                            1996     1995     1994
                                                                                            ----     ----     ----
 
<S>                                                                                         <C>      <C>      <C>
Weighted average discount rate...........................................................   7.75%    7.25%     8.5%
Return on plan assets....................................................................      9%       9%       9%
Rate of increase in compensation levels..................................................      6%       6%       6%
</TABLE>
 
     Employees of  the operations  of WCI  in foreign  countries participate  to
varying  degrees  in  local  pension  plans,  which  in  the  aggregate  are not
significant.
 
     Certain domestic employees of WCI also participate in Time Warner's savings
plans and profit sharing plans, as to which the expense amounted to $14  million
in  1996 and  $13 million in  both 1995  and 1994. Contributions  to the savings
plans are  based upon  a  percentage of  the employees'  elected  contributions.
Contributions   to  the  profit  sharing   plans  are  generally  determined  by
management.
 
9.  FINANCIAL INSTRUMENTS
 
     The carrying value of WCI's financial instruments approximates fair  value,
except  for certain  differences related  to cost  method investments  and other
financial instruments which  are not  significant. The fair  value of  financial
instruments, such as investments, is generally determined by reference to market
values  resulting  from  trading on  a  national  securities exchange  or  in an
over-the-counter market. In cases where quoted market prices are not  available,
such  as for derivative financial instruments,  fair value is based on estimates
using present value or other valuation techniques.
 
     Foreign exchange contracts are used primarily  by Time Warner to hedge  the
risk  that unremitted or future royalties owed to WCI domestic companies for the
sale or anticipated sale  of U.S. copyrighted products  abroad may be  adversely
affected  by changes in foreign currency exchange  rates. As part of its overall
strategy to  manage  the level  of  exposure to  the  risk of  foreign  currency
exchange rate fluctuations, Time Warner hedges a portion of its, TWE's and WCI's
combined  foreign currency exposures  anticipated over the  ensuing twelve month
period. At December 31, 1996,  Time Warner has effectively hedged  approximately
half of WCI's total estimated foreign currency exposures that principally relate
to  anticipated cash flows  to be remitted  to the U.S.  over the ensuing twelve
month period, using foreign exchange contracts that generally have maturities of
three months or  less, which  are generally  rolled over  to provide  continuing
coverage throughout the year. Time Warner reimburses or is reimbursed by WCI for
contract  gains  and losses  related to  WCI's  foreign currency  exposure. Time
Warner often closes foreign exchange sale contracts by purchasing an  offsetting
purchase  contract. At December 31, 1996, Time Warner had contracts for the sale
of $447 million and the purchase of $104 million of foreign currencies at  fixed
rates. Of Time Warner's $343 million net sale contract position, $323 million of
foreign  exchange sale contracts  and $102 million  of foreign exchange purchase
contracts related to WCI's foreign  currency exposure, primarily English  pounds
(30%  of net contract  position related to  WCI), German marks  (25%) and French
francs (14%),  compared  to contracts  for  the sale  of  $372 million  and  the
purchase of $140 million of foreign currencies at December 31, 1995.
 
     Unrealized  gains  or  losses  related to  foreign  exchange  contracts are
recorded in income as  the market value of  such contracts change;  accordingly,
the  carrying value of foreign exchange contracts approximates market value. The
carrying value of foreign  exchange contracts was not  material at December  31,
1996  and 1995 and is included in other current liabilities. No cash is required
to be received or paid with respect to the realization of such gains and  losses
until  the related  foreign exchange contracts  are settled,  generally at their
respective maturity dates. For the years ended December 31, 1996, 1995 and 1994,
WCI had  $14  million in  gains,  and $5  million  and $28  million  in  losses,
respectively,  on foreign exchange  contracts, which were or  are expected to be
offset by  corresponding  increases in  the  dollar value  of  foreign  currency
royalty payments that have been or are
 
                                      F-71
 


<PAGE>

<PAGE>
                              TWE GENERAL PARTNERS
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
anticipated  to be received in  cash from the sale  of U.S. copyrighted products
abroad. Time Warner  places foreign currency  contracts with a  number of  major
financial institutions in order to minimize credit risk.
 
     Based  on Time Warner's  outstanding foreign exchange  contracts related to
WCI's exposure at December 31, 1996, each  5% devaluation of the U.S. dollar  as
compared to the level of foreign exchange rates for currencies under contract at
December 31, 1996 would result in approximately $16 million of unrealized losses
and  $5  million of  unrealized gains  on  foreign exchange  contracts involving
foreign  currency   sales  and   purchases,  respectively.   Conversely,  a   5%
appreciation  of the U.S. dollar would result in $16 million of unrealized gains
and $5 million of unrealized losses, respectively. Consistent with the nature of
the economic hedge provided by such foreign exchange contracts, such  unrealized
gains  or  losses  would  be offset  by  corresponding  decreases  or increases,
respectively, in the dollar  value of future  foreign currency royalty  payments
that  would be received in cash within  the ensuing twelve month period from the
sale of U.S. copyrighted products abroad.
 
10. GEOGRAPHICAL INFORMATION
 
     Information as to the operations of WCI in different geographical areas  is
set forth below:
 
<TABLE>
<CAPTION>
                                                                            YEARS ENDED DECEMBER 31,
                                                                          -----------------------------
                                                                           1996       1995       1994
                                                                          -------    -------    -------
                                                                                   (MILLIONS)
 
<S>                                                                       <C>        <C>        <C>
REVENUES
United States..........................................................   $ 1,978    $ 2,110    $ 1,966
Europe.................................................................     1,222      1,282      1,195
Pacific Rim............................................................       493        576        578
Rest of World..........................................................       256        228        247
                                                                          -------    -------    -------
Total..................................................................   $ 3,949    $ 4,196    $ 3,986
                                                                          -------    -------    -------
                                                                          -------    -------    -------
OPERATING INCOME
United States..........................................................   $   113    $    77    $   110
Europe.................................................................       184        164        106
Pacific Rim............................................................         5         44         61
Rest of World..........................................................        30         17         29
                                                                          -------    -------    -------
Total..................................................................   $   332    $   302    $   306
                                                                          -------    -------    -------
                                                                          -------    -------    -------
ASSETS
United States..........................................................   $ 8,248    $ 8,756    $ 9,169
Europe.................................................................     1,664      1,616      1,543
Pacific Rim............................................................       519        484        537
Rest of World..........................................................       403        380        391
                                                                          -------    -------    -------
Total..................................................................   $10,834    $11,236    $11,640
                                                                          -------    -------    -------
                                                                          -------    -------    -------
</TABLE>
 
                                      F-72
 


<PAGE>

<PAGE>
                              TWE GENERAL PARTNERS
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
11. 1995 CLOSURES AND RESTRUCTURINGS
 
     During  1995,  WCI  recorded  $85 million  in  losses  relating  to certain
businesses and joint ventures that were restructured or closed. The losses  were
primarily  related to  Warner Music Enterprises,  one of  WCI's direct marketing
efforts, and the write-off of its related direct mail order assets that were not
recoverable due to the closure of this business.
 
12. COMMITMENTS AND CONTINGENCIES
 
     Total rent expense of WCI amounted to  $50 million in 1996, $65 million  in
1995  and  $55 million  in 1994.  The  minimum rental  commitments of  WCI under
noncancellable  long-term   operating  leases   are:  1997   --   $46   million;
1998  --  $50 million; 1999 -- $47 million;  2000  -- $43  million; 2001 --  $41
million and after 2001  -- $468 million.
 
     Minimum  commitments  and  guarantees   under  certain  artist  and   other
agreements  at December 31, 1996 aggregated  approximately $500 million for WCI,
which are payable principally over a  five-year period. Each General Partner  is
jointly  and severally liable for all liabilities, commitments and contingencies
of TWE and the Time Warner Service Partnerships, except for substantially all of
TWE's indebtedness, which is recourse to each General Partner only to the extent
of its guarantee (Note 5).
 
     Pending  legal  proceedings   are  substantially   limited  to   litigation
incidental  to  the  businesses  of  the General  Partners.  In  the  opinion of
management, the ultimate resolution  of these matters will  not have a  material
effect on the consolidated financial statements of the General Partners.
 
13. RELATED PARTY TRANSACTIONS
 
     In  the normal course of conducting  their businesses, the General Partners
have had various transactions with Time Warner and TWE units, generally on terms
resulting from a  negotiation among  the affected parties  that in  management's
view  results in reasonable allocations. Employees of WCI participate in various
Time Warner  medical, stock  option and  other benefit  plans for  which WCI  is
charged  its allocable share  of plan expenses,  including administrative costs.
The General  Partners  other  than  WCI  do  not  have  significant  numbers  of
employees. Time Warner's corporate group provides various other services to WCI.
The   consolidated  financial   statements  of  the   General  Partners  include
transactions with Time Warner relating to domestic income taxes or tax  benefits
(Note  6). The  Music division of  WCI provides  home videocassette distribution
services to certain TWE operations.
 
     Time Warner and  TWE entered into  a credit agreement  in 1994 that  allows
Time  Warner to borrow up  to $400 million from  TWE through September 15, 2000.
Outstanding borrowings from TWE bear interest  at LIBOR plus 1% per annum.  Time
Warner borrowed $400 million in 1994 under the credit agreement.
 
     All  of the General Partners have  incurred indebtedness to Time Warner and
interest expense related to  such indebtedness is  included in the  accompanying
consolidated  financial statements. In  addition, WCI has  had transactions with
The Columbia House Company partnerships and other music joint ventures and  with
equity  investees of Time Warner, generally with  respect to sales of product in
the ordinary course of business.
 
                                      F-73
 


<PAGE>

<PAGE>
                              TWE GENERAL PARTNERS
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
14. ADDITIONAL FINANCIAL INFORMATION
 
     Additional financial information with respect  to cash flows is as  follows
(millions):
<TABLE>
<CAPTION>
                                                                         WCI      ATC     TWOI    WCCI
                                                                        ------    ----    ----    ----
<S>                                                                     <C>       <C>     <C>     <C>
YEAR ENDED DECEMBER 31, 1996
Cash payments made for interest......................................   $   24    $ --   $ --    $  --
Cash payments made for income taxes, net.............................      187      47     14       17
Tax-related distributions received from TWE..........................      102      88     25       31
Noncash capital contributions, net...................................        8       6      2        2
 
<CAPTION>
                                                                         WCI      ATC     TWOI    WCCI
                                                                        ------    ----    ----    ----
<S>                                                                     <C>       <C>     <C>     <C>
YEAR ENDED DECEMBER 31, 1995
Cash payments made for interest......................................   $   78    $ --    $--     $ --
Cash payments made for income taxes, net.............................      179      77     15       19
Tax-related distributions received from TWE..........................      324     277     79       98
Noncash capital contributions (distributions), net...................    2,476     (20)    (6)      (7)
<CAPTION>
                                                                         WCI      ATC     TWOI    WCCI
                                                                        ------    ----    ----    ----
<S>                                                                     <C>       <C>     <C>     <C>
YEAR ENDED DECEMBER 31, 1994
Cash payments made for interest......................................   $  250    $  1    $--    $ --
Cash payments made for income taxes, net.............................      189      54     15       19
Tax-related distributions received from TWE..........................       55      47     13       17
Noncash capital contributions, net...................................       91      64     21       25
</TABLE>
 
     Other current liabilities of WCI consist of:
 
<TABLE>
<CAPTION>
                                                                                           DECEMBER 31,
                                                                                           ------------
                                                                                           1996    1995
                                                                                           ----    ----
                                                                                            (MILLIONS)
 
<S>                                                                                        <C>     <C>
Accrued expenses........................................................................   $298    $367
Accrued compensation....................................................................    116     165
Accrued income taxes....................................................................     55      48
Deferred revenues.......................................................................     49      62
                                                                                           ----    ----
Total...................................................................................   $518    $642
                                                                                           ----    ----
                                                                                           ----    ----
</TABLE>
 
                                      F-74



<PAGE>

<PAGE>
                         REPORT OF INDEPENDENT AUDITORS
 
THE BOARD OF DIRECTORS OF
WARNER COMMUNICATIONS INC.
AMERICAN TELEVISION AND COMMUNICATIONS CORPORATION
TIME WARNER OPERATIONS INC.
WARNER CABLE COMMUNICATIONS INC.
 
We   have  audited  the  accompanying  consolidated  balance  sheets  of  Warner
Communications Inc. ('WCI'), American Television and Communications  Corporation
('ATC'),  Time Warner Operations  Inc. ('TWOI') and  Warner Cable Communications
Inc. ('WCCI'), as of  December 31, 1996 and  1995, and the related  consolidated
statements  of operations, cash  flows and shareholders' equity  for each of the
three years in the period ended December 31, 1996. Our audits also included  the
financial  statement schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of management. Our responsibility
is to express an opinion on these financial statements and schedule based on our
audits.
 
We  conducted  our  audits  in  accordance  with  generally  accepted   auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also  includes
assessing  the  accounting principles  used  and significant  estimates  made by
management, as well as evaluating the overall financial statement  presentation.
We believe that our audits provide a reasonable basis for our opinion.
 
In  our opinion, the  financial statements referred to  above present fairly, in
all material respects, the consolidated financial position of WCI, ATC, TWOI and
WCCI at  December 31,  1996 and  1995,  and the  consolidated results  of  their
operations  and  cash flows  for each  of the  three years  in the  period ended
December 31, 1996, in conformity with generally accepted accounting  principles.
Also,  in our opinion, the related financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, presents  fairly
in all material respects the information set forth therein.
 
                                          ERNST & YOUNG LLP
 
New York, New York
February 11, 1997
 
                                      F-75
 


<PAGE>

<PAGE>
                              TWE GENERAL PARTNERS
                         SELECTED FINANCIAL INFORMATION
 
WCI SELECTED HISTORICAL FINANCIAL INFORMATION
 
     The  selected historical financial  information of WCI  set forth below has
been derived  from and  should  be read  in  conjunction with  the  consolidated
financial  statements and other financial information of WCI presented elsewhere
herein. Capitalized  terms are  as defined  and described  in such  consolidated
financial statements, or elsewhere herein.
 
     WCI  was a company  with operations in the  Filmed Entertainment, Music and
Cable businesses and  certain other  investments when  it was  acquired by  Time
Warner  for $14 billion in 1989. However,  as a result of the TWE Capitalization
on June 30, 1992,  WCI was restructured  into a company  with operations in  the
Music business, a partnership interest in TWE and certain other investments. The
selected  historical financial information  of WCI set forth  below for 1992 has
been restated to reflect WCI's  financial results as if  it actually had been  a
company with operations in the Music business, a partnership interest in TWE and
certain other investments in such year.
 
     The   selected  historical  financial  information   for  1995  reflects  a
recapitalization of WCI,  in which  Time Warner  made a  $2.642 billion  capital
contribution  to  WCI  (consisting of  a  $2.5 billion  subordinated  reset note
receivable due from WCI and $142 million of cash) and WCI used the cash proceeds
therefrom to repay its obligations to  Time Warner under their revolving  credit
agreement.  The selected historical financial  information for 1993 reflects the
payment by WCI of a $3 billion special dividend to Time Warner in the form of  a
subordinated reset note due 2008, the prepayment of $500 million of principal of
such note using borrowings under the revolving credit agreement with Time Warner
and  the repurchase or redemption by WCI  of all of its publicly-held senior and
subordinated debentures using capital contributed by Time Warner.
 
<TABLE>
<CAPTION>
                                                                           YEARS ENDED DECEMBER 31,
                                                              ---------------------------------------------------
SELECTED OPERATING STATEMENT INFORMATION                       1996       1995       1994       1993       1992
                                                              -------    -------    -------    -------    -------
                                                                                  (MILLIONS)
 
<S>                                                           <C>        <C>        <C>        <C>        <C>
Revenues...................................................   $ 3,949    $ 4,196    $ 3,986    $ 3,334    $ 3,214
Depreciation and amortization..............................       370        356        341        329        310
Business segment operating income..........................       332        302        306        265        255
Equity in pretax income of TWE.............................       133         87         96        129        100
Interest and other, net....................................       (58)        (3)      (126)         8        (45)
Income before extraordinary item...........................       169        153         70         94        105
Net income.................................................       169        146         70         76        105
</TABLE>
 
<TABLE>
<CAPTION>
                                                                           YEARS ENDED DECEMBER 31,
                                                              ---------------------------------------------------
SELECTED BALANCE SHEET INFORMATION                             1996       1995       1994       1993       1992
                                                              -------    -------    -------    -------    -------
                                                                                  (MILLIONS)
 
<S>                                                           <C>        <C>        <C>        <C>        <C>
Total assets...............................................   $10,834    $11,236    $11,640    $11,222    $10,785
Long-term debt.............................................        --         --      2,668      3,027        543
Shareholder's equity.......................................     8,987      9,342      7,105      6,600      8,801
</TABLE>
 
     Selected historical financial information is not presented for the  General
Partners  other  than  WCI because  such  General Partners  have  no independent
business operations,  nor do  they have  significant amounts  of debt  or  other
liabilities.  The financial position  and results of  operations of such General
Partners are principally derived from their investments in TWE, Time Warner, TBS
and their revolving credit agreements with Time Warner.
 
                                      F-76
 


<PAGE>

<PAGE>
                              TWE GENERAL PARTNERS
              SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS OF WCI
                  YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
                                   (MILLIONS)
 
<TABLE>
<CAPTION>
                                                                                  ADDITIONS
                                                                   BALANCE AT    CHARGED TO                   BALANCE AT
                                                                   BEGINNING      COSTS AND                      END
                          DESCRIPTION                              OF PERIOD      EXPENSES      DEDUCTIONS    OF PERIOD
----------------------------------------------------------------   ----------    -----------    ----------    ----------
 
<S>                                                                <C>           <C>            <C>           <C>
1996:
Reserves deducted from accounts receivable:
     Allowance for doubtful accounts............................      $102          $  73         $  (91)(a)     $ 84
     Reserves for sales returns and allowances..................       206            287           (215)(b)      278
                                                                   ----------    -----------    ----------    ----------
          Total.................................................      $308          $ 360         $ (306)        $362
                                                                   ----------    -----------    ----------    ----------
                                                                   ----------    -----------    ----------    ----------
 
1995:
Reserves deducted from accounts receivable:
     Allowance for doubtful accounts............................      $ 80          $  87         $  (65)(a)     $102
     Reserves for sales returns and allowances..................       231            264           (289)(b)      206
                                                                   ----------    -----------    ----------    ----------
          Total.................................................      $311          $ 351         $ (354)        $308
                                                                   ----------    -----------    ----------    ----------
                                                                   ----------    -----------    ----------    ----------
 
1994:
Reserves deducted from accounts receivable:
     Allowance for doubtful accounts............................      $ 59          $  47         $  (26)(a)     $ 80
     Reserves for sales returns and allowances..................       196            421           (386)(b)      231
                                                                   ----------    -----------    ----------    ----------
          Total.................................................      $255          $ 468         $ (412)        $311
                                                                   ----------    -----------    ----------    ----------
                                                                   ----------    -----------    ----------    ----------
</TABLE>
 
------------
 
 (a) Represents uncollectible receivables charged against the reserve.
 
 (b) Represents returns or allowances applied against the reserve.
 
                                      F-77




<PAGE>

<PAGE>
                                 EXHIBIT INDEX
 
<TABLE>
<CAPTION>
                                                                                                          SEQUENTIAL
EXHIBIT                                                                                                      PAGE
NUMBER                                                 DESCRIPTION                                          NUMBER
-----------------  ------------------------------------------------------------------------------------   ----------
<S>                <C>                                                                                    <C>
 3.1               Agreement  of Limited Partnership, dated  as of October 29,  1991, as amended by the
                   Letter Agreement, dated February 11, 1992,  and the Letter Agreement dated June  23,
                   1992,  among Time Warner  Companies, Inc. ('TWCI') and  certain of its subsidiaries,
                   ITOCHU and  Toshiba (which  is  incorporated  herein  by reference to Exhibit (A) to
                   TWCI's Current Report on Form 8-K dated October  29,  1991  (File  No.  1-8637)  and
                   Exhibits  10(b) and 10(c) to TWCI's  Current Report on Form 8-K dated July 14,  1992
                   ('TWCI's July 1992 Form 8-K'))......................................................         *
 3.2               Amendment Agreement,  dated as  of  September 14, 1993, among ITOCHU, Toshiba, TWCI,
                   US  West,  and  certain   of  their  respective  subsidiaries   amending   the   TWE
                   Partnership   Agreement,  as  amended  (which   is incorporated  herein by reference
                   to Exhibit 3.2 to TWE's Annual Report on Form 10-K for the year ended  December  31,
                   1993 ('TWE's 1993 Form 10-K'))......................................................         *
 3.3(i)            Certificate of Incorporation and By-Laws  of American Television and  Communications
                   Corporation  ('ATC'),  as amended  (which are  incorporated  herein by  reference to
                   Exhibits 3.3(i) and (ii) to TWE's 1993 Form 10-K)...................................         *
 3.3(ii)           Certificate of Ownership  and Merger merging  American Digital Communications,  Inc.
                   into  ATC as filed with the  Secretary of State of the  State of Delaware on May 31,
                   1996................................................................................
 3.3(iii)          Certificate of Ownership and Merger merging Carolina Network Corporation into ATC as
                   filed with the Secretary of State of the State of Delaware on May 31, 1996..........
 3.3(iv)           Certificate of Ownership and Merger merging ATC Holdings II, Inc. into ATC as  filed
                   with the Secretary of State of the State of Delaware on June 28, 1996...............
 3.4               Certificate of Incorporation, as amended, and By-Laws of Time Warner Operations Inc.
                   (which  are incorporated herein  by reference to  Exhibits 3.7(i) and  (ii) to TWE's
                   1993 Form 10-K).....................................................................         *
 3.5               Certificate of Incorporation and By-Laws of Warner Cable Communications Inc.  (which
                   are  incorporated herein by reference to Exhibits 3.8(i) and (ii) to TWE's 1993 Form
                   10-K)...............................................................................         *
 3.6(i)            Restated  Certificate  of   Incorporation,  as  amended,   and  By-Laws  of   Warner
                   Communications  Inc. ('WCI') (which are incorporated herein by reference to Exhibits
                   3.9(i) and (ii) to TWE's 1993 Form 10-K)............................................         *
 3.6(ii)           Certificate of Ownership  and Merger  of Time Warner  Interactive Inc.  into WCI  as
                   filed with the Secretary of State of the State of Delaware on July 3, 1996..........
 4.1               Indenture,  dated  as  of April  30,  1992,  as amended  by  the  First Supplemental
                   Indenture, dated as of June 30, 1992,  among TWE, TWCI, certain of its  subsidiaries
                   party  thereto and The Bank of New York, as Trustee (which is incorporated herein by
                   reference to Exhibits 10(g) and 10(h) to TWCI's July 1992 Form 8-K).................         *
 4.2               Second Supplemental  Indenture, dated  as  of December  9,  1992, among  TWE,  TWCI,
                   certain  of its  subsidiaries party  thereto and  The Bank  of New  York, as Trustee
                   (which is incorporated  herein by reference  to Exhibit  4.2 to Amendment  No. 1  to
                   TWE's  Registration  Statement  on  Form  S-4 (Reg.  No.  33-67688)  filed  with the
                   Securities  and  Exchange  Commission  on  October  25,  1993  ('TWE's   1993   Form
                   S-4'))..............................................................................         *
 4.3               Third Supplemental Indenture, dated as of October 12, 1993, among TWE, TWCI, certain
                   of  its subsidiaries party  thereto and The Bank  of New York,  as Trustee (which is
                   incorporated herein by reference to Exhibit 4.3 to TWE's 1993 Form S-4).............         *
 4.4               Fourth Supplemental Indenture, dated as of March 29, 1994, among TWE, TWCI,  certain
                   of  its subsidiaries party  thereto and The Bank  of New York,  as Trustee (which is
                   incorporated herein by reference to Exhibit 4.4 to TWE's 1993 Form 10-K)............         *
 4.5               Fifth Supplemental  Indenture, dated  as  of December  28,  1994, among  TWE,  TWCI,
                   certain  of its  subsidiaries party  thereto and  The Bank  of New  York, as Trustee
                   (which is incorporated herein by reference to Exhibit 4.5 to TWE's Annual Report  on
                   Form 10-K for the year ended December 31, 1994).....................................         *
</TABLE>
 
<PAGE>


<PAGE>

<TABLE>
<CAPTION>

                                                                                                          SEQUENTIAL
EXHIBIT                                                                                                      PAGE
NUMBER                                                 DESCRIPTION                                          NUMBER
-----------------  ------------------------------------------------------------------------------------   ----------
<S>                <C>                                                                                    <C>
10.1               Credit Agreement, dated as of June 30, 1995, among TWE, TWE-A/N Partnership  and TWI
                   Cable Inc., as borrowers, The Chase  Manhattan  Bank  (formerly  Chemical  Bank), as
                   administrative agent, Bank of  America National Trust  and Savings Association,  The
                   Bank of New York and Morgan Guaranty Trust Company of New York, as documentation and
                   syndication  agents,  and  the  lending  institutions  named  therein  (the  'Credit
                   Agreement') (which is incorporated  herein by reference to  Exhibit 10(a) to  TWCI's
                   Current Report on Form 8-K dated July 6, 1995)......................................         *
10.2               Amendment  No.  1, dated  as October  30, 1995,  to the  Credit Agreement  (which is
                   incorporated herein by  reference to Exhibit  10.27 to TWE's  Annual Report on  Form
                   10-K for the year ended December 31, 1995)..........................................         *
10.3               Waiver  No. 1 dated  as of  December  1,  1995 to  the  Credit  Agreement (which  is
                   incorporated herein by  reference to Exhibit  10.28 to the  Time Warner Inc.  ('Time
                   Warner')  Annual Report  on Form 10-K  for the  year ended December  31, 1996 ('Time
                   Warner's  1996 Form 10-K'))..........................................................         *
10.4               Amendment and Waiver No. 2 dated as of  August 26,  1996  to  the  Credit  Agreement
                   (which  is incorporated herein by  reference to Exhibit 10.29  to Time Warner's 1996
                   Form 10-K)..........................................................................         *
10.5               Admission Agreement, dated as of May 16, 1993, between TWE and U S WEST, Inc. (which
                   is incorporated herein by reference to Exhibit 10(a) to TWE's Current Report on Form
                   8-K dated May 16, 1993).............................................................         *
10.6               Restructuring Agreement, dated as of August 31, 1995, among TWCI, ITOCHU  and ITOCHU
                   Entertainment Inc. (which is incorporated  herein  by  reference to  Exhibit 2(a) to
                   TWCI's Current Report on Form  8-K  dated  August  31,  1995  ('TWCI's  August  1995
                   Form 8-K')).........................................................................         *
10.7               Restructuring  Agreement,  dated as  of August  31, 1995,  between TWCI  and Toshiba
                   (including  Form  of  Registration  Rights   Agreement  between  TWCI  and  Toshiba)
                   (which is incorporated herein  by reference to Exhibit 2(b) to  TWCI's  August  1995
                   Form 8-K)...........................................................................         *
10.8               Option Agreement,  dated  as  of  September  15,  1993,  between  TWE  and  US  West
                   (which  is  incorporated herein  by reference  to  Exhibit 10.9  to TWE's  1993 Form
                   10-K)...............................................................................         *
10.9               Contribution  Agreement,  dated  as  of  September  9,  1994,  among  TWE,   Advance
                   Publications, Inc.  ('Advance'),  Newhouse  Broadcasting  Corporation  ('Newhouse'),
                   Advance/Newhouse Partnership, and  TWE-A/N Partnership (which is incorporated herein
                   by reference to Exhibit 10(a) to TWE's  Current  Report on Form 8-K  dated September
                   9, 1994 ('TWE's September  1994 Form 8-K')).........................................         *
10.10              Partnership   Agreement,  dated   as  of   September  9,   1994,  between   TWE  and
                   Advance/Newhouse Partnership (which is incorporated  herein by reference to  Exhibit
                   10(b) to TWE's September 1994 Form 8-K).............................................         *
10.11              Letter  Agreement,  dated April  1, 1995,  among TWE,  Advance/Newhouse Partnership,
                   Advance and   Newhouse  (which  is incorporated herein by reference to Exhibit 10(c)
                   to TWE's  Current Report on Form 8-K dated April 1, 1995)...........................         *
21                 Subsidiaries of TWE and the Time Warner General Partners............................
23                 Consent of Ernst & Young LLP, Independent Auditors..................................
27                 Financial Data Schedule.............................................................
</TABLE>
 
------------
 
* Incorporated by reference.
 
     The Registrants  hereby agree  to furnish  to the  Securities and  Exchange
Commission  at its  request copies  of long-term  debt instruments  defining the
rights of holders of  the Registrants' outstanding long-term  debt that are  not
required to be filed herewith.

<PAGE>