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________________________________________________________________________________
 
                       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.
                         COMMISSION FILE NUMBER 1-12259
 
                            ------------------------
 
                                TIME WARNER INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 
                            ------------------------
 
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<S>                                                        <C>
                        DELAWARE                                                  13-3527249
             (STATE OR OTHER JURISDICTION OF                                   (I.R.S. EMPLOYER
             INCORPORATION OR ORGANIZATION)                                   IDENTIFICATION NO.)
          75 ROCKEFELLER PLAZA, NEW YORK, N.Y.                                       10019
        (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                                  (ZIP CODE)
</TABLE>
 
                            ------------------------
 
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 484-8000
 
                            ------------------------
 
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
 
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                                                                                      NAME OF EACH EXCHANGE
                               TITLE OF EACH CLASS                                     ON WHICH REGISTERED
---------------------------------------------------------------------------------    ------------------------
 
<S>                                                                                  <C>
Common Stock, $.01 par value                                                         New York Stock Exchange
Rights to Purchase Series A Participating Cumulative Preferred Stock                 New York Stock Exchange
</TABLE>
 
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
 
                                      NONE
 
     Indicate  by check  mark whether the  registrant (1) has  filed all reports
required to be filed by  Section 13 or 15(d) of  the Securities Exchange Act  of
1934  during the preceding  12 months, and  (2) has been  subject to such filing
requirements for the past 90 days. Yes [X]  No [ ]
 
     Indicate by check mark if disclosure of delinquent filers pursuant to  Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best  of registrant's knowledge,  in definitive proxy  or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
 
     As of March 7, 1997, there were 508,429,638  shares of registrant's  Common
Stock  and  50,642,172  shares  of  registrant's   Series  LMCN-V  Common  Stock
outstanding.  The aggregate market value of the registrant's  voting  securities
held by  non-affiliates  of the registrant (based upon the closing price of such
shares  on the New York  Stock  Exchange  Composite  Tape on March 7,  1997) was
approximately $28 billion.
 
                      DOCUMENTS INCORPORATED BY REFERENCE:
 
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                        DESCRIPTION OF DOCUMENT                                   PART OF THE FORM 10-K
------------------------------------------------------------------------   -----------------------------------
 
<S>                                                                        <C>
Portions of the Definitive Proxy Statement to be used in connection with    Part III (Item 10 through Item 13)
  the registrant's 1997 Annual Meeting of Stockholders.
</TABLE>
 
________________________________________________________________________________






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                                Time Warner Inc.

                          CORPORATE ORGANIZATION CHART

Included  in the Form 10-K for Time Warner  Inc.  is a chart  illustrating  Time
Warner Inc.'s corporate organization, providing the following information:

Time Warner Inc. owns 100% of Turner  Broadcasting  System, Inc. and Time Warner
Companies, Inc.

Turner  Broadcasting  System,  Inc. owns 100% of Cable  Networks-TBS  and Filmed
Entertainment-TBS .

Time  Warner  Companies,  Inc.  owns  100%  of  Time  Inc.  (Magazine  and  Book
Publishing), TWI Cable and the Time Warner General and Limited Partners.(1)

Time  Warner  General  and  Limited  Partners  own 100% of  Warner  Music  Group
(Recorded Music and Music  Publishing)  and 74.49% of Time Warner  Entertainment
Company, L.P. ("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 each 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 3 to the
Company's consolidated statements.)






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                                     PART I
 
ITEM 1. BUSINESS
 
     Time  Warner  Inc.  (the  'Company'), together  with  its  consolidated and
unconsolidated subsidiaries,  is the  world's  leading media  and  entertainment
company.  The  Company classifies  its  business interests  in  four fundamental
areas:  Entertainment,   consisting   principally   of   interests   in   filmed
entertainment,  television  production,  television  broadcasting,  theme parks,
recorded music and music publishing;  Cable Networks, consisting principally  of
interests  in cable  television programming  and sports  franchises; Publishing,
consisting principally of interests in magazine publishing, book publishing  and
direct  marketing;  and  Cable,  consisting principally  of  interests  in cable
television systems. The Company is a holding company that derives its  operating
income and cash flow from its investments in its direct subsidiaries Time Warner
Companies, Inc. and Turner Broadcasting System, Inc.
 
     On   October  10,  1996,  the  Company   completed  the  merger  of  Turner
Broadcasting System, Inc. ('TBS') thereby acquiring the remaining  approximately
80%   interest  in  TBS  that  the  Company   did  not  already  own  (the  'TBS
Transaction'). 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 Time  Warner Entertainment  Company,
L.P.  ('TWE'). For convenience, the terms  the 'Registrant,' 'Company' and 'Time
Warner' are used in this report to refer to both the old and new parent  company
and  collectively to the  parent company and the  subsidiaries through which its
various businesses are  conducted, unless  the context  otherwise requires.  See
below for a description of TWE and its relationship to the Company.
 
TBS MERGER
 
     On October 10, 1996, pursuant to an Amended and Restated Agreement and Plan
of Merger among the Company, TWCI, TBS and certain of the Company's wholly owned
subsidiaries, among other things: (a) each of TWCI and TBS became a wholly owned
subsidiary of the Company through a merger with a subsidiary of the Company, (b)
each  outstanding share of common stock of TWCI, other than shares held directly
or indirectly by  TWCI, was  converted into  one share  of common  stock of  the
Company,  (c) each  outstanding share of  preferred stock of  TWCI was converted
into one share  of a substantially  identical series of  preferred stock of  the
Company,  (d) each outstanding share  of common stock of  TBS, other than shares
held directly or indirectly by TBS or the Company or in the treasury of TBS, was
converted into the right to receive .75  shares of common stock of the  Company,
and (e) each outstanding share of preferred stock of TBS, other than shares held
directly  or indirectly by TWCI or the  Company, was converted into the right to
receive 4.8 shares of common stock of the Company. Additional information on the
TBS Transaction  is set  forth in  Note 2,  'Mergers and  Acquisitions,' to  the
Company's consolidated financial statements, at pages F-32 through F-34 herein.
 
TWE
 
     TWE was formed as a Delaware limited partnership in 1992 to own and operate
substantially all of the business of Warner Bros., Home Box Office and the cable
television  businesses owned and operated by the  Company prior to such date. In
1995, the Company acquired the aggregate 11.22% limited partnership interests in
TWE  previously  held  by  subsidiaries   of  ITOCHU  Corporation  and   Toshiba
Corporation  in  exchange for  15 million  shares  of the  Company's convertible
preferred stock and $10  million. As a result,  the Company, through its  wholly
owned  subsidiaries, owns 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 100%  of the senior  priority capital ('Senior
Capital') and junior priority capital ('Series B Capital') of TWE. The remaining
25.51% limited  partnership  interests in  the  Series A  Capital  and  Residual
Capital  of TWE  are held  by a  subsidiary of  US WEST,  Inc. ('US  West'). The
Company does not consolidate TWE and certain related
 
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companies (the  'Entertainment  Group') for financial  reporting  purposes.  The
subsidiaries  of the Company that own general  partnership  interests in TWE are
collectively  referred to herein as the 'Time Warner General Partners.' See also
'Description  of  Certain  Provisions  of the  TWE  Partnership  Agreement'  for
additional information about the organization of TWE.
 
     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 interests therein) serving approximately 4.5 million subscribers, as
well  as certain foreign cable investments and programming investments. TWE owns
a two-thirds equity  interest in  the TWE-A/N  Partnership and  is the  managing
partner.  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.
 
     The  Company from time to  time has engaged in  discussions with US West to
restructure TWE  in  a  manner  that  would  achieve  the  Company's  previously
announced  goal of decreasing its interests  in the cable television business of
TWE and increasing its interests in the filmed entertainment and cable  networks
businesses  of  TWE. Any  TWE restructuring  depends,  among other  things, upon
successful negotiations with US West and other third parties, a renegotiation of
certain credit arrangements and the receipt of consents or approvals from  cable
television franchise and other regulatory authorities. Other alternatives remain
available  to the Company to advance its goal of reducing its interests in cable
systems, in  addition to  or in  lieu of  a TWE  restructuring, that  would  not
require  US West's consent but would  still require other third party, franchise
and regulatory approvals. There is no  assurance that any of these efforts  will
succeed.
 
     For  financial  information  about  the  Company's  industry  segments  and
operations in different geographical areas with respect to each of the years  in
the   three-year  period  ended   December  31,  1996,   see  Note  15  'Segment
Information,' to the Company's consolidated financial statements, at pages  F-56
through F-60 herein.
 
                                 ENTERTAINMENT
 
     The  Company'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,
produce  and  distribute  recorded  music,  license  rights  to  the   Company's
characters and operate theme parks and retail stores featuring consumer products
based on the Company's characters and brands.
 
                              FILMED ENTERTAINMENT
 
     The  Company'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  Company's  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).
 
     The  filmed   entertainment  business   also  includes   New  Line   Cinema
Corporation,  Castle Rock  Entertainment and Hanna-Barbera  Productions Inc., as
well as the Turner libraries, which include Hanna-Barbera, MGM, RKO and  classic
Warner  Bros. films and animated  shorts, which became part  of the Company as a
result of the TBS Transaction. These businesses are wholly owned by the  Company
and  are not a part of TWE, although TWE performs certain distribution and other
services for these businesses.
 
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                      FILMED ENTERTAINMENT -- WARNER BROS.
 
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.  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, including
two Turner  Pictures productions.  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
 
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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.  The TBS Transaction  reunites for distribution  the entire Warner Bros.
film and animation library, adding classic MGM and RKO titles and animation from
Hanna-Barbera, Ruby-Spears  and MGM.  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 the Company 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  the   Company's
subsidiaries and divisions (including Kids' WB! and Cartoon Network).
 
     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.'
 
     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
 
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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 Time Warner's and TWE's cable television networks of $463 million  as
of  December 31, 1996 (which  includes the sale to  TBS of syndication rights to
'ER' during 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, including product
from New Line Cinema  and Turner Pictures and,  commencing in 1997, Castle  Rock
Entertainment.  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  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,
 
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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  incorporated
licensing  programs for  Hanna-Barbera characters  and Turner  classic films and
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.
 
     Time   Warner  owns  a  50%  interest  in  Cinamerica  Theatres,  L.P.,  an
unconsolidated joint venture with Viacom  Inc. which is not  a part of TWE,  and
which  owns  and  operates  two theater  circuits:  Mann  Theatres  and Festival
Cinemas. The joint venture  operates approximately 400  screens in 67  theaters,
principally located in California and Colorado.
 
                          FILMED ENTERTAINMENT -- TBS
 
     Theatrical  films are  also produced by  Castle Rock  Entertainment and New
Line Cinema, which are wholly  owned subsidiaries of TBS and  are not a part  of
TWE.  The Company is exploring alternatives for  Castle Rock and New Line, which
range from an  equity transaction in  these studios to  a nonrecourse  financing
transaction.  Following the release  of 'Michael,' which  was distributed by New
Line during the 1996 holiday season, Turner Pictures ceased active operations in
1996 and final production of its projects is being managed by Warner Bros.
 
     Castle Rock Entertainment produced or acquired 10 films which were released
during 1996, including  'Lone Star,'  'City Hall,' 'The  Spitfire Grill,'  'Some
Mother's  Son'  and 'Hamlet.'  In early  1997,  Castle Rock's  'Absolute Power,'
starring and directed  by Clint Eastwood  was released along  with 'Waiting  for
Guffman' and 'SubUrbia.' It is expected that Castle Rock theatrical product will
become  available for  distribution by  the Company  in the  domestic home video
market in 1997 and the domestic theatrical market in 1998.
 
     New Line  Cinema  is a  leading  independent producer  and  distributor  of
theatrical  motion pictures. Through its two film divisions, New Line Cinema and
Fine Line Features, during 1996 it distributed such films as 'Shine,' 'Island of
Dr. Moreau'  and 'Long  Kiss  Goodnight.' Upcoming  films include  'One  Night,'
directed  by Mike Figgis and starring  Wesley Snipes and Nastassja Kinski; 'Lost
in  Space,'  starring  William  Hurt   and  Gary  Oldman;  and  'Love!   Valour!
Compassion!,'  a  film  adaptation  of  the  Tony  Award-winning  Broadway play,
starring Jason Alexander.
 
     Castle Rock Television  has produced  the critically  acclaimed and  highly
rated  Emmy-winning series 'Seinfeld' for the past eight years. The company also
produces the hit show 'The Single Guy' and 'Boston
 
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Common.' New Line Television creates original television programming,  including
the  animated series  'The Mask.' A  new series for  ABC based on  the film 'The
Player' is under development.
 
     TBS's filmed entertainment  business also includes  the Hanna-Barbera,  MGM
and  RKO libraries, which include classic films such as 'Gone With the Wind' and
the 'Flintstones,' 'Yogi Bear,' 'Huckleberry Hound,' 'Tom & Jerry' and  'Popeye'
cartoons. Distribution of these libraries is managed by Warner Bros.
 
                           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.
 
     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.
 
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DC COMICS AND MAD MAGAZINE
 
     TWE  and Warner Communications Inc. ('WCI'),  which is wholly owned by Time
Warner, 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.
 
     Time Warner owns 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.  E.C.
Publications, Inc. is wholly owned and not a part of TWE.
 
                           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 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.
 
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                                  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.
 
                                     MUSIC
 
     In  the United States and around the world, the Company, 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.
 
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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.
 
     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.
 
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     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.
 
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.
 
                                 CABLE NETWORKS
 
     The   Company's   Cable  Networks   business   consists  of   domestic  and
international basic  cable  networks  and  premium  pay  television  programming
services  and the operation of  sports franchises. TBS's networks (collectively,
the 'Turner Networks') constitute the principal component of the Company's basic
cable networks: Cable  News Network ('CNN');  CNN International; Headline  News;
CNN   Financial   News  Network   ('CNNfn');  WTBS   (commonly  known   as  'TBS
Superstation');  Turner  Network  Television  ('TNT');  Turner  Classic  Movies,
Cartoon  Network  and the  recently launched  sports  news network,  CNN/SI, all
operated  by  TBS,  which  is  wholly  owned  by  the  Company.  Pay  television
programming consists of the HBO and Cinemax pay television programming services,
operated by the Home Box Office division of TWE ('Home Box Office'). The Company
also  has  a  partial  interest  in  certain  other  domestic  and international
programming networks.
 
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GENERAL
 
     The Company, through TBS,  is the leading supplier  of programming for  the
basic  cable industry in the  United States. The Turner  Networks provide a wide
variety of  movies  and  general entertainment,  all-news  and  all-sports  news
programming.  Through Home Box Office, the  Company 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.
 
     All of  the  cable  networks  (which does  not  include  TBS  Superstation)
distribute  their  programming via  cable  and other  distribution technologies,
including  satellite  distribution.  A  separate  distribution  company,  Turner
Network  Sales, handles the sales  and marketing of all  of TBS's domestic basic
cable networks  to cable  systems in  the United  States. Both  the basic  cable
networks  and  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  the Company's  cable networks  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 basic cable networks generate  their revenue principally from the  sale
of  advertising time on the networks and  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. The pay-TV  networks,
being  commercial free, generate their revenue principally from the monthly fees
paid by  affiliates, 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 Turner  Networks' and 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  Turner Networks and  Home Box Office  do business is Tele-Communications,
Inc. ('TCI'), which accounted  for approximately 28% of  TBS's and 20% of  HBO's
and  Cinemax's  combined  subscribers.  (TCI,  through  subsidiaries,  owns 50.6
million shares of LMCN-V Class Common Stock of the Company entitling the  holder
to  1/100 of a vote  per share on certain  limited matters, voting together with
all other voting shares. These shares, which were issued in connection with  the
TBS  Transaction, represent less  than 1% of  the voting power  of the Company's
outstanding common  stock.) As  of December  31, 1996,  Time Warner  Cable  (see
'Cable')  accounted for  an additional  18% and  15%, respectively  of TBS's and
HBO's and Cinemax's combined  subscribers. Turner Networks  and Home Box  Office
attempt  to assure  continuity in their  relationships with  affiliates and have
entered into multi-year contracts  with affiliates, whenever possible.  Although
TBS  and  Home  Box  Office  believe the  prospects  of  continued  carriage and
marketing of their programming services by  the larger affiliates are good,  the
loss  of one  or more of  them as  distributors of any  individual cable network
could have a material adverse effect on their respective businesses.
 
     Advertising revenue on the Company's basic cable networks is a function  of
the  number of advertising spots sold, the  'CPM,' which is the average cost per
thousand homes  charged for  such advertising,  and market  conditions. The  CPM
applicable  to each  network program  varies depending  upon its  ratings (which
measure the numbers  of viewers  delivered), the type  of program  and its  time
slot, which latter factors influence the demographics of such viewers, which are
important  to an advertiser. To evaluate the  level of its viewing audience, TBS
utilizes the metered method of audience measurement as provided by A.C. Nielsen.
Cable
 
                                      I-12
 




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networks which have not  achieved widespread cable  system distribution are  not
able  to achieve significant viewing  levels and, as a  result, do not command a
high CPM for their advertising time.
 
                                TURNER NETWORKS
 
DOMESTIC
 
     TBS Superstation is a 24-hour  per day, independent UHF television  station
headquartered in Atlanta which is transmitted over-the-air to the Atlanta market
and then retransmitted by third parties via satellite to cable systems in all 50
states, Puerto Rico and the Virgin Islands. The network is seen in approximately
70   million  homes  and  its  programming  includes  movies,  sports,  original
productions, and classic television comedies.
 
     TBS Superstation relies principally on advertising revenue and receives  no
direct  compensation  for  its  signal  from  cable  systems,  or  from Southern
Satellite Systems, Inc. ('SSSI'), the  common carrier which delivers its  signal
to  cable systems. Unlike other cable networks, TBS does not have contracts with
local cable  systems which  carry TBS  Superstation  and also  does not  have  a
written agreement with SSSI, which is controlled by TCI.
 
     The  Company  continues  to  explore  the  possibility  of  converting  TBS
Superstation from  a  broadcast television  station  to a  copyright-paid  cable
network.  Such a conversion would  permit the Company to  charge cable systems a
fee  for  providing  the  network  to  customers  but  involves  the  successful
completion  of negotiations with  certain third parties  for programming rights,
among other  things. If  such  conversion occurs,  the  Company has  an  option,
obtained as part of the TBS Transaction, to require SSSI to be subject to a non-
competition  agreement and to provide satellite uplink and distribution services
for the converted cable network.
 
     Other entertainment networks produced and distributed by TBS are TNT, which
as of December 31, 1996  had over 70 million  subscribers in the United  States;
Cartoon  Network, which  in early 1997  increased its subscribers  in the United
States to 40 million, as reported by A.C. Nielsen, and Turner Classic Movies,  a
24-hour  commercial free  classic film network  which presents  films from TBS's
MGM, RKO and pre-1950 Warner Bros. film libraries and which has over 10  million
subscribers.  Programming for these  entertainment networks is  derived from the
Company's film, made-for-television and animation  libraries as to which TBS  or
other  divisions  of  the  Company  own  the  copyrights,  licensed programming,
including sports, and original productions.
 
     TBS  has  acquired   programming  rights  from   the  National   Basketball
Association  (the  'NBA') to  televise a  certain number  of regular  season and
playoff games in each  of the 1994-1995 through  1997-1998 seasons for which  it
has  agreed to pay  fees plus a  share of the  advertising revenues generated in
excess of specified  amounts. TBS has  also acquired broadcast  rights from  the
National  Football League to televise a  certain number of preseason and regular
season Thursday and Sunday night football games in each of the 1994 through 1997
seasons, for which it has agreed to pay fees.
 
     TBS also televises on TBS Superstation  a certain number of baseball  games
of  the Atlanta Braves,  a major league  baseball club owned  by a subsidiary of
TBS, for which rights fee payments are  paid to the Major League's central  fund
for distribution to all Major League Baseball clubs.
 
     CNN,  launched in 1980, is a 24-hour  per day cable television news service
and, with CNN International,  is distributed to more  than 170 million homes  in
more  than 210  countries and  territories. In  addition to  Headline News which
provides updated half-hour newscasts throughout  each day, CNN has expanded  its
brand  franchise  to include  CNNfn, launched  on  December 29,  1995, featuring
business and consumer news; and CNN/SI, launched on December 12, 1996, featuring
sports news and features. The Company has also expanded into a number of special
market networks.
 
     CNN owns and operates 30 permanent news  bureaus, of which nine are in  the
United  States and 21  are located around  the world. In  addition, a network of
satellite newsgathering  trucks, portable  satellite uplinks  and a  network  of
approximately 400 domestic and 200 international broadcast television affiliates
on  five continents  permit CNN  to report live  from virtually  anywhere in the
world. These affiliate  arrangements, from  which CNN  obtains substantial  news
coverage,  are generally  represented by contracts  having terms of  one or more
years.
 
                                      I-13
 




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     CNN also operates CNN Interactive (at http://www.CNN.com), one of the  most
popular  sites on the World Wide Web,  receiving more than 16 million page views
each week.
 
INTERNATIONAL
 
     CNN International  ('CNNI')  is a  television  news service  consisting  of
programming  produced by CNN and Headline News, as well as original programming,
which is  distributed to  cable  systems, broadcasters,  hotels,  direct-to-home
satellite  viewers and businesses around  the world on a  network of 16 regional
satellites. TBS has announced that in March 1997 it will launch CNN en  Espanol,
a new Spanish language all-news network in Latin America, which TBS expects will
achieve greater penetration into the region.
 
     CNNI  derives its revenues primarily from  fees charged to cable operators,
fees paid  by  other  recipients  of  the  CNNI  signal,  including  hotels  and
international  over-the-air  television stations,  and  the sale  of advertising
time.
 
     Internationally, TBS also  distributes TNT Latin  America, Cartoon  Network
Latin America, TNT & Cartoon Network Europe and TNT & Cartoon Network Asia, each
of  which features a portion  of its schedule in  more than one language through
dubbing or subtitling.  In Europe and  Asia, the channels  are dual  programming
services,  featuring animated  programming during  the day  and film  product at
night. These networks are now seen in  33 countries in Europe and North  Africa,
more  than 30 countries in Latin America  and the Caribbean, and 20 countries in
the Asia Pacific  region. In  Latin America,  revenues from  these services  are
derived   primarily  from  subscription  fees  based  on  contracts  with  cable
operators. In Europe and Asia,  these services generate advertising revenues  in
addition to subscriber fees.
 
     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  25.52%-owned by  TBS  and 24.27%-owned  by  the Home  Box  Office
division  of TWE. Like TBS Superstation,  n-tv relies principally on advertising
revenues and receives no compensation for its signal from cable systems.
 
                                HOME BOX OFFICE
 
     HBO, operated by the Home Box Office division of TWE, 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.
 
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.
 
     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.
 
                                      I-14
 




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<PAGE>

     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.
 
                      OTHER BASIC CABLE NETWORK INTERESTS
 
     The  Company,  through 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.
 
     The  Company, through 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 the Company expects to sell its interest in E! in
March 1997.
 
     The Company, through 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.
 
                                      I-15
 




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<PAGE>

                           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
TBS and 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 Turner Networks, 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.'
 
     As a result of  the TBS Transaction,  the Company is  subject to a  Consent
Decree (the 'FTC Consent Decree') entered into with the Federal Trade Commission
('FTC'),  certain  provisions  of  which  impose  limitations  on  the Company's
business conduct with respect to the  sale of TBS's cable programming  services.
Such  provisions  of the  FTC Consent  Decree  are designed  to ensure  that the
Company does not  disadvantage rival multi-channel  programming distributors  by
increasing the proportional relationship which existed prior to the consummation
of  the TBS Transaction between the carriage terms offered to large distributors
and those offered  to smaller distributors  in geographic areas  also served  by
Time  Warner Cable. Compliance  with the FTC  Consent Decree is  not expected to
cause an undue financial burden on the Company.
 
     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.')  The  Company  cannot
predict  at  this time  the  effect of  this  legislation on  its  cable network
business.
 
                                  COMPETITION
 
     The  Turner  Networks  and  Home   Box  Office's  businesses  face   strong
competition.  Each of the  cable networks and  programming services compete with
other cable  television programming  services for  distribution on  the  limited
number  of channels  available on cable  operating systems. All  of the networks
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 cable networks  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.
 
     The Turner Networks and 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.
 
                           OTHER CABLE NETWORK ASSETS
 
THE ATLANTA BRAVES
 
     Through  a  wholly  owned  subsidiary, TBS  owns  the  Atlanta  Braves (the
'Braves'), a major league baseball club and 1996 National League champions. As a
member of the National  League, the Braves are  subject to assessments and  dues
and  to compliance with the constitution and  by-laws of the National League and
rules of the Commissioner  of Baseball. Player  employment matters are  governed
primarily  by the terms of a five-year collective bargaining agreement which was
reached in 1996  between Major  League Baseball  and the  Major League  Baseball
Players Association.
 
     The Braves derive income from gate receipts, concessions and related sales,
suite  sales, local sponsorships, and local media.  The Braves share pro rata in
proceeds from  national  media  contracts,  expansion  fees,  and  the  national
licensing activities of Major League Baseball.
 
                                      I-16
 




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     Commencing  with the 1997 Season, the Braves  will play their home games at
Turner Field in  Atlanta. The stadium  was originally constructed  for the  1996
Summer  Olympic Games and is currently being converted for use as a Major League
Baseball stadium pursuant  to an agreement  between the Braves  and the  Atlanta
Committee  for  the  Olympic Games  under  which  the Braves  have  committed to
contribute $23.4 million towards the cost of such conversion.
 
THE ATLANTA HAWKS
 
     Through wholly owned  subsidiaries, TBS owns  the Atlanta Hawks  basketball
team  (the 'Hawks'), a member of the  NBA. The NBA, through its constitution and
by-laws, has  established  rules  governing club  operations,  including  player
relations.  The Hawks derive income from  gate receipts, concessions and related
sales, suite sales,  local sponsorships, and  local media. The  Hawks share  pro
rata in proceeds from national media contracts, expansion fees, and the national
licensing  activities of the NBA.  The Hawks currently play  their home games in
the Omni  Coliseum  in  Atlanta  which  is  operated  by  another  wholly  owned
subsidiary of TBS.
 
     TBS  has reached  a preliminary agreement  with the  City of Atlanta-Fulton
County Recreation Authority to build a  new multi-purpose arena adjacent to  CNN
Center  to  replace the  Omni Coliseum.  The cost  of the  arena will  be funded
primarily by the proceeds  from bonds issued by  the Authority. Pursuant to  the
preliminary  agreement,  TBS will  contribute $20  million  towards the  cost of
certain infrastructure improvements on the site and become a partner in a  joint
venture that will operate the new arena.
 
WRESTLING AND HOCKEY
 
     Through  World Championship  Wrestling, TBS  produces wrestling programming
for TBS Superstation and TNT, the domestic syndication markets and  pay-per-view
television.
 
     TBS filed an application for a National Hockey League (the 'NHL') franchise
in Atlanta on October 31, 1996. The NHL is expected to make a decision regarding
expansion teams for the league by the end of 1997.
 
                                   PUBLISHING
 
     The  Company's Publishing business  is conducted primarily  by Time Inc., a
wholly owned subsidiary of the Company. Time Inc. is one of the world's  leading
magazine  and book publishers and is one of the largest direct-mail marketers in
the world.
 
                                   MAGAZINES
 
GENERAL
 
     Time Inc. publishes  some of  the world's  best-known magazines,  including
TIME, LIFE, PEOPLE, SPORTS ILLUSTRATED, FORTUNE, MONEY and ENTERTAINMENT WEEKLY.
These  magazines are generally  aimed at a  broad consumer market.  They cover a
broad range  of  topics of  interest  to potential  readers,  including  current
events,  prominent personalities,  sports, entertainment,  business and personal
finance, and  lifestyle.  Several of  the  magazines have  developed  affiliated
publications  that provide editorial content  directed to particular demographic
groups, such as children, that are outside their core readership.
 
     Each magazine  published by  Time Inc.  has an  editorial staff  under  the
general  supervision  of  a  managing  editor and  a  business  staff  under the
management of a  president or  publisher. Many  of the  magazines have  numerous
regional  and  demographic  editions  which  contain  the  same  basic editorial
material but permit advertisers to direct their advertising to specific markets.
Through the  use of  selective  binding and  ink-jet technology,  magazines  can
create special custom editions targeted towards specific groups or readers.
 
     Magazine manufacturing and distribution activities are generally managed by
centralized staffs of Time Inc. Fulfillment activities for Time Inc.'s magazines
are   generally   administered   from   a   centralized   facility   in   Tampa,
 
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Florida. Some  of  the development  properties  and overseas  operations  employ
independent  fulfillment  services  and undertake  their  own  manufacturing and
distribution.
 
     Time Inc. has expanded its core magazine businesses through the development
of product extensions. These are  generally managed by the individual  magazines
and  involve specialized editions of the respective magazine aimed at particular
readership groups, publication  of editorial content  developed by the  magazine
staffs  through different  media, such as  hardcover books,  television, and new
media, particularly the Internet,  and use of  the brand name  and reach of  the
core publications to expand into related products, such as merchandise.
 
DESCRIPTION OF MAGAZINES
 
     The Company's magazines and their areas of interest are summarized below:
 
     TIME  summarizes the news and brings original interpretation and insight to
the week's events, both national and  international, and across the spectrum  of
politics,  business, entertainment,  sports, societal trends,  health, and other
areas  of  general  consumer  interest.  TIME  has  also  developed   additional
publications aimed at particular reader segments. TIME FOR KIDS is a weekly news
magazine  aimed at elementary  school students from  fourth through sixth grade.
TIME DIGITAL is a quarterly supplement to TIME, which discusses issues regarding
the impact of new  electronic technology on society  and culture. TIME also  has
five weekly English-language editions which circulate outside the United States:
TIME  Asia,  TIME Atlantic,  TIME  Canada, TIME  Latin  America, and  TIME South
Pacific.
 
     SPORTS ILLUSTRATED is a weekly magazine which covers the activities of, and
is designed to appeal to, spectators and participants in virtually all forms  of
recreational and competitive sports. In addition, SPORTS ILLUSTRATED has created
special   custom  editions,  including  GOLF  PLUS  and  NFL  PLUS,  to  deliver
advertisers more highly targeted audiences and has also developed new venues for
its editorial  content,  including  television production  through  SITV,  which
produces original programming for sale to the television broadcast networks, and
CNN/SI,  a new sports news cable television  network that is operated as a joint
venture between SPORTS ILLUSTRATED and CNN.
 
     SPORTS ILLUSTRATED FOR KIDS is a monthly sports-oriented magazine geared to
children ages eight through fourteen. SPORTS ILLUSTRATED FOR KIDS also publishes
INSIDE STUFF, a  magazine produced  under license from  the National  Basketball
Association  which is aimed at teen-age basketball fans and published during the
basketball season.
 
     PEOPLE is a weekly magazine which reports on celebrities and other  notable
personalities  in  the  fields of  politics,  sports and  entertainment,  or who
otherwise come to prominent public attention due to acts of heroism, tragedy  or
other  aspects of general human interest.  PEOPLE is currently testing PEOPLE en
Espanol, a Spanish-language edition aimed  primarily at Hispanic readers in  the
United States. WHO WEEKLY is an Australian version of PEOPLE.
 
     Time   Inc.  has  other   magazines  directed  at   readers'  interests  in
entertainment and celebrities. ENTERTAINMENT WEEKLY  is a weekly magazine  which
includes  reviews and  reports on television,  movies, video,  music, books, and
multimedia  and  also  offers  entertainment-related  merchandise  directly   to
consumers.  IN STYLE is a monthly magazine which focuses on celebrity lifestyles
and includes reports and advice on beauty and fashion.
 
     FORTUNE is  a biweekly  magazine which  reports on  worldwide economic  and
business   developments.  FORTUNE  also  provides   extensive  coverage  of  the
activities of major or noteworthy  corporations and business personalities,  and
compiles  the annual FORTUNE 500 list of the largest U.S. corporations. MONEY is
a monthly magazine which reports on personal finance and provides information on
topics such as investing, planning for retirement, financing children's  college
educations,  and other areas of interest  to consumers regarding their financial
concerns. The magazine will be celebrating  its 25th anniversary in 1997.  MONEY
publishes  related products,  such as  the RETIRE  WITH MONEY  newsletter, which
provides consumer advice on retirement investments.
 
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     LIFE is a monthly magazine which features photographic essays of  important
news  events, prominent personalities  and meaningful vignettes  of the lives of
ordinary people. LIFE also publishes  hardcover books that include  contemporary
and historical photographs of note from its extensive collection.
 
     Time  Inc.  also publishes  several  regional magazines  including SOUTHERN
LIVING, a monthly regional home, garden, food and travel magazine focused on the
South, published  by Southern  Progress Corporation  ('Southern Progress'),  and
SUNSET,  The Magazine of Western Living, a  monthly focused on lifestyles in the
West, published by Sunset Publishing Corp. COOKING LIGHT is published nine times
a year  and promotes  health  and fitness  through  active lifestyles  and  good
nutrition.  Southern  Progress  also publishes  SOUTHERN  ACCENTS,  a bi-monthly
magazine that  features  architecture, fine  homes  and gardens,  and  arts  and
travel,  and PROGRESSIVE FARMER,  a monthly regional  farming magazine. In 1996,
Southern Progress acquired the rights to publish WEIGHT WATCHERS magazine, under
license from H.J. Heinz.
 
     Time Publishing Ventures ('TPV')  manages Time Inc.'s specialty  publishing
titles.  Parents and families are addressed by PARENTING, which is published ten
times a year  and aimed at  parents of children  under the age  of ten and  BABY
TALK,  which is published ten times a year  and is targeted at expectant and new
mothers. HEALTH is a women's consumer health magazine and HIPPOCRATES is a trade
magazine targeted at primary care physicians. TPV also publishes THIS OLD  HOUSE
six  times a  year, pursuant to  a licensing arrangement  with public television
station WGBH in Boston based on  the popular home renovation television  series.
MARTHA  STEWART LIVING was sold  in February 1997, with  the Company retaining a
minor equity interest and certain distribution rights.
 
     Time Inc.'s international operations include both regional versions of some
of  its  core  magazines,  including  TIME,  PEOPLE  and  FORTUNE,  as  well  as
publications  whose editorial content  and focus are  outside the United States.
Such magazines include PRESIDENT, DANCYU, and ASIAWEEK.
 
     Time Inc.  also has  management  responsibility for  most of  the  American
Express  Publishing  Corporation's  operations,  including  its  core  lifestyle
magazines TRAVEL &  LEISURE and  FOOD & WINE,  as well  as DEPARTURES  magazine,
which  is  a  controlled  circulation magazine  distributed  to  holders  of the
American Express Platinum  Card. Time  Inc. receives  a fee  for managing  these
properties.
 
CIRCULATION
 
     Time  Inc.'s magazines are sold primarily  by subscription and delivered to
subscribers  through   the  mail.   Subscriptions   are  sold   by   direct-mail
solicitation, subscription sales agencies, television and telephone solicitation
and insert cards in Time Inc. magazines and other publications. Single copies of
magazines  are  sold through  retail news  dealers  and other  consumer magazine
retailers, such as  supermarkets, drug  stores, and discount  stores, which  are
supplied in turn by regional wholesalers.
 
     Circulation  efforts form the basis of  the advertising rate base, which is
the guaranteed minimum  paid circulation  level on which  advertising rates  are
based.  The Time Inc. titles  with the 10 highest rate  bases on January 1, 1997
were:
 
<TABLE>
<CAPTION>
TITLE                                                                               RATE BASE
---------------------------------------------------------------------------------   ---------
 
<S>                                                                                 <C>
TIME.............................................................................   4,000,000
PEOPLE...........................................................................   3,150,000
SPORTS ILLUSTRATED...............................................................   3,150,000
SOUTHERN LIVING..................................................................   2,400,000
MONEY............................................................................   2,000,000
LIFE.............................................................................   1,500,000
SUNSET...........................................................................   1,425,000
COOKING LIGHT....................................................................   1,300,000
ENTERTAINMENT WEEKLY.............................................................   1,275,000
PARENTING........................................................................   1,150,000
</TABLE>
 
                                      I-19
 




<PAGE>

<PAGE>

     Time Distribution  Services  ('TDS')  is a  national  distribution  company
responsible  for the retail sales,  distribution, marketing and merchandising of
single copies of periodicals for Time Inc. and other publishers. TDS distributes
periodicals through a magazine wholesaler network which services retail  outlets
such as newsstands, supermarkets, convenience and drug stores.
 
     Warner  Publisher Services ('WPS') is a  major distributor of magazines and
paperback books sold through  wholesalers in the United  States and Canada,  and
internationally.  WPS is  the sole  national distributor  for MAD  magazine, the
publications  of  DC  Comics,  and  certain  publications  and  paperback  books
published  by other publishers, including TEEN, VOGUE, WOMEN'S DAY, and the Dell
Puzzle Books.
 
ADVERTISING
 
     Advertising carried  in  Time  Inc.  magazines  is  predominantly  consumer
advertising.  In  1996,  Time Inc.  magazines  accounted  for 21%  of  the total
advertising revenue  in  consumer  magazines,  as  measured  by  the  Publishers
Information  Bureau  ('PIB'),  which  measures  consumer  advertising  placed in
magazines. As a result, Time  Inc. had the three  leading magazines in terms  of
advertising dollars and seven of the top 25:
 
<TABLE>
<CAPTION>
TITLE                                                 PIB RANK
---------------------------------------------------   --------
 
<S>                                                   <C>
PEOPLE.............................................       1
SPORTS ILLUSTRATED.................................       2
TIME...............................................       3
FORTUNE............................................      13
ENTERTAINMENT WEEKLY...............................      19
MONEY..............................................      20
SOUTHERN LIVING....................................      22
</TABLE>
 
     The  five leading categories of advertising  carried in Time Inc. magazines
in 1996,  according  to  PIB  were, in  descending  order,  domestic  automobile
manufacturers,  computers, toiletries and cosmetics, food, and publishing, media
and movies.
 
PAPER AND PRINTING
 
     Lightweight coated paper  constitutes a significant  component of  physical
costs  in the production of magazines.  Time Inc. has contractual commitments to
ensure an adequate  supply of  paper, but periodic  shortages may  occur in  the
event  of strikes or other unexpected  disruptions in the paper industry. During
1996, Time Inc. purchased paper principally from six independent  manufacturers,
in  each case under contracts that, for  the most part, are either fixed-term or
open-ended at prices determined on a market price or formula price basis.  Paper
prices  in 1996 declined significantly  for all major grades  of paper for which
Time Inc. has substantial demand.  Based upon the current marketplace,  however,
Time Inc. does not anticipate that this trend will continue.
 
     Printing  and binding for Time Inc. magazines are accomplished primarily by
major domestic and international independent printing concerns in 20  locations.
Magazine  printing contracts are either fixed-term or open-ended at fixed prices
with, in some cases, adjustments based on certain criteria.
 
                                     BOOKS
 
TRADE PUBLISHING
 
     Time Inc.'s trade  publishing operations  are conducted  primarily by  Time
Warner  Trade Publishing, through its two  major publishing houses, Warner Books
and Little, Brown. In 1996, Time Warner Trade Publishing placed 28 books on  The
New York Times best-seller lists.
 
                                      I-20
 




<PAGE>

<PAGE>

WARNER BOOKS
 
     Warner Books primarily publishes hardcover, mass market and trade paperback
books.  Among its  best selling  hardcover books  in 1996  were: The  Search for
Justice, by  Robert L.  Shapiro with  L.  Warren, The  Tenth Insight,  by  James
Redfield,  Simple Abundance, by Sarah Ban  Breathnach, The Notebook, by Nicholas
Spark, and My Sergei, by Ekaterina  Gordeeva with E.M. Swift. Best selling  mass
market  paperbacks  in  1996  included  The Rules,  by  Ellen  Fein  and Sherrie
Schneider, Morning, Noon  & Night,  by Sidney  Sheldon, and  Absolute Power,  by
David Baldacci, which was released as a full-length motion picture in early 1997
produced by the Castle Rock division of the Company.
 
     Time  Warner Audiobooks  develops and markets  audio versions  of books and
other materials published by both Warner  Books and Little, Brown. In  addition,
through  a joint venture  with Little, Brown, Warner  Books operates Time Warner
Electronic Publishing, which is engaged in on-line and multimedia publishing.
 
LITTLE, BROWN
 
     Little, Brown publishes  general and  children's trade  books. Through  its
subsidiary,  Little, Brown  and Company (U.K.)  Ltd., it  also publishes general
hardcover and mass market paperback books in the United Kingdom. Among the trade
hardcover best-sellers published by Little, Brown  in 1996 were: Jack and  Jill,
by  James Patterson, How Good Do  We Have To Be, by  Rabbi Harold Kushner, and A
Good Walk  Spoiled, by  John Feinstein,  which was  a best-selling  mass  market
paperback for Little, Brown as well.
 
     Little, Brown handles book distribution for itself, Warner Books and Sunset
Books, as well as other publishers. The marketing of trade books is primarily to
retail  stores  and wholesalers  throughout the  United  States, Canada  and the
United  Kingdom.  Through  their  combined  United  States  and  United  Kingdom
operations,  Little,  Brown  and  Warner  Books  have  the  ability  to  acquire
English-language publishing rights for the  distribution of hard and  soft-cover
books throughout the world.
 
     In  1996, Little,  Brown sold  its professional  publishing division, which
published legal  and medical  reference books  and textbooks  and journals  sold
primarily to university retail stores and to practitioners.
 
OXMOOR HOUSE AND SUNSET BOOKS
 
     Oxmoor  House, a division  of Southern Progress, markets  how-to books on a
wide variety of topics  including food and  crafts, as well  as Leisure Arts,  a
well-established publisher and distributor of instructional leaflets, continuity
books  series and magazines for the needlework and crafts markets. Sunset Books,
the book publishing division of Sunset Publishing Corp., markets books on topics
such as building and decorating, cooking, gardening and landscaping, and travel.
Sunset Books'  unique  marketing  formula  includes  an  extensive  distribution
network of home repair and garden centers.
 
                                DIRECT MARKETING
 
TIME LIFE
 
     Time  Life is  one of the  nation's largest direct  marketers of continuity
series of books,  music and videos.  Its products are  sold by direct  response,
including  mail order,  television and telephone,  through retail, institutional
and learning  channels, and  by door-to-door  independent distributors  in  some
foreign  markets. Time  Life products  are currently  sold in  over 25 languages
worldwide and approximately 40% of its revenues are generated outside the United
States. Two major titles recently published by Time Life are the Williams-Sonoma
Kitchen  Library  Series,  and  the  Medical  Advisor:  The  Complete  Guide  To
Alternative  and Conventional Treatments. In  1996, Time Life acquired Heartland
Music, a direct marketer of music that offers single-shot packages to  consumers
in genres not currently addressed by Time Life, such as country and gospel.
 
     Editorial material is created by in-house staffs as well as through outside
book   publishers.  Time  Life  Books   products  are  manufactured  by  several
independent companies.  Manufacturing contracts  are entered  into on  a  series
rather than a single title basis and are fixed-price with provisions for cost of
labor, material and
 
                                      I-21
 




<PAGE>

<PAGE>

specification  adjustments. These contracts, subject to certain limitations, may
be terminated  by  Time  Life  or  the  manufacturer.  Time  Life's  fulfillment
activities, excluding international operations, are conducted from a centralized
facility in Richmond, Virginia.
 
BOOK-OF-THE-MONTH CLUB
 
     Book-of-the-Month   Club  currently  operates  eight  book  clubs  and  two
continuity businesses with a combined membership of more than four million.  Two
of  the  clubs,  Book-of-the-Month Club  and  Quality Paperback  Book  Club, are
general interest clubs, and the  remaining clubs specialize in history,  cooking
and  crafts, business, children's books, women's lifestyle, spiritual, self-help
and  health  topics,  and  the  books  of  a  particular  author.  In  addition,
multimedia, audio and video products are offered through the clubs. Book-of-the-
Month Club's international businesses operate in over 50 countries worldwide.
 
     Book-of-the-Month  Club acquires the rights  from publishers to manufacture
and distribute books and then has them printed by independent printing concerns.
Book-of-the-Month Club operates its  own fulfillment and warehousing  operations
in Mechanicsburg, Pennsylvania.
 
AMERICAN FAMILY ENTERPRISES
 
     In  1996,  Time Inc.  restructured  its 50%-owned  joint  venture, American
Family Publishers ('AFP'). As  a result of its  contributions of Time Inc.  Home
Entertainment  and Music Sound Exchange  into the restructured partnership, Time
Inc. now  holds  a 50%  equity  interest  in the  newly-formed  American  Family
Enterprises  ('AFE'), which  is a  direct mail  magazine subscription,  book and
music marketer.
 
                                  POSTAL RATES
 
     Postal costs represent  a significant operating  expense for the  Company's
publishing activities. During 1996, Time Inc. benefitted from a reduction in its
postal  rates as a result  of changes in the  Postal Rate Commission's system of
classification of mail.
 
     Publishing operations strive to minimize postal expense through the use  of
certain  cost-saving measures, including the utilization of contract carriers to
transport books  and  magazines to  central  postal  centers. It  has  been  the
Company's  practice in  selling books  and other products  by mail  to include a
charge for  postage  and  handling, which  is  adjusted  from time  to  time  to
partially offset any increased postage or handling costs.
 
                                  COMPETITION
 
     Time  Inc.'s  magazine operations  compete  for sales  with  numerous other
publishers and  retailers,  as well  as  other media.  The  general  circulation
magazine  industry  is  highly competitive  both  within itself  and  with other
advertising media which compete  with the Company's  magazines for audience  and
advertising revenue.
 
     Time  Inc.'s  book publishing  operations compete  for sales  with numerous
other publishers  and  retailers  as  well as  other  media.  In  addition,  the
acquisition   of  publication  rights   to  important  book   titles  is  highly
competitive, and Warner Books and Little, Brown compete with numerous other book
publishers. TDS and  WPS meet  with direct competition  from other  distributors
operating  throughout  the  United  States and  Canada  in  the  distribution of
magazines and paperback books.
 
                                     CABLE
 
     The Company's Cable  business consists  principally of  interests in  cable
television  systems that are managed by Time Warner Cable, a division of TWE. Of
the approximately 12.3  million subscribers,  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-22
 




<PAGE>

<PAGE>

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,  the Company'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 Company's cable television revenue is derived from monthly fees
paid  by subscribers for cable video programming services. Additional revenue is
generated  by  selling   time  on  cable   television  systems  for   commercial
advertisements  to  local, regional  and, in  some cases,  national advertisers.
Advertising time is sold as inserts into certain non-broadcast cable programming
and local  origination  programming  shown on  the  Company's  cable  television
systems.  In addition, pay-per-view service is  offered in most cable television
 
                                      I-23
 




<PAGE>

<PAGE>

systems, which allows subscribers to choose to view specific movies and  events,
such as concerts and sporting events, and to pay on a per-event basis.
 
     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 the Company's  cable systems generally  are charged monthly
fees based on  the level  of service selected.  The monthly  prices for  various
levels of cable television services (excluding services offered on a per-channel
or  per-program basis) range generally from $5 to $25 for residential customers.
Other services  offered include  equipment rentals,  usually for  an  additional
monthly  fee. Systems offering  pay-per-view movies generally  charge between $4
and $6  per movie,  and systems  offering pay-per-view  events generally  charge
between  $6 and  $50, depending  on the  event. A  one-time installation  fee is
generally charged for connecting subscribers  to the Company'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-24
 




<PAGE>

<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-25
 




<PAGE>

<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 the Company 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.
 
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     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 the FTC Consent  Decree entered into 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  the
Company.
 
     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.
 
     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
 
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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. The Company 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,  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,
 
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<PAGE>

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.
 
                                  OTHER ASSETS
 
AMERICAN LAWYER MEDIA
 
     The Company owns a 90% interest in American Lawyer Media, L.P. ('ALM'). The
Company 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 -- Other Basic Cable Interests.'
 
HASBRO
 
     TWI owns approximately 14% of the outstanding common stock of Hasbro, Inc.,
one  of the world's  largest toy companies.  The Company has  issued zero coupon
exchangeable notes  due 2012  that are  exchangeable for  the shares  of  Hasbro
common  stock  owned  by  the  Company  (the  'Hasbro  Stock')  and  mandatorily
redeemable preferred securities  of a  subsidiary of the  Company redeemable  in
1997  for cash  or Hasbro Stock,  which together have  effectively monetized the
Company's investment in Hasbro. See Note 4 'Other Investments' to the  Company's
consolidated financial statements at pages F-39 and F-40 herein.
 
            DESCRIPTION OF AGREEMENT WITH LIBERTY MEDIA CORPORATION
 
     The  following description  summarizes certain provisions  of the Company's
agreement with Liberty Media  Corporation (a subsidiary of  TCI) and certain  of
its  subsidiaries (collectively, 'LMC') that was entered into in connection with
the TBS  Transaction and  the  FTC Consent  Decree.  Such description  does  not
purport to be
 
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<PAGE>

complete  and is subject to,  and is qualified in  its entirety by reference to,
the provisions of  the Second  Amended and Restated  LMC Agreement  dated as  of
September  22, 1995 among the Company, Time  Warner Companies, Inc. and LMC (the
'LMC Agreement').
 
OWNERSHIP OF TIME WARNER COMMON STOCK
 
     Pursuant to the  LMC Agreement, immediately  following consummation of  the
TBS  Transaction, LMC  exchanged the 50.6  million shares of  Time Warner common
stock, par value $.01 per share ('Time Warner Common Stock'), received by LMC in
the TBS Transaction  on a one-for-one  basis for 50.6  million shares of  LMCN-V
Class  Common  Stock.  Shares of  LMCN-V  Class  Common Stock  receive  the same
dividends and otherwise  have the same  rights as shares  of Time Warner  Common
Stock  except that  (a) holders  of LMCN-V  Class Common  Stock are  entitled to
1/100th of a vote  per share on the  election of directors and  do not have  any
other  voting  rights, except  as required  by  law or  with respect  to limited
matters, including amendments  to the  terms of  the LMCN-V  Class Common  Stock
adverse  to such  holders, and  (b) unlike shares  of Time  Warner Common Stock,
shares of LMCN-V Class Common Stock are not subject to redemption by the Company
if necessary to prevent the loss by  the Company of any governmental license  or
franchise.  The LMCN-V Class Common Stock is not transferable, except in limited
circumstances, and is not listed on any securities exchange.
 
     The LMC Agreement requires LMC to exchange its shares of Time Warner Common
Stock for LMCN-V  Class Common Stock  in order  to comply with  the FTC  Consent
Decree,  which effectively prohibits LMC and its affiliates (including TCI) from
owning voting securities of the Company other than securities that have  limited
voting  rights.  Shares  of  LMCN-V  Class Common  Stock  are  convertible  on a
one-for-one basis for shares of Time Warner  Common Stock at any time when  such
conversion  would no longer violate the FTC  Consent Decree or have a Prohibited
Effect (as defined below), including following a transfer to a third party.  For
a  discussion  of the  agreement under  which the  Company may  issue additional
shares  of  LMCN-V  Class  Common  Stock  to  LMC,  see  Note  2,  'Mergers  and
Acquisitions,'  to the Company's consolidated financial statements at pages F-32
through F-34 herein.
 
OTHER AGREEMENTS
 
     Under the LMC Agreement, if the Company takes certain actions that have the
effect of (a)  making the  continued ownership by  LMC of  the Company's  equity
securities  illegal  under any  federal or  state law,  (b) imposing  damages or
penalties on LMC under any  federal or state law as  a result of such  continued
ownership,  (c) requiring LMC  to divest any such  Company equity securities, or
(d) requiring LMC to  discontinue or divest  any business or  assets or lose  or
significantly  modify any license  under any federal  communications law (each a
'Prohibited Effect'), then the  Company will be required  to compensate LMC  for
income  taxes incurred by it in disposing of all the Company's equity securities
received by LMC in  connection with the TBS  Transaction and related  agreements
(whether  or not the disposition  of all such equity  securities is necessary to
avoid such Prohibited Effect).  In the event LMC  consummates a distribution  or
'spin-off'  of its subsidiaries that hold  substantially all of the LMCN-V Class
Common Stock, the foregoing obligations of the Company will continue to apply to
such spin-off subsidiaries.
 
     The agreements described in the preceding paragraph may have the effect  of
requiring  the Company to pay amounts to LMC in order to engage in (or requiring
the Company to refrain from engaging in) activities that LMC would be prohibited
under the Federal  communications laws from  engaging in. Based  on the  current
businesses  of the Company and LMC and based upon the Company's understanding of
applicable law,  the  Company does  not  expect  these requirements  to  have  a
material effect on its 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.
 
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MANAGEMENT AND OPERATIONS OF TWE
 
     Partners. Upon the capitalization of TWE in June 1992, certain subsidiaries
of  the Company became the general partners (the 'Class B Partners' or the 'Time
Warner  General  Partners')  of  TWE  and  subsidiaries  of  Itochu  Corporation
('Itochu')  and Toshiba Corporation  ('Toshiba') became limited  partners of TWE
(the 'Class  A Partners').  U  S 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  U S  West and  wholly owned
subsidiaries of the  Company and the  general partnership interests  in TWE  are
held  by the  Class B  Partners consisting of  wholly owned  subsidiaries of the
Company.
 
     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%  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 U S 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 U S West and three designated by TWE. If U S West at any time owns
less  than  50%  of  the  partnership  interest  which  it  owned,  directly  or
indirectly,  as of September  15, 1993 or if  a 'change in control'  of U S West
occurs, U S West's  right to designate any  members of the Management  Committee
will  terminate. The  Full Service Network  business is managed  on a day-to-day
basis by the officers of  Time Warner Cable. The approval  of a majority of  the
members  of  the  Management  Committee  is  required  for  certain  significant
transactions relating to  the Full  Service Network  business, including,  among
other  things, the  sale, pledge  or encumbrance of  assets of  the Full Service
Network business, the acquisition of cable assets, the making of commitments  or
expenditures relating to the Full Service Network business, in each case subject
to agreed upon thresholds, certain decisions with
 
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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) U S West from conducting cable and certain regional programming
businesses  in the 14-state region in  which it provides telephone service, (ii)
any party from engaging in  the cable business in a  region in which TWE is  not
then  engaging in the  cable business, subject  to TWE's right  of first refusal
with respect to such  cable business, or  (iii) any party  from engaging in  the
telephone  or information services  business. ITOCHU and  Toshiba continue to be
bound by and benefit from the non-compete provisions but only as they relate  to
Japan.
 
     Transactions  with  Affiliates.  Subject  to  agreed  upon  exceptions  for
existing arrangements, TWE will not enter into any transaction with any  partner
or any of its affiliates other than on an arm's-length basis.
 
REGISTRATION RIGHTS
 
     Beginning  on  June 30,  2002  (or as  early as  June  30, 1999  if certain
threshold cash distributions are not made to the Class A Partners), the Class  A
Partners holding, individually or in the aggregate, at least 10% of the residual
equity  of TWE will have the right to  request that TWE reconstitute itself as a
corporation and register for sale in a public offering an amount of  partnership
interests held by such Class A Partners determined by an investment banking firm
so  as to  maximize trading liquidity  and minimize the  initial public offering
discount, if any. Upon  any such request, the  parties will cause an  investment
banker  to determine the  price at which  the interests sought  to be registered
could be sold in a public  offering (the 'Appraised Value'). Upon  determination
of  the Appraised  Value, TWE  may elect  either to  register such  interests or
purchase such interests at the Appraised Value, subject to certain  adjustments.
If  TWE elects to register the interests  and the proposed public offering price
(as determined  immediately prior  to the  time  the public  offering is  to  be
declared  effective) is less than 92.5% of  the Appraised Value, TWE will have a
second option to  purchase such  interests immediately  prior to  the time  such
public  offering would otherwise have been  declared effective by the Securities
and Exchange Commission at the proposed public offering price less  underwriting
fees and discounts. If TWE exercises its purchase option, it will be required to
pay  the fees and expenses of the underwriters. Upon exercise of either purchase
option, TWE may also elect to  purchase the entire partnership interests of  the
Class  A  Partners requesting  registration at  the  relevant price,  subject to
certain adjustments.
 
     In addition to the foregoing, U S  West will have the right to exercise  an
additional  demand registration right (in which the other Class A Partners would
be entitled to participate) beginning 18 months following the date on which  TWE
reconstitutes  itself  as a  corporation and  registers  the sale  of securities
pursuant to a previously exercised demand registration right.
 
     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
 
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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  the Company elected during  such three-year period  shall
have been so elected against the recommendation of the management of the Company
or  the Board  of Directors  shall be  deemed to  have been  elected against the
recommendation of such Board of Directors  of the Company in office  immediately
prior  to such election; provided, however, that for purposes of this clause (x)
a member of such Board of Directors shall be deemed to have been elected against
the recommendation of  such Board of  Directors if his  or her initial  election
occurs  as a result of either an  actual or threatened election contest (as such
terms are used in Rule 14a-11 of Regulation 14A promulgated under the Securities
Exchange Act of 1934, as amended) or other actual or threatened solicitation  of
proxies  or  consents by  or on  behalf of  a  person other  than such  Board of
Directors; or
 
     (y) whenever any  person shall acquire  (whether by merger,  consolidation,
sale,  assignment,  lease,  transfer or  otherwise,  in one  transaction  or any
related  series  of  transactions),   or  otherwise  beneficially  owns   voting
securities of the Company that represent in excess of 50% of the voting power of
all  outstanding voting securities of the Company generally entitled to vote for
the election of  directors, if such  person acquires or  publicly announces  its
intention  to initially acquire ten percent or more of such voting securities in
a transaction that has not been approved by the management of the Company within
30 days after the date of such acquisition or public announcement.
 
     Assignment of Put Rights, etc. TWE, with the consent of such assignee,  may
assign to the Company, any general partner or any third party, the obligation to
pay  the applicable  put price in  connection with  the exercise of  a change in
control put right by a Class A Partner and the right to receive the  partnership
interests in payment therefor.
 
     With  respect to any of the put rights of the Class A Partners, TWE may pay
the applicable put price in cash  or Marketable Securities (defined as any  debt
or equity securities that are listed on a national securities exchange or quoted
on  NASDAQ) issued by TWE (or if TWE assigns its obligation to pay the put price
to the  Company,  by the  Company).  The  amount of  any  Marketable  Securities
comprising  the applicable  put price  shall be  determined based  on the market
price of such securities during the  seven months following the closing of  such
put transaction.
 
RESTRICTIONS ON TRANSFER BY TIME WARNER GENERAL PARTNERS
 
     Time  Warner General Partners. Any Time Warner General Partner is permitted
to dispose of any partnership interest (and any Time Warner General Partner  and
any  parent of any Time Warner General Partner  may issue or sell equity) at any
time so long as, immediately after giving effect thereto, (i) the Company  would
not  own, directly or indirectly, less than (a) 43.75% of the residual equity of
TWE, if such disposition occurs prior to the later of December 31, 1997 and  the
date  on which  the Class  A Partners have  received cash  distributions of $500
million per $1 billion of investment, and (b) 35% of the residual equity of  TWE
if  such disposition occurs after such date, (ii) no person or entity would own,
directly or indirectly, a partnership interest greater than that owned, directly
or indirectly, by the Company, and (iii) a subsidiary of the Company would be  a
managing general partner of TWE.
 
                                      I-33
 




<PAGE>

<PAGE>

     No  other dispositions are permitted, except  that the Company may sell its
entire partnership interest  subject to the  Class A Partners'  rights of  first
refusal  and 'tag-along' rights  pursuant to which the  Company must provide for
the concurrent sale  of the  partnership interests of  the Class  A Partners  so
requesting.
 
                         CURRENCY RATES AND REGULATIONS
 
     The  Company's foreign operations are subject to the risk of fluctuation in
currency exchange rates and to exchange controls. The Company cannot predict the
extent to which such  controls and fluctuations in  currency exchange rates  may
affect its operations in the future or its ability to remit dollars from abroad.
See    Note   1   'Organization   and    Summary   of   Significant   Accounting
Policies --  Foreign Currency'  and Note  14 'Financial  Instruments --  Foreign
Exchange  Risk Management' to the consolidated financial statements set forth at
pages F-28 and F-55,  respectively, herein. For  the revenues, operating  income
from  and  identifiable  assets  of foreign  operations,  see  Note  15 'Segment
Information' to the consolidated  financial statements set  forth at pages  F-56
through F-60 herein.
 
                                   EMPLOYEES
 
     At  December 31, 1996, the Company employed a total of approximately 73,400
persons. This number includes approximately 30,300 persons employed by TWE.
 
                                      I-34






<PAGE>

<PAGE>

ITEM 2. PROPERTIES
 
TBS, PUBLISHING, MUSIC AND CORPORATE
 
     The  following table sets forth certain information as of December 31, 1996
with respect to the Company's principal properties (over 250,000 square feet  in
area)  that are  used primarily  by TBS and  the Company's  publishing and music
divisions or occupied for corporate offices, all of which the Company  considers
adequate  for its present needs, and all of which were substantially used by the
Company or were leased to outside tenants:
 
<TABLE>
<CAPTION>
                                                                  APPROXIMATE
                                                                  SQUARE FEET           TYPE OF OWNERSHIP
          LOCATION                       PRINCIPAL USE            FLOOR SPACE       EXPIRATION DATE OF LEASE
-----------------------------  ---------------------------------- -----------   ---------------------------------
 
<S>                            <C>                                <C>           <C>
New York, New York             Executive and administrative           560,000   Leased by the Company. Lease
  75 Rockefeller Plaza         offices (Corporate and Music)                    expires in 2014. Approximately
  Rockefeller Center                                                            109,000 sq. ft. are sublet to
                                                                                outside tenants.
New York, New York             Business and editorial offices       1,520,000   Leased by the Company. Most
  Time & Life Bldg.            (Publishing and Corporate)                       leases expire in 2007.
  Rockefeller Center                                                            Approximately 36,000 sq. ft. are
                                                                                sublet to outside tenants.
Atlanta, Georgia               Executive and administrative         1,570,000   Owned by the Company.
  One CNN Center               offices, studio (TBS)                            Approximately 146,000 sq. ft. are
                               Retail, Hotel and Theatres                       sublet to outside tenants.
Atlanta, Georgia               Offices and studios (TBS)              311,000   Owned and occupied by the
  1050 Techwood Dr.                                                             Company.
Mechanicsburg,                 Office and warehouse space             358,000   Owned and occupied by the
  Pennsylvania                 (Publishing)                                     Company.
  1225 S. Market St.
Olyphant,                      Manufacturing, warehouses,           1,058,000   Owned and occupied by the
  Pennsylvania                 distribution and office space                    Company.
  1400 and 1444 East           (Music)
  Lackawanna Avenue
Indianapolis, Indiana          Warehouse space (Publishing)           252,000   Owned and occupied by the
  4200 N. Industrial                                                            Company.
  Street
Nortorf,                       Manufacturing, distribution and        334,000   Owned and occupied by the
  Germany                      office space (Music)                             Company.
  Niedernstrasse 3-7
Alsdorf,                       Manufacturing, distribution and        269,000   Owned and occupied by the
  Germany                      office space (Music)                             Company.
  Max-Planck Strasse 1-9
Terre Haute,                   Manufacturing and office space         269,000   Leased by the Company. Lease
  Indiana                      (Music)                                          expires in 2001.
  Bldg. 102, Fort Harrison
  Industrial Park
</TABLE>
 
                                      I-35
 




<PAGE>

<PAGE>

FILMED ENTERTAINMENT, CABLE NETWORKS -- HBO AND CABLE
 
     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 the Company's  Filmed Entertainment, Cable Networks  -- HBO and cable
television businesses,  all of  which  the Company  considers adequate  for  its
present needs, and all of which were substantially used by TWE.
 
<TABLE>
<CAPTION>
                                                         APPROXIMATE
                                                         SQUARE FEET
                                                         FLOOR                     TYPE OF OWNERSHIP;
        LOCATION          PRINCIPAL USE                  SPACE/ACRES            EXPIRATION DATE OF LEASE
------------------------  -----------------------------  ------------------   -----------------------------
<S>                       <C>                            <C>                  <C>
New York, New York        Business offices               335,000 sq. ft.      Leased by TWE.
  1100 and 1114           (HBO)                          and 237,000 sq.      Leases expire in 2004 and
  Avenue of the                                          ft.                  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.
 
ITEM 3. LEGAL PROCEEDINGS
 
     The Company and  its subsidiaries are  parties, in the  ordinary course  of
business,  to  litigations  involving  property,  personal  injury  and contract
claims. The  amounts that  the  Company believes  may  be recoverable  in  these
matters are either covered by insurance or are not material.
 
     In  November 1992, TBS and TWE filed  federal lawsuits 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 TBS and TWE. On April 8,  1993,
in a 2-1 decision,
 
                                      I-36
 




<PAGE>

<PAGE>

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 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 WMG record labels. (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,  the Company 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. The Company  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 the Company 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
 
                                      I-37
 




<PAGE>

<PAGE>

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.
 
     Litigation relating to the 1990 merger of Time Inc. and WCI has either been
dismissed,  or  has  been dormant  for  years.  The litigation  is  described in
previous reports on Form 10-K filed by the Company.
 
     On October 30, 1995, two complaints were filed in the Court of Chancery  of
the  State of Delaware in and for  New Castle County ('Delaware Chancery Court')
against the Company, certain  officers and directors of  the Company, and  other
defendants,  by stockholders of the  Company, purportedly derivatively on behalf
of the  Company.  The  two  complaints  allege,  among  other  things,  that  in
connection with the then proposed TBS Transaction, some or all of the defendants
have  violated fiduciary  duties owed  to the  Company and  its stockholders by,
among other things, (i) seeking to  entrench themselves in board and  management
positions  and  to eliminate  the threat  of a  hostile takeover,  (ii) securing
economic  benefits   for   themselves   or  conferring   special   benefits   on
Tele-Communications,  Inc. ('TCI')  and others at  the expense  of the Company's
public stockholders, and (iii)  structuring the TBS Transaction  so as to  place
the Company's chief executive officer in a position which allegedly will involve
a  conflict between  the interests  of TCI and  the Company.  Among other relief
demanded, both complaints  seek an  injunction against consummation  of the  TBS
Transaction  and an order directing the  individual defendants to account to the
Company for their alleged profits  and plaintiffs' alleged damages. On  November
22, 1995, the Company and the other defendants moved to dismiss the complaint in
one  of these actions on the ground that the plaintiff had failed to comply with
Delaware Chancery Court Rule 23.1. There  has been no further activity in  these
actions.
 
     On  March 12, 1996,  a complaint was  filed in the  Delaware Chancery Court
against the directors and  certain officers of the  Company by a stockholder  of
the  Company, purportedly derivatively  on behalf of  the Company. The complaint
alleges, among other things,  that some or all  of the defendants have  breached
fiduciary  duties owed to the Company and  its stockholders in furtherance of an
entrenchment scheme by, among other things,  (i) forcing the resignations of  or
firing  certain directors and  officers of the  Company, (ii) conferring special
benefits upon TCI,  R.E. Turner and  Michael Milken in  connection with the  TBS
Transaction,  and (iii) taking  certain actions relating  to a dispute  with U S
West that has since  been successfully litigated by  the Company. The  complaint
seeks,  among other  things, (i) an  injunction against consummation  of the TBS
Transaction and certain  related arrangements,  (ii) an  injunction against  any
settlement  of a litigation between the Company and  U S West (in which U S West
sought to enjoin the transaction with TBS and other relief), (iii) a declaratory
judgment that defendants breached their fiduciary duties to the Company and  its
stockholders,  and (iv)  unspecified damages. On  April 8,  1996, the defendants
moved to  dismiss  the complaint  in  this action.  There  has been  no  further
activity in this action.
 
     Fifteen actions against TBS, the Company, certain officers and directors of
TBS  or  TWE, and  other defendants,  purportedly on  behalf of  a class  of TBS
shareholders, filed in Superior Court, Fulton County, Georgia in connection with
the TBS Transaction  have been  consolidated. On February  29, 1996,  plaintiffs
filed  their third amended consolidated supplemental and derivative class action
complaint (the 'Third  Amended Complaint'). The  Third Amended Complaint,  which
included  a derivative claim, alleged, among other things, that the terms of the
TBS Transaction were  unfair to  TBS shareholders  and that  the defendants  had
breached  or aided and abetted the breach  of fiduciary common law and statutory
duties owned  to TBS  shareholders  by (i)  conferring benefits  on  controlling
shareholders  at the  expense of  other shareholders,  (ii) committing corporate
waste and (iii) taking actions to entrench TBS Board members. The Third  Amended
Complaint  further alleged that the defendants acted fraudulently in negotiating
and approving the TBS Transaction, that  the approval of the TBS Transaction  by
the TBS Board had been fraudulently obtained, and that the vote of the TBS Board
approving  the  TBS  Transaction  did  not  comply  with  the  TBS  Articles  of
Incorporation and By-laws or with Georgia law. Among other relief demanded,  the
Third  Amended Complaint sought damages,  an injunction against the consummation
of the TBS Transaction and related transactions, and an auction of TBS. On April
1, 1996, defendants filed  motions for judgment on  the pleadings on all  claims
asserted in the Third
 
                                      I-38
 




<PAGE>

<PAGE>

Amended  Complaint.  On June  17, 1996,  the  court transformed  the defendants'
motion for judgment  on the pleadings  into a motion  for summary judgment  with
respect  to two of the plaintiffs' claims and denied the plaintiffs' request for
discovery on those claims. On September 13, 1996, plaintiffs filed a motion  for
a  preliminary injunction (and  related relief) seeking,  among other things, an
order enjoining consummation of the TBS Transaction. Their motion was denied  on
October 3, 1996. On September 19, 1996, plaintiffs sought leave to file a fourth
amended  complaint. On December  20, 1996, the  Court granted defendants' motion
for judgment on the pleadings with respect to certain of the claims in the Third
Amended Complaint and also granted plaintiffs' motion for leave to file a fourth
amended complaint. On January 16, 1997, plaintiffs filed a fourth amended  class
action  complaint  containing  allegations and  requesting  relief substantially
similar in substance to the Third Amended Complaint.
 
     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 Alabama, California, Florida, Kansas, Maine, Michigan, Minnesota,
Mississippi, New Mexico, North Dakota,  South Dakota, Tennessee, 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' 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
 
                                      I-39
 




<PAGE>

<PAGE>

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.
 
     The   Company   and  its   subsidiaries  are   also  subject   to  industry
investigations by  certain  government  agencies and/or  proceedings  under  the
antitrust  laws that have been filed by private parties in which, in some cases,
other companies  in the  same or  related industries  are also  defendants.  The
Company  and its subsidiaries have denied or will deny liability in all of these
actions. In all but a few similar  past actions, the damages, if any,  recovered
from the Company or the amounts, if any, for which the actions were settled were
small or nominal in relation to the damages sought; and it is the opinion of the
management  of  the Company  that any  settlements or  adverse judgments  in the
similar actions currently  pending will not  involve the payment  of amounts  or
have  other results that would  have a material adverse  effect on the financial
condition of the Company.
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
     For  information  regarding  the special  meeting  of  stockholders  of the
Company and Turner Broadcasting System, Inc. held on October 10, 1996 to approve
the merger agreement related to the TBS Transaction, see Item 4 to the Quarterly
Report on Form 10-Q for the period ended September 30, 1996 filed by Time Warner
Companies, Inc. (File No. 1-8637).
 
                                      I-40






<PAGE>

<PAGE>

                       EXECUTIVE OFFICERS OF THE COMPANY
 
     Pursuant  to  General  Instruction  G (3),  the  information  regarding the
Company's executive officers required by Item 401(b) of Regulation S-K is hereby
included in Part I of this report.
 
     The following table sets  forth the name of  each executive officer of  the
Company,  the office held by such officer and  the age, as of March 14, 1997, of
such officer:
 
<TABLE>
<CAPTION>
                    NAME                        AGE                              OFFICE
---------------------------------------------   ---   ------------------------------------------------------------
 
<S>                                             <C>   <C>
Gerald M. Levin..............................   57    Chairman of the Board and Chief Executive Officer
R.E. Turner..................................   58    Vice Chairman of the Board
Richard D. Parsons...........................   48    President
Peter R. Haje................................   62    Executive Vice President, General Counsel and Secretary
Timothy A. Boggs.............................   46    Senior Vice President
Richard J. Bressler..........................   39    Senior Vice President and Chief Financial Officer
Philip R. Lochner, Jr. ......................   54    Senior Vice President
</TABLE>
 
     Set forth below are the principal  positions held by each of the  executive
officers named above since March 1, 1992:
 
<TABLE>
<S>                                      <C>
Mr. Levin..............................  Chairman  of the  Board of Directors  and Chief  Executive Officer since
                                           January 21, 1993. Prior to that,  he served as President and  Co-Chief
                                           Executive Officer from February 20, 1992.
 
Mr. Turner.............................  Vice  Chairman since the consummation of  the TBS Transaction on October
                                           10, 1996.  Prior to  that, he  served  as Chairman  of the  Board  and
                                           President of TBS from 1970.
 
Mr. Parsons............................  President  since February 1, 1995. Prior  to that, he served as Chairman
                                           and Chief Executive Officer of The Dime Savings Bank of New York,  FSB
                                           from January 1991.
 
Mr. Haje...............................  Executive  Vice President and General Counsel  since October 1, 1990 and
                                           Secretary since May 20, 1993.
 
Mr. Boggs..............................  Senior Vice President since November 19,  1992. Prior to that he  served
                                           as Vice President of Public Affairs.
 
Mr. Bressler...........................  Senior  Vice President and Chief Financial Officer since March 16, 1995.
                                           Prior to that he served as Senior Vice President, Finance from January
                                           2, 1995; and as a Vice President prior to that.
 
Mr. Lochner............................  Senior Vice President since July 18, 1991.
</TABLE>
 
                                      I-41






<PAGE>

<PAGE>

                                    PART II
 
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
 
     The  principal market for the Company's Common  Stock is the New York Stock
Exchange. For quarterly price information  with respect to the Company's  Common
Stock  for  the two  years  ended December  31,  1996, see  'Quarterly Financial
Information' at page F-66  herein, which information  is incorporated herein  by
reference.
 
     The  approximate number of holders of  record of the Company's Common Stock
as of January 31, 1997 was 26,000.
 
     For information on the frequency and amount of dividends paid with  respect
to  the Company's Common Stock during the two years ended December 31, 1996, see
'Quarterly Financial  Information' at  page F-66  herein, which  information  is
incorporated herein by reference.
 
ITEM 6. SELECTED FINANCIAL DATA
 
     The  selected financial information of the Company for the five years ended
December 31, 1996 is set forth at pages F-64 and F-65 herein and is incorporated
herein by reference.
 
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
 
     The information set  forth under the  caption 'Management's Discussion  and
Analysis' at pages F-2 through F-22 herein is incorporated herein by reference.
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
     The consolidated financial statements and supplementary data of the Company
and  the report of independent auditors thereon  set forth at pages F-23 through
F-61, F-67 and F-68, and F-63 herein are incorporated herein by reference.
 
     Quarterly  Financial  Information  set  forth   at  page  F-66  herein   is
incorporated herein by reference.
 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
 
     Not Applicable.
 
                                      II-1






<PAGE>

<PAGE>

                                    PART III
 
<TABLE>
<S>                                <C>
Items 10, 11, 12 and 13.           DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT; EXECUTIVE COMPENSATION;
                                   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT; CERTAIN
                                   RELATIONSHIPS AND RELATED TRANSACTIONS
</TABLE>
 
     Information  called  for  by  PART  III  (Items  10,  11,  12  and  13)  is
incorporated by reference from  the Company's definitive  Proxy Statement to  be
filed  in connection  with its 1997  Annual Meeting of  Stockholders pursuant to
Regulation 14A, except  that the information  regarding the Company's  executive
officers called for by Item 401(b) of Regulation S-K has been included in PART I
of  this report  and the information  called for  by Items 402(k)  and 402(l) of
Regulation S-K is not incorporated by reference.
 
                                     III-1






<PAGE>

<PAGE>

                                    PART IV
 
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
 
     (a) (1)-(2) Financial Statements and Schedules:
 
          (i)  The list of  consolidated financial statements  and schedules set
     forth in the  accompanying Index to  Consolidated Financial Statements  and
     Other  Financial Information at  page F-1 herein  is incorporated herein by
     reference. Such consolidated financial  statements and schedules are  filed
     as part of this report.
 
          (ii)  The unaudited  financial statements  of the  Time Warner Service
     Partnerships for the quarterly period ended September 30, 1995 included  in
     the  Current Report on Form 8-K  of Time Warner Entertainment Company, L.P.
     (Reg. No. 33-53742)  dated November 28,  1995 ('TWE's 1995  Form 8-K')  are
     incorporated  herein  by reference  and  are filed  as  an exhibit  to this
     report.
 
          (iii) The financial statements of the Time Warner Service Partnerships
     and the report  of independent auditors  thereon, set forth  at pages  F-64
     through  F-73  in  the 1994  Annual  Report  on Form  10-K  of  Time Warner
     Entertainment Company,  L.P.  ('TWE's  1994 Form  10-K')  are  incorporated
     herein by reference and are filed as an exhibit to this report.
 
          (iv)  The unaudited financial statements of Paragon Communications for
     the quarterly period ended  June 30, 1995 included  in TWE's 1995 Form  8-K
     are  incorporated herein by reference  and are filed as  an exhibit to this
     report.
 
          (v) The  financial  statements  and financial  statement  schedule  of
     Paragon  Communications and the report  of independent accountants thereon,
     set forth  at  pages  F-74  through  F-83 in  TWE's  1994  Form  10-K,  are
     incorporated  herein  by reference  and  are filed  as  an exhibit  to this
     report.
 
     All other financial  statement schedules are  omitted because the  required
information  is not applicable, or because  the information required is included
in the consolidated financial statements and notes thereto.
 
     (3) Exhibits:
 
     The exhibits  listed  on  the  accompanying  Exhibit  Index  are  filed  or
incorporated  by reference  as part  of this  report and  such Exhibit  Index is
incorporated herein  by reference.  Exhibits 10.1  through 10.18  listed on  the
accompanying  Exhibit Index identify management  contracts or compensatory plans
or arrangements  required to  be filed  as  exhibits to  this report,  and  such
listing is incorporated herein by reference.
 
     (b) Reports on Form 8-K.
 
          (i)  The Company filed a Current Report  on Form 8-K dated October 10,
     1996 in which it reported  (x) in Item 2 that  on October 10, 1996 the  TBS
     Transaction  was consummated, and (y) in  Item 5 certain events relating to
     the Company's decision not to carry  the Financial News Channel on its  New
     York City cable system and certain matters related to the TBS Transaction.
 
          (ii) The Company filed a Current Report on Form 8-K dated November 14,
     1996 setting forth in Item 7 certain pro forma financial  statements of the
     Company and the Time Warner  Entertainment  Group at  September  30,  1996,
     reflecting the TBS Transaction and certain other transactions  entered into
     by the Company and TWE during 1995 and 1996.
 
                                      IV-1
 




<PAGE>

<PAGE>

                                   SIGNATURES
 
     PURSUANT  TO  THE REQUIREMENTS  OF SECTION  13 OR  15(d) OF  THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
 
                                                 TIME WARNER INC.
 
                                            By         /s/ PETER R. HAJE
                                              ..................................
                                                        PETER R. HAJE
                                                  EXECUTIVE VICE PRESIDENT,
                                                GENERAL COUNSEL AND SECRETARY
 
Date: March 25, 1997
 
     Pursuant to the requirements of the  Securities Exchange Act of 1934,  this
report  has  been  signed  below  by the  following  persons  on  behalf  of the
registrant and in the capacities and on the dates indicated.
 
<TABLE>
<CAPTION>
                SIGNATURE                                       TITLE                              DATE
------------------------------------------  ---------------------------------------------   -------------------
<C>                                         <S>                                             <C>
           /S/ GERALD M. LEVIN              Director, Chairman of the Board and Chief         March 25, 1997
 .........................................    Executive Officer (principal executive
            (GERALD M. LEVIN)                 officer)
 
         /S/ RICHARD J. BRESSLER            Senior Vice President and Chief Financial         March 25, 1997
 .........................................    Officer (principal financial officer)
          (RICHARD J. BRESSLER)
 
           /S/ JOHN A. LABARCA              Vice President and Controller (principal          March 25, 1997
 .........................................    accounting officer)
            (JOHN A. LABARCA)
 
             /S/ MERV ADELSON               Director                                          March 25, 1997
 .........................................
              (MERV ADELSON)
 
           /S/ J. CARTER BACOT              Director                                          March 25, 1997
 .........................................
            (J. CARTER BACOT)
 
       /S/ LAWRENCE B. BUTTENWIESER         Director                                          March 25, 1997
 .........................................
        (LAWRENCE B. BUTTENWIESER)
 
       /S/ BEVERLY SILLS GREENOUGH          Director                                          March 25, 1997
 .........................................
        (BEVERLY SILLS GREENOUGH)
 
            /S/ CARLA A. HILLS              Director                                          March 25, 1997
 .........................................
             (CARLA A. HILLS)
 
           /S/ DAVID T. KEARNS              Director                                          March 25, 1997
 .........................................
            (DAVID T. KEARNS)
</TABLE>
 
                                      IV-2
 




<PAGE>

<PAGE>

 
<TABLE>
<CAPTION>
                SIGNATURE                                       TITLE                              DATE
------------------------------------------  ---------------------------------------------   -------------------
<C>                                         <S>                                             <C>
             /S/ REUBEN MARK                                  Director                        March 25, 1997
 .........................................
              (REUBEN MARK)
 
           /S/ MICHAEL A. MILES                               Director                        March 25, 1997
 .........................................
            (MICHAEL A. MILES)
 
           /S/ J. RICHARD MUNRO                               Director                        March 25, 1997
 .........................................
            (J. RICHARD MUNRO)
 
          /S/ RICHARD D. PARSONS                              Director                        March 25, 1997
 .........................................
           (RICHARD D. PARSONS)
 
          /S/ DONALD S. PERKINS                               Director                        March 25, 1997
 .........................................
           (DONALD S. PERKINS)
 
          /S/ RAYMOND S. TROUBH                               Director                        March 25, 1997
 .........................................
           (RAYMOND S. TROUBH)
 
             /S/ R.E. TURNER                                  Director                        March 25, 1997
 .........................................
              (R. E. TURNER)
 
       /S/ FRANCIS T. VINCENT, JR.                            Director                        March 25, 1997
 .........................................
        (FRANCIS T. VINCENT, JR.)
</TABLE>
 
                                      IV-3






<PAGE>

<PAGE>

          TIME WARNER INC. AND TIME WARNER ENTERTAINMENT COMPANY, L.P.
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
                        AND OTHER FINANCIAL INFORMATION
 
<TABLE>
<CAPTION>
                                                                                                        PAGE
                                                                                                   ---------------
                                                                                                    TIME
                                                                                                   WARNER     TWE
                                                                                                   ------    -----
 
<S>                                                                                                <C>       <C>
Management's Discussion and Analysis of Results of Operations and Financial Condition...........     F-2      F-75
Consolidated Financial Statements:
     Balance Sheet..............................................................................    F-23      F-84
     Statement of Operations....................................................................    F-24      F-85
     Statement of Cash Flows....................................................................    F-25      F-86
     Statement of Shareholders' Equity and Partnership Capital..................................    F-26      F-87
     Notes to Consolidated Financial Statements.................................................    F-27      F-88
Report of Management............................................................................    F-62
Report of Independent Auditors..................................................................    F-63     F-108
Selected Financial Information..................................................................    F-64     F-109
Quarterly Financial Information.................................................................    F-66     F-110
Supplementary Information.......................................................................    F-67
Financial Statement Schedules:
     Schedule I -- Condensed Financial Information of Registrant................................    F-69
     Schedule II -- Valuation and Qualifying Accounts...........................................    F-74     F-111
</TABLE>
 
                                      F-1






<PAGE>

<PAGE>

                                TIME WARNER INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
 
     On  October 10,  1996, Time Warner  Inc. ('Time Warner'  or the 'Company'),
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 ('New Time Warner'). References herein to 'Time Warner' or the 'Company'
refer  to  Old  Time  Warner prior  to  October  10, 1996  and  New  Time Warner
thereafter.
 
     Time Warner classifies its business interests into four fundamental  areas:
Entertainment,  consisting principally of interests  in recorded music and music
publishing, filmed entertainment, television production, television broadcasting
and theme parks; Cable  Networks, consisting principally  of interests in  cable
television programming and sports franchises; Publishing, consisting principally
of  interests in magazine publishing, book  publishing and direct marketing; and
Cable, consisting  principally  of  interests in  cable  television  systems.  A
majority   of  Time  Warner's  interests  in  filmed  entertainment,  television
production, television broadcasting and theme parks, a portion of its  interests
in  cable television programming and a  majority of its cable television systems
are held through Time  Warner Entertainment Company,  L.P. ('TWE'). Time  Warner
owns  general and limited  partnership interests in TWE  consisting of 74.49% of
the pro rata priority capital ('Series  A Capital') and residual equity  capital
('Residual Capital'), and 100% of the senior priority capital ('Senior Capital')
and  junior priority capital ('Series B  Capital'). The remaining 25.51% limited
partnership interests in the  Series A Capital and  Residual Capital of TWE  are
held  by a  subsidiary of  U S  WEST, Inc.  ('U S  WEST'). Time  Warner does not
consolidate TWE and  certain related companies  (the 'Entertainment Group')  for
financial  reporting purposes  because of  certain limited  partnership approval
rights  related  to  TWE's  interest   in  certain  cable  television   systems.
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,  Time Warner has pursued significant,  strategic
initiatives  that have resulted in  the acquisition of TBS  and the expansion of
Time Warner's interests in the cable television business. These initiatives were
part  of  an  ongoing  strategy   to  strengthen  Time  Warner's  interests   in
entertainment  and cable television programming, and  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  combined financial condition of Time Warner and the Entertainment Group, as
well as to increase their overall financial flexibility, through the  initiation
of a debt reduction program and significant debt refinancings.
 
     Management  believes  its  expansion  strategy  has  largely  achieved  its
objectives and intends to sharpen its focus on improving the combined  financial
condition  of  Time  Warner and  the  Entertainment Group  and  increasing their
overall financial flexibility through additional initiatives, such as  continued
debt  reduction and implementation of various cost-savings and revenue-enhancing
measures designed to augment fundamental business growth.
 
     Consistent with management's strategic direction, Time Warner completed the
following transactions in  1996 that have  had and are  expected to continue  to
have a significant effect on its results of operations and financial condition:
 
                                      F-2
 




<PAGE>

<PAGE>

                                TIME WARNER INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
        OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
 
      The  acquisition in October 1996 of the remaining 80% interest in TBS that
      was not already  owned (the  'TBS Transaction'). In  connection with  this
      transaction, New Time Warner issued or agreed to issue approximately 178.4
      million shares of common stock, approximately 14 million stock options and
      $67  million of consideration payable, at  its election, in either cash or
      common stock. New Time Warner  also assumed approximately $2.8 billion  of
      indebtedness.  The addition  of TBS's  news and  entertainment programming
      networks, film  and animation  libraries,  film production  companies  and
      sports franchises is expected to complement virtually all of Time Warner's
      business interests.
 
      The  implementation in April 1996 of a program to repurchase, from time to
      time, up to 15 million shares of Time Warner common stock. This program is
      supported, in part, by a five-year, $750 million revolving credit facility
      which is expected to be repaid principally from the cash proceeds from the
      future exercise of employee stock options.  As of December 31, 1996,  Time
      Warner  had acquired approximately 11.4 million shares of its common stock
      for an aggregate cost of $456 million.
 
      The issuance  in April  1996 of  1.6 million  shares of  a new  series  of
      exchangeable  preferred  stock, which  currently pays  cumulative, noncash
      dividends at the rate of 10 1/4% per annum. The approximate $1.55  billion
      of net proceeds raised from this transaction were used to reduce debt (the
      'Preferred  Stock  Refinancing').  Along  with  other  actions  since  the
      initiation of a  $2-$3 billion  debt reduction program  in February  1995,
      including  the expected  1997 sale of  TWE's interest  in E! Entertainment
      Television, Inc., Time  Warner and the  Entertainment Group have  exceeded
      their initial goals under this program.
 
      The  redemption in  1996 and early  1997 of approximately  $1.5 billion of
      convertible debt  using  proceeds  from other  financings,  which  lowered
      interest  rates, staggered  debt maturities  and eliminated  the potential
      dilution from the conversion of  such securities into 31.3 million  shares
      of common stock.
 
      The   acquisition  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. Time  Warner issued 2.9  million shares of
      common stock and 6.3 million shares of new convertible preferred stock and
      assumed or  incurred  approximately  $2 billion  of  indebtedness.  As  of
      December  31, 1996, Time Warner Cable, which includes the cable operations
      of  both  Time   Warner  and  TWE,   served  approximately  12.3   million
      subscribers, passing nearly 20% of the television homes in the U.S.
 
The  nature of these transactions and their  impact on the results of operations
and financial condition of Time Warner  and the Entertainment Group are  further
discussed below.
 
TBS TRANSACTION
 
     In  the TBS Transaction, each  of Old Time Warner  and TBS became separate,
wholly owned  subsidiaries of  New Time  Warner, which  combines, for  financial
reporting  purposes, the  consolidated net assets  and operating  results of Old
Time Warner and TBS. Each issued and outstanding share of each class of  capital
stock  of  Old Time  Warner  was converted  into  one share  of  a substantially
identical class of capital stock of New Time Warner.
 
     In connection  with  the  TBS  Transaction,  New  Time  Warner  issued  (i)
approximately  173.4  million shares  of  common stock  (including  50.6 million
shares of LMCN-V Class Common Stock  to affiliates of Liberty Media  Corporation
('LMC'),  a subsidiary of Tele-Communications, Inc.),  in exchange for shares of
TBS capital stock and (ii) approximately 14 million stock options to replace all
outstanding TBS stock options. In addition,  New Time Warner agreed to issue  to
LMC  and its  affiliates at a  later date  an additional five  million shares of
 
                                      F-3
 




<PAGE>

<PAGE>

                                TIME WARNER INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
        OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
 
LMCN-V Class  Common Stock  and $67  million of  consideration payable,  at  the
election of New Time Warner, in cash or additional shares of LMCN-V Class Common
Stock.  This  additional consideration  will be  issued  pursuant to  a separate
option and  non-competition agreement  that  will provide,  if New  Time  Warner
exercises  its  option, for  a subsidiary  of LMC  to provide  certain satellite
uplink and distribution services for WTBS, a broadcast television station  owned
by  TBS, if  it is converted  to a copyright-paid,  cable television programming
service. The cost to acquire TBS was approximately $6.2 billion. New Time Warner
has also fully and unconditionally guaranteed all of TBS's and Old Time Warner's
outstanding publicly traded indebtedness, which amounted to approximately $1.030
billion and $7.754 billion, respectively, at December 31, 1996.
 
     As part of the integration of TBS's businesses into Time Warner's operating
structure, management  is  pursuing various  cost-saving  and  revenue-enhancing
initiatives.  Such  initiatives, some  of which  have already  been implemented,
include the consolidation of certain duplicative administrative and  operational
functions  (such as transferring the  management of TBS's television syndication
and home video  operations to  Warner Bros.),  the restructuring  of TBS's  film
production   companies,  the  planned  conversion   of  WTBS  from  a  broadcast
superstation into a  copyright-paid, cable television  programming service,  the
creation  of new basic cable television  networks (such as CNN/SI, Time Warner's
sports news  network)  and  other revenue-enhancing  activities,  including  the
cross-promotion of animation assets, film libraries and children's programming.
 
     In  restructuring TBS's film production activities, Time Warner has already
phased out  all  production activities  of  Turner Pictures  and  is  evaluating
alternatives  for Castle Rock Entertainment ('Castle  Rock') and New Line Cinema
('New Line').  These alternatives  range  from an  equity transaction  in  these
studios to a nonrecourse financing transaction.
 
CABLE STRATEGY
 
     Over  the past two years,  Time Warner has combined  with or acquired cable
television systems  serving approximately  3.7 million  subscribers (the  'Cable
Transactions'),  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.
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.
 
     Time Warner's  current  strategy is  to  restructure its  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, Time Warner is  seeking
to  reduce its economic  interest in the  cable television business  in order to
reduce existing debt  and its share  of future funding  requirements related  to
such  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.
 
                                      F-4
 




<PAGE>

<PAGE>

                                TIME WARNER INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
        OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
 
USE OF EBITDA
 
     The following  comparative  discussion of  the  results of  operations  and
financial  condition of Time Warner and  the Entertainment Group includes, among
other factors, an analysis  of changes in the  operating income of the  business
segments  before depreciation and amortization  ('EBITDA') in order to eliminate
the effect  on the  operating performance  of the  music, filmed  entertainment,
cable  network and  cable businesses of  significant amounts  of amortization of
intangible assets recognized in the $14 billion acquisition of WCI in 1989,  the
$1.3  billion acquisition of the ATC minority interest in 1992, the $2.3 billion
of Cable Acquisitions in 1995 and 1996,  the $6.2 billion acquisition of TBS  in
1996  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  Time Warner  and the
Entertainment Group, and when used in comparison to debt levels or the  coverage
of  interest  expense, as  a  measure of  liquidity.  However, EBITDA  should be
considered in  addition to,  not  as a  substitute  for, operating  income,  net
income,  cash flow  and other  measures of  financial performance  and liquidity
reported in accordance with generally accepted accounting principles.
 
TRANSACTIONS AFFECTING COMPARABILITY OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
 
     In connection with management's strategic initiatives, Time Warner and  the
Entertainment  Group have completed  a number of transactions  over the past two
years which  have  affected  the  comparability  of  each  entity's  results  of
operations  and financial condition. For Time Warner, these transactions include
the TBS Transaction, the Cable Acquisitions, the ITOCHU/Toshiba Transaction, the
Preferred Stock  Refinancing  and  certain  other  debt  refinancings  (the  'TW
Transactions').  For  the Entertainment  Group,  these transactions  include the
formation of the TWE-Advance/Newhouse Partnership, the refinancing of TWE's bank
debt and certain asset sales, including the sale of 51% of TWE's interest in Six
Flags (the 'Entertainment Group Transactions' and, when taken together with  the
TW  Transactions, the 'Time Warner Transactions'). Each of these transactions is
more fully discussed elsewhere herein.
 
     In order to enhance comparability,  the following discussion of results  of
operations  for Time Warner  and the Entertainment  Group is supplemented, where
appropriate, by pro forma  financial information that gives  effect to the  Time
Warner  Transactions and the Entertainment  Group Transactions, respectively, as
if such transactions  had occurred at  the beginning of  the respective  periods
presented.  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 those
periods, nor are they necessarily indicative of future operating results.
 
RESULTS OF OPERATIONS
 
     As a result of the  TBS Transaction, Time Warner  now has two new  business
segments   which   parallel  its   previously   existing  interests   in  filmed
entertainment and cable television programming  held through TWE. Time  Warner's
Cable  Networks segment principally consists  of TBS's cable television networks
and sports operations. These operations  include entertainment networks such  as
TNT,  the TBS Superstation, the Cartoon  Network and Turner Classic Movies; news
networks such  as CNN,  CNN  International and  CNN  Headline News;  and  sports
franchises consisting of the Atlanta Braves and the Atlanta Hawks. Time Warner's
Filmed  Entertainment segment principally consists  of TBS's film and television
production  and  distribution  operations,  including  New  Line,  Castle  Rock,
Hanna-Barbera,   Inc.  and   the  former   film  and   television  libraries  of
Metro-Goldwyn-Mayer,  Inc.  and  RKO  Pictures,  Inc.  Because  the  results  of
operations of these businesses and Time Warner's cable
 
                                      F-5
 




<PAGE>

<PAGE>

                                TIME WARNER INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
        OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
 
businesses  are not comparable to the  prior period, the following discussion of
business segment operating  results is presented  on both a  historical and  pro
forma basis.
 
1996 VS. 1995
 
     EBITDA  and operating income for Time Warner and the Entertainment Group in
1996 and 1995 are as follows:
 
<TABLE>
<CAPTION>
                                                                     YEARS ENDED DECEMBER 31,
                                                 ----------------------------------------------------------------
                                                             EBITDA                       OPERATING INCOME
                                                 ------------------------------    ------------------------------
                                                   PRO FORMA       HISTORICAL        PRO FORMA       HISTORICAL
                                                 --------------  --------------    --------------  --------------
                                                  1996    1995    1996    1995      1996    1995    1996    1995
                                                 ------  ------  ------  ------    ------  ------  ------  ------
                                                                            (MILLIONS)
 
<S>                                              <C>     <C>     <C>     <C>       <C>     <C>     <C>     <C>
Time Warner:
Publishing...................................... $  535  $  476  $  535  $  476    $  418   $381   $  418   $381
Music(1)........................................    744     690     744     690       361    321      361    321
Cable Networks-TBS..............................    547     502     162      --       297    267       99     --
Filmed Entertainment-TBS........................   (108)     48      32      --      (202)   (62)       8     --
Cable...........................................    476     425     476      90        75     29       75     (5)
Intersegment elimination........................    (10)      6       5      --       (10)     6        5     --
                                                 ------  ------  ------  ------    ------  ------  ------  ------
Total........................................... $2,184  $2,147  $1,954  $1,256    $  939   $942   $  966   $697
                                                 ------  ------  ------  ------    ------  ------  ------  ------
                                                 ------  ------  ------  ------    ------  ------  ------  ------
Entertainment Group:
Filmed Entertainment-Warner Bros................ $  546  $  490  $  546  $  490    $  254   $253   $  254   $253
Six Flags Theme Parks(2)........................     --      --      --      60        --     --       --     29
Broadcasting-The WB Network.....................    (98)    (66)    (98)    (66)      (98)   (66)     (98)   (66)
Cable Networks-HBO..............................    350     293     350     293       328    274      328    274
Cable...........................................  1,536   1,355   1,536   1,275       606    533      606    502
                                                 ------  ------  ------  ------    ------  ------  ------  ------
Total........................................... $2,334  $2,072  $2,334  $2,052    $1,090   $994   $1,090   $992
                                                 ------  ------  ------  ------    ------  ------  ------  ------
                                                 ------  ------  ------  ------    ------  ------  ------  ------
</TABLE>
 
------------
 
(1) Includes pretax losses of  $85 million recorded in  1995 related to  certain
    businesses  and  joint  ventures  owned by  the  Music  division  which were
    restructured or closed.
 
(2) Deconsolidated as  a result  of the  sale of  a 51%  interest in  Six  Flags
    effective as of June 23, 1995.
 
     Time  Warner had revenues of $10.064 billion,  a loss of $156 million ($.95
per common share) before an extraordinary loss  on the retirement of debt and  a
net  loss of $191 million ($1.04 per common share) in 1996, compared to revenues
of $8.067 billion,  a loss of  $124 million  ($.46 per common  share) before  an
extraordinary  loss on  the retirement of  debt and  a net loss  of $166 million
($.57 per common share) in  1995. Time Warner's equity  in the pretax income  of
the  Entertainment Group was $290  million in 1996, compared  to $256 million in
1995.
 
     As discussed more fully below, the increase in Time Warner's historical net
loss in 1996 principally resulted from an increase in interest expense  relating
to approximately $6.1 billion of debt assumed or incurred in the TBS Transaction
and the Cable Acquisitions and a decrease in investment-related income primarily
relating  to  lower gains  on certain  asset  sales, which  more than  offset an
overall increase in the operating income of Time Warner's business segments  and
increased  income  from its  equity in  the pretax  income of  the Entertainment
Group. The increase in Time Warner's  1996 historical net loss per common  share
was   further  affected  by  a  $205  million  increase  in  preferred  dividend
requirements relating to the preferred stock issued in
 
                                      F-6
 




<PAGE>

<PAGE>

                                TIME WARNER INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
        OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
 
connection with the Preferred Stock Refinancing, the Cable Acquisitions and  the
ITOCHU/Toshiba  Transaction, offset in part by  the dilutive effect from issuing
173.4 million shares of common stock in connection with the TBS Transaction.
 
     Time Warner's  historical  results  of  operations  include  the  operating
results  of  each acquired  business from  the respective  closing date  of each
transaction. On a pro forma basis, giving effect to the Time Warner Transactions
as if each  of such transactions  had occurred  at the beginning  of 1995,  Time
Warner  would have  reported for  the years  ended December  31, 1996  and 1995,
respectively, revenues of $12.799 billion and $12.154 billion, EBITDA of  $2.184
billion  and $2.147 billion, operating income  of $939 million and $942 million,
equity in the pretax income of the Entertainment Group of $290 million and  $286
million,  a  loss before  extraordinary item  of $284  million and  $233 million
($1.05 and  $.97 per  common share)  and a  net loss  of $319  million and  $275
million ($1.11 and $1.04 per common share).
 
     The 1996 and 1995 comparison of pro forma results are similarly affected by
any  underlying historical trends  that are unrelated  to the transactions given
pro forma  effect  to  therein, such  as  lower  gains on  certain  asset  sales
discussed  above.  The increased  pro forma  over historical  net loss  for each
period is principally  the result  of higher amortization  and interest  expense
associated  with the  TBS Transaction and  the Cable Acquisitions.  The 1996 pro
forma results  are  further affected  by  the significant  pre-merger  operating
losses  incurred by  TBS's filmed  entertainment companies  as a  consequence of
disappointing results from worldwide theatrical releases.
 
     The Entertainment Group had revenues of  $10.861 billion and net income  of
$220  million in 1996,  compared to revenues  of $9.629 billion,  income of $170
million before an extraordinary loss on the retirement of debt and net income of
$146 million in 1995. On a pro  forma basis, giving effect to the  Entertainment
Group Transactions as if each of such transactions had occurred at the beginning
of 1995, the Entertainment Group would have reported for the year ended December
31, 1995, revenues of $9.686 billion, EBITDA of $2.072 billion, operating income
of $994 million, income before extraordinary item of $203 million and net income
of  $179 million. No pro forma financial  information has been presented for the
Entertainment Group 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 the Entertainment Group.
 
     As discussed more  fully below,  the Entertainment  Group'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.
 
     The  relationship between income before income taxes and income tax expense
of Time  Warner is  principally affected  by the  amortization of  goodwill  and
certain  other financial statement  expenses that are  not deductible for income
tax purposes.  Income tax  expense  of Time  Warner  includes all  income  taxes
related  to its  allocable share  of partnership  income and  its equity  in the
income tax expense of corporate subsidiaries of the Entertainment Group.
 
TIME WARNER
 
     Publishing.   Revenues  increased to  $4.117  billion, compared  to  $3.722
billion   in  1995.  EBITDA  increased  to   $535  million  from  $476  million.
Depreciation  and  amortization  amounted  to  $117  million  in  1996  and  $95
 
                                      F-7
 




<PAGE>

<PAGE>

                                TIME WARNER INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
        OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
 
million  in 1995. Operating income increased  to $418 million from $381 million.
Revenues benefited  from  across-the-board increases  in  magazine  circulation,
advertising and book revenues. All major magazine brands achieved revenue gains,
including  People, Entertainment Weekly,  and Sports Illustrated,  the latter of
which benefited in  part from  Olympics-related coverage. The  increase in  book
revenues was led by the direct marketing businesses. EBITDA and operating income
increased principally as a result of the revenue gains.
 
     Music.  Revenues decreased to $3.949 billion, compared to $4.196 billion in
1995.  EBITDA  increased to  $744 million  from  $690 million.  Depreciation and
amortization, including amortization related to the purchase of WCI, amounted to
$383 million in  1996 and $369  million in 1995.  Operating income increased  to
$361  million  from $321  million. Operating  results for  1995 included  an $85
million charge relating to certain start-up businesses and joint ventures  owned
by  the Music division which  were restructured or closed.  With regard to 1996,
despite maintaining  its leading  domestic market  share (over  22%), the  Music
division'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 the  Music
division'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 the  Music division. 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, a  related increase in  the Music division's provision
for bad debts  and lower  results from direct  marketing activities.  Management
expects  that the current state of the  U.S. retail environment will continue to
affect 1997 operating results.
 
     Cable Networks-TBS.  Cable Networks results reflect the acquisition of  TBS
effective  in October 1996 and include revenues  of $680 million, EBITDA of $162
million, depreciation and amortization  of $63 million  and operating income  of
$99  million. Such operating results  are not comparable to  the prior year and,
accordingly, are discussed on a pro forma basis.
 
     On a pro  forma basis, revenues  increased to $2.477  billion, compared  to
$2.106  billion in  1995. EBITDA  increased to  $547 million  from $502 million.
Depreciation and amortization, including amortization related to the purchase of
TBS, amounted to $250 million in 1996 and $235 million in 1995. Operating income
increased to $297 million from  $267 million. Revenues benefited from  increases
in advertising and subscriptions. Advertising revenues increased due to a strong
overall  advertising  market for  TNT and  the  TBS Superstation,  the continued
expansion of CNN International, and  increased viewership for the news  networks
during   the  1996   U.S.  political  conventions   and  presidential  campaign.
Subscription revenues  increased as  a result  of higher  rates, as  well as  an
increase in both cable and home satellite viewers, primarily at TNT, the Cartoon
Network,  CNN  and  CNN  International. EBITDA  and  operating  income increased
principally as a result of  the revenue gains, offset  in part by higher  sports
and  entertainment programming costs and start-up  costs for three new networks,
including CNN/SI.
 
     Filmed  Entertainment-TBS.    Filmed  Entertainment  results  reflect   the
acquisition  of  TBS effective  in October  1996, and  include revenues  of $455
million, EBITDA of $32 million, depreciation and amortization of $24 million and
operating income of $8 million. Such operating results are not comparable to the
prior year and, accordingly, are discussed on a pro forma basis.
 
     On a pro  forma basis, revenues  increased to $1.458  billion, compared  to
$1.352  billion in 1995. EBITDA decreased from $48  million in 1995 to a loss of
$108 million  in 1996.  Depreciation  and amortization,  including  amortization
related to the purchase of TBS, amounted to $94 million in 1996 and $110 million
in 1995.
 
                                      F-8
 




<PAGE>

<PAGE>

                                TIME WARNER INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
        OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
 
Operating  losses increased to $202 million from $62 million. Revenues benefited
from increases  in  worldwide  theatrical and  home  video  revenues.  Worldwide
theatrical  revenues  benefited from  an increase  in  the number  of theatrical
releases. Home video revenues increased primarily due to an increase in sales of
theatrical and existing library product. Despite such revenue increases,  EBITDA
and  operating income decreased principally as a result of disappointing results
for theatrical  releases,  which  resulted  in  approximately  $200  million  of
write-offs at New Line and Castle Rock during the nine-month, pre-merger period.
 
     Cable.   The 1996 Cable operating results  increased as a result of the CVI
Acquisition effective as of January 4, 1996,  and the full year effect from  the
acquisitions  of KBLCOM effective as of July  6, 1995 and Summit effective as of
May 2, 1995.  Revenues increased to  $909 million, compared  to $172 million  in
1995.  EBITDA  increased  to $476  million  from $90  million.  Depreciation and
amortization amounted to $401 million in 1996 and $95 million in 1995. Operating
income increased to $75 million from a loss of $5 million.
 
     On a pro  forma basis, Time  Warner's Cable division  had 1995 revenues  of
$847  million, EBITDA  of $425  million, depreciation  and amortization  of $396
million and operating  income of $29  million. In comparison  to 1995 pro  forma
results,  1996 revenues benefited  from an increase  in basic cable subscribers,
increases in  regulated  cable rates  as  permitted under  Time  Warner  Cable's
'social  contract' with the Federal Communications Commission (the 'FCC') and an
increase 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,  increased to  $1.174
billion in 1996, compared to $877 million in 1995. Interest expense increased to
$968  million, compared  to $877 million.  The increase in  interest expense was
principally due to the assumption or incurrence of approximately $6.1 billion of
debt in the Cable Acquisitions  and the TBS Transaction,  offset in part by  the
favorable  effect  from  Time  Warner's  redemption  of  the  8.75%  Convertible
Debentures and  the  reduction  in  debt associated  with  the  Preferred  Stock
Refinancing.  Other  expense, net,  increased to  $206 million  in 1996  from an
immaterial  amount   in   1995,   principally   because   of   a   decrease   in
investment-related  income resulting  from lower  gains on  certain asset sales,
increased losses from reductions  in the carrying  value of certain  investments
and an increase in dividend requirements on preferred securities of subsidiaries
issued  in  1995 in  connection  with the  redemption  of the  8.75% Convertible
Debentures.
 
ENTERTAINMENT GROUP
 
     Filmed Entertainment-Warner Bros.   Revenues increased  to $5.648  billion,
compared  to $5.078 billion in 1995. EBITDA  increased to $546 million from $490
million. Depreciation and  amortization, including amortization  related to  the
purchase  of WCI,  amounted to $292  million in  1996 and $237  million in 1995.
Operating income increased to $254 million from $253 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 large 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.
 
     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.
 
                                      F-9
 




<PAGE>

<PAGE>

                                TIME WARNER INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
        OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
 
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,  compared to
$1.607 billion in  1995. EBITDA  increased to  $350 million  from $293  million.
Depreciation and amortization amounted to $22 million in 1996 and $19 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, compared to $3.094 billion in
1995.  EBITDA increased to $1.536 billion  from $1.275 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
$773 million  in 1995.  Operating income  increased to  $606 million  from  $502
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, the  Entertainment Group's Cable  division had 1995
revenues  of  $3.378  billion,  EBITDA  of  $1.355  billion,  depreciation   and
amortization of $822 million and operating income of $533 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  $524
million in 1996, compared to $539 million in 1995. Interest expense decreased to
$478  million, compared  to $579  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 $46  million in 1996, compared  to other income, net, of
$40  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 during 1996.
 
                                      F-10
 




<PAGE>

<PAGE>

                                TIME WARNER INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
        OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
 
1995 VS. 1994
 
     EBITDA and operating income for Time Warner and the Entertainment Group  in
1995 and 1994 are as follows:
 
<TABLE>
<CAPTION>
                                                                                    YEARS ENDED DECEMBER 31,
                                                                              ------------------------------------
                                                                                   EBITDA         OPERATING INCOME
                                                                              ----------------    ----------------
                                                                               1995      1994      1995      1994
                                                                              ------    ------    ------    ------
                                                                                           (MILLIONS)
 
<S>                                                                           <C>       <C>       <C>       <C>
Time Warner:
Publishing.................................................................   $  476    $  430     $381      $347
Music(1)...................................................................      690       720      321       366
Cable......................................................................       90        --       (5)       --
                                                                              ------    ------    ------    ------
Total......................................................................   $1,256    $1,150     $697      $713
                                                                              ------    ------    ------    ------
                                                                              ------    ------    ------    ------
Entertainment Group:
Filmed Entertainment-Warner Bros...........................................   $  490    $  430     $253      $219
Six Flags Theme Parks(2)...................................................       60       135       29        56
Broadcasting-The WB Network................................................      (66)       --      (66)       --
Cable Networks-HBO.........................................................      293       257      274       237
Cable......................................................................    1,275       989      502       340
                                                                              ------    ------    ------    ------
Total......................................................................   $2,052    $1,811     $992      $852
                                                                              ------    ------    ------    ------
                                                                              ------    ------    ------    ------
</TABLE>
 
------------
 
(1) Includes  pretax losses of  $85 million recorded in  1995 related to certain
    businesses and  joint  ventures  owned  by the  Music  division  which  were
    restructured or closed.
 
(2) Deconsolidated  as  a result  of the  sale of  a 51%  interest in  Six Flags
    effective as of June 23, 1995.
 
     Time Warner had revenues  of $8.067 billion, a  loss of $124 million  ($.46
per  common share) before an extraordinary loss  on the retirement of debt and a
net loss of $166 million ($.57 per  common share) in 1995, compared to  revenues
of $7.396 billion and a net loss of $91 million ($.27 per common share) in 1994.
Time  Warner's equity in the  pretax income of the  Entertainment Group was $256
million in 1995, compared to $176 million in 1994.
 
     The increase in Time Warner's net loss in 1995 was principally related to a
$42 million extraordinary loss on the retirement of debt ($.11 per common share)
and $85 million in pretax  losses ($52 million after  taxes and $.13 per  common
share)  related  to certain  businesses and  joint ventures  owned by  the Music
division which were restructured or closed.  As discussed more fully below,  the
increase  in Time  Warner's net  loss in 1995  from such  losses was principally
mitigated by an  overall increase in  the fundamental operating  income of  Time
Warner's  business segments and  increased income from its  equity in the pretax
income  of  the  Entertainment   Group,  offset  in  part   by  a  decrease   in
investment-related  income  and higher  interest  expense on  approximately $1.3
billion of debt assumed in the  acquisitions of Summit and KBLCOM. The  increase
in Time Warner's net loss per common share in 1995 also related to a $39 million
increase  in preferred dividend requirements as  a result of the preferred stock
issued in  connection  with  the  acquisitions of  Summit  and  KBLCOM  and  the
ITOCHU/Toshiba Transaction.
 
     The  Entertainment Group  had revenues  of $9.629  billion, income  of $170
million before an extraordinary loss on the retirement of debt and net income of
$146 million in 1995, compared to revenues  of $8.509 billion and net income  of
$136  million in 1994. As discussed  more fully below, the Entertainment Group's
operating results  in  1995 reflect  an  overall increase  in  operating  income
generated by its business segments (including the
 
                                      F-11
 




<PAGE>

<PAGE>

                                TIME WARNER INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
        OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
 
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.
 
TIME WARNER
 
     Publishing.    Revenues increased  to  $3.722 billion,  compared  to $3.433
billion  in  1994.  EBITDA  increased   to  $476  million  from  $430   million.
Depreciation and amortization amounted to $95 million in 1995 and $83 million in
1994.  Operating income  increased to $381  million from  $347 million. Revenues
benefited from increases in magazine circulation, advertising and book revenues.
Contributing to  the revenue  gain  were increases  achieved by  People,  Sports
Illustrated,  Fortune  and book  publisher  Oxmoor House.  EBITDA  and operating
income  increased  as  a  result  of  the  revenue  gains,  offset  in  part  by
significantly higher postal and paper costs as a result of price increases.
 
     Music.  Revenues increased to $4.196 billion, compared to $3.986 billion in
1994.  EBITDA  decreased to  $690 million  from  $720 million.  Depreciation and
amortization, including amortization related to the purchase of WCI, amounted to
$369 million in  1995 and $354  million in 1994.  Operating income decreased  to
$321 million from $366 million. Operating results were adversely affected by $85
million  in losses recorded in 1995 that related to certain businesses and joint
ventures owned by the Music division which were restructured or closed. Revenues
for 1995 were negatively affected by certain reclassifications relating to third
party,  pressing  and  distribution  arrangements  and  changes  in  the   Music
division's  ownership  interests in  certain  investments and  subsidiaries that
resulted in changes from the consolidation  to the equity method of  accounting.
Excluding the effects from such reclassifications and changes, revenues from the
fundamental  business increased by approximately 6%,  principally as a result of
increases in  both  domestic  and  international  recorded  music  revenues  and
increased  music publishing revenues. Domestic  and international recorded music
revenues benefited from  a number  of popular releases  and an  increase in  the
percentage  of compact disc  to total unit  sales. Excluding the  $85 million in
losses, EBITDA increased, and operating  income benefited, principally from  the
revenue  gains and  interest income  on the resolution  of a  recorded music tax
matter, offset in part by expenses incurred in connection with the settlement of
certain employment contracts and lower results from direct marketing  activities
attributable to higher amortization of member acquisition costs.
 
     The  losses in 1995 relating to  certain businesses and joint ventures that
were restructured or closed are  primarily related to Warner Music  Enterprises,
one  of the Company's direct marketing efforts, and the write off of its related
direct mail order assets that  were not recoverable due  to the closure of  this
business.  The activities that were not  continued were not material to previous
historical operating results.
 
     Cable.  The 1995 Cable operating results reflect the acquisition of  KBLCOM
effective  as of July 6, 1995 and Summit effective as of May 2, 1995 and include
revenues of $172 million, EBITDA  of $90 million, depreciation and  amortization
of  $95 million and operating  losses of $5 million.  Such operating results are
not comparable to the prior year.
 
     Interest and  Other, Net.    Interest and  other,  net, increased  to  $877
million in 1995, compared to $724 million in 1994. Interest expense increased to
$877 million, compared to $769 million, principally as a result of approximately
$1.3  billion of debt  assumed in the cable  acquisitions and higher short-term,
floating-rates of interest paid on $2.6 billion notional amount of interest rate
swap contracts.  Other income,  net, was  immaterial in  1995, compared  to  $45
million in 1994, principally because of a decrease in investment-related income.
Investment-related  income in  both periods  consisted of  gains on  the sale of
certain assets, including the sale of
 
                                      F-12
 




<PAGE>

<PAGE>

                                TIME WARNER INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
        OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
 
an interest in QVC, Inc. in 1995, which were offset by losses from reductions in
the carrying value of certain investments taken in each period.
 
ENTERTAINMENT GROUP
 
     Filmed Entertainment-Warner Bros.   Revenues increased  to $5.078  billion,
compared  to $4.484 billion in 1994. EBITDA  increased to $490 million from $430
million. Depreciation and  amortization, including amortization  related to  the
purchase  of WCI,  amounted to $237  million in  1995 and $211  million in 1994.
Operating income increased to $253 million from $219 million. Revenues benefited
from increases  in  worldwide  theatrical, home  video,  consumer  products  and
television distribution operations. Worldwide theatrical and domestic home video
revenues in 1995 were led by the success of Batman Forever. EBITDA and operating
income  benefited from  the revenue  gains and  increased income  from licensing
operations.
 
     Six Flags Theme Parks.  As a result of TWE's sale of 51% of its interest in
Six Flags, the operating results of Six Flags have been deconsolidated effective
as of June 23, 1995 and TWE's  remaining 49% interest in Six Flags is  accounted
for  under the equity  method of accounting.  Accordingly, revenues decreased to
$227 million, compared to $557 million in 1994. EBITDA decreased to $60  million
from $135 million. Depreciation and amortization amounted to $31 million in 1995
and  $79 million  in 1994.  Operating income decreased  to $29  million from $56
million.
 
     Broadcasting-The WB Network.  The WB Network was launched in January  1995,
and  generated $66 million of  operating losses on $33  million of revenues. The
operating loss was  mitigated by  a favorable legal  settlement, as  well as  by
funding  from a limited partner admitted as  of August 1995. Due to the start-up
nature of this national broadcast operation, losses are expected to continue.
 
     Cable Networks-HBO.   Revenues  increased to  $1.607 billion,  compared  to
$1.513  billion in  1994. EBITDA  increased to  $293 million  from $257 million.
Depreciation and amortization amounted to $19 million in 1995 and $20 million in
1994. Operating income  increased to  $274 million from  $237 million.  Revenues
benefited  primarily from an  increase in subscriptions to  29.7 million from 27
million at the  end of 1994,  as well as  from higher pay-TV  rates. EBITDA  and
operating income improved principally as a result of the revenue gains.
 
     Cable.    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
$3.094 billion, compared to $2.242 billion  in 1994. EBITDA increased to  $1.275
billion from $989 million. Depreciation and amortization, including amortization
related to the purchase of WCI and the acquisition of the ATC minority interest,
amounted  to $773  million in  1995 and $649  million in  1994. Operating income
increased to  $502 million  from $340  million. Revenues  and operating  results
benefited  from the  formation of  the TWE-Advance/Newhouse  Partnership and the
consolidation of Paragon.  Excluding such  effects, revenues  benefited from  an
aggregate  increase  in  basic  cable  and  Primestar-related,  direct broadcast
satellite 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
related to increased capital spending.
 
     Interest  and  Other, Net.    Interest and  other,  net, decreased  to $539
million in 1995, compared to $616 million in 1994. Interest expense increased to
$579  million,   compared  to   $567   million  in   1994,  principally   as   a
 
                                      F-13
 




<PAGE>

<PAGE>

                                TIME WARNER INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
        OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
 
result of higher short-term, floating-rates of interest paid on borrowings under
TWE's  former and  existing bank credit  agreements, offset in  part by interest
savings in the last quarter of 1995 on lower debt levels related to management's
asset sales  program. There  was other  income,  net, of  $40 million  in  1995,
compared  to other expense, net, of $49  million in 1994, principally because of
an increase in investment-related income related to gains on the sale of certain
unclustered cable systems and other investments.
 
FINANCIAL CONDITION AND LIQUIDITY
DECEMBER 31, 1996
TIME WARNER
1996 FINANCIAL CONDITION
 
     At December 31, 1996, Time Warner  had $12.7 billion of debt, $452  million
of  available cash and equivalents (net debt  of $12.2 billion), $488 million of
borrowings against future  stock option  proceeds, $949  million of  mandatorily
redeemable  preferred  securities  of  subsidiaries, $1.7  billion  of  Series M
Preferred Stock  and $9.5  billion  of shareholders'  equity, compared  to  $9.9
billion  of debt, $1.2  billion of available  cash and equivalents  (net debt of
$8.7 billion), $949  million of mandatorily  redeemable preferred securities  of
subsidiaries  and $3.7 billion of shareholders'  equity at December 31, 1995. At
December 31,  1996, Time  Warner also  had $62  million of  noncurrent cash  and
equivalents  held in escrow  for purposes of  funding certain preferred dividend
requirements. The increase in  net debt principally  reflects the assumption  or
incurrence  of approximately $4.8 billion of debt related to the TBS Transaction
and the  CVI Acquisition,  offset in  part  by the  use of  approximately  $1.55
billion  of net proceeds from  the issuance of the  Series M Preferred Stock for
debt reduction. The  increase in shareholders'  equity principally reflects  the
issuance  in  1996 of  approximately  173.4 million  shares  of common  stock in
connection with  the TBS  Transaction and  approximately 2.9  million shares  of
common  stock and 6.3 million  shares of preferred stock  in connection with the
CVI Acquisition.  The  effect from  such  issuances was  offset  in part  by  an
increase  in  dividend requirements  and  the repurchase  of  approximately 11.4
million shares of Time Warner common stock at an aggregate cost of $456 million.
 
INVESTMENT IN TWE
 
     Time Warner's investment in TWE at December 31, 1996 consisted of interests
in 74.49% of the Series A Capital and  Residual Capital of TWE, and 100% of  the
Senior  Capital  and Series  B Capital  of TWE.  The priority  capital interests
provide Time Warner (and with  respect to the Series A  Capital only, U S  WEST)
with  certain  priority  claims  to  the  net  partnership  income  of  TWE  and
distributions  of   TWE   partnership  capital,   including   certain   priority
distributions  of partnership capital in the event of liquidation or dissolution
of TWE. Each level of priority capital  interest provides for an annual rate  of
return equal to or exceeding 8%, including an above-market 13.25% annual rate of
return  (11.25% to the extent concurrently distributed) related to Time Warner's
Series B  Capital  interest,  which,  when taken  together  with  Time  Warner's
contributed capital, represented a cumulative priority Series B Capital interest
of  $5.2  billion at  December  31, 1996.  While  the TWE  partnership agreement
contemplates the reinvestment of significant partnership cash flows in the  form
of  capital expenditures and  otherwise provides for  certain other restrictions
that are expected to limit cash  distributions on partnership interests for  the
foreseeable  future, Time Warner's $1.5 billion  Senior Capital interest and, to
the extent  not previously  distributed,  partnership income  allocated  thereto
(based  on an 8%  annual rate of return)  is required to  be distributed to Time
Warner in  three annual  installments beginning  on July  1, 1997.  Time  Warner
expects  that the initial  distribution of Senior  Capital will be approximately
$535 million.
 
                                      F-14
 




<PAGE>

<PAGE>

                                TIME WARNER INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
        OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
 
SERIES M EXCHANGEABLE PREFERRED STOCK
 
     In April  1996,  Time Warner  raised  approximately $1.55  billion  of  net
proceeds  for debt  reduction in  a private placement  of 1.6  million shares of
exchangeable preferred  stock, which  pay cumulative  dividends at  the rate  of
10  1/4% per annum. This  issuance allowed the Company  to realize cash proceeds
through  a  security  whose  payment  terms  are  principally  linked  (until  a
reorganization  of TWE occurs, if  any) to a portion  of Time Warner's currently
noncash-generating interest  in the  Series  B Capital  of  TWE, as  more  fully
described  herein.  Time  Warner  used these  proceeds  to  redeem  $250 million
principal amount of 8.75%  Debentures due April 1,  2017 for approximately  $265
million  (including redemption  premiums and  accrued interest  thereon), and to
reduce bank debt of TWI Cable  Inc. ('TWI Cable'), its wholly owned  subsidiary,
by  approximately $1.3 billion. As part  of the TBS Transaction, these preferred
shares were converted into registered shares of Series M exchangeable  preferred
stock with substantially identical terms ('Series M Preferred Stock').
 
     Generally,  the terms  of the  Series M  Preferred Stock  only require Time
Warner to pay  cash dividends or  to redeem, prior  to its mandatory  redemption
date,  any portion  of the security  for cash  upon the receipt  of certain cash
distributions from TWE with respect to  Time Warner's interests in the Series  B
Capital   and  Residual   Capital  of   TWE  (excluding   stock  option  related
distributions and certain tax related distributions). However, because such cash
distributions are subject to restrictions  under the TWE partnership  agreement,
Time  Warner does not expect  to pay cash dividends or  to redeem any portion of
the Series M Preferred Stock for  cash in the foreseeable future. Instead,  Time
Warner  expects to  satisfy its  dividend requirements  through the  issuance of
additional shares  of Series  M Preferred  Stock with  an aggregate  liquidation
preference  equal  to  the  amount  of  such  dividends.  In  addition,  upon  a
reorganization of TWE, Time Warner must elect either to redeem each  outstanding
share of Series M Preferred Stock for cash, subject to certain conditions, or to
exchange  the Series M Preferred  Stock for new Series  L Preferred Stock, which
also pays cumulative  dividends at  the rate  of 10 1/4%  per annum  but is  not
linked  to Time Warner's interest  in the Series B Capital  of TWE. The terms of
the Series L Preferred Stock  do not require Time  Warner to pay cash  dividends
until  July 2006 and provide Time Warner with an option to exchange the Series L
Preferred Stock, subject to certain conditions, into 10 1/4% Senior Subordinated
Debentures which do not  require the payment of  cash interest until July  2006.
See  Note 10 to the accompanying consolidated financial statements for a summary
of the principal terms of the Series M Preferred Stock.
 
COMMON STOCK REPURCHASE PROGRAM
 
     In April 1996,  Time Warner's Board  of Directors authorized  a program  to
repurchase,  from time to  time, up to  15 million shares  of Time Warner common
stock. In  connection therewith,  Time  Warner entered  into a  five-year,  $750
million  revolving credit facility (the 'Stock Option Proceeds Credit Facility')
in May 1996.  Borrowings under  the Stock  Option Proceeds  Credit Facility  are
principally  used to  fund stock repurchases  and approximately  $200 million of
preferred dividend requirements on Time Warner's Series G, H, I and J  Preferred
Stock.  The common stock repurchased under the program is expected to be used to
satisfy future  share issuances  related to  the exercise  of existing  employee
stock  options.  Actual repurchases  in  any period  will  be subject  to market
conditions. As of December 31, 1996, Time Warner had acquired approximately 11.4
million shares of its common stock for  an aggregate cost of $456 million.  Such
repurchases  were  principally funded  with  borrowings under  the  Stock Option
Proceeds Credit Facility.
 
     The Stock Option Proceeds Credit Facility initially provided for borrowings
of up to $750 million,  of which up to $100  million is reserved solely for  the
payment  of interest and fees thereunder. At December 31, 1996, $488 million had
been borrowed under the Stock Option Proceeds Credit Facility. Borrowings  under
the  Stock Option Proceeds Credit Facility generally bear interest at LIBOR plus
a margin equal to 75 basis points
 
                                      F-15
 




<PAGE>

<PAGE>

                                TIME WARNER INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
        OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
 
and are principally expected to be  repaid from the cash proceeds received  from
the  exercise of  designated employee stock  options. The receipt  of such stock
option  proceeds  permanently  reduces  the  borrowing  availability  under  the
facility,  which has been  reduced to approximately $715  million as of December
31, 1996. At December 31, 1996, based  on a closing market price of Time  Warner
common stock of $37.50, the aggregate value of potential proceeds to Time Warner
from  the exercise of  outstanding vested, 'in the  money' stock options covered
under the  facility was  approximately $1.5  billion, representing  a 2.1  to  1
coverage ratio over the related borrowing availability.
 
     To the extent that stock option proceeds are not sufficient to satisfy Time
Warner's  obligations  under the  Stock  Option Proceeds  Credit  Facility, Time
Warner is generally required  to repay such borrowings  using proceeds from  the
sale  of  shares of  its  common stock  held in  escrow  under the  Stock Option
Proceeds Credit Facility or, at Time Warner's election, using available cash  on
hand.  In addition,  as a result  of Time  Warner's commitment to  use the Stock
Option Proceeds Credit Facility to fund approximately $200 million of  preferred
dividend  requirements on its Series G, H,  I and J Preferred Stock, Time Warner
has also supplementally agreed to place in escrow an amount of cash equal to the
excess  of  the  unpaid  preferred  dividend  requirements  on  such  series  of
convertible  preferred stock over the  borrowing availability under the facility
at any time. At December  31, 1996, Time Warner had  placed $62 million of  cash
and  36 million shares in escrow under  these arrangements, which shares are not
considered to  be issued  and outstanding  capital stock  of the  Company.  Time
Warner  may be required,  from time to time,  to have up  to 52.5 million shares
held in escrow.
 
     Because borrowings  under the  Stock Option  Proceeds Credit  Facility  are
expected  to be principally repaid by Time Warner from the cash proceeds related
to the exercise of employee stock options, Time Warner's principal credit rating
agencies have concluded  that such  borrowings and related  financing costs  are
credit  neutral and are excludable from debt and interest expense, respectively,
for their purposes in evaluating Time Warner's leverage and coverage ratios.  In
addition,  because Time  Warner has committed  to use the  Stock Option Proceeds
Credit Facility  to  fund  approximately  $200  million  of  preferred  dividend
requirements  on its Series G, H, I and  J Preferred Stock, and has entered into
the escrow arrangements  described above, such  preferred dividend  requirements
are  similarly excluded from preferred dividends for purposes of evaluating Time
Warner's coverage ratio.
 
DEBT REFINANCINGS
 
     In 1996 and early  1997, Time Warner continued  to capitalize on  favorable
market  conditions  through certain  debt  refinancings, which  lowered interest
rates, staggered debt  maturities and,  with respect  to the  redemption of  the
8.75%  Convertible Debentures in February 1996  and the TBS Convertible Notes in
February 1997, eliminated  the potential  dilution from the  conversion of  such
securities into 31.3 million shares of common stock.
 
     In  January 1996, in  connection with the  CVI Acquisition, subsidiaries of
Time Warner  assumed $500  million of  public notes  and debentures  of CVI  and
borrowed $1.5 billion under the 1995 Credit Agreement to refinance a like-amount
of other indebtedness assumed or incurred in such acquisition.
 
     In February 1996, Time Warner redeemed the remaining $1.2 billion principal
amount  of 8.75% Convertible Debentures  for $1.28 billion, including redemption
premiums and  accrued interest  thereon. The  redemption was  financed with  (1)
proceeds  raised  from a  $575  million issuance  in  December 1995  of Company-
obligated mandatorily redeemable  preferred securities of  a subsidiary and  (2)
$750  million of proceeds raised  from the issuance in  January 1996 of (i) $400
million principal amount of 6.85% debentures  due 2026, which are redeemable  at
the option of the holders thereof in 2003, (ii) $200 million principal amount of
8.3% discount
 
                                      F-16
 




<PAGE>

<PAGE>

                                TIME WARNER INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
        OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
 
debentures  due 2036,  which do  not pay  cash interest  until 2016,  (iii) $166
million principal amount  of 7.48%  debentures due  2008 and  (iv) $150  million
principal amount of 8.05% debentures due 2016.
 
     During  the first  quarter of  1997, Time Warner  entered into  a number of
financing transactions, which resulted in the refinancing of approximately  $600
million  of debt. Time  Warner redeemed $300 million  principal amount of 10.75%
Senior Notes due January  30, 2002 of TWI  Cable and approximately $283  million
accreted  amount of  TBS Convertible Notes  at an aggregate  redemption price of
approximately $600 million, including  redemption premiums and accrued  interest
thereon.  Time Warner also issued $600 million principal amount of Floating Rate
Reset Notes  due  December 30,  2031  (the  'Floating Rate  Reset  Notes').  The
Floating  Rate Reset Notes bear interest at  a floating rate equal to LIBOR less
25 basis points until December 30, 2001, at which time the interest rate will be
reset at a  fixed rate equal  to 6.59% plus  a margin based  upon Time  Warner's
credit  risk at such time.  The Floating Rate Reset  Notes are redeemable at the
election of the holders, in whole but not in part, on December 30, 2001.
 
DEBT REDUCTION PROGRAM
 
     As part of  a continuing  strategy to  enhance the  financial position  and
credit  statistics of Time  Warner and the Entertainment  Group, a $2-$3 billion
debt reduction program was initiated in 1995. Including the sale of 51% of TWE's
interest in Six  Flags in June  1995, the sale  of an interest  in QVC, Inc.  in
February  1995,  the sale  of certain  unclustered  cable systems,  the proceeds
raised from the  monetization of Time  Warner's investment in  Hasbro in  August
1995  (through the issuance of mandatorily  redeemable preferred securities of a
subsidiary) and a  portion of its  interest in  TWE in April  1996 (through  the
issuance  of  Series M  Preferred Stock)  and  the expected  1997 sale  of TWE's
interest in E! Entertainment Television, Inc., Time Warner and the Entertainment
Group on a combined basis have exceeded their initial goals under this program.
 
CREDIT STATISTICS
 
     The combination  of  asset  sales  and debt  refinancings  is  intended  to
strengthen  the financial  position of Time  Warner and  the Entertainment Group
and, when  taken  together with  EBITDA  growth,  is expected  to  continue  the
improvement  of Time Warner's overall credit statistics. These credit statistics
consist of  commonly-used  liquidity  measures such  as  leverage  and  coverage
ratios.  The leverage ratio  represents the ratio of  total debt, less available
cash and  equivalents  ('Net  debt')  to total  business  segment  EBITDA,  less
corporate  expenses ('Adjusted EBITDA'). The coverage ratio represents the ratio
of Adjusted EBITDA to total  interest expense and/or preferred dividends.  Those
ratios,  on a pro forma basis  for 1996 and 1995, and  on a historical basis for
1994, are as set  forth below for each  of Time Warner and  Time Warner and  the
Entertainment  Group combined. Certain rating agencies and other credit analysts
place more emphasis on the combined  ratios while others place more emphasis  on
the  Time Warner stand-alone ratios. It  should be understood, however, that the
assets of the  Entertainment Group  are not freely  available to  fund the  cash
needs of Time Warner.
 
                                      F-17
 




<PAGE>

<PAGE>

                                TIME WARNER INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
        OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
 
<TABLE>
<CAPTION>
                                                                                          PRO FORMA(a)
                                                                                        ----------------    HISTORICAL
                                                                                         1996      1995        1994
                                                                                        ------    ------    ----------
<S>                                                                                     <C>       <C>       <C>
Time Warner and Entertainment Group combined:
Net debt/Adjusted EBITDA.............................................................     4.1x      4.3x       5.3x
Adjusted EBITDA/Interest (b).........................................................     2.9x      2.5x       2.1x
Adjusted EBITDA/Interest and preferred dividends (b)(c)..............................     2.3x      2.0x       2.1x
 
Time Warner:
Net debt/Adjusted EBITDA.............................................................     5.9x      5.7x       8.3x
Adjusted EBITDA/Interest (b).........................................................     2.0x      1.9x       1.4x
Adjusted EBITDA/Interest and preferred dividends (b)(c)..............................     1.5x      1.4x       1.4x
</TABLE>
 
------------
 
(a) Pro  forma  ratios  for  1996  and  1995  give  effect  to  the  Time Warner
    Transactions as if each  of such transactions occurred  at the beginning  of
    1995.  Historical ratios for 1996  and 1995 are not  meaningful and have not
    been presented because  they reflect  the operating results  of acquired  or
    disposed  entities for only a portion of  the year in comparison to year-end
    Net debt levels.
 
(b) Excludes interest  of $26  million in  1996,  $28 million  in 1995  and  $12
    million  in 1994 which was  paid to TWE in  connection with borrowings under
    Time Warner's $400  million credit agreement  with TWE, and,  in 1996  only,
    excludes  interest  of  $13 million  on  borrowings under  the  Stock Option
    Proceeds Credit Facility.
 
(c) Includes  preferred  dividends  related  to  Company-obligated   mandatorily
    redeemable   preferred  securities   of  subsidiaries.   Excludes  preferred
    dividends of $17 million in 1996 related to Time Warner's Series G, H, I and
    J Preferred Stock, which  Time Warner has funded  with borrowings under  the
    Stock Option Proceeds Credit Facility.
 
CASH FLOWS
 
     During  1996, Time  Warner's cash provided  by operations  amounted to $253
million and reflected $1.954 billion of EBITDA from its Publishing, Music, Cable
Networks-TBS, Filmed  Entertainment-TBS and  Cable businesses,  $228 million  of
distributions  from TWE and $147 million from the securitization of receivables,
less $839  million of  interest  payments, $338  million  of income  taxes,  $78
million  of corporate expenses and $821 million  related to an increase in other
working capital requirements,  balance sheet  accounts and  noncash items.  Cash
provided  by operations  of $1.051 billion  in 1995 reflected  $1.256 billion of
EBITDA from the Publishing,  Music and Cable businesses,  $1.063 billion of  net
distributions  from TWE and $35 million  from the securitization of receivables,
less $659  million of  interest  payments, $278  million  of income  taxes,  $74
million  of corporate expenses and $292 million  related to an increase in other
working capital requirements, balance sheet accounts and noncash items.
 
     Cash used  by  investing activities  increased  to $424  million  in  1996,
compared  to $271  million in  1995, principally  as a  result of  a decrease in
investment proceeds  realized in  connection  with management's  debt  reduction
program  and higher  capital expenditures,  offset in  part by  lower investment
spending. Capital expenditures increased  to $481 million  in 1996, compared  to
$266  million in 1995, principally as a  result of higher cable capital spending
associated with Time Warner's cable acquisitions.
 
     Cash used by  financing activities was  $500 million in  1996, compared  to
cash  provided by financing activities of $123  million in 1995. The use of cash
in 1996 principally resulted from higher cash dividend requirements and the  use
of  $557 million of noncurrent cash and  equivalents raised in the December 1995
issuance of the Preferred  Trust Securities to redeem  the remaining portion  of
the  8.75% Convertible Debentures in February 1996, offset in part by borrowings
incurred to finance the cash portion  of the consideration paid to acquire  CVI.
Cash  dividends paid increased to $287 million in 1996, compared to $171 million
in 1995, principally as a result of dividends paid on the preferred stock issued
in connection with the Cable Acquisitions and the ITOCHU/Toshiba Transaction. In
addition, Time Warner raised approximately $1.55 billion of net proceeds in 1996
from the issuance of 1.6 million shares of Series M Preferred Stock and used the
net proceeds therefrom to  reduce debt. Time Warner  also borrowed $488  million
under its Stock Options Proceeds Credit
 
                                      F-18
 




<PAGE>

<PAGE>

                                TIME WARNER INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
        OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
 
Facility  and  used  the  proceeds therefrom  to  repurchase  approximately 11.4
million shares of its common stock at an aggregate cost of $456 million.
 
     The assets  and  cash  flows of  certain  consolidated  and  unconsolidated
subsidiaries  of Time Warner are restricted by certain borrowing and partnership
agreements. The assets and cash flows of  TBS, TWE and TWI Cable are  restricted
by their respective bank credit agreements, although each entity is permitted to
incur  additional indebtedness to make  loans, advances, distributions and other
cash payments to Time Warner, subject to its individual compliance with the cash
flow coverage and leverage ratio covenants contained therein. Further, under the
TWE partnership agreement, the assets and  cash flows of TWE are unavailable  to
Time  Warner except  through the payment  of certain  fees, reimbursements, cash
distributions and loans, which are subject to limitations.
 
     Management believes  that  Time  Warner's operating  cash  flow,  cash  and
marketable  securities and additional borrowing  capacity are sufficient to fund
its capital and liquidity needs for the foreseeable future without distributions
and loans from its restricted subsidiaries, including TWE, above those permitted
by existing agreements.
 
ENTERTAINMENT GROUP
 
1996 FINANCIAL CONDITION
 
     At December 31,  1996, the Entertainment  Group had $5.7  billion of  debt,
$1.5 billion of Time Warner General Partners' Senior Capital and $6.7 billion of
partners' capital, compared to $6.2 billion of debt, $1.4 billion of Time Warner
General  Partners' Senior Capital and $6.6  billion of partners' capital (net of
the $169 million uncollected portion  of the note receivable  from U S WEST)  at
December  31, 1995. Cash and equivalents were $216 million at December 31, 1996,
compared to $209  million at  December 31, 1995,  reducing the  debt-net-of-cash
amounts   for  the  Entertainment   Group  to  $5.5   billion  and  $6  billion,
respectively.
 
CREDIT STATISTICS
 
     Entertainment Group leverage and  coverage ratios for  1996, 1995 and  1994
were as follows:
 
<TABLE>
<CAPTION>
                                                                                  HISTORICAL    PRO FORMA    HISTORICAL
                                                                                     1996        1995(a)        1994
                                                                                  ----------    ---------    ----------
<S>                                                                               <C>           <C>          <C>
Net debt/Adjusted EBITDA.......................................................       2.4x         2.9x          3.5x
Adjusted EBITDA/Interest.......................................................       4.8x         3.8x          3.1x
</TABLE>
 
------------
 
(a) Pro   forma  ratios  for  1995  give   effect  to  the  Entertainment  Group
    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, the Entertainment Group's cash provided by operations amounted to
$1.912  billion  and  reflected  $2.334  billion  of  EBITDA  from  the   Filmed
Entertainment-Warner  Bros., Broadcasting-The WB Network, Cable Networks-HBO and
Cable businesses and  $234 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 $1.495 billion in 1995 reflected $2.052
billion  of business segment EBITDA  and $159 million related  to a reduction in
working capital requirements,  other balance sheet  accounts and noncash  items,
less  $577 million  of interest  payments, $75 million  of income  taxes and $64
million of corporate expenses.
 
     Cash used by investing activities was  $1.253 billion in 1996, compared  to
$750  million in  1995, principally as  a result  of a $508  million decrease in
investment  proceeds   realized  in   1995  in   connection  with   management's
 
                                      F-19
 




<PAGE>

<PAGE>

                                TIME WARNER INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
        OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
 
debt  reduction program  and higher  capital expenditures.  Capital expenditures
increased to  $1.719  billion in  1996,  compared  to $1.653  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
$1.607 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 an $835 million decrease  in net 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 the  business
for  sustained,  long-term  growth.  Capital  spending  by  Time  Warner  Cable,
including the cable operations of both  Time Warner and TWE, amounted to  $1.563
billion  in 1996, compared to  $1.349 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. Cable  capital spending  for 1997 is  budgeted to  be
steady at approximately $1.6 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
Time Warner, TWE and the TWE-Advance/Newhouse Partnership. Management expects to
continue  to finance such level of  investment principally through the growth in
cable operating cash flow derived from increases in subscribers and cable rates,
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,  Time  Warner  believes  that  the  value  of  certain
off-balance  sheet  assets  should  be  considered,  along  with  other  factors
discussed elsewhere herein, in evaluating the Company's financial condition  and
prospects  for future results  of operations, including its  ability to fund its
capital and liquidity needs.
 
Intangible Assets
 
     As a  creator  and distributor  of  branded information  and  entertainment
copyrights, Time Warner and the Entertainment Group have a significant amount of
internally-generated  intangible assets  whose value  is not  fully reflected in
their respective  consolidated balance  sheets.  Such intangible  assets  extend
across  Time Warner's principal business interests,  but are best exemplified by
Time  Warner's  collection  of  copyrighted  music  product,  its  libraries  of
copyrighted film and television product 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  Time  Warner owns  the copyrights  to  such creative  material, it
continually generates revenue through the sale of such products across different
media and in new and existing markets. The value of film and  television-related
copyrighted  product and trademarks is continually  realized by the licensing of
films and
 
                                      F-20
 




<PAGE>

<PAGE>

                                TIME WARNER INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
        OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
 
television series to secondary markets and the licensing of trademarks, such  as
the  Looney  Tunes  characters and  Batman,  to  the retail  industry  and other
markets. In addition, technological  advances, such as  the introduction of  the
compact  disc and home  videocassette in the 1980's  and potentially the digital
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 the
consolidated balance sheets of Time Warner and the Entertainment Group.
 
Filmed Entertainment Backlog
 
     Backlog represents the amount of future revenue not yet recorded from  cash
contracts  for the licensing of theatrical and television product for pay cable,
basic cable, network  and syndicated  television exhibition.  Backlog of  Warner
Bros.  amounted to $1.502  billion and $1.056  billion at December  31, 1996 and
1995, respectively (including amounts relating to the licensing of film  product
to  Time Warner's and TWE's  cable television networks of  $463 million and $175
million, respectively). Warner Bros.' backlog increased principally as a  result
of  the  licensing of  the hit  television  series Friends  and ER  for domestic
syndication, as  well  as  for  exhibition on  Time  Warner's  cable  television
networks  beginning in  1998. Backlog  of the  recently-acquired film production
companies of TBS  amounted to approximately  $290 million at  December 31,  1996
(including  amounts relating to  the licensing of film  product to Time Warner's
cable television networks of approximately $90 million).
 
     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.
 
INTEREST RATE AND FOREIGN CURRENCY RISK MANAGEMENT
 
Interest Rate Swap Contracts
 
     Time  Warner uses interest rate swap  contracts to adjust the proportion of
total debt that is subject to variable and fixed interest rates. At December 31,
1996, Time Warner  had interest  rate swap  contracts to  pay floating-rates  of
interest  (average  six-month LIBOR  rate of  5.7%)  and receive  fixed-rates of
interest (average rate of 5.5%) on $2.3 billion notional amount of indebtedness,
which resulted in approximately 47% of Time Warner's underlying debt, and 43% of
the debt of Time Warner and  the Entertainment Group combined, being subject  to
variable  interest rates.  At December 31,  1995, Time Warner  had interest rate
swap contracts on $2.6 billion notional amount of indebtedness.
 
Foreign Exchange Contracts
 
     Time Warner uses  foreign exchange  contracts primarily to  hedge the  risk
that  unremitted or future royalties and license fees owed to Time Warner or TWE
domestic companies for the sale or anticipated sale of U.S. copyrighted products
abroad may be adversely affected by changes in foreign currency exchange  rates.
As  part of its overall strategy to manage  the level of exposure to the risk of
foreign currency exchange rate fluctuations, Time Warner hedges a portion of its
and  TWE's   combined   foreign   currency  exposures   anticipated   over   the
 
                                      F-21
 




<PAGE>

<PAGE>

                                TIME WARNER INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
        OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
 
ensuing  twelve month period. At December  31, 1996, Time Warner had effectively
hedged approximately half of the  combined estimated foreign currency  exposures
that  principally relate to  anticipated cash flows  to be remitted  to the U.S.
over the  ensuing twelve  month period,  using foreign  exchange contracts  that
generally  have maturities of  three months or less,  which are generally rolled
over to  provide continuing  coverage  throughout the  year. Time  Warner  often
closes  foreign  exchange sale  contracts by  purchasing an  offsetting purchase
contract. At December 31, 1996, Time Warner  had contracts for the sale of  $447
million  and the purchase of $104 million  of foreign currencies at fixed rates,
compared to contracts  for the sale  of $504  million and the  purchase of  $140
million of foreign currencies at December 31, 1995.
 
     See  Note 14  to the accompanying  consolidated financial  statements for a
more comprehensive  description  of  Time Warner's  interest  rate  and  foreign
currency risk management activities.
 
                                      F-22






<PAGE>

<PAGE>

                                TIME WARNER INC.
                           CONSOLIDATED BALANCE SHEET
                                  DECEMBER 31,
                      (MILLIONS, EXCEPT PER SHARE AMOUNTS)
 
<TABLE>
<CAPTION>
                                                                                                  1996         1995
                                                                                                 -------      -------
 
<S>                                                                                              <C>          <C>
ASSETS
CURRENT ASSETS
Cash and equivalents..........................................................................   $   452      $   628
Receivables, less allowances of $976 and $786 million.........................................     2,421        1,755
Inventories...................................................................................       941          443
Prepaid expenses..............................................................................     1,007          894
                                                                                                 -------      -------
Total current assets..........................................................................     4,821        3,720
 
Noncurrent cash and equivalents...............................................................        62          557
Noncurrent inventories........................................................................     1,698           --
Investments in and amounts due to and from Entertainment Group................................     5,814        5,734
Other investments.............................................................................     1,919        2,389
Property, plant and equipment, net............................................................     1,986        1,119
Music catalogues, contracts and copyrights....................................................     1,035        1,140
Cable television and sports franchises........................................................     4,203        1,696
Goodwill......................................................................................    12,421        5,213
Other assets..................................................................................     1,105          564
                                                                                                 -------      -------
Total assets..................................................................................   $35,064      $22,132
                                                                                                 -------      -------
                                                                                                 -------      -------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable..............................................................................   $   715      $   672
Participations, royalties and programming costs payable.......................................     1,196          755
Debt due within one year......................................................................        11           34
Other current liabilities.....................................................................     2,090        1,566
                                                                                                 -------      -------
Total current liabilities.....................................................................     4,012        3,027
 
Long-term debt................................................................................    12,713        9,907
Borrowings against future stock option proceeds...............................................       488           --
Deferred income taxes.........................................................................     4,082        3,420
Unearned portion of paid subscriptions........................................................       679          654
Other liabilities.............................................................................       967          508
Company-obligated mandatorily redeemable preferred securities of subsidiaries
  holding solely subordinated notes and debentures of subsidiaries of the Company (a).........       949          949
Series M exchangeable preferred stock, $.10 par value, 15.2 million shares authorized,
  1.72 million shares outstanding and $1.720 billion liquidation preference...................     1,672           --
 
SHAREHOLDERS' EQUITY
Preferred stock, $.10 and $1 par value, 250 million shares authorized, 35.6 million and 29.7
  million shares outstanding, $3.559 billion and $2.994 billion liquidation preference........         4           30
LMCN-V Class Common Stock, $.01 par value, 60 million shares authorized, 50.6 million shares
  outstanding.................................................................................         1           --
Common stock, $.01 and $1 par value, 2 billion shares authorized, 508.4 million and 387.7
  million shares outstanding..................................................................         5          388
Paid-in capital...............................................................................    12,250        5,422
Accumulated deficit...........................................................................    (2,758)      (2,173)
                                                                                                 -------      -------
Total shareholders' equity....................................................................     9,502        3,667
                                                                                                 -------      -------
Total liabilities and shareholders' equity....................................................   $35,064      $22,132
                                                                                                 -------      -------
                                                                                                 -------      -------
</TABLE>
 
------------
(a) Includes  $374 million of preferred securities  that are redeemable for cash
    or, at Time Warner's  option, approximately 18.1  million shares of  Hasbro,
    Inc. common stock owned by Time Warner (Note 9).
 
See accompanying notes.
 
                                      F-23
 




<PAGE>

<PAGE>

                                TIME WARNER INC.
                      CONSOLIDATED STATEMENT OF OPERATIONS
                            YEARS ENDED DECEMBER 31,
                      (MILLIONS, EXCEPT PER SHARE AMOUNTS)
 
<TABLE>
<CAPTION>
                                                                                         1996         1995        1994
                                                                                        -------      ------      ------
 
<S>                                                                                     <C>          <C>         <C>
Revenues (a).........................................................................   $10,064      $8,067      $7,396
                                                                                        -------      ------      ------
 
Cost of revenues (a)(b)..............................................................     5,922       4,682       4,307
Selling, general and administrative (a)(b)...........................................     3,176       2,688       2,376
                                                                                        -------      ------      ------
 
Operating expenses...................................................................     9,098       7,370       6,683
                                                                                        -------      ------      ------
 
Business segment operating income....................................................       966         697         713
Equity in pretax income of Entertainment Group (a)...................................       290         256         176
Interest and other, net (a)..........................................................    (1,174)       (877)       (724)
Corporate expenses (a)...............................................................       (78)        (74)        (76)
                                                                                        -------      ------      ------
 
Income before income taxes...........................................................         4           2          89
Income taxes.........................................................................      (160)       (126)       (180)
                                                                                        -------      ------      ------
Loss before extraordinary item.......................................................      (156)       (124)        (91)
Extraordinary loss on retirement of debt, net of $22 million and $26 million
  income tax benefit in 1996 and 1995, respectively..................................       (35)        (42)         --
                                                                                        -------      ------      ------
Net loss.............................................................................      (191)       (166)        (91)
Preferred dividend requirements......................................................      (257)        (52)        (13)
                                                                                        -------      ------      ------
 
Net loss applicable to common shares.................................................   $  (448)     $ (218)     $ (104)
                                                                                        -------      ------      ------
                                                                                        -------      ------      ------
Loss per common share:
Loss before extraordinary item.......................................................   $  (.95)     $ (.46)     $ (.27)
                                                                                        -------      ------      ------
                                                                                        -------      ------      ------
 
Net loss.............................................................................   $ (1.04)     $ (.57)     $ (.27)
                                                                                        -------      ------      ------
                                                                                        -------      ------      ------
 
Average common shares................................................................     431.2       383.8       378.9
                                                                                        -------      ------      ------
                                                                                        -------      ------      ------
</TABLE>
 
------------
(a) Includes  the following  income (expenses) resulting  from transactions with
    the Entertainment  Group and  other related  companies for  the years  ended
    December  31, 1996, 1995 and 1994, respectively: revenues-$224 million, $211
    million and $203  million; cost of  revenues-$(177) million, $(108)  million
    and  $(109) million;  selling, general  and administrative-$34  million, $46
    million  and  $47  million;  equity   in  pretax  income  of   Entertainment
    Group-$(29)  million, $(95) million and  $(120) million; interest and other,
    net-$(33) million, $(27) million and $13 million; and corporate expenses-$69
    million, $64 million and $60 million (Note 17).
 
<TABLE>
<S>                                                                                      <C>         <C>         <C>
(b) Includes depreciation and amortization expense of:................................   $  988      $  559      $  437
                                                                                         ------      ------      ------
                                                                                         ------      ------      ------
</TABLE>
 
See accompanying notes.
 
                                      F-24
 




<PAGE>

<PAGE>

                                TIME WARNER INC.
                      CONSOLIDATED STATEMENT OF CASH FLOWS
                            YEARS ENDED DECEMBER 31,
                                   (MILLIONS)
 
<TABLE>
<CAPTION>
                                                                                          1996         1995        1994
                                                                                         -------      -------      -----
 
<S>                                                                                      <C>          <C>          <C>
OPERATIONS
Net loss..............................................................................   $  (191)     $  (166)     $ (91)
Adjustments for noncash and nonoperating items:
Extraordinary loss on retirement of debt..............................................        35           42         --
Depreciation and amortization.........................................................       988          559        437
Noncash interest expense..............................................................        96          176        219
Excess (deficiency) of distributions over equity in pretax income of Entertainment
  Group...............................................................................       (62)         807        (56)
Equity in income of other investee companies, net of distributions....................       (53)         (16)       (17)
Changes in operating assets and liabilities:
    Receivables.......................................................................       (39)         (68)       (47)
    Inventories.......................................................................      (180)         (52)       (38)
    Accounts payable and other liabilities............................................      (408)         160        324
    Other balance sheet changes.......................................................        67         (391)      (258)
                                                                                         -------      -------      -----
 
Cash provided by operations...........................................................       253        1,051        473
                                                                                         -------      -------      -----
 
INVESTING ACTIVITIES
Investments and acquisitions..........................................................      (261)        (381)      (187)
Capital expenditures..................................................................      (481)        (266)      (164)
Investment proceeds...................................................................       318          376        118
                                                                                         -------      -------      -----
 
Cash used by investing activities.....................................................      (424)        (271)      (233)
                                                                                         -------      -------      -----
 
FINANCING ACTIVITIES
Borrowings............................................................................     3,431        2,023        582
Debt repayments.......................................................................    (5,271)      (2,693)      (626)
Borrowings against future stock option proceeds.......................................       488
Repurchases of Time Warner common stock...............................................      (456)          --         --
Issuance of Series M Preferred Stock..................................................     1,550           --         --
Issuance of Company-obligated mandatorily redeemable preferred securities of
  subsidiaries........................................................................        --          949         --
Dividends paid........................................................................      (287)        (171)      (142)
Stock option and dividend reinvestment plans..........................................       105          106         34
Other, principally financing costs....................................................       (60)         (91)        (6)
                                                                                         -------      -------      -----
 
Cash provided (used) by financing activities..........................................      (500)         123       (158)
                                                                                         -------      -------      -----
 
INCREASE (DECREASE) IN CASH AND EQUIVALENTS...........................................      (671)         903         82
 
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD (a).......................................     1,185          282        200
                                                                                         -------      -------      -----
 
CASH AND EQUIVALENTS AT END OF PERIOD (a).............................................   $   514      $ 1,185      $ 282
                                                                                         -------      -------      -----
                                                                                         -------      -------      -----
</TABLE>
 
------------
(a) Includes current and noncurrent  cash and equivalents  at December 31,  1996
    and 1995.
 
See accompanying notes.
 
                                      F-25
 




<PAGE>

<PAGE>

                                TIME WARNER INC.
                 CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
                      (MILLIONS, EXCEPT PER SHARE AMOUNTS)
 
<TABLE>
<CAPTION>
                                                            PREFERRED      COMMON      PAID-IN    ACCUMULATED
                                                              STOCK      STOCK (a)     CAPITAL      DEFICIT      TOTAL
                                                            ---------    ----------    -------    -----------    ------
 
<S>                                                         <C>          <C>           <C>        <C>            <C>
BALANCE AT DECEMBER 31, 1993.............................     $   1         $378       $ 2,537      $(1,546)     $1,370
 
Net loss.................................................                                               (91)        (91)
Dividends on common stock-$.35 per share.................                                              (133)       (133)
Dividends on Series B preferred stock-$9.28 per share....                                    4          (13)         (9)
Shares issued pursuant to stock option, dividend
  reinvestment and benefit plans (1 million shares)......                      1            53                       54
Unrealized losses on certain marketable equity
  investments............................................                                               (75)        (75)
Other....................................................                                   (6)          38          32
                                                                ---        -----       -------    -----------    ------
 
BALANCE AT DECEMBER 31, 1994.............................         1          379         2,588       (1,820)      1,148
 
Net loss.................................................                                              (166)       (166)
Dividends on common stock-$.36 per share.................                                              (138)       (138)
Dividends on Series B preferred stock-$6.40 per share....                                    3           (8)         (5)
Dividends on Series C, D, G, H and I preferred
  stock-$3.75 per share per year effective from the
  respective dates of issuance...........................                                               (44)        (44)
Issuance of common and preferred stock in the KBLCOM and
  Summit acquisitions (14.3 million preferred shares and
  2.6 million common shares).............................        14            3         1,367                    1,384
Issuance of preferred stock in the ITOCHU/Toshiba
  Transaction (15 million shares)........................        15                      1,335                    1,350
Shares issued pursuant to stock option, dividend
  reinvestment and benefit plans (3.9 million shares)....                      4           122                      126
Unrealized losses on certain marketable equity
  investments............................................                                               (14)        (14)
Other (1.9 million shares issued)........................                      2             7           17          26
                                                                ---        -----       -------    -----------    ------
 
BALANCE AT DECEMBER 31, 1995.............................        30          388         5,422       (2,173)      3,667
 
Net loss.................................................                                              (191)       (191)
Dividends on common stock-$.36 per share.................                                              (155)       (155)
Dividends on Series B preferred stock-$3.36 per share....                                                (2)         (2)
Dividends on Series D, E, F, G, H, I and J preferred
  stock-$3.75 per share..................................                                              (133)       (133)
Dividends on Series M exchangeable preferred stock (120
  thousand shares paid in-kind)..........................                                              (122)       (122)
Issuance of common and preferred stock in the CVI
  acquisition (6.3 million preferred shares and 2.9
  million common shares).................................         6            3           671                      680
Reduction in par value of common stock and preferred
  stock in connection with the TBS Transaction...........       (32)        (382)          414                       --
Issuance of common stock in the TBS Transaction (173.4
  million shares)........................................                      2         6,025                    6,027
Repurchases of Time Warner common stock (11.4 million
  shares)................................................                    (11)         (445)                    (456)
Shares issued pursuant to stock option, dividend
  reinvestment and benefit plans (4.6 million shares)....                      4           159           (8)        155
Unrealized gains on certain marketable equity
  investments............................................                                                17          17
Other (1.8 million shares issued)........................                      2             4            9          15
                                                                ---        -----       -------    -----------    ------
 
BALANCE AT DECEMBER 31, 1996.............................     $   4         $  6       $12,250      $(2,758)     $9,502
                                                                ---        -----       -------    -----------    ------
                                                                ---        -----       -------    -----------    ------
</TABLE>
 
------------
(a) Includes  50.6 million shares of LMCN-V Class Common Stock issued in 1996 in
    connection with the TBS Transaction (Note 2).
 
See accompanying notes.
 
                                      F-26






<PAGE>

<PAGE>

                                TIME WARNER INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
DESCRIPTION OF BUSINESS
 
     On  October 10,  1996, Time  Warner Inc.  ('Time Warner'  or the 'Company')
acquired the remaining 80% interest in Turner Broadcasting System, Inc.  ('TBS')
that  it did  not already  own, as more  fully described  herein (Note  2). 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  ('New Time
Warner'). References herein to 'Time Warner' or the 'Company' refer to Old  Time
Warner prior to October 10, 1996 and New Time Warner thereafter.
 
     Time  Warner is the world's leading  media and entertainment company, whose
principal business objective is to create and distribute branded information and
entertainment copyrights  throughout  the  world.  Time  Warner  classifies  its
business  interests  into  four  fundamental  areas:  Entertainment,  consisting
principally  of  interests  in  recorded  music  and  music  publishing,  filmed
entertainment,  television production, television  broadcasting and theme parks;
Cable  Networks,  consisting  principally  of  interests  in  cable   television
programming   and  sports  franchises;  Publishing,  consisting  principally  of
interests in  magazine publishing,  book publishing  and direct  marketing;  and
Cable,  consisting  principally  of  interests in  cable  television  systems. A
majority  of  Time  Warner's  interests  in  filmed  entertainment,   television
production,  television broadcasting and theme parks, a portion of its interests
in cable television programming and a  majority of its cable television  systems
are  held through Time  Warner Entertainment Company,  L.P. ('TWE'). Time Warner
owns general and limited  partnership interests in TWE  consisting of 74.49%  of
the  pro rata priority capital ('Series  A Capital') and residual equity capital
('Residual Capital'), and 100% of the senior priority capital ('Senior Capital')
and junior priority capital ('Series  B Capital'). The remaining 25.51%  limited
partnership  interests in the Series  A Capital and Residual  Capital of TWE are
held by a  subsidiary of  U S  WEST, Inc.  ('U S  WEST'). Time  Warner does  not
consolidate  TWE and certain  related companies (the  'Entertainment Group') for
financial reporting  purposes because  of certain  limited partnership  approval
rights related to TWE's interest in certain cable television systems.
 
     Each  of  the  business  interests  within  Entertainment,  Cable Networks,
Publishing and  Cable  is  important to  management's  objective  of  increasing
shareholder   value  through   the  creation,  extension   and  distribution  of
recognizable brands  and  copyrights  throughout  the  world.  Such  brands  and
copyrights  include  (1)  copyrighted music  from  many of  the  world's leading
recording artists that is  produced and distributed by  a family of  established
record   labels  such  as  Warner  Bros.   Records,  the  Atlantic  and  Elektra
Entertainment  Groups  and  Warner  Music  International,  (2)  the  unique  and
extensive  film, television and animation libraries of Warner Bros. and TBS, and
trademarks such as the Looney Tunes characters, Batman and The Flintstones,  (3)
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 the
Company's collection of children's cartoons and television programming, (4)  Six
Flags,  the largest regional theme park operator  in the United States, in which
TWE owns a  49% interest, (5)  leading cable television  networks, such as  HBO,
Cinemax,  CNN, TNT and the TBS Superstation, (6) sports franchises consisting of
the Atlanta Braves  and Atlanta  Hawks, (7)  magazine franchises  such as  Time,
People and Sports Illustrated and direct marketing brands such as Time Life Inc.
and  Book-of-the-Month  Club  and  (8) Time  Warner  Cable,  the  second largest
operator of cable television systems in the U.S.
 
     The operating  results  of Time  Warner's  various business  interests  are
presented herein as an indication of financial performance (Note 15). Except for
start-up  losses  incurred  in connection  with  The WB  Network,  Time Warner's
principal business interests generate significant operating income and cash flow
from operations.  The  cash flow  from  operations generated  by  such  business
interests is considerably greater than their operating income due to significant
amounts  of  noncash amortization  of  intangible assets  recognized  in various
acquisitions accounted  for  by  the  purchase  method  of  accounting.  Noncash
amortization of intangible assets
 
                                      F-27
 






<PAGE>

<PAGE>

                                TIME WARNER INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
recorded  by  Time  Warner's business  interests,  including  the unconsolidated
business interests of  the Entertainment  Group, amounted to  $1.117 billion  in
1996, $822 million in 1995 and $782 million in 1994.
 
BASIS OF PRESENTATION
 
     The   consolidated  financial   statements  of  Time   Warner  reflect  the
acquisitions of Summit Communications Group, Inc. ('Summit') effective as of May
2,  1995,  KBLCOM  Incorporated  ('KBLCOM')  effective  as  of  July  6,   1995,
Cablevision Industries Corporation and related companies ('CVI') effective as of
January 4, 1996 (collectively, the 'Cable Acquisitions') and TBS effective as of
October  10, 1996. 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 Time Warner and
all  companies  in  which  Time   Warner  has  a  controlling  voting   interest
('subsidiaries'),  as if Time Warner and its subsidiaries were a single company.
Significant intercompany  accounts  and transactions  between  the  consolidated
companies  have been  eliminated. Significant accounts  and transactions between
Time  Warner  and  the  Entertainment  Group  are  disclosed  as  related  party
transactions (Note 17).
 
     The Entertainment Group and investments in certain other companies in which
Time  Warner  has  significant  influence but  less  than  a  controlling voting
interest, are accounted for  using the equity method.  Under the equity  method,
only Time Warner's investment in and amounts due to and from the equity investee
are  included in the consolidated balance sheet, only Time Warner's share of the
investee's earnings is included in the consolidated operating results, and  only
the  dividends,  cash  distributions,  loans or  other  cash  received  from the
investee, less any additional  cash investments, loan  repayments or other  cash
paid to the investee are included in the consolidated cash flows.
 
     Investments in companies in which Time Warner does not have the controlling
interest  or an ownership and  voting interest so large  as to exert significant
influence are accounted  for at  market value  if the  investments are  publicly
traded  and there  are no  resale restrictions,  or at  cost, if  the sale  of a
publicly-traded investment is restricted  or if the  investment is not  publicly
traded. Unrealized gains and losses on investments accounted for at market value
are  reported net-of-tax in accumulated deficit until the investment is sold, at
which time the realized gain or loss is included in income. Dividends and  other
distributions of earnings from both market value and cost method investments are
included in income when declared.
 
     The  effect of any  changes in Time  Warner's ownership interests resulting
from the  issuance of  equity  capital by  consolidated subsidiaries  or  equity
investees to unaffiliated parties is included in income.
 
FOREIGN CURRENCY
 
     The  financial position and operating  results of substantially all foreign
operations are consolidated using the local currency as the functional currency.
Local currency assets and liabilities are translated at the rates of exchange on
the balance sheet date, and local currency revenues and expenses are  translated
at  average rates of exchange during  the period. Resulting translation gains or
losses, which  have not  been  material, are  included in  accumulated  deficit.
Foreign currency transaction gains and losses, which have not been material, are
included in operating results.
 
                                      F-28
 






<PAGE>

<PAGE>

                                TIME WARNER INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
USE OF ESTIMATES
 
     The  preparation  of  financial  statements  in  conformity  with generally
accepted  accounting  principles  requires  management  to  make  estimates  and
assumptions  that affect  the amounts reported  in the  financial statements and
footnotes thereto. Actual results could differ from those estimates.
 
     Significant estimates  inherent  in  the preparation  of  the  accompanying
consolidated  financial statements include  management's forecast of anticipated
revenues from  the sale  of  future and  existing music  and  publishing-related
products, as well as from the distribution of theatrical and television product,
in  order to evaluate the ultimate  recoverability of accounts receivables, film
inventory and artist and author advances recorded as assets in the  consolidated
balance  sheet.  Accounts  receivables and  sales  in the  music  and publishing
industries, as well as sales 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 of  accounts receivables, individual
films and  television product  and  individual artist  and author  advances  may
change based on actual results and other factors.
 
REVENUES AND COSTS
 
     The  unearned portion of paid subscriptions is deferred until magazines are
delivered to subscribers. Upon each delivery, a proportionate share of the gross
subscription price is included in revenues.
 
     Inventories of magazines, books, cassettes and compact discs are stated  at
the  lower  of cost  or  estimated realizable  value.  Cost is  determined using
first-in, first-out; last-in, first-out; and average cost methods. In accordance
with industry  practice,  certain  products  (such  as  magazines,  books,  home
videocassettes,  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.
 
     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, backlog of the
recently-acquired film  production companies  of TBS  amounted to  approximately
$290  million at December 31, 1996  (including amounts relating to the licensing
of film product to Time Warner's cable television networks of approximately  $90
million).
 
                                      F-29
 






<PAGE>

<PAGE>

                                TIME WARNER INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     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 TBS in 1996  was allocated to its theatrical and television
product, including an allocation to purchased  program rights (such as the  film
and  animation libraries of Hanna-Barbera Inc. and Turner Entertainment Co., the
latter of which  includes the  former film  and television  libraries of  Metro-
Goldwyn-Mayer,  Inc. and RKO Pictures, Inc.) and 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  and advertising. Subscriber  fees are recorded as
revenue in  the period  the service  is provided  and advertising  revenues  are
recognized  in the  period that  the advertisements  are exhibited.  The cost of
rights to exhibit  feature films  and other  programming on  the cable  networks
during  one  or more  availability  periods ('programming  costs')  generally is
recorded when  the programming  is initially  available for  exhibition, and  is
allocated   to  the  appropriate  availability  periods  and  amortized  as  the
programming is exhibited.
 
ADVERTISING
 
     In accordance with 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, except  for certain  direct-response advertising,  for which  the
costs are capitalized and amortized over the expected period of future benefits.
Direct-response   advertising  principally   consists  of   product  promotional
mailings, broadcast advertising, catalogs  and other promotional costs  incurred
in  the Company's  direct-marketing businesses.  Deferred advertising  costs are
generally amortized  over  periods  of  up to  three  years  subsequent  to  the
promotional event using straight-line or accelerated methods, with a significant
portion  of such costs amortized in  twelve months or less. Deferred advertising
costs for Time Warner amounted to $217 million and $195 million at December  31,
1996  and  1995,  respectively. Advertising  expense,  excluding  theatrical and
television product, amounted to $1.050 billion  in 1996, $1.045 billion in  1995
and $931 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. Noncurrent cash and  equivalents at December 31,  1996 consist of  amounts
held  in escrow for purposes of  funding certain preferred dividend requirements
(Note 7). Noncurrent cash  and equivalents at December  31, 1995 consist of  net
proceeds  received from the  issuance of Preferred  Trust Securities in December
1995, which  were  segregated  for  the  redemption  of  the  8.75%  Convertible
Debentures in February 1996 (Notes 6 and 9).
 
                                      F-30
 






<PAGE>

<PAGE>

                                TIME WARNER INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
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.............................................................................   $  914    $  431
Cable television equipment.....................................................................      777       361
Furniture, fixtures and other equipment........................................................    1,337     1,196
                                                                                                  ------    ------
                                                                                                   3,028     1,988
Less accumulated depreciation..................................................................   (1,042)     (869)
                                                                                                  ------    ------
Total..........................................................................................   $1,986    $1,119
                                                                                                  ------    ------
                                                                                                  ------    ------
</TABLE>
 
     Effective  January 1,  1996, Time  Warner 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 Time Warner's
financial statements.
 
INTANGIBLE ASSETS
 
     As a  creator  and distributor  of  branded information  and  entertainment
copyrights,  Time  Warner has  a significant  and  growing amount  of intangible
assets, including  goodwill,  cable  television  and  sports  franchises,  music
catalogues,  contracts  and  copyrights,  and  other  copyrighted  products  and
trademarks. In accordance  with generally accepted  accounting principles,  Time
Warner  does  not recognize  the fair  value of  internally-generated intangible
assets. Costs  incurred  to create  and  produce copyrighted  product,  such  as
feature  films,  television  series  and  compact  discs,  are  generally either
expensed as incurred, or capitalized as tangible  assets as in the case of  cash
advances and inventoriable product costs. However, accounting recognition is not
given  to any increasing asset value that  may be associated with the collection
of the underlying copyrighted material.  Additionally, costs incurred to  create
or  extend brands,  such as  magazine titles  and new  cable networks, generally
result in losses  over an extended  development period and  are recognized as  a
reduction  of income as incurred, while any corresponding brand value created is
not recognized as an intangible asset in the consolidated balance sheet. On  the
other hand, intangible assets acquired in business combinations accounted for by
the  purchase  method of  accounting are  capitalized  and amortized  over their
expected useful life as a noncash  charge against future results of  operations.
Accordingly, the intangible assets reported in the consolidated balance sheet do
not  reflect  the fair  value of  Time Warner's  internally-generated intangible
assets, but  rather are  limited  to intangible  assets resulting  from  certain
acquisitions in which the cost of the acquired companies exceeded the fair value
of their tangible assets at the time of acquisition.
 
     Time  Warner amortizes  goodwill and sports  franchises over  periods up to
forty years using the straight-line  method. Cable television franchises,  music
catalogues,  contracts and copyrights, and other intangible assets are amortized
over periods up to  twenty years using the  straight-line method. In 1996,  1995
and  1994, amortization of  goodwill amounted to $250  million, $175 million and
$158 million, respectively; amortization of music copyrights, artists' contracts
and record catalogues amounted to $132  million, $118 million and $115  million,
respectively; amortization of cable television and sports franchises amounted to
$212  million  in  1996  and  $42 million  in  1995  and  amortization  of other
intangible   assets   amounted   to   $87   million,   $43   million   and   $31
 
                                      F-31
 






<PAGE>

<PAGE>

                                TIME WARNER INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
million, respectively. Accumulated amortization of intangible assets at December
31, 1996 and 1995 amounted to $2.452 billion and $1.845 billion, respectively.
 
     Time  Warner separately reviews  the carrying value  of acquired intangible
assets for each  acquired entity on  a quarterly basis  to determine whether  an
impairment may exist. Time Warner considers relevant cash flow and profitability
information,  including  estimated future  operating  results, trends  and other
available information, in  assessing whether  the carrying  value of  intangible
assets  can  be  recovered. Upon  a  determination  that the  carrying  value of
intangible assets will not be recovered from the undiscounted future cash  flows
of  the acquired business, the carrying value of such intangible assets would be
considered impaired and will be reduced by a charge to operations in the  amount
of  the  impairment.  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
 
     Income  taxes are  provided using the  liability method  prescribed by FASB
Statement No. 109, 'Accounting  for Income Taxes.'  Under the liability  method,
deferred  income  taxes reflect  tax carryforwards  and the  net tax  effects of
temporary differences between the carrying amount of assets and liabilities  for
financial  statement and  income tax purposes,  as determined  under enacted tax
laws and  rates.  The financial  effect  of changes  in  tax laws  or  rates  is
accounted for in the period of enactment.
 
     Realization   of  the  net   operating  loss  and   investment  tax  credit
carryforwards, which  were acquired  in  acquisitions, are  accounted for  as  a
reduction of goodwill.
 
     The  principal  operations  of  the Entertainment  Group  are  conducted by
partnerships. Income  tax expense  includes  all income  taxes related  to  Time
Warner's  allocable share of partnership income and its equity in the income tax
expense of corporate subsidiaries of the partnerships.
 
STOCK OPTIONS
 
     In accordance with Accounting Principles Board Opinion No. 25,  'Accounting
for  Stock Issued to Employees' ('APB  25'), compensation cost for stock options
is recognized in income based on the excess, if any, of the quoted market  price
of  the stock at the grant date of  the award or other measurement date over the
amount an employee must pay to acquire  the stock. The exercise price for  stock
options  granted to employees  equals or exceeds  the fair market  value of Time
Warner common stock at the date of grant, thereby resulting in no recognition of
compensation expense by Time Warner.
 
LOSS PER COMMON SHARE
 
     Loss per  common share  is based  upon the  net loss  applicable to  common
shares  after preferred dividend  requirements and upon  the weighted average of
common shares  outstanding  during  the period.  The  conversion  of  securities
convertible into common stock and the exercise of stock options were not assumed
in  the calculations of loss per common share because the effect would have been
antidilutive.
 
2. MERGERS AND ACQUISITIONS
 
TBS TRANSACTION
 
     On October 10, 1996, New Time Warner acquired the remaining 80% interest in
TBS that was not already  owned by Old Time  Warner (the 'TBS Transaction').  As
part of the transaction, each of Old Time Warner and TBS became separate, wholly
owned  subsidiaries of New  Time Warner which  combines, for financial reporting
purposes, the consolidated net assets and  operating results of Old Time  Warner
and TBS. Each issued and
 
                                      F-32
 






<PAGE>

<PAGE>

                                TIME WARNER INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
outstanding  share  of  each class  of  capital  stock of  Old  Time  Warner was
converted into one share of a substantially identical class of capital stock  of
New Time Warner.
 
     In  connection  with  the  TBS  Transaction,  New  Time  Warner  issued (i)
approximately 173.4  million  shares of  common  stock (including  50.6  million
shares  of a special  class of non-redeemable  common stock having  1/100th of a
vote per  share on  certain limited  matters ('LMCN-V  Class Common  Stock')  to
affiliates   of   Liberty   Media   Corporation   ('LMC'),   a   subsidiary   of
Tele-Communications, Inc.), in exchange for shares of TBS capital stock and (ii)
approximately 14  million stock  options to  replace all  outstanding TBS  stock
options.  In addition, New Time Warner agreed to issue to LMC and its affiliates
at a later date an additional five  million shares of LMCN-V Class Common  Stock
and $67 million of consideration payable, at the election of New Time Warner, in
cash  or  additional  shares  of  LMCN-V  Class  Common  Stock.  This additional
consideration will be issued pursuant  to a separate option and  non-competition
agreement  that will  provide, if  New Time Warner  exercises its  option, for a
subsidiary of LMC to provide certain satellite uplink and distribution  services
for  WTBS, a broadcast television station owned by  TBS, if it is converted to a
copyright-paid, cable television programming service.  New Time Warner has  also
fully  and  unconditionally  guaranteed  all  of  TBS's  and  Old  Time Warner's
outstanding publicly traded indebtedness, which  amounted to $1.030 billion  and
$7.754 billion, respectively, at December 31, 1996.
 
     The  TBS Transaction was accounted for by the purchase method of accounting
for business combinations; accordingly, the cost to acquire TBS of approximately
$6.2  billion  was  preliminarily  allocated  to  the  net  assets  acquired  in
proportion   to  estimates  of   their  respective  fair   values,  as  follows:
goodwill-$6.746 billion;  other current  and noncurrent  assets-$3.806  billion;
long-term  debt-$2.765 billion;  deferred income  taxes-$189 million;  and other
current and noncurrent liabilities-$1.416 billion.
 
CABLE TRANSACTIONS
 
     On January 4, 1996, Time Warner  acquired CVI which owned cable  television
systems  serving  approximately 1.3  million  subscribers, in  exchange  for the
issuance of approximately 2.9 million  shares of common stock and  approximately
6.3  million  shares of  new convertible  preferred  stock ('Series  E Preferred
Stock' and  'Series F  Preferred Stock'),  as adjusted,  and the  assumption  or
incurrence  of  approximately $2  billion of  indebtedness. The  acquisition was
accounted for by the  purchase method of  accounting for business  combinations;
accordingly,  the cost to acquire  CVI of $904 million  was allocated to the net
assets acquired in proportion to their respective fair values, as follows: cable
television franchises-$2.390 billion; goodwill-$688  million; other current  and
noncurrent  assets-$481 million; long-term  debt-$1.766 billion; deferred income
taxes-$731 million; and other current and noncurrent liabilities-$158 million.
 
     On July 6, 1995, Time Warner acquired KBLCOM, which owned cable  television
systems serving approximately 700,000 subscribers, and a 50% interest in Paragon
Communications  ('Paragon'),  which owned  cable  television systems  serving an
additional 972,000 subscribers. The  other 50% interest  in Paragon was  already
owned  by TWE. To acquire KBLCOM, Time  Warner issued 1 million shares of common
stock and 11  million shares  of a new  convertible preferred  stock ('Series  D
Preferred  Stock')  and  assumed  or  incurred  approximately  $1.2  billion  of
indebtedness. The  acquisition  was accounted  for  by the  purchase  method  of
accounting for business combinations; accordingly, the cost to acquire KBLCOM of
approximately  $1.033  billion  was  allocated to  the  net  assets  acquired in
proportion  to  their  respective  fair  values,  as  follows:  investments-$950
million;  cable  television  franchises-$1.366  billion;  goodwill-$586 million;
other current and noncurrent assets-$289 million; long-term debt-$1.213 billion;
deferred income taxes-$895 million; and other current liabilities-$50 million.
 
     On May 2, 1995, Time Warner  acquired Summit, which owned cable  television
systems  serving approximately 162,000 subscribers, in exchange for the issuance
of approximately  1.6  million shares  of  common stock  and  approximately  3.3
million shares of a new convertible preferred stock ('Series C Preferred Stock')
 
                                      F-33
 






<PAGE>

<PAGE>

                                TIME WARNER INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
and  the  assumption  of  $140  million  of  indebtedness.  The  acquisition was
accounted for by the  purchase method of  accounting for business  combinations;
accordingly,  the  cost  to acquire  Summit  of approximately  $351  million was
allocated to the assets acquired in proportion to their respective fair  values,
as  follows:  cable television  franchises-$372 million;  goodwill-$146 million;
other current and noncurrent  assets-$144 million; long-term debt-$140  million;
deferred income taxes-$166 million; and other current liabilities-$5 million. In
August 1996, all shares of Series C Preferred Stock were exchanged for shares of
a  new series of convertible preferred  stock with substantially identical terms
('Series J Preferred Stock').
 
     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. No gain was  recognized by TWE upon  the capitalization of the
partnership.
 
PRO FORMA FINANCIAL INFORMATION
 
     The  accompanying  consolidated  statement   of  operations  includes   the
operating  results of each acquired business from the respective closing date of
each  transaction.  On  a  pro  forma  basis,  giving  effect  to  (i)  the  TBS
Transaction,   (ii)  the  cable  transactions  as  described  above,  (iii)  the
ITOCHU/Toshiba Transaction (Note 3), (iv) the Preferred Stock Refinancing  (Note
10),  (v) Time Warner's  and TWE's debt  refinancings (Note 6)  and (vi) certain
asset sales,  including  the  sale  of  51%  of  TWE's  interest  in  Six  Flags
Entertainment   Corporation  ('Six  Flags')  (Note  3),   as  if  each  of  such
transactions had  occurred at  the beginning  of 1995,  Time Warner  would  have
reported  for the years ended December 31, 1996 and 1995, respectively, revenues
of $12.799 billion and $12.154 billion, depreciation and amortization of  $1.245
billion  and $1.205 billion, operating income  of $939 million and $942 million,
equity in the pretax income of the Entertainment Group of $290 million and  $286
million,  a  loss before  extraordinary item  of $284  million and  $233 million
($1.05 and  $.97 per  common share)  and a  net loss  of $319  million and  $275
million ($1.11 and $1.04 per common share).
 
                                      F-34
 






<PAGE>

<PAGE>

                                TIME WARNER INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
3. ENTERTAINMENT GROUP
 
     Time  Warner's investment in and amounts  due to and from the Entertainment
Group at December 31, 1996 and 1995 consists of the following:
 
<TABLE>
<CAPTION>
                                                                                                    DECEMBER 31,
                                                                                                  ----------------
                                                                                                   1996      1995
                                                                                                  ------    ------
                                                                                                     (MILLIONS)
 
<S>                                                                                               <C>       <C>
Investment in TWE..............................................................................   $6,254    $6,179
Stock option related distributions due from TWE................................................       93       122
Credit agreement debt due to TWE...............................................................     (400)     (400)
Other net liabilities due to TWE, principally related to home video distribution...............     (256)     (278)
                                                                                                  ------    ------
Investment in and amounts due to and from TWE..................................................    5,691     5,623
Investment in other Entertainment Group companies..............................................      123       111
                                                                                                  ------    ------
Total..........................................................................................   $5,814    $5,734
                                                                                                  ------    ------
                                                                                                  ------    ------
</TABLE>
 
     TWE is a Delaware limited partnership that was capitalized on June 30, 1992
to own and operate substantially  all of the Filmed Entertainment-Warner  Bros.,
Cable Networks-HBO and Cable businesses previously owned by subsidiaries of Time
Warner.  Certain Time Warner subsidiaries are the general partners of TWE ('Time
Warner General Partners').  Time Warner  acquired the  aggregate 11.22%  limited
partnership  interests  previously  held  by  subsidiaries  of  each  of  ITOCHU
Corporation and  Toshiba Corporation  in 1995  for an  aggregate cost  of  $1.36
billion, consisting of 15 million shares of convertible preferred stock ('Series
G  Preferred Stock', 'Series H Preferred  Stock' and 'Series I Preferred Stock')
and $10 million  in cash (the  'ITOCHU/Toshiba Transaction'). Accordingly,  Time
Warner,  through its  wholly owned  subsidiaries, collectively  owns general and
limited partnership  interests in  TWE  consisting of  74.49%  of the  Series  A
Capital  and  Residual Capital  and  100% of  the  Senior Capital  and  Series B
Capital. The  remaining 25.51%  limited partnership  interests in  the Series  A
Capital  and Residual Capital of TWE are owned  by 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.  The
ITOCHU/Toshiba   Transaction  was  accounted  for  by  the  purchase  method  of
accounting for business combinations.
 
     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  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-35
 






<PAGE>

<PAGE>

                                TIME WARNER INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     A summary of the priority  of Contributed Capital, Time Warner's  ownership
of  Contributed Capital and Cumulative Priority Capital at December 31, 1996 and
priority capital rates of return thereon is as set forth below:
 
<TABLE>
<CAPTION>
                                                                                         PRIORITY
                                                                         CUMULATIVE      CAPITAL
                                                         CONTRIBUTED      PRIORITY       RATES OF       % OWNED BY
PRIORITY OF CONTRIBUTED CAPITAL                          CAPITAL(a)       CAPITAL       RETURN(b)       TIME WARNER
                                                         -----------     ----------    ------------     -----------
                                                                 (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)        74.49%
Series B Capital......................................        2.9(g)         5.2           13.25%(e)       100.00%
Residual Capital......................................        3.3(g)         3.3(f)           --(f)         74.49%
</TABLE>
 
------------
 
(a) Excludes partnership income or loss allocated thereto.
 
(b) Income allocations related to priority capital rates of return are based  on
    partnership income after any special tax allocations.
 
(c) Net  of $366 million of partnership  income distributed in 1995 representing
    the priority capital return thereon through June 30, 1995.
 
(d) 11.00% to the extent concurrently distributed.
 
(e) 11.25% to the extent concurrently distributed.
 
(f) Residual 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 the  Time  Warner
General  Partners may be increased if  certain operating performance targets are
achieved over a five-year period ending on December 31,
 
                                      F-36
 






<PAGE>

<PAGE>

                                TIME WARNER INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
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.
 
     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. Time Warner did not recognize a gain when TWE was capitalized.
TWE  recorded the assets contributed by the Time Warner General Partners at Time
Warner's historical  cost.  The excess  of  the Time  Warner  General  Partners'
interests  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.
 
     Each  Time  Warner 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  Time Warner
General Partner contributed to TWE. Such  indebtedness is recourse to each  Time
Warner General Partner only to the extent of its guarantee. In addition to their
interests  in TWE and the other Entertainment Group companies, the assets of the
Time Warner General Partners include a  10.6% interest in TBS, a 10.2%  interest
in Old Time Warner, 18.1 million common shares of Hasbro, Inc. and substantially
all the assets of Time Warner's music business. There are no restrictions on the
ability  of the Time Warner General Partner guarantors to transfer assets, other
than TWE assets, to parties that are not guarantors.
 
     Set forth below  is summarized financial  information of the  Entertainment
Group,   which  reflects  the  formation  by  TWE  of  the  TWE-Advance/Newhouse
Partnership effective as of April 1,  1995 (Note 2), the deconsolidation of  Six
Flags  effective as of June 23, 1995  and the consolidation of Paragon effective
as of July 6, 1995.
 
TIME WARNER ENTERTAINMENT GROUP
 
<TABLE>
<CAPTION>
                                                                                        YEARS ENDED DECEMBER 31,
                                                                                       ---------------------------
                                                                                        1996       1995      1994
                                                                                       -------    ------    ------
                                                                                               (MILLIONS)
<S>                                                                                    <C>        <C>       <C>
OPERATING STATEMENT INFORMATION
Revenues............................................................................   $10,861    $9,629    $8,509
Depreciation and amortization.......................................................     1,244     1,060       959
Business segment operating income...................................................     1,090       992       852
Interest and other, net.............................................................       524       539       616
Minority interest...................................................................       207       133        --
Income before income taxes..........................................................       290       256       176
Income before extraordinary item....................................................       220       170       136
Net income..........................................................................       220       146       136
</TABLE>
 
                                      F-37
 






<PAGE>

<PAGE>

                                TIME WARNER INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
<TABLE>
<CAPTION>
                                                                                       YEARS ENDED DECEMBER 31,
                                                                                     -----------------------------
                                                                                      1996       1995       1994
                                                                                     -------    -------    -------
                                                                                              (MILLIONS)
 
<S>                                                                                  <C>        <C>        <C>
CASH FLOW INFORMATION
Cash provided by operations.......................................................   $ 1,912    $ 1,495    $ 1,341
Capital expenditures..............................................................    (1,719)    (1,653)    (1,235)
Investments and acquisitions......................................................      (146)      (217)      (186)
Investment proceeds...............................................................       612      1,120         51
Loan to Time Warner...............................................................        --         --       (400)
Borrowings........................................................................       215      2,484      1,001
Debt repayments...................................................................      (716)    (3,596)      (953)
Collections on note receivable from U S WEST......................................       169        602        234
Capital distributions.............................................................      (228)    (1,063)      (120)
Other financing activities, net...................................................       (92)       (34)        --
Increase (decrease) in cash and equivalents.......................................         7       (862)      (267)
</TABLE>
 
<TABLE>
<CAPTION>
                                                                                                 DECEMBER 31,
                                                                                              -------------------
                                                                                               1996        1995
                                                                                              -------     -------
                                                                                                  (MILLIONS)
 
<S>                                                                                           <C>         <C>
BALANCE SHEET INFORMATION
Cash and equivalents.......................................................................   $   216     $   209
Total current assets.......................................................................     3,147       2,909
Total assets...............................................................................    20,027      18,960
Total current liabilities..................................................................     4,092       3,230
Long-term debt.............................................................................     5,676       6,137
Minority interests.........................................................................     1,020         726
Time Warner General Partners' Senior Capital, consisting of $1.364 billion Contributed
  Capital plus an undistributed priority return............................................     1,543       1,426
Partners' capital..........................................................................     6,681       6,576
</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 Time Warner General
Partners had  recorded $93  million  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 Time Warner  General Partners also receive
tax-related distributions  from  TWE.  The payment  of  such  distributions  was
previously  subject to restrictions until July 1995  and is now made to the Time
Warner General Partners on a current basis. During 1996, the Time Warner 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  Time Warner  General Partners
received net distributions from TWE in the amount of $1.063 billion,  consisting
of  $366 million of TWE partnership income  allocated to the Time Warner General
Partners' Senior Capital interest, $680 million of tax-related distributions and
$17 million of stock option related distributions. During 1994, the Time  Warner
General  Partners  received net  distributions from  TWE in  the amount  of $120
million, consisting of $115 million of tax-related distributions and $5  million
of  stock option related distributions. In addition to the tax, stock option and
Time Warner General Partners' Senior  Capital distributions, TWE may make  other
distributions,   generally  depending  on  excess   cash  and  credit  agreement
limitations. The Time Warner General
 
                                      F-38
 






<PAGE>

<PAGE>

                                TIME WARNER INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
Partners' full  share of  such  distributions may  be  deferred if  the  limited
partners do not receive certain threshold amounts by certain dates.
 
     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.
 
4. OTHER INVESTMENTS
 
   Time Warner's other investments consist of:
 
<TABLE>
<CAPTION>
                                                                                                    DECEMBER 31,
                                                                                                  ----------------
                                                                                                   1996      1995
                                                                                                  ------    ------
                                                                                                     (MILLIONS)
 
<S>                                                                                               <C>       <C>
Equity method investments(1)...................................................................   $1,392    $1,898
Market value method investments................................................................      401       375
Cost method investments........................................................................      126       116
                                                                                                  ------    ------
Total..........................................................................................   $1,919    $2,389
                                                                                                  ------    ------
                                                                                                  ------    ------
</TABLE>
 
------------
 
(1) Equity method  investments  at  December 31,  1995  included  Time  Warner's
    investment  in TBS which was  carried at $541 million.  On October 10, 1996,
    Time  Warner  consolidated  its  investment  in  TBS  as  a  result  of  its
    acquisition  of the remaining  interest in TBS  that it did  not already own
    (Note 2).
 
     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 the zero coupon exchangeable notes due 2012 (Note 6)
or the  Company-obligated  mandatorily  redeemable  preferred  securities  of  a
subsidiary due 1997 (Note 9). Because the issuance of the mandatorily redeemable
preferred  securities provides Time  Warner with protection  against the risk of
depreciation of the  market price  of Hasbro common  stock and  the zero  coupon
exchangeable  notes limit Time Warner's ability  to share in the appreciation of
the market price of Hasbro common stock, the combination thereof has effectively
monetized Time Warner's investment in Hasbro.
 
     In addition to TWE and its equity investees, companies accounted for  using
the  equity  method  include:  Cinamerica Theatres,  L.P.  (50%  owned)  and The
Columbia House Company partnerships (50% owned), other
 
                                      F-39
 






<PAGE>

<PAGE>

                                TIME WARNER INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
music joint ventures (generally 50% owned) and  in 1995 and 1994 only, TBS  (20%
owned).  A summary of  combined financial information as  reported by the equity
investees of Time Warner is set forth below:
 
<TABLE>
<CAPTION>
                                                                                       YEARS ENDED DECEMBER 31,
                                                                                     ----------------------------
                                                                                      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>
 
5. INVENTORIES
 
   Inventories consist of:
 
<TABLE>
<CAPTION>
                                                                          DECEMBER 31, 1996        DECEMBER 31, 1995
                                                                        ---------------------    ---------------------
                                                                        CURRENT    NONCURRENT    CURRENT    NONCURRENT
                                                                        -------    ----------    -------    ----------
                                                                                          (MILLIONS)
 
<S>                                                                     <C>        <C>           <C>        <C>
Film costs:
     Released, less amortization.....................................    $ 209       $  142       $  --       $   --
     Completed and not released......................................       54           --          --           --
     In process and other............................................       24          251          --           --
     Library, less amortization......................................       --        1,116          --           --
Programming costs, less amortization.................................      213          189          --           --
Magazines, books and recorded music..................................      441           --         443           --
                                                                        -------    ----------    -------    ----------
Total................................................................    $ 941       $1,698       $ 443       $   --
                                                                        -------    ----------    -------    ----------
                                                                        -------    ----------    -------    ----------
</TABLE>
 
     The increase in film and programming costs resulted from the acquisition of
TBS effective as  of October  10, 1996. Excluding  the Library,  the total  cost
incurred  in the production  of theatrical and television  films since such date
amounted to $339 million in 1996, and the total cost amortized amounted to  $239
million.  Excluding  the Library,  the unamortized  cost  of completed  films at
December 31, 1996 amounted to $405 million,  more than 90% of which is  expected
to be amortized within three years after release.
 
                                      F-40
 






<PAGE>

<PAGE>

                                TIME WARNER INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
6. LONG-TERM DEBT
 
   Long-term debt consists of:
 
<TABLE>
<CAPTION>
                                                                                                  DECEMBER 31,
                                                                                               ------------------
                                                                                                1996       1995
                                                                                               -------    -------
                                                                                                   (MILLIONS)
<S>                                                                                            <C>        <C>
Old Time Warner(1):
7.45% Notes due February 1, 1998............................................................   $   500    $   500
7.95% Notes due February 1, 2000............................................................       500        500
Floating rate notes due August 15, 2000 (6.5% and 6.8%).....................................       454        454
7.975% Notes due August 15, 2004............................................................       272        272
7.75% Notes due June 15, 2005...............................................................       497        497
8.11% Debentures due August 15, 2006........................................................       545        545
8.18% Debentures due August 15, 2007........................................................       545        545
7.48% Debentures due January 15, 2008.......................................................       166         --
Zero coupon exchangeable notes due December 17, 2012 (6.25% yield)..........................       618        581
Zero coupon convertible notes due June 22, 2013 (5% yield)..................................     1,070      1,019
9.125% Debentures due January 15, 2013......................................................     1,000      1,000
8.75% Convertible subordinated debentures due January 10, 2015..............................        --      1,226
8.05% Debentures due January 15, 2016.......................................................       150         --
8.75% Debentures due April 1, 2017..........................................................        --        248
9.15% Debentures due January 15, 2023.......................................................     1,000      1,000
6.85% Debentures due January 15, 2026.......................................................       400         --
8.30% Discount Debentures due January 15, 2036..............................................        37         --
Debt due to TWE (6.7% and 6.8%).............................................................       400        400
 
TBS(1):
TBS Credit Agreements (7.0%)................................................................       677         --
7.4% Senior Notes due February 1, 2004......................................................       250         --
Zero coupon subordinated convertible notes due February 13, 2007 (7.25% yield)..............       283         --
8.375% Senior Notes due July 1, 2013........................................................       297         --
8.4% Senior Debentures due February 1, 2024.................................................       200         --
 
TWI Cable:
1995 Credit Agreement (6.5% and 6.8%).......................................................     2,530      1,265
10.75% Senior Notes due January 30, 2002....................................................       300         --
10.5% Debentures due April 15, 2005.........................................................       140        140
9.25% Senior Debentures due April 1, 2008...................................................       200         --
 
Other.......................................................................................        82        115
                                                                                               -------    -------
Subtotal....................................................................................    13,113     10,307
Reclassification of debt due to TWE to amounts due to the Entertainment Group...............      (400)      (400)
                                                                                               -------    -------
Total.......................................................................................   $12,713    $ 9,907
                                                                                               -------    -------
                                                                                               -------    -------
</TABLE>
 
------------
 
(1) New  Time Warner has guaranteed all such indebtedness of Old Time Warner and
    TBS, except  for  debt  due to  TWE  and  borrowings under  the  TBS  Credit
    Agreements.  New  Time Warner  has not  guaranteed  any indebtedness  of TWI
    Cable.
 
                                      F-41
 






<PAGE>

<PAGE>

                                TIME WARNER INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
DEBT REFINANCINGS
 
     During the  past two  years and  in early  1997, in  response to  favorable
market  conditions  and in  connection  with certain  acquisitions,  Time Warner
entered into  a series  of  financing transactions  which  has resulted  in  the
refinancing  of  approximately $6.4  billion  of debt  and  the reduction  of an
additional $2.5  billion  of debt,  as  more  fully described  below.  The  debt
refinancings have had the positive effect of lowering interest rates, staggering
debt  maturities and,  with respect to  the redemption of  its 8.75% Convertible
Subordinated Debentures due 2015 (the '8.75% Convertible Debentures') and  TBS's
zero  coupon  subordinated notes  due February  13,  2007 (the  'TBS Convertible
Notes'),  eliminating  the  potential  dilution  from  the  conversion  of  such
securities  into 52.2 million shares of common  stock. In turn, the reduction in
debt, using  proceeds  raised from  the  issuance of  certain  preferred  equity
securities, has partially offset the assumption or incurrence of $6.1 billion of
debt in connection with the Cable Acquisitions and the TBS Transaction.
 
     During  the first  quarter of  1997, Time Warner  entered into  a number of
financing transactions, which resulted in the refinancing of approximately  $600
million  of debt. Time  Warner redeemed $300 million  principal amount of 10.75%
Senior Notes due January 30,  2002 of TWI Cable  Inc. ('TWI Cable'), its  wholly
owned  subsidiary,  and  approximately  $283  million  accreted  amount  of  TBS
Convertible Notes  at  an  aggregate  redemption  price  of  approximately  $600
million,   including   redemption   premiums   and   accrued   interest  thereon
(collectively, the  '1997  Debt  Redemptions'). Time  Warner  also  issued  $600
million principal amount of Floating Rate Reset Notes due December 30, 2031 (the
'Floating  Rate Reset Notes'). The Floating Rate  Reset Notes bear interest at a
floating rate equal to LIBOR  less 25 basis points  until December 30, 2001,  at
which time the interest rate will be reset at a fixed rate equal to 6.59% plus a
margin  based upon  Time Warner's  credit risk at  such time.  The Floating Rate
Reset Notes are redeemable at the election  of the holders, in whole but not  in
part, on December 30, 2001.
 
     In  October  1996,  Time  Warner  assumed  approximately  $2.8  billion  of
indebtedness in connection with the TBS Transaction, of which approximately $1.1
billion was  subsequently repaid  during 1996  principally using  proceeds  from
additional borrowings under the 1995 Credit Agreement (as defined below).
 
     In  April  1996,  Time Warner  raised  approximately $1.55  billion  of net
proceeds in a private  placement of 10 1/4%  exchangeable preferred stock  (Note
10).  The proceeds  were used  by Time Warner  to redeem  $250 million principal
amount of  8.75%  Debentures  due  April 1,  2017  (the  '8.75%  Non-Convertible
Debentures'  and when taken together with  the 8.75% Convertible Debentures, the
'8.75% Debentures')  for  approximately  $265 million  in  May  1996  (including
redemption  premiums and accrued  interest thereon), and to  reduce bank debt of
TWI Cable by approximately $1.3 billion.
 
     In February 1996, Time Warner redeemed its remaining $1.2 billion principal
amount of 8.75% Convertible Debentures  for $1.28 billion, including  redemption
premiums  and accrued  interest thereon.  The redemption  was financed  with (1)
proceeds  raised   from  a   $575   million  issuance   in  December   1995   of
Company-obligated  mandatorily redeemable  preferred securities  of a subsidiary
and (2) $750 million of proceeds raised from the issuance in January 1996 of (i)
$400 million principal amount of 6.85% debentures due 2026, which are redeemable
at the option of the holders thereof in 2003, (ii) $200 million principal amount
of 8.3% discount debentures due 2036, which do not pay cash interest until 2016,
(iii) $166 million principal amount of  7.48% debentures due 2008 and (iv)  $150
million  principal  amount  of  8.05%  debentures  due  2016.  Time  Warner  had
previously  redeemed  approximately  $1   billion  principal  amount  of   8.75%
Convertible  Debentures  for $1.06  billion  (including redemption  premiums and
accrued interest)  in September  1995  using proceeds  raised  from (a)  a  $500
million  issuance  in June  1995 of  7.75%  ten-year notes,  (b) a  $374 million
issuance in August  1995 of Company-obligated  mandatorily redeemable  preferred
securities  of a subsidiary and  (c) available cash and  equivalents. See Note 9
for a description of the  mandatorily redeemable preferred securities issued  in
connection with such redemptions.
 
                                      F-42
 






<PAGE>

<PAGE>

                                TIME WARNER INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     In January 1996, in connection with its acquisition of CVI, subsidiaries of
Time  Warner assumed  $500 million  of public  notes and  debentures of  CVI and
borrowed $1.5 billion  under the  1995 Credit  Agreement (as  defined below)  to
refinance  a  like-amount  of other  indebtedness  assumed or  incurred  in such
acquisition.
 
     In August 1995,  Time Warner  redeemed all  of its  $1.8 billion  principal
amount  of outstanding  Redeemable Reset Notes  due August 15,  2002 (the 'Reset
Notes') in exchange for new securities, consisting of approximately $454 million
aggregate  principal  amount  of  Floating  Rate  Notes  due  August  15,  2000,
approximately $272 million aggregate principal amount of 7.975% Notes due August
15,  2004,  approximately  $545  million  aggregate  principal  amount  of 8.11%
Debentures due  August  15,  2006,  and  approximately  $545  million  aggregate
principal amount of 8.18% Debentures due August 15, 2007.
 
     In  July 1995, TWI Cable borrowed approximately $1.2 billion under the 1995
Credit Agreement to refinance  certain indebtedness assumed  or incurred in  the
acquisition of KBLCOM.
 
     In  June  1995, TWI  Cable,  TWE and  the  TWE-Advance/Newhouse Partnership
executed a five-year  revolving credit facility  (the '1995 Credit  Agreement').
The   1995  Credit  Agreement   enabled  such  entities   to  refinance  certain
indebtedness assumed in the cable acquisitions, to refinance TWE's  indebtedness
under  a pre-existing bank  credit agreement and to  finance the ongoing working
capital, capital expenditure and other corporate needs of each borrower.
 
     An extraordinary loss of $17 million  was recognized by Time Warner in  the
first  quarter  of  1997  in  connection  with  the  1997  Debt  Redemptions. An
extraordinary loss of $35 million was recognized in 1996 in connection with Time
Warner's redemption  of  the 8.75%  Debentures.  An extraordinary  loss  of  $42
million  was  recognized  in  1995  in  connection  with  Time  Warner's partial
redemption of  the 8.75%  Convertible Debentures  and the  write-off by  TWE  of
deferred  financing costs related  to its former bank  credit agreement that was
terminated.
 
ZERO COUPON NOTES
 
     Time Warner's zero  coupon notes do  not pay interest  until maturity.  The
zero  coupon exchangeable  notes due December  17, 2012 are  exchangeable at any
time by the holders into an aggregate of 18.1 million shares of common stock  of
Hasbro  at the rate of 10.9515 shares for each $1,000 principal amount of notes,
subject to Time Warner's right to pay in  whole or in part with cash instead  of
Hasbro  common stock. The terms of these  notes have been adjusted for a 3-for-2
stock split of  Hasbro common  stock that occurred  in March  1997 (the  'Hasbro
Stock Split'). Time Warner can elect to redeem the notes any time after December
17,  1997, and holders can elect to have the notes redeemed prior thereto in the
event of a change of control, at the issue price plus accrued interest.  Holders
also  can  elect to  have the  notes redeemed  at the  issue price  plus accrued
interest on December 17, 1997, 2002 and 2007, subject to Time Warner's right  to
pay in whole or in part with Hasbro common stock instead of cash. The equivalent
conversion  price of  Hasbro common  stock at  the first  date of  redemption is
$36.27 per share, and  will be adjusted thereafter  in proportion to changes  in
the  accrued original issue  discount of each  note. The 18.1  million shares of
Hasbro common stock  owned by Time  Warner can be  used by the  Company, at  its
election,  to satisfy its obligations under  such notes or its obligations under
certain mandatorily redeemable  preferred securities of  a subsidiary (Note  9).
Unamortized  original issue discount  on the zero  coupon exchangeable notes due
2012 was  $1.033 billion  and $1.070  billion  at December  31, 1996  and  1995,
respectively.
 
     The  zero coupon convertible notes due June 22, 2013 are convertible at any
time by the  holders into an  aggregate of  18.7 million shares  of Time  Warner
common  stock at the  rate of 7.759  shares for each  $1,000 principal amount of
notes. Time Warner can elect to redeem  the notes any time after June 22,  1998,
and holders can elect to have the notes redeemed prior thereto in the event of a
change  in control, at the  issue price plus accrued  interest. Holders also can
elect to have the  notes redeemed at  the issue price  plus accrued interest  on
June  22, 1998, 2003 and 2008, subject to Time Warner's right to pay in whole or
in part with Time Warner
 
                                      F-43
 






<PAGE>

<PAGE>

                                TIME WARNER INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
common stock instead  of cash. The  equivalent conversion price  of Time  Warner
common  stock at the first  date of redemption is $61.44  per share, and will be
adjusted thereafter  in proportion  to  changes in  the accrued  original  issue
discount  of each note.  Unamortized original issue discount  on the zero coupon
convertible notes due 2013 was $1.345 billion and $1.396 billion at December 31,
1996 and 1995, respectively.
 
BANK CREDIT FACILITIES
 
     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.  TWI  Cable may  also be
required to pay an annual facility fee  equal to .1875% of the entire amount  of
its  commitment, depending on the  level of its financial  leverage in any given
year. The 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 connection with the TBS  Transaction, Time Warner assumed  approximately
$1.7  billion of debt under two separate revolving credit facilities of TBS (the
'TBS Credit Agreements'). The TBS Credit Agreements permit borrowings by TBS  in
an  aggregate amount of up  to $2 billion. Borrowing  availability under the TBS
Credit Agreements is scheduled to be  reduced by $100 million for each  calendar
quarter  in 1998 and thereafter, by $200  million per quarter until December 31,
2000, at which time the TBS  Credit Agreements expire. Borrowings under the  TBS
Credit  Agreements bear interest at rates generally equal to LIBOR plus a margin
ranging from 50 to 150 basis points,  which margin will vary based on a  measure
of  TBS's financial  leverage. Unused credit  is available  for general business
purposes. TBS is required to pay commitment fees of .375% on the unused  portion
of  its commitments. The TBS Credit Agreements contain certain covenants for TBS
relating to,  among  other things,  additional  indebtedness; liens  on  assets;
guarantees;  dispositions  and  acquisitions; cash  flow  coverage  and leverage
ratios; and loans, advances, distributions and other cash payments or  transfers
of assets from TBS to Time Warner or its affiliates.
 
     Principally as a result of the restrictions under the 1995 Credit Agreement
and   the  TBS  Credit   Agreements,  restricted  net   assets  of  consolidated
subsidiaries of Time Warner amounted  to approximately $8.7 billion at  December
31, 1996.
 
TIME WARNER-TWE CREDIT AGREEMENT
 
     Time  Warner and TWE  entered into a  credit agreement in  1994 that allows
Time Warner to borrow up  to $400 million from  TWE through September 15,  2000.
Outstanding  borrowings from TWE bear interest at  LIBOR plus 1% per annum. Time
Warner borrowed $400 million  in 1994 under the  credit agreement, and used  the
proceeds  therefrom principally to repay certain of its notes at their maturity.
In addition, each Time Warner General Partner has guaranteed a pro rata  portion
of approximately $5.4 billion of TWE's debt and accrued interest at December 31,
1996, as more fully described in Note 3.
 
                                      F-44
 






<PAGE>

<PAGE>

                                TIME WARNER INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
INTEREST EXPENSE AND MATURITIES
 
     At  December 31, 1996, Time Warner had  interest rate swap contracts to pay
floating-rates of interest and receive  fixed-rates of interest on $2.3  billion
notional  amount of  indebtedness, which resulted  in approximately  47% of Time
Warner's underlying debt being subject to variable interest rates (Note 14).
 
     Interest expense amounted to $968 million in 1996, $877 million in 1995 and
$769 million in 1994, including $26 million in 1996, $28 million in 1995 and $12
million in 1994 which was paid to  TWE in connection with borrowings under  Time
Warner's  $400 million credit agreement with  TWE. The weighted average interest
rate on Time  Warner's total debt,  including the effect  of interest rate  swap
contracts, was 7.5% and 7.9% at December 31, 1996 and 1995, respectively.
 
     Annual  repayments  of  long-term debt  for  the five  years  subsequent to
December 31, 1996 consist of $500 million due in 1998 and $4.161 billion due  in
2000.  Such repayments exclude the aggregate  repurchase or redemption prices of
$656 million in  1997 and $1.151  billion in  1998 relating to  the zero  coupon
exchangeable notes and zero coupon convertible notes, respectively, in the years
in which the holders of such debt may first exercise their redemption options.
 
7. BORROWINGS AGAINST FUTURE STOCK OPTION PROCEEDS
 
     In connection with Time Warner's common stock repurchase program (Note 11),
Time  Warner entered  into a five-year,  $750 million  revolving credit facility
(the 'Stock Option Proceeds Credit Facility') in May 1996. Borrowings under  the
Stock  Option  Proceeds  Credit  Facility are  principally  used  to  fund stock
repurchases and approximately $200 million of preferred dividend requirements on
Time Warner's Series G, H, I and  J Preferred Stock. At December 31, 1996,  Time
Warner  had  borrowed  $488  million  under  the  Stock  Option  Proceeds Credit
Facility.
 
     The Stock Option Proceeds Credit Facility initially provided for borrowings
of up to $750 million,  of which up to $100  million is reserved solely for  the
payment  of  interest and  fees thereunder.  Borrowings  under the  Stock Option
Proceeds Credit Facility generally bear interest at LIBOR plus a margin equal to
75 basis points and are principally expected to be repaid from the cash proceeds
received from the exercise of designated employee stock options. The receipt  of
such  stock option proceeds permanently reduces the borrowing availability under
the facility,  which  has been  reduced  to  approximately $715  million  as  of
December 31, 1996. At December 31, 1996, based on a closing market price of Time
Warner common stock of $37.50, the aggregate value of potential proceeds to Time
Warner  from the  exercise of outstanding  vested, 'in the  money' stock options
covered under the facility was approximately $1.5 billion, representing a 2.1 to
1 coverage ratio  over the related  borrowing availability. To  the extent  that
such  stock  option  proceeds  are  not  sufficient  to  satisfy  Time  Warner's
obligations under  the Stock  Option Proceeds  Credit Facility,  Time Warner  is
generally  required to  repay such  borrowings using  proceeds from  the sale of
shares of its common stock held in escrow under the Stock Option Proceeds Credit
Facility or,  at  Time Warner's  election,  using  available cash  on  hand.  In
addition,  as  a result  of Time  Warner's  commitment to  use the  Stock Option
Proceeds Credit  Facility  to  fund  approximately  $200  million  of  preferred
dividend  requirements on its Series G, H,  I and J Preferred Stock, Time Warner
has also supplementally agreed to place in escrow an amount of cash equal to the
excess  of  the  unpaid  preferred  dividend  requirements  on  such  series  of
convertible  preferred stock over the  borrowing availability under the facility
at any time. At December  31, 1996, Time Warner had  placed $62 million of  cash
and  36 million shares in escrow under  these arrangements, which shares are not
considered to  be issued  and outstanding  capital stock  of the  Company.  Time
Warner  may be required,  from time to time,  to have up  to 52.5 million shares
held in escrow.
 
                                      F-45
 






<PAGE>

<PAGE>

                                TIME WARNER INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
8. 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..............................................................................   $(193)    $(203)    $(78)
Foreign...............................................................................     197       205      167
                                                                                         -----     -----     ----
Total.................................................................................   $   4     $   2     $ 89
                                                                                         -----     -----     ----
                                                                                         -----     -----     ----
</TABLE>
 
     Current and deferred income taxes (tax benefits) provided are as follows:
 
<TABLE>
<CAPTION>
                                                                                         YEARS ENDED DECEMBER 31,
                                                                                         ------------------------
                                                                                         1996      1995      1994
                                                                                         -----     -----     ----
                                                                                                (MILLIONS)
<S>                                                                                      <C>       <C>       <C>
Federal:
     Current(1).......................................................................   $  50     $  42     $ 66
     Deferred.........................................................................    (143)     (167)     (81)
Foreign:
     Current(2).......................................................................     230       215      194
     Deferred.........................................................................     (16)        8      (45)
State and Local:
     Current..........................................................................      89        78       79
     Deferred.........................................................................     (50)      (50)     (33)
                                                                                         -----     -----     ----
Total.................................................................................   $ 160     $ 126     $180
                                                                                         -----     -----     ----
                                                                                         -----     -----     ----
</TABLE>
 
------------
 
(1) Includes utilization  of tax  carryforwards  of $77  million in  1996,  $101
    million  in 1995 and $48  million in 1994. Excludes  current tax benefits of
    $16 million in 1996, $9  million in 1995 and  $11 million in 1994  resulting
    from  the exercise of stock options  and vesting of restricted stock awards,
    which were credited directly to paid-in-capital, and current tax benefits of
    $4 million in 1996 and $3 million  in 1995 resulting from the retirement  of
    debt, which reduced the extraordinary losses in such years.
(2) Includes  foreign withholding taxes of $101 million in 1996, $102 million in
    1995 and $74 million in 1994.
 
     The differences between income taxes expected at the U.S. federal statutory
income tax  rate  and  income  taxes  provided  are  as  set  forth  below.  The
relationship  between income before income taxes  and income tax expense is most
affected by the amortization of  goodwill and certain other financial  statement
expenses that are not deductible for income tax purposes.
 
<TABLE>
<CAPTION>
                                                                                         YEARS ENDED DECEMBER 31,
                                                                                        ------------------------
                                                                                         1996     1995     1994
                                                                                         ----     ----     ----
                                                                                               (MILLIONS)
 
<S>                                                                                      <C>      <C>      <C>
Taxes on income at U.S. federal statutory rate........................................   $  2     $  1     $ 31
State and local taxes, net............................................................     26       18       30
Nondeductible goodwill amortization...................................................    131      100       97
Other nondeductible expenses..........................................................     10       10       10
Foreign income taxed at different rates, net of U.S. foreign tax credits..............      4        3        1
Other.................................................................................    (13)      (6)      11
                                                                                         ----     ----     ----
Total.................................................................................   $160     $126     $180
                                                                                         ----     ----     ----
                                                                                         ----     ----     ----
</TABLE>
 
                                      F-46
 






<PAGE>

<PAGE>

                                TIME WARNER INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     Significant components of Time Warner's net deferred tax liabilities are as
follows:
 
<TABLE>
<CAPTION>
                                                                                                    DECEMBER 31,
                                                                                                  ----------------
                                                                                                   1996      1995
                                                                                                  ------    ------
                                                                                                     (MILLIONS)
 
<S>                                                                                               <C>       <C>
Assets acquired in business combinations.......................................................   $3,788    $2,963
Depreciation and amortization..................................................................      912       829
Unrealized appreciation of certain marketable securities.......................................       91        81
Other..........................................................................................      463       390
                                                                                                  ------    ------
Deferred tax liabilities.......................................................................    5,254     4,263
                                                                                                  ------    ------
Tax carryforwards..............................................................................      458       296
Accrued liabilities............................................................................      322       228
Receivable allowances and return reserves......................................................      222       211
Other..........................................................................................      170       108
                                                                                                  ------    ------
Deferred tax assets............................................................................    1,172       843
                                                                                                  ------    ------
Net deferred tax liabilities...................................................................   $4,082    $3,420
                                                                                                  ------    ------
                                                                                                  ------    ------
</TABLE>
 
     U.S.  income  and  foreign  withholding taxes  have  not  been  recorded on
permanently   reinvested   earnings   of   foreign   subsidiaries    aggregating
approximately  $860 million at December 31, 1996. Determination of the amount of
unrecognized deferred U.S. income tax liability with respect to such earnings is
not practicable. If such  earnings are repatriated,  additional U.S. income  and
foreign  withholding  taxes  are  substantially expected  to  be  offset  by the
accompanying foreign tax credits.
 
     U.S. federal  tax carryforwards  at  December 31,  1996 consisted  of  $752
million  of  net operating  losses,  $37 million  of  foreign tax  credits, $106
million of investment  tax credits and  $52 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    FOREIGN
                                                                                    OPERATING       TAX          TAX
                                                                                     LOSSES       CREDITS      CREDITS
                                                                                    ---------    ----------    -------
                                                                                                 (MILLIONS)
<S>                                                                                 <C>          <C>           <C>
1997.............................................................................     $   3         $  9         $ 7
1998.............................................................................         5            7          15
1999.............................................................................         5            6          --
2000.............................................................................         8            3          15
Thereafter up to 2008............................................................       731           81          --
                                                                                    ---------    ----------    -------
                                                                                      $ 752         $106         $37
                                                                                    ---------    ----------    -------
                                                                                    ---------    ----------    -------
</TABLE>
 
9. MANDATORILY REDEEMABLE PREFERRED SECURITIES
 
     In  August   1995,   Time   Warner  issued   approximately   12.1   million
Company-obligated  mandatorily redeemable preferred securities of a wholly owned
subsidiary ('PERCS')  for aggregate  gross proceeds  of $374  million. The  sole
assets  of the  subsidiary that  is the  obligor on  the PERCS  are $385 million
principal amount of 4%  subordinated notes of Old  Time Warner due December  23,
1997.  Cumulative cash distributions are payable on  the PERCS at an annual rate
of 4%.  The  PERCS are  mandatorily  redeemable on  December  23, 1997,  for  an
 
                                      F-47
 






<PAGE>

<PAGE>

                                TIME WARNER INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
amount  per PERCS  equal to the  lesser of $54.41,  and the market  value of 1.5
shares of common  stock of  Hasbro on  December 17,  1997 (as  adjusted for  the
Hasbro  Stock Split), payable in cash or, at Time Warner's option, Hasbro common
stock. Time  Warner has  the right  to redeem  the PERCS  at any  time prior  to
December 23, 1997, at an amount per PERCS equal to $54.41 (or in certain limited
circumstances  the lesser of such  amount and the market  value of 1.5 shares of
Hasbro common  stock  at  the  time  of  redemption)  plus  accrued  and  unpaid
distributions  thereon  and a  declining premium,  payable in  cash or,  at Time
Warner's option, Hasbro common stock.
 
     In  December   1995,   Time   Warner  issued   approximately   23   million
Company-obligated  mandatorily redeemable preferred securities of a wholly owned
subsidiary ('Preferred Trust Securities') for  aggregate gross proceeds of  $575
million.  The sole assets of the subsidiary that is the obligor on the Preferred
Trust Securities  are  $592 million  principal  amount of  8  7/8%  subordinated
debentures   of  Old  Time  Warner  due   December  31,  2025.  Cumulative  cash
distributions are payable on the Preferred Trust Securities at an annual rate of
8 7/8%. The Preferred  Trust Securities are mandatorily  redeemable for cash  on
December  31, 2025, and Time Warner has  the right to redeem the Preferred Trust
Securities, in whole  or in part,  on or after  December 31, 2000,  or in  other
certain  circumstances, in each  case at an amount  per Preferred Trust Security
equal to $25 plus accrued and unpaid distributions thereon.
 
     Time Warner has certain obligations relating to the PERCS and the Preferred
Trust Securities  which  amount to  a  full  and unconditional  guaranty  (on  a
subordinated basis) of each subsidiary's obligations with respect thereto.
 
10. SERIES M EXCHANGEABLE PREFERRED STOCK
 
     In  April  1996,  Time Warner  raised  approximately $1.55  billion  of net
proceeds in a private  placement of 1.6 million  shares of 10 1/4%  exchangeable
preferred  stock. This  issuance allowed  the Company  to realize  cash proceeds
through  a  security  whose  payment  terms  are  principally  linked  (until  a
reorganization  of TWE occurs, if  any) to a portion  of Time Warner's currently
noncash-generating interest in the Series B Capital of TWE. The proceeds  raised
from  this transaction were used  by Time Warner to reduce  debt. As part of the
TBS Transaction, these preferred shares were converted into registered shares of
Series  M  exchangeable  preferred  stock  with  substantially  identical  terms
('Series M Preferred Stock').
 
     Each  share  of  Series M  Preferred  Stock  is entitled  to  a liquidation
preference of  $1,000 and  entitles  the holder  thereof to  receive  cumulative
dividends  at the rate of  10 1/4% per annum, payable  quarterly (1) in cash, to
the extent of  an amount equal  to the  Pro Rata Percentage  (as defined  below)
multiplied  by the amount of cash distributions received by Time Warner from TWE
with respect to its interests  in the Series B  Capital and Residual Capital  of
TWE,  excluding  stock  option  related distributions  and  certain  tax related
distributions (collectively, 'Eligible TWE Cash  Distributions'), or (2) to  the
extent  of any balance,  at Time Warner's  option, (i) in  cash or (ii) in-kind,
through the issuance of  additional shares of Series  M Preferred Stock with  an
aggregate liquidation preference equal to the amount of such dividends. The 'Pro
Rata  Percentage'  is  equal  to  the ratio  of  (1)  the  aggregate liquidation
preference of the outstanding shares of Series M Preferred Stock, including  any
accumulated and unpaid dividends thereon, to (2) Time Warner's total interest in
the Series B Capital of TWE, including any undistributed priority capital return
thereon. Because cash distributions to Time Warner with respect to its interests
in  the Series B  Capital and Residual  Capital of TWE  are generally restricted
until June 30, 1998 and are  subject to additional limitations thereafter  under
the TWE partnership agreement, Time Warner does not expect to pay cash dividends
in the foreseeable future.
 
     The  Series M Preferred Stock may be redeemed at the option of Time Warner,
in whole or in part, on or after July 1, 2006, subject to certain conditions, at
an amount per  share equal to  its liquidation preference  plus accumulated  and
accrued  and unpaid dividends  thereon, and a declining  premium through July 1,
2010 (the 'Optional Redemption Price'). Time Warner is required to redeem shares
of Series M Preferred Stock
 
                                      F-48
 






<PAGE>

<PAGE>

                                TIME WARNER INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
representing up to 20%, 25%, 33 1/3% and 50% of the then outstanding liquidation
preference of the Series  M Preferred Stock  on July 1 of  2012, 2013, 2014  and
2015,  respectively, at an amount equal  to the aggregate liquidation preference
of the number of shares to be  redeemed plus accumulated and accrued and  unpaid
dividends  thereon (the 'Mandatory Redemption Price'). Total payments in respect
of such mandatory redemption obligations on  any redemption date are limited  to
an amount equal to the Pro Rata Percentage of any cash distributions received by
Time  Warner from TWE in the preceding year in connection with the redemption of
Time Warner's interest in  the Series B  Capital of TWE  and in connection  with
certain  cash distributions  related to Time  Warner's interest  in the Residual
Capital of TWE. The redemption  of the Series B Capital  of TWE is scheduled  to
occur  ratably over a five-year period commencing  on June 30, 2011. Time Warner
is required to  redeem any remaining  outstanding shares of  Series M  Preferred
Stock  on July 1, 2016 at the  Mandatory Redemption Price; however, in the event
that Time Warner's interest in the Series B Capital of TWE has not been redeemed
in full prior to  such final mandatory redemption  date, payments in respect  of
the  final mandatory  redemption obligation of  the Series M  Preferred Stock in
2016 will  be  limited  to an  amount  equal  to the  lesser  of  the  Mandatory
Redemption  Price and  an amount equal  to the  Pro Rata Percentage  of the fair
market value of TWE  (net of taxes) attributable  to Time Warner's interests  in
the Series B Capital and Residual Capital of TWE.
 
     Upon  a reorganization  of TWE,  as defined  in the  related certificate of
designation, Time  Warner must  elect either  to (1)  exchange each  outstanding
share  of  Series M  Preferred  Stock for  shares  of a  new  series of  10 1/4%
exchangeable preferred  stock ('Series  L Preferred  Stock') or  (2) subject  to
certain conditions, redeem the outstanding shares of Series M Preferred Stock at
an  amount per share equal  to 110% of the  liquidation preference thereof, plus
accumulated and accrued and unpaid dividends thereon or, after July 1, 2006,  at
the Optional Redemption Price. The Series L Preferred Stock has terms similar to
those  of the Series M Preferred Stock, except that (i) Time Warner may only pay
dividends in-kind until June  30, 2006, (ii) Time  Warner is required to  redeem
the  outstanding shares of Series L Preferred Stock on July 1, 2011 at an amount
per share  equal to  the liquidation  preference thereof,  plus accumulated  and
accrued  and unpaid dividends  thereon and (iii)  Time Warner has  the option to
exchange, in  whole  but  not  in  part,  subject  to  certain  conditions,  the
outstanding  shares of Series L  Preferred Stock for Time  Warner 10 1/4% Senior
Subordinated Debentures due July 1, 2011 (the 'Senior Subordinated  Debentures')
having  a principal amount equal  to the liquidation preference  of the Series L
Preferred Stock  plus accrued  and  unpaid dividends  thereon. Interest  on  the
Senior  Subordinated Debentures is  payable in cash or,  at Time Warner's option
through June  30,  2006,  in-kind  through the  issuance  of  additional  Senior
Subordinated  Debentures with  a principal  amount equal  to such  interest. The
Senior Subordinated Debentures may be redeemed at the option of Time Warner,  in
whole or in part, on or after July 1, 2006, subject to certain conditions, at an
amount  per  debenture equal  to its  principal amount  plus accrued  and unpaid
interest, and a declining premium through July 1, 2010.
 
11. SHAREHOLDERS' EQUITY
 
     Shareholders' equity  of Time  Warner at  December 31,  1996 included  35.6
million  shares of  convertible preferred stock,  50.6 million  shares of LMCN-V
Class Common Stock and 508.4 million shares  of common stock (net of 50  million
shares  of  common  stock  in  treasury).  At  February  28,  1997,  there  were
approximately 26,000 holders of record of  Time Warner common stock. This  total
does  not include  the large  number of investors  who hold  such shares through
banks, brokers or other fiduciaries.
 
     In April 1996,  Time Warner's Board  of Directors authorized  a program  to
repurchase,  from time to  time, up to  15 million shares  of Time Warner common
stock. The common stock repurchased under the program is expected to be used  to
satisfy  future share  issuances related  to the  exercise of  existing employee
stock options.  Actual repurchases  in  any period  will  be subject  to  market
conditions. As of December 31, 1996, Time Warner had acquired approximately 11.4
million  shares of its common stock for  an aggregate cost of $456 million. Such
repurchases were  principally  funded with  borrowings  under the  Stock  Option
Proceeds Credit Facility (Note 7).
 
                                      F-49
 






<PAGE>

<PAGE>

                                TIME WARNER INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     During  1996 and 1995, Time Warner issued approximately 35.6 million shares
of convertible preferred stock in connection with the ITOCHU/Toshiba Transaction
and its acquisitions of KBLCOM, Summit and CVI. Set forth below is a summary  of
the principal terms of Time Warner's outstanding issues of preferred stock:
 
<TABLE>
<CAPTION>

                                                                NUMBER OF SHARES
                                                                OF COMMON STOCK     EFFECTIVE   EARLIEST     EARLIEST
                                                   SHARES        ISSUABLE UPON      ISSUANCE    EXCHANGE    REDEMPTION
DESCRIPTION                                      OUTSTANDING      CONVERSION         DATE        DATE         DATE
----------------------------------------------   -----------    ----------------    --------    --------    ----------
                                                 (MILLIONS)         (MILLIONS)
 
<S>                                              <C>            <C>                 <C>         <C>         <C>
Series D Preferred Stock......................       11.0             22.9           7/6/95      7/6/99        7/6/00
Series E Preferred Stock......................        3.3              6.8           1/4/96      1/4/01        1/4/01
Series F Preferred Stock......................        3.0              6.4           1/4/96      1/4/00        1/4/01
Series G Preferred Stock......................        6.2             12.9           9/5/95      9/5/99        9/5/99
Series H Preferred Stock......................        1.8              3.7           9/5/95      9/5/00        9/5/99
Series I Preferred Stock......................        7.0             14.6          10/2/95     10/2/99       10/2/99
Series J Preferred Stock......................        3.3              6.8           5/2/95      5/2/98        5/2/00
                                                    -----            -----
Total shares outstanding at December 31,
  1996........................................       35.6             74.1
                                                    -----            -----
                                                    -----            -----
</TABLE>
 
     The principal terms of each series of convertible preferred stock issued in
1996  and 1995 (the Series D Preferred  Stock, the Series E Preferred Stock, the
Series F Preferred Stock, the Series  G Preferred Stock, the Series H  Preferred
Stock,  the  Series I  Preferred Stock  and  the Series  J Preferred  Stock, and
collectively, the 'Convertible Preferred Stock')  are similar in nature,  unless
otherwise  noted  below.  Each  share of  Convertible  Preferred  Stock:  (1) is
entitled to  a liquidation  preference of  $100 per  share, (2)  is  immediately
convertible  into 2.08264  shares of  Time Warner  common stock  at a conversion
price of $48 per share (based on  its liquidation value), except that shares  of
the Series H Preferred Stock are generally not convertible until September 2000,
(3)  entitles the holder thereof (i) to  receive for a four-year period from the
date of issuance (or a five-year period with respect to the Series E and  Series
J  Preferred Stock) an annual  dividend per share equal  to the greater of $3.75
and an amount equal to the dividends  paid on the Time Warner common stock  into
which each share may be converted and (ii) to the extent that any of such shares
of  preferred stock  remain outstanding at  the end  of the period  in which the
minimum $3.75 per  share dividend  is to be  paid, the  holders thereafter  will
receive  dividends equal to the  dividends paid on shares  of Time Warner common
stock multiplied by the  number of shares into  which their shares of  preferred
stock  are convertible and (4) except for  the Series H Preferred Stock which is
generally not entitled  to vote, entitles  the holder thereof  to vote with  the
common stockholders on all matters on which the common stockholders are entitled
to  vote, and each share of such  Convertible Preferred Stock is entitled to two
votes on any such matter.
 
     Time Warner has the right to exchange each series of Convertible  Preferred
Stock for Time Warner common stock at the stated conversion price at any time on
or  after  the  respective  exchange  date.  The  Series  J  Preferred  Stock is
exchangeable by  the holder  beginning after  the third  year from  its date  of
issuance and by Time Warner after the fourth year at the stated conversion price
plus  a declining premium in  years four and five  and no premium thereafter. In
addition, Time  Warner  has the  right  to  redeem each  series  of  Convertible
Preferred  Stock, in whole  or in part,  for cash at  the liquidation value plus
accrued dividends, at any time on or after the respective redemption date.
 
     In June 1996, Time Warner exchanged all outstanding shares of its Series  B
preferred  stock  having  an  aggregate liquidation  value  of  $69  million for
approximately 1.7 million shares of Time Warner common stock.
 
     Pursuant to Time Warner's shareholder  rights plan, as amended, each  share
of  Time  Warner  common stock  has  attached  to it  one  right,  which becomes
exercisable in certain events  involving the acquisition of  15% or more of  the
then  outstanding common stock of Time Warner on a fully-diluted basis. Upon the
occurrence of such an event, each right entitles its holder to purchase for $150
the economic equivalent of common stock of
 
                                      F-50
 






<PAGE>

<PAGE>

                                TIME WARNER INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
Time Warner, or in certain circumstances, of the acquiror, worth twice as  much.
In  connection with the plan, 8 million shares of preferred stock were reserved.
The rights expire on January 20, 2004.
 
     At December 31, 1996,  Time Warner had  reserved approximately 200  million
shares  of common stock  for the conversion of  its Convertible Preferred Stock,
zero coupon  convertible notes  and other  convertible securities,  and for  the
exercise of outstanding options to purchase shares of common stock.
 
12. 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 Time Warner and 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  for  its 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'),  Time
Warner's net loss and net loss per common share would have been increased to the
pro forma amounts indicated below:
 
<TABLE>
<CAPTION>
                                                                                           YEARS ENDED DECEMBER 31,
                                                                                          ------------------------
                                                                                           1996            1995
                                                                                          ------           -----
                                                                                           (IN MILLIONS, EXCEPT
                                                                                            PER SHARE AMOUNTS)
<S>                                                                                       <C>              <C>
Net loss:
     As reported.......................................................................   $ (191)          $(166)
                                                                                          ------           -----
                                                                                          ------           -----
     Pro forma.........................................................................   $ (216)          $(178)
                                                                                          ------           -----
                                                                                          ------           -----
Net loss per common share:
     As reported.......................................................................   $(1.04)          $(.57)
                                                                                          ------           -----
                                                                                          ------           -----
     Pro forma.........................................................................   $(1.10)          $(.60)
                                                                                          ------           -----
                                                                                          ------           -----
</TABLE>
 
     FAS  123 is applicable only to stock options granted subsequent to December
31, 1994. Accordingly, since Time Warner'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 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 6.1%  and 7.1%;  and expected  lives of 5  years in  both periods.  The
weighted  average fair  value of  an option granted  during the  year was $11.55
($6.81, net of  taxes) and  $11.95 ($7.05,  net of  taxes) 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 $52.88 and $8.87 ($5.23, net
of taxes), respectively.
 
                                      F-51
 






<PAGE>

<PAGE>

                                TIME WARNER INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     A summary of stock option activity under all plans is as follows:
 
<TABLE>
<CAPTION>
                                                                                                          WEIGHTED-
                                                                                                           AVERAGE
                                                                                             THOUSANDS    EXERCISE
                                                                                             OF SHARES      PRICE
                                                                                             ---------    ---------
 
<S>                                                                                          <C>          <C>
Balance at January 1, 1994................................................................     72,954      $ 30.04
Granted...................................................................................      6,071        37.85
Exercised.................................................................................     (1,262)       23.55
Cancelled.................................................................................       (152)       35.24
                                                                                             ---------
Balance at December 31, 1994..............................................................     77,611      $ 30.75
 
Granted...................................................................................      5,096        38.00
Exercised.................................................................................     (3,721)       27.16
Cancelled.................................................................................       (367)       35.80
                                                                                             ---------
Balance at December 31, 1995..............................................................     78,619      $ 31.36
 
Granted...................................................................................      9,460        43.30
Exercised.................................................................................     (3,686)       26.91
Assumed in connection with the TBS Transaction............................................     13,713        26.40
Cancelled.................................................................................       (239)       40.83
                                                                                             ---------
Balance at December 31, 1996..............................................................     97,867      $ 31.97
                                                                                             ---------
                                                                                             ---------
</TABLE>
 
<TABLE>
<CAPTION>
                                                                                               DECEMBER 31,
                                                                                        --------------------------
                                                                                         1996      1995      1994
                                                                                        ------    ------    ------
                                                                                               (THOUSANDS)
 
<S>                                                                                     <C>       <C>       <C>
Exercisable..........................................................................   82,697    66,242    63,106
Available for future grants..........................................................    8,032     7,884     8,849
</TABLE>
 
     The following table summarizes information about stock options  outstanding
at December 31, 1996:
 
<TABLE>
<CAPTION>
                                  OPTIONS OUTSTANDING                   OPTIONS EXERCISABLE
                       -----------------------------------------     -------------------------
                                        WEIGHTED-                    
                                         AVERAGE       WEIGHTED-                     WEIGHTED-
     RANGE OF            NUMBER         REMAINING       AVERAGE        NUMBER         AVERAGE
     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             2,688         3 years        $ 12.65          2,688        $ 12.65
 $17.00 to $25.00         20,313         4 years        $ 21.26         20,313        $ 21.26
 $25.01 to $35.00         25,873         5 years        $ 29.58         25,568        $ 29.53
 $35.01 to $40.00         35,356         5 years        $ 36.79         29,054        $ 36.59
 $40.01 to $45.00         11,412         8 years        $ 42.08          4,824        $ 42.05
 $45.01 to $63.95          2,225         9 years        $ 52.36            250        $ 48.29
                       -----------                                   -----------
       Total              97,867         5 years        $ 31.97         82,697        $ 30.22
                       -----------                                   -----------
                       -----------                                   -----------
</TABLE>
 
     For  options exercised by  employees of TWE, Time  Warner is reimbursed for
the amount by which the market value of Time Warner common stock on the exercise
date exceeds the exercise price, or the greater of the exercise price or  $27.75
for options granted prior to the TWE capitalization on June 30, 1992. There were
30.3 million options held by employees of TWE at December 31, 1996, 22.8 million
of which were exercisable.
 
                                      F-52
 






<PAGE>

<PAGE>

                                TIME WARNER INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
13. BENEFIT PLANS
 
     Time  Warner  and  its  subsidiaries  have  defined  benefit  pension plans
covering substantially all  domestic employees.  Pension benefits  are based  on
formulas  that reflect the  employees' years of  service and compensation levels
during their employment period. Qualifying  plans are funded in accordance  with
government  pension  and income  tax regulations.  Plan  assets are  invested in
equity and  fixed  income  securities. 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.........................................................................   $ 49      $  29      $ 34
Interest cost........................................................................     64         53        50
Actual return on plan assets.........................................................    (90)      (137)       (2)
Net amortization and deferral........................................................     37         89       (45)
                                                                                        ----      -----      ----
Total................................................................................   $ 60      $  34      $ 37
                                                                                        ----      -----      ----
                                                                                        ----      -----      ----
</TABLE>
 
     The status of funded pension plans is as follows:
 
<TABLE>
<CAPTION>
                                                                                                     DECEMBER 31,
                                                                                                     ------------
                                                                                                     1996    1995
                                                                                                     ----    ----
                                                                                                      (MILLIONS)
 
<S>                                                                                                  <C>     <C>
Accumulated benefit obligation (90% vested).......................................................   $550    $544
Effect of future salary increase..................................................................    210     192
                                                                                                     ----    ----
Projected benefit obligation......................................................................    760     736
Plan assets at fair value.........................................................................    704     643
                                                                                                     ----    ----
Projected benefit obligation in excess of plan assets.............................................    (56)    (93)
Unamortized actuarial losses......................................................................      2      94
Unamortized plan changes..........................................................................      3       2
Other.............................................................................................     (2)    (10)
                                                                                                     ----    ----
Accrued pension expense...........................................................................   $(53)   $ (7)
                                                                                                     ----    ----
                                                                                                     ----    ----
</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.....................................................           6%           6%           6%
</TABLE>
 
     Employees of Time Warner's operations  in foreign countries participate  to
varying  degrees  in  local  pension  plans,  which  in  the  aggregate  are not
significant.
 
     Time Warner also has certain defined contribution plans, including  savings
and  profit sharing plans,  as to which  the expense amounted  to $67 million in
1996, $51 million in 1995 and $51 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
and approved by the board of directors of the participating companies.
 
                                      F-53
 






<PAGE>

<PAGE>

                                TIME WARNER INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
14. FINANCIAL INSTRUMENTS
 
     The carrying value of Time Warner's financial instruments approximates fair
value, except for  differences with  respect to long-term,  fixed-rate debt  and
related  interest rate  swap contracts and  certain differences  related to cost
method investments and  other financial instruments  which are not  significant.
The fair value of financial instruments, such as long-term debt and investments,
is  generally determined by reference to market values resulting from trading on
a national securities exchange or in an over-the-counter market. In cases  where
quoted  market  prices  are  not available,  such  as  for  derivative financial
instruments, fair  value is  based on  estimates using  present value  or  other
valuation techniques.
 
INTEREST RATE RISK MANAGEMENT
 
     Interest  rate swap  contracts are used  to adjust the  proportion of total
debt that is subject to variable  and fixed interest rates. Under interest  rate
swap  contracts, the Company either agrees to pay an amount equal to a specified
floating-rate of interest times a notional  principal amount, and to receive  in
return  an amount  equal to  a specified fixed-rate  of interest  times the same
notional principal amount or, vice versa, to receive a floating-rate amount  and
to  pay  a fixed-rate  amount. The  notional  amounts of  the contracts  are not
exchanged. No other  cash payments are  made unless the  contract is  terminated
prior  to maturity, in which  case the amount paid  or received in settlement is
established by agreement at the time of termination, and usually represents  the
net present value, at current rates of interest, of the remaining obligations to
exchange  payments under the terms of the contract. Interest rate swap contracts
are entered  into with  a number  of major  financial institutions  in order  to
minimize credit risk.
 
     The net amounts paid or payable, or received or receivable, through the end
of the accounting period are included in interest expense. Because interest rate
swap  contracts are used to modify the interest characteristics of Time Warner's
outstanding debt  from  a  fixed  to  a  floating-rate  basis  or,  vice  versa,
unrealized gains or losses on interest rate swap contracts are not recognized in
income  unless the  contracts are terminated  prior to their  maturity. Gains or
losses on any contracts  terminated early are deferred  and amortized to  income
over the remaining average life of the terminated contracts.
 
     At  December 31, 1996, Time Warner had  interest rate swap contracts to pay
floating-rates of interest (average  six-month LIBOR rate  of 5.7%) and  receive
fixed-rates  of interest (average rate of  5.5%) on $2.3 billion notional amount
of indebtedness, which resulted in approximately 47% of Time Warner's underlying
debt, and 43% of the debt of  Time Warner and the Entertainment Group  combined,
being  subject to  variable interest rates.  The notional  amount of outstanding
contracts by year  of maturity  at December 31,  1996 is  as follows:  1998-$700
million;  1999-$1.2 billion; and  2000-$400 million. At  December 31, 1995, Time
Warner had  interest rate  swap contracts  on $2.6  billion notional  amount  of
indebtedness.
 
     Based  on the level of interest rates  prevailing at December 31, 1996, the
fair value of Time Warner's fixed-rate debt exceeded its carrying value by  $231
million  and it would  have cost $43  million to terminate  the related interest
rate swap contracts, which combined is  the equivalent of an unrealized loss  of
$274  million. Based on the  level of interest rates  prevailing at December 31,
1995, the fair  value of  Time Warner's  fixed-rate debt  exceeded its  carrying
value  by  $407 million  and  it would  have cost  $9  million to  terminate its
interest rate swap contracts, which combined was the equivalent of an unrealized
loss of $416 million. Unrealized gains or  losses on debt or interest rate  swap
contracts are not recognized for financial reporting purposes unless the debt is
retired or the contracts are terminated prior to their maturity.
 
     Changes  in the unrealized gains or  losses on interest rate swap contracts
and debt do  not result in  the realization  or expenditure of  cash unless  the
contracts are terminated or the debt is retired. However, based on Time Warner's
variable-rate  debt  and related  interest  rate swap  contracts  outstanding at
December 31, 1996,  each 25 basis  point increase  or decrease in  the level  of
interest  rates would, respectively,  increase or decrease  Time Warner's annual
interest expense  and  related  cash  payments  by  approximately  $16  million,
including $6
 
                                      F-54
 






<PAGE>

<PAGE>

                                TIME WARNER INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
million  related to  interest rate swap  contracts. Such  potential increases or
decreases are based  on certain  simplifying assumptions,  including a  constant
level  of variable-rate debt and related interest rate swap contracts during the
period and,  for  all maturities,  an  immediate, across-the-board  increase  or
decrease in the level of interest rates with no other subsequent changes for the
remainder of the period.
 
FOREIGN EXCHANGE RISK MANAGEMENT
 
     Foreign  exchange contracts are used primarily  by Time Warner to hedge the
risk that unremitted or future royalties and license fees owed to Time Warner or
TWE domestic companies  for the  sale or  anticipated sale  of U.S.  copyrighted
products  abroad  may  be  adversely affected  by  changes  in  foreign currency
exchange rates. As part of its overall strategy to manage the level of  exposure
to the risk of foreign currency exchange rate fluctuations, Time Warner hedges a
portion  of its and  TWE's combined foreign  currency exposures anticipated over
the ensuing  twelve  month  period.  At  December  31,  1996,  Time  Warner  has
effectively hedged approximately half of the combined estimated foreign currency
exposures  that principally relate  to anticipated cash flows  to be remitted to
the U.S. over the ensuing twelve month period, using foreign exchange  contracts
that  generally have  maturities of  three months  or less,  which are generally
rolled over  to provide  continuing coverage  throughout the  year. Time  Warner
often  closes foreign  exchange 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,
primarily English  pounds  (21% of  net  contract value),  German  marks  (19%),
Canadian  dollars (18%), French francs (15%) and Japanese yen (19%), compared to
contracts for the  sale of  $504 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 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,  Time  Warner
recognized  $15  million in  gains, $20  million  in losses  and $33  million in
losses, respectively, and  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 royalties and
license fee payments that have  been or are anticipated  to be received in  cash
from  the sale of U.S. copyrighted products abroad. Time Warner reimburses or is
reimbursed by  TWE  for contract  gains  and  losses related  to  TWE's  foreign
currency  exposure. Foreign currency contracts are placed with a number of major
financial institutions in order to minimize credit risk.
 
     Based on the foreign exchange  contracts outstanding at December 31,  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 $22 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 $22 million of unrealized  gains and $5 million of unrealized  losses,
respectively.  At  December 31,  1996, none  of  Time Warner's  foreign exchange
purchase contracts relates  to TWE's  foreign currency  exposure. However,  with
regard to the $22 million of unrealized losses or gains on foreign exchange sale
contracts,  Time  Warner would  be reimbursed  by TWE,  or would  reimburse TWE,
respectively, for approximately  $5 million  related to  TWE's foreign  currency
exposure.  Consistent with  the nature  of the  economic hedge  provided by such
foreign exchange contracts, such unrealized gains  or losses would be offset  by
corresponding  decreases  or increases,  respectively,  in the  dollar  value of
future foreign currency royalty and license fee payments that would be  received
in cash within the ensuing twelve month period from the sale of U.S. copyrighted
products abroad.
 
                                      F-55
 






<PAGE>

<PAGE>

                                TIME WARNER INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
15. SEGMENT INFORMATION
 
     Time   Warner  classifies  its  businesses  into  four  fundamental  areas:
Entertainment, consisting principally of interests  in recorded music and  music
publishing, filmed entertainment, television production, television broadcasting
and  theme parks; Cable  Networks, consisting principally  of interests in cable
television programming and sports franchises; Publishing, consisting principally
of interests in magazine publishing,  book publishing and direct marketing;  and
Cable,  consisting  principally  of  interests in  cable  television  systems. A
majority  of  Time  Warner's  interests  in  filmed  entertainment,   television
production,  television broadcasting and theme parks, a portion of its interests
in cable television programming and a  majority of its cable television  systems
are held by the Entertainment Group. The Entertainment Group is not consolidated
for financial reporting purposes.
 
     Information as to the operations of Time Warner and the Entertainment Group
in different business segments is set forth below. The operating results of Time
Warner  reflect the acquisitions of  Summit effective as of  May 2, 1995, KBLCOM
effective as  of July  6, 1995,  CVI effective  as of  January 4,  1996 and  TBS
effective  as of  October 10, 1996.  The operating results  of the Entertainment
Group 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 consolidation of Paragon effective as of 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
Time Warner:
Publishing........................................................................   $ 4,117      $3,722      $3,433
Music.............................................................................     3,949       4,196       3,986
Cable Networks-TBS................................................................       680          --          --
Filmed Entertainment-TBS..........................................................       455          --          --
Cable.............................................................................       909         172          --
Intersegment elimination..........................................................       (46)        (23)        (23)
                                                                                     -------    ----------    ------
Total.............................................................................   $10,064      $8,067      $7,396
                                                                                     -------    ----------    ------
                                                                                     -------    ----------    ------
Entertainment Group:
Filmed Entertainment-Warner Bros..................................................   $ 5,648      $5,078      $4,484
Six Flags Theme Parks.............................................................        --         227         557
Broadcasting-The WB Network.......................................................        87          33          --
Cable Networks-HBO................................................................     1,763       1,607       1,513
Cable.............................................................................     3,851       3,094       2,242
Intersegment elimination..........................................................      (488)       (410)       (287)
                                                                                     -------    ----------    ------
Total.............................................................................   $10,861      $9,629      $8,509
                                                                                     -------    ----------    ------
                                                                                     -------    ----------    ------
</TABLE>
 
                                      F-56
 






<PAGE>

<PAGE>

                                TIME WARNER INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
                                                                                             YEARS ENDED DECEMBER 31,
                                                                                     ---------------------------------------
                                                                                      1996             1995          1994    
                                                                                     ------          ------         ------
                                                                                              (MILLIONS)                     
<S>                                                                                  <C>        <C>            <C>          
OPERATING INCOME                                                                                               
Time Warner:
Publishing........................................................................   $  418           $  381        $  347      
Music(1)..........................................................................      361              321           366      
Cable Networks-TBS................................................................       99               --            --      
Filmed Entertainment-TBS..........................................................        8               --            --      
Cable.............................................................................       75               (5)           --      
Intersegment elimination..........................................................        5               --            --      
                                                                                     ------          -------       -------      
Total.............................................................................   $  966           $  697        $  713      
                                                                                     ------          -------       -------      
                                                                                     ------          -------       -------      
Entertainment Group:                                                                                                        
Filmed Entertainment-Warner Bros..................................................   $  254           $  253        $  219      
Six Flags Theme Parks.............................................................       --               29            56      
Broadcasting-The WB Network.......................................................      (98)             (66)           --      
Cable Networks-HBO................................................................      328              274           237      
Cable.............................................................................      606              502           340      
                                                                                     ------          -------       -------      
Total.............................................................................   $1,090           $  992        $  852      
                                                                                     ------          -------       -------      
                                                                                     ------          -------       -------      
</TABLE>
 
------------
 
(1) Includes  pretax losses of  $85 million recorded in  1995 related to certain
    businesses and  joint  ventures  owned  by the  Music  division  which  were
    restructured  or closed. The  losses were primarily  related to Warner Music
    Enterprises, one of the Company's  former 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.
 
<TABLE>
<CAPTION>
                                                                                         YEARS ENDED DECEMBER 31,
                                                                                         ------------------------
                                                                                         1996     1995     1994
                                                                                         ----     ----     ----
                                                                                               (MILLIONS)
 
<S>                                                                                      <C>      <C>      <C>
DEPRECIATION OF PROPERTY, PLANT AND EQUIPMENT
Time Warner:
Publishing............................................................................   $ 71     $ 59     $ 47
Music.................................................................................     91       95       86
Cable Networks-TBS....................................................................     20       --       --
Filmed Entertainment-TBS..............................................................      2       --       --
Cable.................................................................................    123       27       --
                                                                                         ----     ----     ----
Total.................................................................................   $307     $181     $133
                                                                                         ----     ----     ----
                                                                                         ----     ----     ----
Entertainment Group:
Filmed Entertainment-Warner Bros......................................................   $167     $113     $ 76
Six Flags Theme Parks.................................................................     --       20       51
Broadcasting-The WB Network...........................................................     --       --       --
Cable Networks-HBO....................................................................     22       18       14
Cable.................................................................................    619      465      340
                                                                                         ----     ----     ----
Total.................................................................................   $808     $616     $481
                                                                                         ----     ----     ----
                                                                                         ----     ----     ----
</TABLE>
 
                                      F-57
 






<PAGE>

<PAGE>

                                TIME WARNER INC.
           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)
Time Warner:
Publishing.......................................................................   $    46    $    36    $    36
Music............................................................................       292        274        268
Cable Networks-TBS...............................................................        43         --         --
Filmed Entertainment-TBS.........................................................        22         --         --
Cable............................................................................       278         68         --
                                                                                    -------    -------    -------
Total............................................................................   $   681    $   378    $   304
                                                                                    -------    -------    -------
                                                                                    -------    -------    -------
Entertainment Group:
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 all amortization relating to the acquisition of Warner
    Communications Inc.  ('WCI')  in  1989,  the  acquisition  of  the  minority
    interest  in American  Television and Communications  Corporation ('ATC') in
    1992, the acquisitions of KBLCOM and Summit in 1995, the acquisitions of TBS
    and CVI  in  1996 and  other  business  combinations accounted  for  by  the
    purchase method.
 
     Information  as to the  assets and capital expenditures  of Time Warner and
the Entertainment Group is as follows:
 
<TABLE>
<CAPTION>
                                                                                            DECEMBER 31,
                                                                                    -----------------------------
                                                                                     1996       1995       1994
                                                                                    -------    -------    -------
                                                                                             (MILLIONS)
<S>                                                                                 <C>        <C>        <C>
ASSETS
Time Warner:
Publishing.......................................................................   $ 2,418    $ 2,175    $ 2,013
Music............................................................................     7,478      7,828      7,672
Cable Networks-TBS...............................................................     7,860         --         --
Filmed Entertainment-TBS.........................................................     3,232         --         --
Cable............................................................................     7,257      3,875         --
Entertainment Group(1)...........................................................     5,814      5,734      5,350
Corporate(2).....................................................................     1,005      2,520      1,681
                                                                                    -------    -------    -------
Total............................................................................   $35,064    $22,132    $16,716
                                                                                    -------    -------    -------
                                                                                    -------    -------    -------
Entertainment Group:
Filmed Entertainment-Warner Bros.................................................   $ 8,111    $ 7,389    $ 7,184
Six Flags Theme Parks............................................................        --         --        814
Broadcasting-The WB Network......................................................        67         63         --
Cable Networks-HBO...............................................................       997        935        911
Cable............................................................................    10,202      9,842      8,303
Corporate(2).....................................................................       650        731      1,780
                                                                                    -------    -------    -------
Total............................................................................   $20,027    $18,960    $18,992
                                                                                    -------    -------    -------
                                                                                    -------    -------    -------
</TABLE>
 
------------
 
(1) Entertainment Group assets represent Time Warner's investment in and amounts
    due to and from the Entertainment Group.
(2) Consists principally of cash, cash equivalents and other investments.
 
                                      F-58
 






<PAGE>

<PAGE>

                                TIME WARNER INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
<TABLE>
<CAPTION>
                                                                                        YEARS ENDED DECEMBER 31,
                                                                                       ---------------------------
                                                                                        1996       1995      1994
                                                                                       -------    ------    ------
                                                                                               (MILLIONS)
 
<S>                                                                                    <C>        <C>       <C>
CAPITAL EXPENDITURES
Time Warner:
Publishing..........................................................................   $    76    $   70    $   50
Music...............................................................................       142       121       108
Cable Networks-TBS..................................................................        34        --        --
Filmed Entertainment-TBS............................................................         2        --        --
Cable...............................................................................       215        56        --
Corporate...........................................................................        12        19         6
                                                                                       -------    ------    ------
Total...............................................................................   $   481    $  266    $  164
                                                                                       -------    ------    ------
                                                                                       -------    ------    ------
Entertainment Group:
Filmed Entertainment-Warner Bros....................................................   $   340    $  294    $  395
Six Flags Theme Parks...............................................................        --        43        46
Broadcasting-The WB Network.........................................................         2        --        --
Cable Networks-HBO..................................................................        29        20        14
Cable(1)............................................................................     1,348     1,293       778
Corporate...........................................................................        --         3         2
                                                                                       -------    ------    ------
Total...............................................................................   $ 1,719    $1,653    $1,235
                                                                                       -------    ------    ------
                                                                                       -------    ------    ------
</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 3). The U S WEST Note Receivable  was
    fully collected during 1996.
 
     Information  as to Time Warner's operations in different geographical areas
is as follows:
 
<TABLE>
<CAPTION>
                                                                                        YEARS ENDED DECEMBER 31,
                                                                                       ---------------------------
                                                                                        1996       1995      1994
                                                                                       -------    ------    ------
                                                                                               (MILLIONS)
 
<S>                                                                                    <C>        <C>       <C>
REVENUES
United States(1)....................................................................   $ 7,562    $5,447    $4,944
Europe..............................................................................     1,494     1,552     1,445
Pacific Rim.........................................................................       697       775       724
Rest of World.......................................................................       311       293       283
                                                                                       -------    ------    ------
Total...............................................................................   $10,064    $8,067    $7,396
                                                                                       -------    ------    ------
                                                                                       -------    ------    ------
OPERATING INCOME
United States.......................................................................   $   732    $  457    $  494
Europe..............................................................................       184       158       108
Pacific Rim.........................................................................        12        57        74
Rest of World.......................................................................        38        25        37
                                                                                       -------    ------    ------
Total...............................................................................   $   966    $  697    $  713
                                                                                       -------    ------    ------
                                                                                       -------    ------    ------
</TABLE>
 
------------
 
(1) Time Warner's  revenues do  not include  the revenues  of the  Entertainment
    Group,  which had export revenues of  $2.134 billion in 1996, $1.982 billion
    in 1995 and  $1.693 billion  in 1994, principally  from the  sale of  Filmed
    Entertainment products abroad.
 
                                      F-59
 






<PAGE>

<PAGE>

                                TIME WARNER INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
<TABLE>
<CAPTION>
                                                                                            DECEMBER 31,
                                                                                    -----------------------------
                                                                                     1996       1995       1994
                                                                                    -------    -------    -------
                                                                                             (MILLIONS)
 
<S>                                                                                 <C>        <C>        <C>
ASSETS
United States....................................................................   $31,999    $19,301    $13,961
Europe...........................................................................     1,886      1,797      1,717
Pacific Rim......................................................................       692        628        636
Rest of World....................................................................       487        406        402
                                                                                    -------    -------    -------
Total............................................................................   $35,064    $22,132    $16,716
                                                                                    -------    -------    -------
                                                                                    -------    -------    -------
</TABLE>
 
16. COMMITMENTS AND CONTINGENCIES
 
     Total  rent expense amounted to $192 million  in 1996, $174 million in 1995
and $157 million in  1994. The minimum  rental commitments under  noncancellable
long-term  operating leases are: 1997-$235 million; 1998-$230 million; 1999-$205
million; 2000-$185 million; 2001-$160 million and after 2001-$1.151 billion.
 
     Minimum commitments and  guarantees under  certain programming,  licensing,
artists,  athletes, franchise and other agreements aggregated approximately $3.8
billion at December  31, 1996, which  are payable principally  over a  five-year
period.  Such amounts do not include  the Time Warner General Partner guarantees
of approximately $5.4 billion of TWE debt.
 
     Pending  legal  proceedings   are  substantially   limited  to   litigation
incidental  to the businesses of Time Warner, alleged damages in connection with
class action lawsuits and the pending litigation  with the City of New York  and
Fox News Channel ('FNC') relating to the TBS Transaction 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 financial statements of Time Warner.
 
17. RELATED PARTY TRANSACTIONS
 
     In  the normal course  of conducting their businesses,  Time Warner and its
subsidiaries and affiliates  have had  various transactions with  TWE and  other
Entertainment  Group companies, generally on  terms resulting from a negotiation
between the  affected units  that  in management's  view results  in  reasonable
allocations.  Employees of TWE participate in various Time Warner medical, stock
option and other benefit plans for  which Time Warner charges TWE its  allocable
share of plan expenses, including administrative costs. In addition, 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. 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.
 
     Time Warner's Cable division has  management services agreements with  TWE,
pursuant  to which  TWE manages, or  provides services to,  the cable television
systems owned by Time Warner. Such cable television systems also pay TWE for the
right to carry cable television programming provided by TWE's cable networks.
 
     Time  Warner's  Filmed  Entertainment-TBS  division  has  various   service
agreements  with TWE's  Filmed Entertainment-Warner Bros.  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.
 
                                      F-60
 






<PAGE>

<PAGE>

                                TIME WARNER INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     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.
 
     In  addition  to  transactions  with  TWE  and  other  Entertainment  Group
companies, Time  Warner 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  Warner and the  Entertainment Group,  generally
with respect to sales of product in the ordinary course of business.
 
18. 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......................................................     $839      $659      $539
Cash payments made for income taxes..................................................      382       302       389
Tax-related distributions received from TWE..........................................      215       680       115
Income tax refunds received..........................................................       44        24        50
Noncash dividends....................................................................      122        --        --
</TABLE>
 
     During  the  years ended  December  31, 1996,  1995  and 1994,  Time Warner
realized $147  million, $35  million and  $179 million,  respectively, from  the
securitization of receivables. Noncash investing activities in 1996 included the
$6.2  billion acquisition  of TBS  and the  $904 million  acquisition of  CVI in
exchange for capital stock (Note 2). Noncash investing and financing  activities
in  1995 included the $1.4 billion acquisitions of KBLCOM and Summit in exchange
for capital  stock (Note  2),  the $1.36  billion  acquisition of  ITOCHU's  and
Toshiba's interests in TWE in exchange for capital stock and $10 million in cash
(Note  3)  and the  $1.8  billion redemption  of  Time Warner's  Reset  Notes in
exchange for other debt securities (Note 6).
 
     Other current liabilities consist of:
 
<TABLE>
<CAPTION>
                                                                                                    DECEMBER 31,
                                                                                                  ----------------
                                                                                                   1996      1995
                                                                                                  ------    ------
                                                                                                     (MILLIONS)
 
<S>                                                                                               <C>       <C>
Accrued expenses...............................................................................   $1,410    $  972
Accrued compensation...........................................................................      351       337
Accrued income taxes...........................................................................       81       173
Deferred revenues..............................................................................      248        84
                                                                                                  ------    ------
Total..........................................................................................   $2,090    $1,566
                                                                                                  ------    ------
                                                                                                  ------    ------
</TABLE>
 
                                      F-61






<PAGE>

<PAGE>

                              REPORT OF MANAGEMENT
 
     The  accompanying consolidated  financial statements have  been prepared by
management in  conformity with  generally  accepted accounting  principles,  and
necessarily  include some amounts that are  based on management's best estimates
and judgments.
 
     Time Warner maintains a system of internal accounting controls designed  to
provide management with reasonable assurance that assets are safeguarded against
loss from unauthorized use or disposition, and that transactions are executed in
accordance with management's authorization and recorded properly. The concept of
reasonable  assurance is based on  the recognition that the  cost of a system of
internal control should not exceed the benefits derived and that the  evaluation
of  those  factors  requires  estimates and  judgments  by  management. Further,
because of inherent limitations  in any system  of internal accounting  control,
errors or irregularities may occur and not be detected. Nevertheless, management
believes  that a  high level  of internal control  is maintained  by Time Warner
through the selection and training of qualified personnel, the establishment and
communication of  accounting  and  business policies,  and  its  internal  audit
program.
 
     The Audit Committee of the Board of Directors, composed solely of directors
who  are not  employees of Time  Warner, meets periodically  with management and
with Time Warner's internal auditors and independent auditors to review  matters
relating  to the quality of financial reporting and internal accounting control,
and the  nature, extent  and results  of their  audits. Time  Warner's  internal
auditors and independent auditors have free access to the Audit Committee.
 
<TABLE>
<S>                               <C>                               <C>
Gerald M. Levin                   Richard D. Parsons                Richard J. Bressler
Chairman and                      President                         Senior Vice President and
Chief Executive Officer                                             Chief Financial Officer
</TABLE>
 
                                      F-62
 




<PAGE>

<PAGE>

                         REPORT OF INDEPENDENT AUDITORS
 
THE BOARD OF DIRECTORS AND SHAREHOLDERS
TIME WARNER INC.
 
We  have audited the accompanying consolidated balance sheet of Time Warner Inc.
('Time Warner') as of December 31,  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 schedules and supplementary information listed in the Index
at  Item  14(a).  These   financial  statements,  schedules  and   supplementary
information   are   the  responsibility   of   Time  Warner's   management.  Our
responsibility is to express an opinion on these financial statements, schedules
and supplementary information based on our audits.
 
We  conducted  our  audits  in  accordance  with  generally  accepted   auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence  supporting
the  amounts and disclosures in the financial statements. An audit also includes
assessing the  accounting  principles used  and  significant estimates  made  by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the  financial statements referred to  above present fairly,  in
all  material respects,  the consolidated financial  position of  Time Warner at
December 31, 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   schedules   and  supplementary
information, when considered in relation to the basic financial statements taken
as a whole, present  fairly in all material  respects the information set  forth
therein.
 
                                          ERNST & YOUNG LLP
 
New York, New York
February 11, 1997
 
                                      F-63
 





<PAGE>

<PAGE>

                                TIME WARNER INC.
                         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 financial  statements and  other financial information
presented elsewhere herein. Capitalized  terms are as  defined and described  in
such  consolidated  financial  statements,  or  elsewhere  herein.  The selected
historical financial  information  for  all  periods  after  1992  reflects  the
deconsolidation  of the Entertainment Group,  principally TWE, effective January
1, 1993.
 
     The selected historical  financial information  for 1996  reflects (a)  the
issuance  of  approximately  173.4  million  shares  of  common  stock  and  the
assumption of approximately $2.8 billion of indebtedness in connection with  the
TBS Transaction, (b) the issuance of 1.6 million shares of Series M exchangeable
preferred  stock having an aggregate liquidation  preference of $1.6 billion and
the use of approximately $1.55 billion of net proceeds therefrom to reduce  debt
and  (c)(i) the  issuance of 6.3  million shares of  convertible preferred stock
having an  aggregate liquidation  preference  of $633  million and  2.9  million
shares of common stock and (ii) the assumption or incurrence of approximately $2
billion of indebtedness, in connection with the acquisition of CVI. The selected
historical  financial information  for 1995  reflects (a)  the issuance  of 29.3
million shares of  convertible preferred stock  having an aggregate  liquidation
preference  of $2.926 billion and 2.6 million shares of common stock and (b) the
assumption or  incurrence  of  approximately $1.3  billion  of  indebtedness  in
connection  with (x) the acquisitions of KBLCOM  and Summit and (y) the exchange
by Toshiba  and  ITOCHU of  their  direct and  indirect  interests in  TWE.  The
selected historical financial information for 1993 reflects the issuance of $6.1
billion  of long-term debt and  the use of $500  million of cash and equivalents
for  the  exchange  or  redemption  of  preferred  stock  having  an   aggregate
liquidation  preference  of  $6.4  billion.  The  selected  historical financial
information for 1992  reflects the capitalization  of TWE on  June 30, 1992  and
associated  refinancings, and the acquisition of  the 18.7% minority interest in
ATC as of June 30,  1992, using the purchase  method of accounting for  business
combinations.
 
     Per  common share amounts  and average common shares  have been restated to
give effect to the  four-for-one common stock split  that occurred on  September
10, 1992.
 
<TABLE>
<CAPTION>
                                                                           YEARS ENDED DECEMBER 31,
                                                              ---------------------------------------------------
SELECTED OPERATING STATEMENT INFORMATION                       1996       1995       1994       1993       1992
                                                              -------    -------    -------    -------    -------
                                                                     (MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S>                                                           <C>        <C>        <C>        <C>        <C>
Revenues...................................................   $10,064    $ 8,067    $ 7,396    $ 6,581    $13,070
Depreciation and amortization..............................       988        559        437        424      1,172
Business segment operating income (a)......................       966        697        713        591      1,343
Equity in pretax income of Entertainment Group.............       290        256        176        281         --
Interest and other, net....................................     1,174        877        724        718        882
Income (loss) before extraordinary item....................      (156)      (124)       (91)      (164)        86
Net income (loss) (b)......................................      (191)      (166)       (91)      (221)        86
Net loss applicable to common shares (after preferred
  dividends)...............................................      (448)      (218)      (104)      (339)      (542)
Per share of common stock:
  Net loss (b).............................................   $ (1.04)   $ (0.57)   $ (0.27)   $ (0.90)   $ (1.46)
  Dividends................................................   $  0.36    $  0.36    $  0.35    $  0.31    $ 0.265
Average common shares......................................     431.2      383.8      378.9      374.7      371.0
</TABLE>
 
------------
 (a)  Business  segment operating  income for the  year ended  December 31, 1995
      includes $85 million in  losses relating to  certain businesses and  joint
      ventures owned by the Music division which were restructured or closed.
 
 (b)  The   net  loss  for  the  year   ended  December  31,  1996  includes  an
      extraordinary loss on  the retirement  of debt  of $35  million ($.09  per
      common  share). The net loss for the year ended December 31, 1995 includes
      an extraordinary loss on the retirement  of debt of $42 million ($.11  per
      common  share). The net loss for the year ended December 31, 1993 includes
      an extraordinary loss on the retirement  of debt of $57 million ($.15  per
      common share) and an unusual charge of $70 million ($.19 per common share)
      from the effect of the new income tax law on Time Warner's deferred income
      tax liability.
 
                                      F-64
 




<PAGE>

<PAGE>

 
<TABLE>
<CAPTION>
                                                                                 DECEMBER 31,
                                                              ---------------------------------------------------
SELECTED BALANCE SHEET INFORMATION                             1996       1995       1994       1993       1992
                                                              -------    -------    -------    -------    -------
                                                                                  (MILLIONS)
 
<S>                                                           <C>        <C>        <C>        <C>        <C>
Investments in and amounts due to and from Entertainment
  Group....................................................   $ 5,814    $ 5,734    $ 5,350    $ 5,627    $    --
Total assets...............................................    35,064     22,132     16,716     16,892     27,366
Debt due within one year...................................        11         34        355        120        171
Long-term debt.............................................    12,713      9,907      8,839      9,291     10,068
Borrowings against future stock option proceeds............       488         --         --         --         --
Company-obligated mandatorily redeemable preferred
  securities of subsidiaries holding solely subordinated
  notes and debentures of subsidiaries of the Company(c)...       949        949         --         --         --
Series M exchangeable preferred stock......................     1,672         --         --         --         --
Shareholders' equity:
  Preferred stock liquidation preference...................     3,559      2,994        140        140      6,532
  Equity applicable to common stock........................     5,943        673      1,008      1,230      1,635
  Total shareholders' equity...............................     9,502      3,667      1,148      1,370      8,167
Total capitalization.......................................    25,335     14,557     10,342     10,781     18,406
</TABLE>
 
------------
 (c)  Includes $374 million of preferred securities that are redeemable for cash
      or,  at Time Warner's option, approximately 18.1 million shares of Hasbro,
      Inc. common stock owned by Time Warner.
 
                                      F-65
 




<PAGE>

<PAGE>

                                TIME WARNER INC.
                  QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
                                          EQUITY IN                       NET          NET INCOME
                          OPERATING        PRETAX                    INCOME (LOSS)     (LOSS) PER     DIVIDENDS
                          INCOME OF       INCOME OF        NET        APPLICABLE         COMMON          PER
                          BUSINESS      ENTERTAINMENT     INCOME       TO COMMON         SHARE         COMMON
QUARTER      REVENUES     SEGMENTS          GROUP         (LOSS)       SHARES(d)         (d)(e)         SHARE
--------     --------     ---------     -------------     ------     -------------     ----------     ---------
                                     (MILLIONS, EXCEPT PER SHARE AMOUNTS)
 
<S>          <C>          <C>           <C>               <C>        <C>               <C>            <C>
1996 (a)
1st (b)       $2,068        $ 110           $ 116         $(119)         $(153)          $(0.39)        $0.09
2nd (b)        2,139          215              93           (40)          (110)           (0.28)         0.09
3rd            2,157          139              61           (91)          (167)           (0.43)         0.09
4th            3,700          502              20            59            (18)           (0.03)         0.09
Year (b)      10,064          966             290          (191)          (448)           (1.04)         0.36
 
1995
1st           $1,817        $ 138           $  22         $ (47)         $ (50)          $(0.13)        $0.09
2nd            1,907          184              84            (8)           (13)           (0.03)         0.09
3rd (c)        1,981           21             129          (144)          (160)           (0.41)         0.09
4th            2,362          354              21            33              5             0.01          0.09
Year (c)       8,067          697             256          (166)          (218)           (0.57)         0.36
 
<CAPTION>
 
                         COMMON 
           AVERAGE       STOCK
           COMMON    ------------
QUARTER    SHARES    HIGH     LOW
--------   ------    ----     ---
 
<S>         <C>      <C>      <C>
1996 (a)
1st (b)    391.7     $45 1/4  $37 1/4
2nd (b)    389.5      42 7/8   38 1/8
3rd        385.0      39 7/8   29 3/4
4th        558.7      42 1/4   36 1/2
Year (b)   431.2      45 1/4   29 3/4

1995
1st        379.5     $39 1/4  $33 5/8
2nd        381.4      43 1/2   34 1/4
3rd (c)    386.5      45 5/8   38 7/8
4th        387.5      41 1/4   35 3/4
Year (c)   383.8      45 5/8   33 5/8
</TABLE>
 
------------
 (a)  Quarterly financial information for 1996 reflects the acquisition by  Time
      Warner  of the  remaining interest  in TBS  that it  did not  already own,
      effective as of October 10, 1996.
 
 (b)  The net loss for the first quarter of 1996 includes an extraordinary  loss
      on  the retirement of debt of $26 million ($.07 per common share). The net
      loss for the second quarter of 1996 includes an extraordinary loss on  the
      retirement of debt of $9 million ($.02 per common share).
 
 (c)  Business  segment operating income for the  third quarter of 1995 includes
      $85 million in losses  relating to certain  businesses and joint  ventures
      owned  by the  Music division which  were restructured or  closed. The net
      loss for the third quarter of  1995 includes an extraordinary loss on  the
      retirement of debt of $42 million ($.11 per common share).
 
 (d)  After preferred dividend requirements.
 
 (e)  Per  common  share  amounts for  the  quarters  and full  years  have been
      calculated separately. Accordingly, quarterly amounts  may not add to  the
      annual  amount  because  of  differences  in  the  average  common  shares
      outstanding during each period.
 
                                      F-66
 




<PAGE>

<PAGE>

                                TIME WARNER INC.
                           SUPPLEMENTARY INFORMATION
                      SUMMARIZED FINANCIAL INFORMATION OF
        TIME WARNER COMPANIES, INC. AND TURNER BROADCASTING SYSTEM, INC.
 
     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 more
fully  described  in  Note 2  to  the  Time Warner  Inc.  consolidated financial
statements. 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 ('New Time
Warner'). New Time Warner  has fully and unconditionally  guaranteed all of  the
outstanding publicly traded indebtedness of each of Old Time Warner and TBS.
 
     Set  forth below  is summarized financial  information of each  of Old Time
Warner and TBS presented  for the information  of their respective  debtholders.
Summarized financial information of Old Time Warner presented below includes Old
Time  Warner's  20%  interest in  TBS  under  the equity  method  of accounting.
Summarized financial information  of TBS for  all post-merger periods  presented
below  has been adjusted  to reflect New  Time Warner's basis  of accounting and
includes $6.254 billion of contributed capital. Summarized financial information
of TBS  presented  below  for  all pre-merger  periods  is  reflected  at  TBS's
historical cost basis of accounting. Certain reclassifications have been made to
TBS's  summarized financial information for all pre-merger periods to conform to
the post-merger presentation.
 
OLD TIME WARNER
 
<TABLE>
<CAPTION>
                                                                                         YEARS ENDED DECEMBER 31,
                                                                                        --------------------------
OPERATING STATEMENT INFORMATION                                                          1996      1995      1994
                                                                                        ------    ------    ------
                                                                                                (MILLIONS)
<S>                                                                                     <C>       <C>       <C>
Revenues.............................................................................   $8,951    $8,067    $7,396
Depreciation and amortization........................................................      902       559       437
Business segment operating income (a)................................................      853       697       713
Equity in pretax income of Entertainment Group.......................................      290       256       176
Interest and other, net..............................................................    1,096       877       724
Loss before extraordinary item.......................................................     (145)     (124)      (91)
Net loss (b).........................................................................     (180)     (166)      (91)
</TABLE>
 
<TABLE>
<CAPTION>
                                                                                                  DECEMBER 31,
                                                                                               ------------------
BALANCE SHEET INFORMATION                                                                       1996       1995
                                                                                               -------    -------
                                                                                                   (MILLIONS)
<S>                                                                                            <C>        <C>
Total current assets........................................................................   $ 3,529    $ 3,720
Investments in and amounts due to and from Entertainment Group..............................     5,814      5,734
Total assets................................................................................    25,595     22,132
Total current liabilities...................................................................     2,831      3,027
Long-term debt..............................................................................    11,002      9,907
Total liabilities...........................................................................    18,532     17,516
Old Time Warner-obligated mandatorily redeemable preferred securities of subsidiaries
  holding solely subordinated notes and debentures of subsidiaries (c)......................       949        949
Series M exchangeable preferred stock.......................................................     1,672         --
Shareholders' equity........................................................................     4,442      3,667
</TABLE>
 
------------
 (a)  Business segment operating  income for  the year ended  December 31,  1995
      includes  $85 million in  losses relating to  certain businesses and joint
      ventures owned by the Music division which were restructured or closed.
 
 (b)  The  net  loss  for  the  year   ended  December  31,  1996  includes   an
      extraordinary  loss on the retirement of debt of $35 million. The net loss
      for the year ended December 31, 1995 includes an extraordinary loss on the
      retirement of debt of $42 million.
 
 (c)  Includes $374 million of preferred securities that are redeemable for cash
      or, at  Old Time  Warner's option,  approximately 18.1  million shares  of
      Hasbro, Inc. common stock owned by Old Time Warner.
 
                                      F-67
 




<PAGE>

<PAGE>

TBS
 
<TABLE>
<CAPTION>
                                                                            
                                                           THREE            NINE
                                                        MONTHS ENDED    MONTHS ENDED       YEARS ENDED DECEMBER 31,
                                                        DECEMBER 31,     SEPTEMBER 30,  ---------------------------
                                                            1996            1996           1995            1994
                                                        ------------    ------------    -----------    ------------
                                                                                (MILLIONS)
 
<S>                                                     <C>             <C>             <C>            <C>
OPERATING STATEMENT INFORMATION
Revenues.............................................      $1,124          $2,735         $ 3,412         $2,790
Depreciation and amortization........................          86             141             188            153
Business segment operating income....................         113             123             415            319
Interest and other, net..............................          62             143             215            216
Income before extraordinary item.....................           3             (20)            103             46
Net income (loss) (a)................................           3             (20)            103             21
</TABLE>
 
<TABLE>
<CAPTION>
                                                                                                  DECEMBER 31,
                                                                                                -----------------
                                                                                                 1996       1995
                                                                                                -------    ------
                                                                                                   (MILLIONS)
 
<S>                                                                                             <C>        <C>
BALANCE SHEET INFORMATION
Total current assets.........................................................................   $ 1,286    $1,393
Total assets.................................................................................    11,092     4,395
Total current liabilities....................................................................       934       840
Long-term debt...............................................................................     1,711     2,480
Total liabilities............................................................................     3,989     3,958
Shareholder's equity.........................................................................     7,103       438
</TABLE>
 
------------
 (a)  Net  income for the year ended December 31, 1994 includes an extraordinary
      loss on the retirement of debt of $25 million.
 
                                      F-68
 




<PAGE>

<PAGE>

                                TIME WARNER INC.
          SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
              UNCONSOLIDATED (PARENT-ONLY) CONDENSED BALANCE SHEET
                                  DECEMBER 31,
                                   (MILLIONS)
 
<TABLE>
<CAPTION>
                                                                                                1996       1995
                                                                                               -------    -------
<S>                                                                                            <C>        <C>
ASSETS
 
Cash and equivalents (a)....................................................................   $    62    $   922
Investments in and amounts due to and from unconsolidated subsidiaries and
  equity method investees...................................................................    16,110     16,040
Other assets................................................................................       216        436
                                                                                               -------    -------
Total assets................................................................................   $16,388    $17,398
                                                                                               -------    -------
                                                                                               -------    -------
 
LIABILITIES AND SHAREHOLDERS' EQUITY
Long-term debt..............................................................................   $    --    $ 8,467
Borrowings against future stock option proceeds.............................................       488         --
Deferred income taxes.......................................................................     4,082      3,420
Other liabilities...........................................................................       644        867
Subordinated notes and debentures in support of mandatorily redeemable preferred securities
  of subsidiaries...........................................................................        --        977
Series M exchangeable preferred stock.......................................................     1,672         --
 
Shareholders' equity:
Preferred stock.............................................................................         4         30
LMCN-V Class Common Stock...................................................................         1         --
Common stock................................................................................         5        388
Paid-in capital.............................................................................    12,250      5,422
Accumulated deficit.........................................................................    (2,758)    (2,173)
                                                                                               -------    -------
Total shareholders' equity..................................................................     9,502      3,667
                                                                                               -------    -------
Total liabilities and shareholders' equity..................................................   $16,388    $17,398
                                                                                               -------    -------
                                                                                               -------    -------
</TABLE>
 
------------
 (a)  Cash and equivalents at December 31, 1996 consists of $62 million held  in
      escrow for purposes of funding certain preferred dividend requirements and
      $557  million  at  December  31, 1995  segregated  for  the  redemption of
      long-term debt.
 
See accompanying notes.
 
                                      F-69
 




<PAGE>

<PAGE>

                                TIME WARNER INC.
          SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
         UNCONSOLIDATED (PARENT-ONLY) CONDENSED STATEMENT OF OPERATIONS
                                   (MILLIONS)
 
<TABLE>
<CAPTION>
                                                                   THREE MONTHS     NINE MONTHS         YEARS ENDED 
                                                                      ENDED            ENDED             DECEMBER 31,
                                                                   DECEMBER 31,    SEPTEMBER 30,   ------------------------
                                                                       1996            1996           1995         1994
                                                                   ------------    -------------   -----------  -----------
 
<S>                                                                <C>             <C>             <C>          <C>
Equity in the income of unconsolidated subsidiaries and equity
  method investees before federal and state income and foreign
  withholding taxes.............................................      $  156           $ 395        $     815    $     731
Interest and other, net.........................................         (16)           (574)            (860)        (641)
Corporate expenses..............................................         (17)            (52)             (74)         (76)
                                                                      ------          ------       -----------  -----------
Income (loss) before federal and state income and foreign
  withholding taxes.............................................         123            (231)            (119)          14
Benefit (provision) for federal and state income and foreign
  withholding taxes.............................................         (64)             16               (5)        (105)
                                                                      ------          ------       -----------  -----------
Income (loss) before extraordinary item.........................          59            (215)            (124)         (91)
Extraordinary loss on debt, net of $22 million and
  $26 million income tax benefit in the nine months ended
  September 30, 1996 and the year ended December 31, 1995,
  respectively..................................................          --             (35)             (42)          --
                                                                      ------          ------       -----------  -----------
Net income (loss)...............................................      $   59           $(250)       $    (166)   $     (91)
                                                                      ------          ------       -----------  -----------
                                                                      ------          ------       -----------  -----------
</TABLE>
 
See accompanying notes.
 
                                      F-70
 




<PAGE>

<PAGE>

                                TIME WARNER INC.
          SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
         UNCONSOLIDATED (PARENT-ONLY) CONDENSED STATEMENT OF CASH FLOWS
                                   (MILLIONS)
 
<TABLE>
<CAPTION>
                                                                  THREE MONTHS     NINE MONTHS         YEARS ENDED 
                                                                     ENDED            ENDED            DECEMBER 31,
                                                                  DECEMBER 31,    SEPTEMBER 30,   ------------------------
                                                                      1996            1996           1995         1994
                                                                  ------------    -------------   -----------  -----------
<S>                                                               <C>             <C>             <C>          <C>
OPERATIONS
Net income (loss)..............................................     $     59         $  (250)      $    (166)   $     (91)
Extraordinary loss on retirement of debt.......................           --              35              42           --
Noncash interest expense.......................................           --              68             176          219
Excess (deficiency) of distributions over equity in pretax
  income of unconsolidated subsidiaries and equity method
  investees(a).................................................          213            (288)            (89)        (396)
Other, principally changes in operating assets and
  liabilities..................................................           35              89             (72)         149
                                                                  ------------    -------------   -----------  -----------
Cash provided (used) by operations(b)(d).......................          307            (346)           (109)        (119)
                                                                  ------------    -------------   -----------  -----------
 
INVESTING ACTIVITIES
Investments and acquisitions, principally loans and advances to
  unconsolidated subsidiaries..................................       (1,300)         (1,506)           (353)        (815)
Investment proceeds, principally repayments of loans and
  advances by unconsolidated subsidiaries......................        1,058             304           1,154        1,087
                                                                  ------------    -------------   -----------  -----------
Cash provided (used) by investing activities(c)(d).............         (242)         (1,202)            801          272
                                                                  ------------    -------------   -----------  -----------
 
FINANCING ACTIVITIES
Borrowings.....................................................           --             845             748          550
Debt repayments................................................           --          (1,526)         (1,455)        (617)
Borrowings against future stock option proceeds................           63             425              --           --
Repurchases of Time Warner common stock........................           (4)           (452)             --           --
Issuance of Series M Preferred Stock...........................           --           1,550              --           --
Issuance of subordinated notes and debentures in support of
  mandatorily redeemable preferred securities of
  subsidiaries.................................................           --              --             977           --
Dividends paid.................................................          (84)           (203)           (171)        (142)
Stock option and dividend reinvestment plans...................           22              83             106           34
Other, principally financing costs.............................           --             (60)            (43)          (6)
                                                                  ------------    -------------   -----------  -----------
Cash provided (used) by investing activities(c)(d).............           (3)            662             162         (181)
                                                                  ------------    -------------   -----------  -----------
 
INCREASE (DECREASE) IN CASH AND EQUIVALENTS....................           62            (886)            854          (28)
 
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD....................           --             922              68           96
                                                                  ------------    -------------   -----------  -----------
 
CASH AND EQUIVALENTS AT END OF PERIOD..........................     $     62         $    36       $     922    $      68
                                                                  ------------    -------------   -----------  -----------
                                                                  ------------    -------------   -----------  -----------
</TABLE>
 
------------
 (a)  Distributions from unconsolidated subsidiaries and equity method investees
      were $369 million,  $107 million,  $726 million  and $335  million in  the
      three  months ended December 31, 1996, the nine months ended September 30,
      1996 and the years ended December 31, 1995 and 1994, respectively.
 
 (b)  Cash payments made for interest amounted to $6 million, $598 million, $628
      million and $539 million in the three months ended December 31, 1996,  the
      nine months ended September 30, 1996 and the years ended December 31, 1995
      and  1994,  respectively.  U.S.  federal  and  state  income  and  foreign
      withholding tax payments were $67 million, $231 million, $195 million  and
      $299  million in the three months ended December 31, 1996, the nine months
      ended September 30, 1996 and the  years ended December 31, 1995 and  1994,
      respectively,  and related tax  refunds were $6  million, $31 million, $19
      million and $44 million, respectively.
 
 (c)  For information with  respect to certain  noncash investing and  financing
      activities  of Time  Warner, see Note  18 to the  Time Warner consolidated
      financial statements. In  addition, noncash investing  activities of  Time
      Warner  with  its  unconsolidated  subsidiaries  included  noncash capital
      distributions (contributions), net, of  $2.450 billion and ($176)  million
      in the years ended December 31, 1995 and 1994, respectively.
 
 (d)  The  noncash  effects of  the capitalization  of New  Time Warner  were to
      increase investments in unconsolidated subsidiaries-$9.783 billion,  other
      assets-$215  million, borrowings against future stock option proceeds-$425
      million, deferred  income  taxes-$3.935  billion,  other  liabilities-$429
      million,   Series  M  exchangeable   preferred  stock-$1.629  billion  and
      equity-$3.580 billion.
 
See accompanying notes.
 
                                      F-71
 




<PAGE>

<PAGE>

                                TIME WARNER INC.
          SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
     NOTES TO UNCONSOLIDATED (PARENT-ONLY) CONDENSED FINANCIAL INFORMATION
 
1. BASIS OF PRESENTATION
 
     On October  10,  1996,  Time  Warner Inc.  ('Time  Warner'),  acquired  the
remaining  80% interest in Turner Broadcasting  System, Inc. ('TBS') that it did
not already own (the 'TBS  Transaction'), as more fully  described in Note 2  to
the  Time  Warner  consolidated  financial  statements.  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 ('New Time  Warner'). The  accompanying
condensed   financial  information  presented   herein  reflects  the  financial
condition, results of operations and cash flows of Old Time Warner prior to  the
TBS  Transaction and New Time Warner thereafter. Similarly, references herein to
'Time Warner' refer to Old Time Warner prior to the TBS Transaction and New Time
Warner thereafter.
 
     Time Warner's investments  in and  amounts due to  and from  unconsolidated
subsidiaries  and equity method investees are stated  at cost plus equity in the
undistributed income (loss) of subsidiaries and equity method investees,  before
U.S.  federal and  state income  and foreign  withholding taxes,  since dates of
acquisition.  Time  Warner's  share  of  the  income  (loss)  of  unconsolidated
subsidiaries  and equity method  investees, before federal  and state income and
foreign withholding taxes, is included in the statement of operations using  the
equity  method. The unconsolidated (parent-only)  financial statements should be
read in conjunction with the  accompanying consolidated financial statements  of
Time  Warner. Capitalized terms are  as defined herein or  elsewhere in the Time
Warner consolidated financial statements.
 
2. LONG-TERM DEBT
 
     The principal terms and  amounts of the long-term  debt of Old Time  Warner
(parent-only)  at December 31, 1995  are set forth in Note  6 to the Time Warner
consolidated financial statements. Such indebtedness was not assumed by New Time
Warner in connection  with the  TBS Transaction. Old  Time Warner  (parent-only)
long-term  debt at December 31, 1995  excludes unconsolidated subsidiary debt of
$1.440 billion.
 
     New Time Warner has  fully and unconditionally guaranteed  all of Old  Time
Warner's  and TBS's outstanding publicly  traded indebtedness, which amounted to
approximately $7.754 billion and $1.030  billion, respectively, at December  31,
1996.
 
3. BORROWINGS AGAINST FUTURE STOCK OPTION PROCEEDS
 
     In  connection with Time Warner's common stock repurchase program, Old Time
Warner entered into  a five-year,  $750 million revolving  credit facility  (the
'Stock Option Proceeds Credit Facility') in May 1996. Borrowings under the Stock
Option  Proceeds Credit Facility are principally  used to fund stock repurchases
and approximately  $200  million  of preferred  dividend  requirements  on  Time
Warner's  Series  G, H,  I and  J Preferred  Stock. In  connection with  the TBS
Transaction, New  Time  Warner assumed  all  of  Old Time  Warner's  rights  and
obligations  under the  Stock Option Proceeds  Credit Facility.  At December 31,
1996, $488  million  of  borrowings  were outstanding  under  the  Stock  Option
Proceeds  Credit  Facility. The  principal terms  of  the Stock  Option Proceeds
Credit Facility  are  set  forth in  Note  7  to the  Time  Warner  consolidated
financial statements.
 
4. SUBORDINATED NOTES AND DEBENTURES
 
     In  August 1995, Old Time Warner issued $385 million principal amount of 4%
subordinated notes due  December 23,  1997 (the '4%  Notes') to  a wholly  owned
subsidiary  in support of such subsidiary's  issuance of the PERCS. In addition,
in December 1995, Old Time Warner issued $592 million principal amount of 8 7/8%
subordinated debentures due  December 31, 2025  (the '8 7/8%  Debentures') to  a
wholly  owned  subsidiary  in  support  of  such  subsidiary's  issuance  of the
Preferred  Trust  Securities.   The  4%   Notes  and  the   8  7/8%   Debentures
 
                                      F-72
 




<PAGE>

<PAGE>

                                TIME WARNER INC.
          SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
                     NOTES TO UNCONSOLIDATED (PARENT-ONLY)
                 CONDENSED FINANCIAL INFORMATION -- (CONTINUED)
 
were  not assumed  by New  Time Warner in  connection with  the TBS Transaction.
However,  New  Time  Warner  has   guaranteed  Old  Time  Warner's   obligations
thereunder.
 
5. SERIES M EXCHANGEABLE PREFERRED STOCK
 
     In  April 1996, Old  Time Warner raised approximately  $1.55 billion of net
proceeds in a private  placement of 1.6 million  shares of 10 1/4%  exchangeable
preferred  stock. As a part of the  TBS Transaction, these shares were converted
into registered shares  of Series  M exchangeable  preferred stock  of New  Time
Warner  with  substantially identical  terms ('Series  M Preferred  Stock'). The
principal terms of the Series M Preferred Stock are set forth in Note 10 to  the
Time Warner consolidated financial statements.
 
                                      F-73
 




<PAGE>

<PAGE>

                                TIME WARNER INC.
                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........................     $  188       $    312(a)   $   (264)(c)       $ 236
     Reserves for sales returns and allowances..............        598          2,628(b)     (2,486)(d)(e)      740
                                                               ----------    ----------    ----------        ---------
          Total.............................................     $  786       $  2,940      $ (2,750)          $ 976
                                                               ----------    ----------    ----------        ---------
                                                               ----------    ----------    ----------        ---------
Reserves deducted from amounts due to publishers
     (accounts payable)
     Allowance for magazine and book returns................     $ (163)      $ (1,023)     $  1,007(e)        $(179)
                                                               ----------    ----------    ----------        ---------
                                                               ----------    ----------    ----------        ---------
1995:
Reserves deducted from accounts receivable:
     Allowance for doubtful accounts........................     $  157       $    230      $   (199)(c)       $ 188
     Reserves for sales returns and allowances..............        611          2,217        (2,230)(d)(e)      598
                                                               ----------    ----------    ----------        ---------
          Total.............................................     $  768       $  2,447      $ (2,429)          $ 786
                                                               ----------    ----------    ----------        ---------
                                                               ----------    ----------    ----------        ---------
Reserves deducted from amounts due to publishers
     (accounts payable)
     Allowance for magazine and book returns................     $ (159)      $ (1,015)     $  1,011(e)        $(163)
                                                               ----------    ----------    ----------        ---------
                                                               ----------    ----------    ----------        ---------
1994:
Reserves deducted from accounts receivable:
     Allowance for doubtful accounts........................     $  131       $    197      $   (171)(c)       $ 157
     Reserves for sales returns and allowances..............        545          1,822        (1,756)(d)(e)      611
                                                               ----------    ----------    ----------        ---------
          Total.............................................     $  676       $  2,019      $ (1,927)          $ 768
                                                               ----------    ----------    ----------        ---------
                                                               ----------    ----------    ----------        ---------
Reserves deducted from amounts due to publishers
     (accounts payable)
     Allowance for magazine and book returns................     $ (154)      $   (905)     $    900(e)        $(159)
                                                               ----------    ----------    ----------        ---------
                                                               ----------    ----------    ----------        ---------
</TABLE>
 
------------
 (a)  Includes  $40 million  charged to  other accounts  in connection  with the
      allocation of Time Warner's cost to acquire the remaining 80% interest  in
      TBS that it did not already own.
 
 (b)  Includes  $21 million  charged to  other accounts  in connection  with the
      allocation of Time Warner's cost to acquire the remaining 80% interest  in
      TBS that it did not already own.
 
 (c)  Represents uncollectible receivables charged against reserve.
 
 (d)  Represents returns or allowances applied against reserve.
 
 (e)  The  distribution  of magazines  not  owned by  Time  Warner results  in a
      receivable recorded at the  sales price and  a corresponding liability  to
      the publisher recorded at the sales price less the distribution commission
      recognized by Time Warner as revenue. Therefore, it would be misleading to
      compare  magazine revenues  to the  provision charged  to the  reserve for
      magazine returns that  is deducted from  accounts receivable without  also
      considering  the related offsetting  activity in the  reserve for magazine
      returns that is deducted from the liability due to the publishers.
 
                                      F-74
 

 




<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-75
 




<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-76
 




<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-77
 




<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-78
 




<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-79
 




<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-80
 




<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-81
 




<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-82
 




<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-83
 





<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-84
 




<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-85
 




<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-86
 




<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-87
 





<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-88
 




<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-89
 




<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-90
 




<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-91
 




<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-92
 




<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-93
 




<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-94
 




<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-95
 




<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-96
 




<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
                                                   CUMULATIVE     CAPITAL       WARNER
                                     CONTRIBUTED    PRIORITY      RATES OF     GENERAL
PRIORITY OF CONTRIBUTED CAPITAL      CAPITAL(a)     CAPITAL      RETURN(b)     PARTNERS
-----------------------------------  -----------   ----------   ------------   --------
                                            (BILLIONS)         (% PER ANNUM  (OWNERSHIP %)
                                                                 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%
 
<CAPTION>
                                    LIMITED PARTNERS
                                   -------------------
                                                  U S
PRIORITY OF CONTRIBUTED CAPITAL    TIME WARNER   WEST
-----------------------------------------------  -----
                                       (OWNERSHIP %) 
<S>                                  <C>         <C>
Senior Capital.....................       --       --
Series A Capital...................    11.22%    25.51%
Series B Capital...................       --       --
Residual Capital...................    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-97
 




<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-98
 




<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-99
 




<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-100
 




<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-101
 




<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-102
 




<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-103
 




<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-104
 




<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-105
 




<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-106
 




<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-107
 





<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-108
 




<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-109
 




<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-110
 




<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-111
 





<PAGE>

<PAGE>

                                 EXHIBIT INDEX
 
<TABLE>
<CAPTION>
 EXHIBIT                                                                                                  SEQUENTIAL
 NUMBER                                             DESCRIPTION                                           PAGE NUMBER
---------   -------------------------------------------------------------------------------------------   -----------
 
<C>         <S>                                                                                           <C>

 2.1        The Amended and Restated Agreement and Plan of Merger (the 'Merger Agreement'), dated as of
              September  22, 1995,  among TWCI,  the  Registrant,  Time Warner  Acquisition  Corp.,  TW
              Acquisition  Corp. and TBS (which is incorporated  herein by reference to Appendix A-1(a)
              to the Joint Proxy Statement/Prospectus included as part of the Registrant's Registration
              Statement   on  Form  S-4   (Registration   No.   333-11471)   (the   'S-4   Registration
              Statement')).............................................................................        *
2.2        Amendment No. 1 dated as of August 8,  1996 to the Merger Agreement (which is  incorporated
              herein  by reference to Appendix A-1(b)  to the Joint Proxy Statement/Prospectus included
              as part of the Registrant's S-4 Registration Statement)..................................        *
 3.(i)(a)   Restated Certificate of  Incorporation of  the Registrant as  filed with  the Secretary  of
               State of the State of  Delaware on October  10,  1996  (which is  incorporated  herein by
              reference to Exhibit 4.3 to the Registrant's  Post-Effective  Amendment No. 1 on Form S-8
              to the Registrant's  S-4 Registration  Statement  (Registration  No. 333-11471) (the 'S-8
              Registration Statement'))................................................................        *
 3.(i)(b)   Certificate of Amendment  of Restated  Certificate of  Incorporation of  the Registrant  as
              filed with the  Secretary of State of the State of Delaware on October 10, 1996 (which is
              incorporated  herein by reference  to Exhibit 4.4 to the  Registrant's  S-8  Registration
              Statement)...............................................................................        *
 3.(i)(c)   Certificate  of the Voting  Powers, Designations, Preferences  and Relative, Participating,
              Optional or  Other  Special  Rights,  and  Qualifications,  Limitations  or  Restrictions
              Thereof,  of Series  LMC Common Stock  of the Registrant  as filed with  the Secretary of
              State of the  State of  Delaware on  October 10, 1996  (which is  incorporated herein  by
              reference to Exhibit 4.5 to the Registrant's S-8 Registration Statement).................        *
 3.(i)(d)   Certificate  of the Voting  Powers, Designations, Preferences  and Relative, Participating,
              Optional or  Other  Special  Rights,  and  Qualifications,  Limitations  or  Restrictions
              Thereof,  of Series LMCN-V Common Stock of the  Registrant as filed with the Secretary of
              State of the  State of  Delaware on  October 10, 1996  (which is  incorporated herein  by
              reference to Exhibit 4.6 to the Registrant's S-8 Registration Statement).................        *
 3.(i)(e)   Certificate  of the Voting  Powers, Designations, Preferences  and Relative, Participating,
              Optional or  Other  Special  Rights,  and  Qualifications,  Limitations  or  Restrictions
              Thereof,  of Series A Participating Cumulative Preferred Stock of the Registrant as filed
              with the Secretary  of State  of the  State of  Delaware on  October 10,  1996 (which  is
              incorporated  herein by  reference to  Exhibit 4.7  to the  Registrant's S-8 Registration
              Statement)...............................................................................        *
 3.(i)(f)   Certificate of the  Voting Powers, Designations,  Preferences and Relative,  Participating,
              Optional  or  Other  Special  Rights,  and  Qualifications,  Limitations  or Restrictions
              Thereof, of Series  D Convertible Preferred  Stock of  the Registrant as  filed with  the
              Secretary  of State of the  State of Delaware on October  10, 1996 (which is incorporated
              herein by reference to Exhibit 4.8 to the Registrant's S-8 Registration Statement).......        *
 3.(i)(g)   Certificate of the  Voting Powers, Designations,  Preferences and Relative,  Participating,
              Optional  or  Other  Special  Rights,  and  Qualifications,  Limitations  or Restrictions
              Thereof, of Series  E Convertible Preferred  Stock of  the Registrant as  filed with  the
              Secretary  of State of the  State of Delaware on October  10, 1996 (which is incorporated
              herein by reference to Exhibit 4.9 to the Registrant's S-8 Registration Statement).......        *
 3.(i)(h)   Certificate  of  Correction  of  the  Certificate  of  the  Voting  Powers,   Designations,
              Preferences   and  Relative,  Participating,  Optional   or  Other  Special  Rights,  and
              Qualifications, Limitations or  Restrictions Thereof, of  Series E Convertible  Preferred
              Stock  of the Registrant as filed with the Secretary of State of the State of Delaware on
              November 13, 1996........................................................................
 3.(i)(i)   Certificate of the  Voting Powers, Designations,  Preferences and Relative,  Participating,
              Optional  or  Other  Special  Rights,  and  Qualifications,  Limitations  or Restrictions
              Thereof, of Series  F Convertible Preferred  Stock of  the Registrant as  filed with  the
              Secretary  of State of the  State of Delaware on October  10, 1996 (which is incorporated
              herein by reference to Exhibit 4.10 to the Registrant's S-8 Registration Statement)......        *
</TABLE>
 




<PAGE>

<PAGE>

<TABLE>
<CAPTION>
 EXHIBIT                                                                                                  SEQUENTIAL
 NUMBER                                             DESCRIPTION                                           PAGE NUMBER
---------   -------------------------------------------------------------------------------------------   -----------
<C>         <S>                                                                                           <C>
 3.(i)(j)   Certificate  of  Correction  of  the  Certificate  of  the  Voting  Powers,   Designations,
              Preferences   and  Relative,  Participating,  Optional   or  Other  Special  Rights,  and
              Qualifications, Limitations or  Restrictions Thereof, of  Series F Convertible  Preferred
              Stock  of the Registrant as filed with the Secretary of State of the State of Delaware on
              November 13, 1996........................................................................
 3.(i)(k)   Certificate of the  Voting Powers, Designations,  Preferences and Relative,  Participating,
              Optional  or  Other  Special  Rights,  and  Qualifications,  Limitations  or Restrictions
              Thereof, of Series  G Convertible Preferred  Stock of  the Registrant as  filed with  the
              Secretary  of State of the  State of Delaware on October  10, 1996 (which is incorporated
              herein by reference to Exhibit 4.11 to the Registrant's S-8 Registration Statement)......        *
 3.(i)(l)   Certificate of the  Voting Powers, Designations,  Preferences and Relative,  Participating,
              Optional  or  Other  Special  Rights,  and  Qualifications,  Limitations  or Restrictions
              Thereof, of Series  H Convertible Preferred  Stock of  the Registrant as  filed with  the
              Secretary  of State of the  State of Delaware on October  10, 1996 (which is incorporated
              herein by reference to Exhibit 4.12 to the Registrant's S-8 Registration Statement)......        *
 3.(i)(m)   Certificate of the  Voting Powers, Designations,  Preferences and Relative,  Participating,
              Optional  or  Other  Special  Rights,  and  Qualifications,  Limitations  or Restrictions
              Thereof, of Series  I Convertible Preferred  Stock of  the Registrant as  filed with  the
              Secretary  of State of the  State of Delaware on October  10, 1996 (which is incorporated
              herein by reference to Exhibit 4.13 to the Registrant's S-8 Registration Statement)......        *
 3.(i)(n)   Certificate of the  Voting Powers, Designations,  Preferences and Relative,  Participating,
              Optional  or  Other  Special  Rights,  and  Qualifications,  Limitations  or Restrictions
              Thereof, of Series  J Convertible Preferred  Stock of  the Registrant as  filed with  the
              Secretary  of State of the  State of Delaware on October  10, 1996 (which is incorporated
              herein by reference to Exhibit 4.14 to the Registrant's S-8 Registration Statement)......        *
 3.(i)(o)   Certificate of the  Voting Powers, Designations,  Preferences and Relative,  Participating,
              Optional  or  Other  Special  Rights,  and  Qualifications,  Limitations  or Restrictions
              Thereof, of 10 1/4% Series M Exchangeable Preferred Stock of the Registrant as filed with
              the Secretary  of  State  of  the  State  of Delaware  on  October  10,  1996  (which  is
              incorporated  herein by  reference to Exhibit  4.15 to the  Registrant's S-8 Registration
              Statement)...............................................................................        *
 3.(ii)     By-laws of the Registrant as of November 21, 1996..........................................
 4.1        Rights Agreement  dated as  of October  10,  1996 between  the Registrant  and  ChaseMellon
              Shareholder  Services  L.L.C. (which is incorporated  herein by reference to Exhibit 4.17
              to the Registrant's S-8 Registration Statement)..........................................        *
 4.2        Indenture dated as of April 30, 1992, as amended by the First Supplemental Indenture, dated
              as of June 30, 1992, among Time Warner Entertainment Company, L.P. ('TWE'), TWCI, certain
              of TWCI's  subsidiaries  that are parties  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
              Current Report on Form 8-K dated July 14, 1992 (File No. 1-8637)  ('TWCI's July 1992 Form
              8-K'))....................................................................................       *
4.3        Second Supplemental Indenture, dated as  of December 9, 1992,  among TWE, TWCI, certain  of
              TWCI's  subsidiaries that are parties 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 (Registration No. 33-67688) filed with the Commission
              on October 25, 1993 ('TWE's 1993 Form S-4')).............................................        *
 4.4        Third  Supplemental Indenture, dated  as of October  12, 1993, among  TWE, TWCI, certain of
              TWCI's subsidiaries that are parties 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)...............        *
 4.5        Fourth  Supplemental Indenture,  dated as of  March 29,  1994, among TWE,  TWCI, certain of
              TWCI's subsidiaries that are parties thereto and The Bank of New York, as Trustee  (which
              is  incorporated herein by reference  to Exhibit 4.4 to TWE's  Annual Report on Form 10-K
              for the year ended December 31, 1993 ('TWE's 1993 Form 10-K'))...........................        *
</TABLE>

 




<PAGE>

<PAGE>

<TABLE>
<CAPTION>
 EXHIBIT                                                                                                  SEQUENTIAL
 NUMBER                                             DESCRIPTION                                           PAGE NUMBER
---------   -------------------------------------------------------------------------------------------   -----------
<C>         <S>                                                                                           <C>
 4.6        Fifth Supplemental Indenture, dated  as of December 28, 1994, among  TWE, TWCI, certain  of
              TWCI's  subsidiaries that are parties thereto and The Bank of New York, as Trustee (which
              is incorporated herein by reference  to Exhibit 4.5 to TWE's  Annual Report on Form  10-K
              for the year ended December 31, 1994 ('TWE's 1994 Form 10-K'))...........................        *
 4.7        Indenture dated as of January 15, 1993, between TWCI and The Chase Manhattan Bank (formerly
              Chemical Bank) ('Chase Manhattan'), as Trustee (which is incorporated herein by reference
              to Exhibit  4.11 to TWCI's  Annual  Report on Form 10-K for the year ended  December  31,
              1992)....................................................................................        *
 4.8        First  Supplemental Indenture dated as of June  15, 1993  between TWCI and Chase Manhattan,
              as  Trustee (which is incorporated herein by  reference to Exhibit 4 to TWCI's  Quarterly
              Report on Form 10-Q for the quarter ended June 30, 1993).................................        *
 4.9        Second  Supplemental Indenture dated as of October  10, 1996 among the Registrant, TWCI and
              Chase Manhattan,  as Trustee (which is incorporated herein by reference to Exhibit 4.1 to
              TWCI's   Quarterly   Report  on  Form  10-Q  for  the   quarter   ended   September   30,
              1996)....................................................................................        *
 4.10       Third  Supplemental Indenture dated as of December  31, 1996 among the Registrant, TWCI and
              Chase Manhattan, as Trustee..............................................................
10.1        Time Warner 1986 Stock Option Plan, as amended through July 18, 1996.......................
10.2        1988 Stock Incentive Plan of Time Warner Inc., as amended through July 18, 1996............
10.3        Time Warner 1989 Stock Incentive Plan, as amended through July 18, 1996....................
10.4        Time Warner 1994 Stock Option Plan, as amended through July 18, 1996.......................
10.5        Time Warner Corporate Group Stock Incentive Plan, as amended through July 18, 1996.........
10.6        Time Warner  1988 Restricted  Stock Plan  for Non-Employee  Directors, as  amended  through
              November  18, 1993 (which is  incorporated herein by reference  to Exhibit 10.8 to TWCI's
              Annual Report  on Form  10-K for  the year  ended December  31, 1993  ('TWCI's 1993  Form
              10-K'))..................................................................................        *
10.7        Time Warner 1996 Stock Option Plan for Non-Employee Directors (which is incorporated herein
              by reference to Annex A to TWCI's definitive Proxy Statement dated March 29, 1996 used in
              connection with TWCI's 1996 Annual Meeting of Stockholders)..............................        *
10.8        Deferred  Compensation Plan for Directors  of Time Warner, as  amended through November 18,
              1993 (which is  incorporated herein  by reference  to Exhibit  10.9 to  TWCI's 1993  Form
              10-K)....................................................................................        *
10.9        Time Warner Retirement Plan for Outside Directors, as amended through May 16, 1996.........
10.10       Amended  and Restated Time Warner  Inc. Annual Bonus Plan  for Executive Officers (which is
              incorporated herein by reference  to Annex A to  TWCI's definitive Proxy Statement  dated
              March 30, 1995 used in connection with TWCI's 1995 Annual Meeting of Stockholders).......        *
10.11       Amended  and Restated Employment  and Termination Agreement  dated as of  March 3, 1989, as
              amended and restated as of January 10, 1990, between the Registrant and J. Richard  Munro
              (which  is incorporated herein by  reference to Exhibit 10.26  to TWCI's Annual Report on
              Form 10-K for the year ended December 31, 1989 (File No.1-8637))..........................       *
10.12       Amended and  Restated Employment  Agreement dated  as  of November  15, 1990,  between  the
              Registrant  and Gerald M. Levin  (which is  incorporated  herein by  reference to Exhibit
              10.26 to TWCI's Annual Report on Form 10-K for the year ended December 31, 1990 (File No.
              1-8637))......... .......................................................................        *
10.13       Employment Agreement made and effective as of October 10, 1996, between the Registrant  and
              R.E. Turner ('Turner')...................................................................
10.14       Employment  Agreement made as  of November 2,  1994, between the  Registrant and Richard D.
              Parsons (which is  incorporated herein  by reference to  Exhibit 10.17  to TWCI's  Annual
              Report on Form 10-K for the year ended December 31, 1994 ('TWCI's 1994 Form 10-K'))......        *
10.15       Employment  Agreement made  as of  May 17, 1995  between the  Registrant and  Peter R. Haje
              (which is incorporated herein by reference to Exhibit 10.5 to TWCI's Quarterly Report  on
              Form 10-Q for the quarter ended June 30, 1995)...........................................        *
</TABLE>
 




<PAGE>

<PAGE>

<TABLE>
<CAPTION>
 EXHIBIT                                                                                                  SEQUENTIAL
 NUMBER                                             DESCRIPTION                                           PAGE NUMBER
---------   -------------------------------------------------------------------------------------------   -----------
<C>         <S>                                                                                           <C>
10.16       Employment Agreement effective as of January 1, 1995, between the Registrant and Richard J.
              Bressler (which is incorporated  herein by reference to Exhibit 10.18 to TWCI's 1994 Form
              10-K)....................................................................................        *
10.17       Amended and Restated  Employment Agreement  effective as of  January 1,  1994, between  the
              Registrant  and Philip R.  Lochner,  Jr.  (which is  incorporated  herein by reference to
              Exhibit 10.20 to TWCI's  1994 Form 10-K).................................................        *
10.18       Employment Agreement  dated as  of May  15, 1996,  between the  Registrant and  Timothy  A.
              Boggs....................................................................................
10.19       Second  Amended and Restated LMC Agreement dated as  of September 22, 1995 among TWCI, LMC,
              TCI Turner Preferred,  Inc.  ('TCITP'),  Communication  Capital Corp.  ('CCC') and United
              Cable Turner Investment, Inc. (which is incorporated herein by reference to Exhibit 10(a)
              to the TWCI Current  Report on Form 8-K dated  September 6, 1996 ('TWCI's  September 1996
              Form 8-K')).................. ...........................................................        *
10.20       SSSI Agreement dated as of October 10, 1996 between the Registrant, LMC, Southern Satellite
              Systems, Inc. and with respect to Section 11(d), Section 11(f) and  Section  11(g)  only,
              Satellite Services, Inc. ................................................................
10.21       Agreement   Containing   Consent   Order   dated  August   14,   1996   among   TWCI,  TBS,
              TCI, LMC and the Federal Trade Commission  (which is incorporated  herein by reference to
              Exhibit 2(b) to TWCI's September 1996 Form 8-K)..........................................        *
10.22       Stockholders' Agreement dated as of October 10,  1996 among the  Registrant, Turner, TCITP,
              Liberty  Broadcasting  Inc.,  CCC,  Turner  Outdoor Inc.  ('Turner  Outdoor')  and Turner
              Partners, L.P. ('Turner Partners').......................................................
10.23       Investors  Agreement (No.  1) dated  as of  October 10, 1996 among  the Registrant, Turner,
              Turner Outdoor and Turner Partners.......................................................
10.24       Investors Agreement (No.  2) dated  as of  October 10,  1996 among  the Registrant,  Turner
              Foundation, Inc. ('Turner Foundation') and Robert E. Turner Charitable Remainder Unitrust
              No. 2 ('Turner Trust')...................................................................
10.25       Registration  Rights Agreement dated  as of October 10, 1996 among  the Registrant, Turner,
              Turner Outdoor, Turner Foundation, Turner Trust and Turner Partners......................
10.26       Credit Agreement dated as  of June 30,  1995 (the 'TWE Credit  Agreement') among TWE,  Time
              Warner  Entertainment-Advance/Newhouse Partnership  ('TWE-AN Partnership')  and TWI Cable
              Inc., as borrowers, Chase  Manhattan, as administrative agent,  Bank of America  National
              Trust  and Savings Association, The Bank of New York and Morgan Guaranty Trust Company of
              New York, as  documentation and syndication  agents, and the  lending institutions  named
              therein  (which is incorporated  herein by reference  to Exhibit 10(a)  to TWCI's Current
              Report on Form 8-K dated July 6, 1995)...................................................        *
10.27       Amendment No. 1 dated  as of  October  30,  1995 to the TWE  Credit  Agreement  (which   is
              incorporated  herein by reference to Exhibit 10.2 to TWE's Annual Report on Form 10-K for
              the year ended December 31, 1995). ......................................................
10.28       Waiver No. 1 dated as of December 1, 1995 to the TWE Credit Agreement......................
10.29       Amendment and Waiver No. 2 dated as of August 26, 1996 to the TWE Credit Agreement.........
10.30       Credit Agreement,  dated as of July 1, 1993 ('1993 TBS Credit Agreement'),  between TBS and
              Chase Manhattan,  as agent (which is incorporated herein by reference to Exhibit 4.9.1 to
              TBS's   Quarterly    Report   on   Form   10-Q   for   the   quarter   ended   June   30,
              1993)....................................................................................        *
10.31       Form of  Amendment  No. 1, dated as of December 1, 1993,  to the 1993 TBS Credit  Agreement
              (which is  incorporated  herein  by  reference  to  Exhibit  4.6.2 to TBS's  Registration
              Statement on Form S-4  (Registration  No. 33-51739) filed with the Commission on December
              29, 1993 ('TBS's Form S-4 Registration Statement'))......................................        *
10.32       Form of Amendment  No. 2, dated as of December 15, 1993,  to the 1993 TBS Credit  Agreement
              (which  is  incorporated  herein  by  reference  to  Exhibit  4.6.3  to  TBS's  Form  S-4
              Registration Statement)..................................................................        *
10.33       Form of Consent and  Agreement,  dated as of December  21,  1993,  relating to the 1993 TBS
              Credit  Agreement  (which is  incorporated  herein by reference to Exhibit 4.6.4 to TBS's
              Form S-4 Registration Statement).........................................................        *
10.34       Amendment  No. 3, dated as of June 30,  1994,  to the 1993 TBS Credit  Agreement  (which is
              incorporated  herein by reference to Exhibit 10.46 to TBS's Quarterly Report on Form 10-Q
              for   the   quarter   ended   September   30,   1994   ('TBS's    September   1994   Form
              10-Q'))..................................................................................        *

</TABLE>

 




<PAGE>

<PAGE>

<TABLE>
<CAPTION>
 EXHIBIT                                                                                                  SEQUENTIAL
 NUMBER                                             DESCRIPTION                                           PAGE NUMBER
---------   -------------------------------------------------------------------------------------------   -----------
<C>         <S>                                                                                           <C>
10.35       Form of  Amendment  No. 4, dated as of December 5, 1994,  to the 1993 TBS Credit  Agreement
              (which is incorporated  herein by reference to Exhibit 4.4.6 to TBS's Quarterly Report on
              Form  10-Q  for  the   quarter   ended   March  31,   1995   ('TBS's   March   1995  Form
              10-Q'))..................................................................................        *
10.36       Amendment No. 5, dated as of April 25, 1996, to the 1993 TBS Credit Agreement..............
10.37       Amendment No. 6, dated as of September 30, 1996 to the 1993 TBS Credit Agreement...........
10.38       Credit Agreement,  dated as of September 7, 1994 (the '1994 TBS Credit  Agreement'),  among
              TBS, the banks  listed  therein and Chase  Manhattan,  as agent,  (which is  incorporated
              herein   by   reference    to   Exhibit    10.45   to   TBS's    September    1994   Form
              10-Q)....................................................................................        *
10.39       Form of  Amendment  No. 1, dated as of December 5, 1994,  to the 1994 TBS Credit  Agreement
              (which is  incorporated  herein by  reference  to Exhibit  4.7.1 to TBS's March 1995 Form
              10-Q)....................................................................................        *
10.40       Amendment No. 2, dated as of April 26, 1996, to the 1994 TBS Credit Agreement..............
10.41       Amendment No. 3, dated as of September 30, 1996 to the 1994 TBS Credit Agreement...........
10.42       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
              TWCI  and  certain  of  its  subsidiaries,  ITOCHU  Corporation  ('ITOCHU')  and  Toshiba
              Corporation ('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 Exhibit
              10(b) and 10(c) to TWCI's July 1992 Form 8-K)............................................        *
10.43       Admission Agreement,  dated  as  of May  16,  1993,  between  TWE and  US  West  (which  is
              incorporated  herein by reference  to Exhibit 10(a)  to TWE's Current  Report on Form 8-K
              dated May 16, 1993)......................................................................        *
10.44       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 1993  Form
              10-K)....................................................................................        *
10.45       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'))........        *
10.46       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)......................        *
10.47       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)................        *
10.48       Contribution Agreement dated as of September 9, 1994 among TWE, Advance Publications, Inc.,
              ("Advance    Publications'),     Newhouse    Broadcasting    Corporation    ('Newhouse'),
              Advance/Newhouse  Partnership  ('Advance/Newhouse'),  and  TWE-A/N  Partnership (which is
              incorporated  herein by reference to Exhibit  10(a) to TWE's  Current  Report on Form 8-K
              dated September 9, 1994 ('TWE's September 1994 Form 8-K'))...............................        *
10.49       Partnership Agreement, dated  as of  September 9,  1994, between  TWE and  Advance/Newhouse
              (which  is incorporated herein by reference to Exhibit 10(b) to TWE's September 1994 Form
              8-K).....................................................................................        *
10.50       Letter Agreement dated April 1, 1995 among TWE, Advance/Newhouse, Advance Publications, 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 the Registrant.............................................................
23.1        Consent of Ernst & Young LLP, Independent Auditors.........................................
23.2        Consent of Price Waterhouse LLP, Independent Accountants...................................
27          Financial Data Schedule....................................................................
99.1        The 1994 financial statements  of the Time  Warner Service Partnerships  and the report  of
              independent  auditors  thereon (which  is incorporated  by reference  to TWE's  1994 Form
              10-K)....................................................................................        *
</TABLE>

 




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<PAGE>

<TABLE>
<CAPTION>
 EXHIBIT                                                                                                  SEQUENTIAL
 NUMBER                                             DESCRIPTION                                           PAGE NUMBER
---------   -------------------------------------------------------------------------------------------   -----------
<C>         <S>                                                                                           <C>
99.2        The unaudited  financial  statements  of  the Time  Warner  Service  Partnerships  for  the
              quarterly  period ended September 30, 1995 (which  is incorporated herein by reference to
              the Current Report on Form 8-K of TWE dated November 28, 1995 ('TWE's November 1995  Form
              8-K'))...................................................................................        *
99.3        The  1994 financial statements  and financial statement  schedule of Paragon Communications
              and the  report of  independent  accountants thereon  (which  is incorporated  herein  by
              reference to TWE's 1994 Form 10-K).......................................................        *
99.4        The unaudited financial statements of Paragon Communications for the quarterly period ended
              June 30, 1995 (which is incorporated by reference to TWE's November 1995 Form 8-K).......        *
99.5        Annual  Report on Form  11-K of the Time  Warner  Employees'  Savings  Plan for the  period
              December 31, 1995 to October 1, 1996 (to be filed by amendment)..........................
99.6        Annual  Report  on  Form  11-K  of  the  Time  Warner  Savings  Plan  for  the  year  ended
              December 31, 1996 (to be filed by amendment).............................................
99.7        Annual  Report on Form 11-K of the Time Warner  Thrift Plan for the year ended December 31,
              1996 (to be filed by amendment)..........................................................
99.8        Annual Report on Form 11-K of the Cable Employees Savings Plan for the year ended  December
              31, 1996 (to be filed by amendment)......................................................
</TABLE>
 
------------
 
*  Incorporated by reference.
 
     The  Registrant hereby  agrees to  furnish to  the Securities  and Exchange
Commission at  its request  copies of  long-term debt  instruments defining  the
rights  of holders  of outstanding  long-term debt that  are not  required to be
filed herewith.


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