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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, 1997.
                         COMMISSION FILE NUMBER 1-12259
 
                            ------------------------
 
                                TIME WARNER INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 
                            ------------------------
 
                 DELAWARE                                       13-3527249
     (STATE OR OTHER JURISDICTION OF                          (I.R.S. EMPLOYER
      INCORPORATION OR ORGANIZATION)                         IDENTIFICATION NO.)
   75 ROCKEFELLER PLAZA, NEW YORK, N.Y.                            10019
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                        (ZIP CODE)
 
                            ------------------------
 
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
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<S>                                                                                  <C>
Common Stock, $.01 par value                                                         New York Stock Exchange
Rights to Purchase Series A Participating Cumulative Preferred Stock                 New York Stock Exchange
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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. [x]
 
     As of March 23, 1998, there were 532,707,059 shares of registrant's Common
Stock and 57,061,942 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 23, 1998) was
approximately $35.5 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 1998 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 Magazine and Book Publishing, TWI
Cable and the Time Warner General and Limited Partners.(1)

Time Warner General and Limited Partners own 100% of 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 65.2%  of the TWE - A/N Partnership (Cable).
The TWE - A/N Partnership is also 33.3% - owned by Advance/Newhouse and 1.5% - 
owned by TWI Cable.(3)

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


     (1) Time Warner Companies, 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 interests
senior and junior to the pro rata priority capital interests. (See Note 4 to the
Company's consolidated statements.)

     (3) Direct or indirect common equity interests. In addition, TWI Cable
indirectly owns preferred partnership interests.
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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, recorded music
and music publishing; Cable Networks, consisting principally of interests in
cable television programming; Publishing, consisting principally of interests in
magazine publishing, book publishing and direct marketing; and Cable, consisting
principally of interests in cable television systems. 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.
 
     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, 1997, see Note 16 'Segment
Information,' to the Company's consolidated financial statements, at pages F-51
through F-55 herein.
 
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 page F-31 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
 
                                      I-1
 

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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
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.
 
     In 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 is
the managing partner of the TWE-A/N Partnership.
 
RECENT EVENTS
 
     In early 1998, the Company, through wholly owned subsidiaries, contributed
or beneficially assigned to the TWE-A/N Partnership additional cable television
systems serving approximately 650,000 subscribers, subject to approximately $1
billion of debt, in exchange for common and preferred interests in the TWE-A/N
Partnership. In addition, TWE contributed or beneficially assigned to the
TWE-A/N Partnership its interest in cable television systems serving
approximately 500,000 subscribers formerly owned by Paragon Communications in
satisfaction of certain commitments made by TWE to the TWE-A/N Partnership at
the time of its formation. Following these transactions, the common equity of
the TWE-A/N Partnership is owned approximately as follows: 33.3% by
Advance/Newhouse, 65.2% by TWE and 1.5% indirectly by Time Warner.
 
     In February 1998, TWE entered into an agreement to sell its remaining 49%
interest in Six Flags Entertainment Corporation ('Six Flags') to Premier Parks
Inc. ('Premier'), a regional theme park operator, for approximately $375 million
of cash and $100 million of convertible preferred stock, before transaction
costs. Under the terms of the transaction, Premier will continue to license the
use of Warner Bros.' and DC Comics' cartoon characters at the Six Flags parks,
and the license will be extended to Premier's other parks in the United States
and Canada. Subject to the satisfaction of certain conditions, the closing of
the transaction is expected in the second quarter of 1998.
 
     In September 1997, the Company, TWE, the TWE-A/N Partnership and a
subsidiary of Tele-Communications, Inc. entered into a letter of intent to form
two new cable television joint ventures in Texas that will be managed by TWE,
expand an existing joint venture in Kansas City, and exchange various cable
television systems to enhance clustering of properties. These transactions,
which are each subject to execution of definitive agreements and customary
closing conditions, are expected to close periodically during 1998.
 
     In June 1997, TWE, Advance/Newhouse and the other partners of Primestar
Partners L.P. ('Primestar') agreed to restructure the business of Primestar by
contributing, in a series of transactions, the separate Primestar direct
broadcast satellite distribution business of each of the Primestar partners
together with their partnership interests into a new corporation. Subject to
regulatory approval, the restructuring is currently expected to close on or
about April 1, 1998. In a separate pending transaction which is also subject to
regulatory approval, the new Primestar would acquire certain high power
satellites and FCC permits from MCI Communications Corporation and The News
Corporation Limited.
 
                                      I-2
 

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                                 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 television network,
produce and distribute recorded music, license rights to the Company's
characters, operate retail stores featuring consumer products based on the
Company's characters and brands and also operate international theme parks and
motion picture theaters.
 
                              FILMED ENTERTAINMENT
 
     The Company's filmed entertainment business includes the production,
financing and distribution of feature motion pictures, 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 broadcast television network and
the distribution of 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, operation and franchising of retail
stores, international movie theaters and theme parks.
 
     The filmed entertainment business also includes New Line Cinema Corporation
and Castle Rock Entertainment ('Castle Rock'), 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 and is compensated for certain distribution and
other services for these businesses.
 
                      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. Warner Bros. also acquires
for distribution completed films produced by others. Acquired distribution
rights may be limited to specified territories, media and/or 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. It is expected that the agreements with Morgan
Creek will be renewed. Under this arrangement, Warner Bros. released 'Wild
America' in 1997 and anticipates releasing 'Wrongfully Accused,' 'Incognito' and
'Major League 3,' among others, in 1998. An affiliate of Warner Bros. is a party
to co-financing and distribution agreements with Monarchy Enterprises C.V. and
its affiliate, Regency Entertainment U.S.A. (collectively 'Monarchy/Regency').
These agreements expire in 1998 and will not be renewed. Among the remaining
Monarchy/Regency productions to be distributed by Warner Bros. in 1998 are
'Dangerous Beauty,' 'Goodbye Lover' and 'The Negotiator.' It is anticipated that
'City of Angels' will be released as a co-financed picture in l998.
 
                                      I-3
 

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     In July l997, an affiliate of Warner Bros. and an affiliate of Canal Plus
formed a joint venture to co-finance on a 50/50 basis a total of approximately
20 to 25 motion pictures over a five-year period. Warner Bros. acquired all
distribution rights in the U.S. and Canada and substantially all international
distribution rights to these pictures. Warner Bros. will advance marketing and
distribution costs and will receive a distribution fee in connection with the
exploitation of the pictures. It is anticipated that 'Message in a Bottle' will
be released under this arrangement in 1998.
 
     Warner Bros. and one of its affiliates have reached an agreement in
principle with Village Roadshow Pictures and certain of its affiliates ('VRP')
to co-finance under a cost sharing arrangement the production of up to 20 motion
pictures over a five-year period. Approximately 50% of the production costs of
those pictures will be provided by Warner Bros. and its affiliate, and the
balance will be provided by VRP. Warner Bros. will acquire all distribution
rights in the U.S. and Canada and substantially all international distribution
rights to the co-financed pictures. Warner Bros. will advance marketing and
distribution costs and will receive a distribution fee in connection with the
exploitation of the pictures.
 
     Warner Bros. and Polygram Filmed Entertainment ('Polygram') have agreed to
co-finance on a 50/50 basis the production of motion pictures developed and
produced by Castle Rock through 2000. Warner Bros. and Polygram will each
acquire distribution rights in the U.S. and Canada to half of the Castle Rock
pictures and international distribution rights to the other half on an
alternating picture-by-picture basis. Warner Bros. and Polygram will each
advance marketing and distribution costs and will receive distribution fees in
connection with the exploitation of the Castle Rock pictures. Among the Castle
Rock releases anticipated for l998 are 'Mickey Blue Eyes,' which Warner Bros.
will distribute in the U.S. and Canada, and 'The Last Days of Disco,' to be
distributed by Warner Bros. internationally.
 
     During 1997, Warner Bros. domestically released 25 motion pictures for
theatrical exhibition, of which 11 were produced by or with others. In addition,
Warner Bros. released ten motion pictures in foreign markets, all of which were
produced by others. The following motion pictures released in 1997 produced
substantial domestic gross theatrical receipts: 'Contact,' 'Batman and Robin,'
'Conspiracy Theory,' 'Devil's Advocate' and 'L.A. Confidential.' During 1997,
approximately 54% of film rentals from Warner Bros. theatrical distribution were
generated in the United States and 46% in international territories.
 
     During 1998, Warner Bros. expects to release domestically approximately 28
motion pictures, of which 14 are expected to be produced by or with others.
During the first quarter of 1998, Warner Bros. released 'U.S. Marshals' and
'Sphere.' Other 1998 releases include 'The Avengers,' 'Lethal Weapon 4,' 'You
Have Mail' and 'Quest for Camelot,' the first fully animated feature film
produced by Warner Bros.' feature animation division.
 
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 on a growing array of international television
distribution outlets. With the TBS Transaction, the distribution library owned
or managed by Warner Bros. grew to more than 6,000 feature films, 28,500
television titles, l0,000 animated titles plus l,500 classic animated shorts.
The acquisition reunites the entire Warner Bros. film and animation library and
adds classic MGM and RKO titles, and animation from Hanna-Barbera and MGM.
Warner Bros. acts as distributor of the programming owned by subsidiaries of
TBS.
 
     Warner Bros.' television programming is produced by Warner Bros.
Television, which produces dramatic and comedy programming, and Telepictures
Productions ('Telepictures'), 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 1997-1998 season, Warner Bros. Television successfully launched
several new network primetime series, including 'Veronica's Closet.' Returning
network primetime series included, among others,
 
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the top-rated series 'ER' and 'Friends' (both in their fourth season); 'Murphy
Brown' (in its tenth and final season); 'Family Matters' (in its ninth season);
'Step by Step' (in its seventh season); 'The Parent 'Hood' and 'The Wayans
Bros.' (each in its fourth season); 'The Drew Carey Show' (in its third season);
and 'Suddenly Susan' (in its second season).
 
     Telepictures launched in 1996 the syndicated daytime television hit 'The
Rosie O'Donnell Show.' Telepictures also produces for syndicated television such
popular series as 'Jenny Jones' (in its seventh season) and, through
Time-Telepictures Television, 'Change of Heart' (in its first season) and
'EXTRA' (in its fourth season). Telepictures also produces 'How'd They Do That'
(in its second season) for cable television.
 
     Warner Bros. Television Animation ('WBTA') is responsible for the creation,
development and production of contemporary television animation, as well as for
the creative use and production of classic animated characters from Warner
Bros.', TBS's and DC Comic's libraries, including 'Looney Tunes' and the Hanna-
Barbera and MGM libraries. 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 and direct-to-video projects, with such programs as 'Steven
Spielberg Presents Animaniacs,' 'Steven Spielberg presents Pinky & The Brain,'
'The Sylvester and Tweety Mysteries,' 'The New Batman/Superman Adventures' and
'Superman,' the upcoming edu-tainment series 'Histeria' and Batman's
direct-to-video release 'Sub-Zero.' Since the TBS Transaction, WBTA has managed
Hanna-Barbera programming, which includes the television series 'Dexter's
Laboratory,' 'Cow and Chicken,' 'Johnny Bravo' and 'Scooby Doo's Zombie Island'
direct-to-video.
 
     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 TBS libraries. A typical sale of a new program series
produced by or for Warner Bros. Television to a major domestic network grants
that network an option to carry such program series for four years, after which
time Warner Bros. Television can enter into a new license agreement with that or
any other network as well as license the already-broadcast episodes into
off-network syndication (broadcast and/or cable). New series are also licensed
concurrently into the international marketplace and can, after a short period of
time, be sold in part or in whole on home video. Warner Bros.' domestic
distribution operation handles the launching and supporting of first-run series
produced directly for syndication, as well as the sale of movie packages,
off-network syndication strips (in which shows originally produced for weekly
broadcast on a network are aired five days a week), and reruns of classic
television series for cable and satellite broadcasting.
 
     Television programs currently in off-network syndication include, among
others, 'Murphy Brown,' 'Living Single,' 'The Fresh Prince of Bel Air' and
'Family Matters.' The top-rated series 'ER' was sold to Turner Network
Television for syndication commencing in 1998, and 'Friends' was sold for
syndication commencing in 1998 to stations covering over 85% of the country.
 
     Warner Bros. International Television Distribution ('WBITD') is the world's
largest distributor of feature and television programming for television
exhibition outside of the United States. WBITD distributes programming in more
than 175 countries and in more than 40 languages. During l997, WBITD entered
into new significant licensing agreements with Sogecable, the leading Spanish
pay television operator, and Channel 5, the United Kingdom's newest free
television broadcaster.
 
     The introduction of new technologies and programming services throughout
the world has created many new opportunities for WBITD. In conjunction with
these new services seeking Warner Bros.' programming, WBITD is seeking to form
strategic alliances with some of the world's leading satellite, cable and
over-the-air television broadcasters. In December l997, WBITD acquired a l0%
interest in Canal Satellite, a partnership with Canal Plus and Pathe, which is
the largest digital direct-to-home satellite television service in France.
 
     WBITD has recently commenced the development and production of television
programming with international partners. In l997, WBITD completed and sold four
new co-produced series internationally: the live-
 
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action television series 'The New Adventures of Robin Hood' and 'Police Academy:
The Series' and the animated television series 'The Fantastic Voyages of Sinbad
the Sailor' and 'Zorro.'
 
     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 $2.1 billion at December 31, 1997, compared to $1.5
billion at December 31, 1996 (including amounts relating to the licensing of
product to Time Warner's and TWE's cable television networks of $719 million as
of December 31, 1997, and $463 million as of December 31, 1996, respectively).
The backlog excludes advertising barter contracts. See also 'Management's
Discussion and Analysis of Results of Operations and Financial
Condition -- Filmed Entertainment Backlog.'
 
HOME VIDEO
 
     Warner Home Video ('WHV') distributes for home video use pre-recorded
videocassettes, laser optical videodiscs and digital versatile discs or 'DVDs'
(as described below) containing the filmed entertainment product of (i) Warner
Bros., (ii) Home Box Office, (iii) WarnerVision Entertainment, (iv) Castle Rock,
(v) MGM/UA and (vi) New Line Cinema. WHV also distributes (or services the
distribution of) other companies' product for which it has acquired home video
distribution or servicing rights. In August l997, WHV granted exclusive
laserdisc distribution rights in North America to Image Entertainment Inc. for
five years in order to concentrate on the videocassette and DVD markets.
 
     During 1997, WHV released five titles in the North American rental market
with sales exceeding 400,000 units each: 'Contact,' 'Conspiracy Theory,'
'Sleepers,' 'Michael' and 'Absolute Power.' Internationally, the following
titles generated substantial home video revenue in 1997: 'Space Jam,' 'Mars
Attacks,' 'Batman & Robin,' 'Eraser' and the first and second seasons of the
television series 'Friends.' Additionally, the Warner Bros. Family Entertainment
label continued to expand through affordably-priced North American video
releases, including 'Space Jam,' 'Free Willy 3: The Rescue,' 'Wild America,'
'Cats Don't Dance,' 'The Swan Princess: Escape from Castle Mountain' and
'Shiloh' which generated combined videocassette sales in excess of 14 million
units. Also, WHV released for home sale in North America 'Batman & Robin' which
generated sales of more than six million units. During l997, approximately 55%
of WHV's revenue was generated in the United States and approximately 45% in
other territories.
 
     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. DVD product is
replicated by Warner Advance Media Operations, a Warner Music Group company, and
third parties.
 
     In December l995, a consortium of nine major consumer electronics
manufacturers and TWE announced agreement on a standard for a high density
digital optical technology ('DVD') that is capable of storing large volumes of
digitalized information -- enough storage capacity for two full-length feature
films on a double-sided disc. The DVD technology offers picture quality
significantly superior to existing home video technology as well as premium
features such as multiple language soundtracks. WHV, along with several other
studios, released software titles in the DVD format in l997 in the United
States, Canada, Japan and certain countries in Asia. Additionally, WHV is
currently benefiting by releasing first-run feature motion pictures in the DVD
format as well as re-releasing titles from the extensive WHV catalogue of
feature motion pictures. By year-end l998, WHV plans to have DVD distribution in
all major territories worldwide.
 
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 of
DC Comics, Hanna-Barbera characters and Turner classic films.
 
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     In 1997, Warner Bros. Studio Stores continued its expansion with the
opening of eight outlets in the United States and 16 internationally by
franchisees. Of the total of 185 stores at the end of 1997, 157 are wholly owned
and 28 are operated outside the United States by franchisees. Six stores are
currently planned to be opened overseas in 1998.
 
THEATERS
 
     Through joint ventures, Warner Bros. International Theatres operates 72
multi-screen cinema complexes with 625 screens in seven foreign countries,
including 28 theatres in Australia, 17 in the United Kingdom, 13 in Japan, five
in Portugal, four in Germany, three in Italy and two in Spain. During l998,
Warner Bros. International Theatres plans to open a further 28 cinemas and 281
screens, including expansion into Taiwan with the opening of a l7-screen
multiplex in the city of Taipei.
 
                          FILMED ENTERTAINMENT -- TBS
 
     Theatrical films are also produced by New Line Cinema Corporation, which is
a wholly owned subsidiary of TBS and not a part of TWE. New Line Cinema is a
leading independent producer and distributor of theatrical motion pictures.
During 1997, through its two film divisions, New Line Cinema and Fine Line
Features, New Line distributed such films as 'Austin Powers,' 'Boogie Nights,'
'Spawn,' 'Money Talks' and 'Wag the Dog.' During the first quarter of l998, New
Line released 'The Wedding Singer;' 'Lost in Space' and 'Blade' will be among
the films to be released by New Line later in 1998.
 
     Castle Rock Television has produced the critically acclaimed and highly
rated Emmy-winning series 'Seinfeld' for the past nine years. This year will be
the last year of production. 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 incorporates the Hanna-Barbera,
MGM and RKO libraries, which include classic films such as 'Gone With the Wind'
and cartoons such as the 'Flintstones,' 'Yogi Bear,' 'Huckleberry Hound,' 'Tom &
Jerry' and 'Popeye.' Distribution of these libraries is managed by Warner Bros.
 
                           THE WB TELEVISION NETWORK
 
     The WB Television Network ('The WB') completed its third year of broadcast
operations in January l998. In January l998, five major market affiliates were
added to The WB station line-up bringing total coverage to 97 stations
representing 88% of U.S. households. During the l997/98 broadcast season, The
WB's primetime program schedule was expanded to a fourth night, broadcasting on
Sunday, Monday, Tuesday and Wednesday nights. A fifth night of primetime
programming is scheduled to be added in January l999.
 
     Kids' WB! children's programming expanded in September l997 with the
addition of ten hours per week of programming. Kids' WB! currently airs l9 hours
per week, including Saturday morning, weekday mornings and weekday afternoons.
 
     The WeB, The WB's satellite-delivered program service, is expected to
launch in September l998 with initial penetration of about eight to ten percent
of U.S. TV households. This is a program service that, in partnership with local
broadcasters in smaller markets, will create an affiliate of The WB on local
cable systems.
 
     Tribune Broadcasting owns a 22.25% interest in The WB. Key employees of The
WB hold an ll% interest in the network.
 
                           OTHER ENTERTAINMENT ASSETS
 
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. Warner Bros. Movie World, a regional theme
park and studio complex, was opened in 1996 in the Rhine/Ruhr area of Germany.
The park
 
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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.
The Company has announced that it is studying the feasibility of building the
first movie-based theme park in Spain.
 
     In February 1998, TWE entered into an agreement to sell its remaining 49%
interest in Six Flags to Premier, a regional theme park operator, for
approximately $375 million of cash and $100 million of convertible preferred
stock, before transaction costs. Under the terms of the transaction, Premier
will continue to license the use of Warner Bros.' and DC Comics' cartoon
characters at the Six Flags parks, and the license will be extended to Premier's
other parks in the United States and Canada. Subject to the satisfaction of
certain conditions, the closing of the transaction is expected in the second
quarter of 1998.
 
DC COMICS AND MAD MAGAZINE
 
     TWE and Warner Communications Inc. ('WCI'), which is wholly owned by Time
Warner, each own 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 collections
sold as books. DC Comics also derives revenues from motion pictures, television,
product licensing, books for juvenile and adult markets and foreign publishing.
 
     Time Warner wholly owns E.C. Publications, Inc., the publisher of MAD, a
magazine featuring articles of humorous and satirical interest, which is
regularly published 12 times a year and also in periodic special editions.
 
                           REGULATION AND LEGISLATION
 
     The Telecommunications Competition and Deregulation Act of 1996 (the '1996
Telecommunications Act') substantially revised 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 Federal Communications
Commission ('FCC') rules regarding the manufacture of such sets, originally
scheduled for March 8, 1998, has been deferred for one year. 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 has been 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. In 1997,
the FCC sought public comment on whether the voluntary industry guidelines
comply with the requirements of the 1996 Telecommunications Act. That proceeding
remains pending.
 
     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 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 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
 
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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.
 
     Pursuant to the 1996 Telecommunications Act, the FCC must conduct a
biennial review of its ownership rules and repeal or modify any regulation that
it deems to be no longer in the public interest. The first such biennial review
will commence in 1998. Among the ownership rules which will be reviewed are the
daily newspaper-television station and cable system-television station
cross-ownership prohibitions.
 
     Warner Bros. cannot at this time predict the effect on its television
businesses of the passage of the 1996 Telecommunications Act and the changes, or
proposed changes, to the FCC rules discussed above.
 
                                  COMPETITION
 
     The production and distribution of theatrical motion pictures, television
and animation product and videocassettes/videodiscs are highly competitive
businesses, as each competes with the other for viewers' attention, as well as
with other forms of entertainment and leisure time activities, including video
games, the Internet and other computer-related activities. Furthermore, there is
increased competition in the television industry evidenced by the increasing
number and variety of broadcast networks and 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.
 
                                     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, 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, Elektra Entertainment Group and the newly formed Sire Records Group
Inc. 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), 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
 
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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 1997, more than 55% of WMG's recorded music
revenues came from outside the United States.
 
DOMESTIC
 
     WMG's record labels in the United States -- Warner Bros., Atlantic, Elektra
and Sire -- 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-refundable 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.
Product is also beginning to be sold directly to consumers through the Internet.
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 in perpetuity. 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 the WMG label or by
both parties. Included among these arrangements are the labels Maverick, Tommy
Boy, Sub Pop, Qwest and 143 Records. WMG labels also enter into agreements with
unaffiliated third-party record labels such as Curb 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 albums resulting in significant sales for WMG during 1997 were
the Space Jam soundtrack and Madonna's 'Evita' soundtrack, as well as releases
by Paula Cole, Fleetwood Mac, Jewel, matchbox20, Metallica, Sugar Ray and LeAnn
Rimes.
 
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.
 
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     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.
 
     Among the artists whose albums resulted in significant sales for WMI in
1997 were Enya, Noriyuki Makihara, Luis Miguel and Alejandro Sanz.
 
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
Warner Bros. Publications and CPP/Belwin, two 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 recorded music outlets over the
past several years led to the closing of many such stores during 1996 and 1997,
which has resulted in further increased competition among recorded music
companies. Competition during 1997, as in past years, also reflected the 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 and parallel imports and may in the future be
affected by consumers' ability to download quality sound reproductions from the
Internet without authorization from the Company. 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.
 
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                                 CABLE NETWORKS
 
     The Company's Cable Networks business consists of domestic and
international basic cable networks and 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'), TBS Superstation, Turner Network Television
('TNT'), Turner Classic Movies, Cartoon Network, CNN/SI and CNN en Espanol, all
operated by TBS, which is wholly owned by the Company. Pay television
programming consists of the multi-channel HBO and Cinemax pay television
programming services, operated by the Home Box Office division of TWE ('Home Box
Office'). The Company also has interests in certain other domestic and
international programming networks.
 
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, sports and general entertainment, all-news and all-sports
news programming. Through TWE's Home Box Office division, 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 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 distribute their programming via cable and other
distribution technologies, including satellite distribution. A separate
distribution subsidiary handles the sales and marketing of all of TBS's domestic
basic cable networks to cable, satellite master antenna television ('SMATV') and
multichannel MDS ('MMDS') systems and direct-to-home satellite ('DTH')
distribution companies 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, SMATV, MMDS and DTH distribution companies 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, 1997, 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 21% of TBS's cable subscribers
and 17% of HBO's and Cinemax's combined subscribers. (TCI, through subsidiaries,
owns approximately 57 million shares of Series LMCN-V 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,
1997, Time Warner Cable (see
 
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'Cable') accounted for an additional 18% and 14%, respectively of TBS's cable
subscribers 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 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
 
     Effective at year-end 1997, TBS Superstation converted to a copyright-paid
cable network from an independent UHF television station whose signal was
retransmitted by a third party common carrier via satellite. The network, while
still transmitted over-the-air in the Atlanta market, is now retransmitted by
TBS and delivered via satellite to cable systems in all 50 states, Puerto Rico
and the Virgin Islands, and is seen by approximately 73 million subscribers. Its
programming includes movies, sports, original productions and classic television
comedies. As a broadcast television station, TBS Superstation relied principally
on advertising revenue and received no direct compensation for its signal from
cable systems. As a cable network, TBS Superstation will also receive
subscription revenue directly from cable and other systems that carry the
service.
 
     Other entertainment networks produced and distributed by TBS are TNT, which
as of December 31, 1997 had approximately 72 million subscribers in the United
States; Cartoon Network, with more than 46 million subscribers in the United
States; 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 20 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 completed negotiations to acquire programming rights from the
National Basketball Association (the 'NBA') to televise a certain number of
regular season and playoff games through the 2001-02 season for which it has
agreed to pay fees plus a share of the advertising revenues generated in excess
of specified amounts. 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. TNT's rights
to televise National Football League games expired at the end of the 1997
season.
 
     CNN, launched in 1980, is a 24-hour per day cable television news service
and, with CNN International, is distributed to approximately 200 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 in December 1995, featuring business
and consumer news; and CNN/SI, launched in December 1996, featuring sports news
and features. The Company has also expanded into a number of special market
networks.
 
     CNN owns and operates 32 permanent news bureaus, of which nine are in the
United States and 23 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
 
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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.
 
     In addition to its cable networks, CNN operates seven Web sites on the
Internet. With approximately 292 million page views in January 1998, CNN
believes that its family of Web sites is utilized more than the Web sites of any
other news organization in the world. Overall, the CNN family of Web sites had
more than 1.9 billion page views in 1997.
 
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. In March 1997, TBS launched CNN en Espanol, a Spanish language
all-news network in Latin America which, as of December 31, 1997, had over 4
million subscribers.
 
     Each of CNNI and CNN en Espanol derives its revenues primarily from fees
charged to cable operators, fees paid by other recipients of the CNNI and CNN en
Espanol signals, including hotels and international over-the-air television
stations, and the sale of advertising time.
 
     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.
 
     In the fall of 1997, Cartoon Network Japan, a Japanese-language, all
animation (including a significant amount of locally sourced, Japanese product)
24-hour network, was launched in Japan. Cartoon Network Japan is a joint venture
owned 40% by TBS, 40% by ITOCHU and 20% by Time Warner Entertainment Japan Inc.,
which is 37.5% owned by Time Warner. Revenue sources for the Network will
include both subscription and advertising sales.
 
     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 49.8%-owned, in the aggregate, by TBS and a subsidiary of TWE and
managed by TBS. n-tv relies principally on advertising revenues and receives no
compensation for its signal from cable systems. TBS also manages the Company's
interest in music video channels in Germany, Hungary and Asia.
 
                                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 33.6 million subscriptions as of December
31, 1997.
 
PROGRAMMING
 
     A majority of HBO's programming and a large portion of that on Cinemax
consists of recently released, uncut and uncensored theatrical 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.
 
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     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 agreements
with DreamWorks SKG, Regency Entertainment, Sony Pictures Entertainment, Inc.
('Sony Pictures'), 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 Pictures Corporation, Sony Pictures and Walt
Disney Pictures for older, library films.
 
     HBO also defines itself by the exhibition of sporting events such as boxing
matches and Wimbledon, sports documentaries, contemporary and sometimes
controversial pay television premiere movies and mini-series, dramatic and
comedy specials, concert events, family programming, television series and
documentaries that are produced by HBO for initial exhibition on HBO.
 
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 1997, Home Box Office's own production company, HBO Independent
Productions, produced 'Everybody Loves Raymond,' in its second season on CBS.
Divisions of Home Box Office also produce comedy programming for HBO, Comedy
Central, broadcast networks and syndication. 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.
 
     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 its original programming into domestic
syndication and foreign television.
 
INTERNATIONAL
 
     HBO Ole, a 37.5%-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. TWE also has interests in
several advertiser-supported television services distributed by HBO Ole in Latin
America. 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, the Slovak
Republic, Poland and Romania.
 
                      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 approximately 46 million homes at
year-end 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 33 million viewers
at year-end 1997. During prime time, Court TV features live analyses of the
day's coverage and other programming exploring aspects of the legal system.
 
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                           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. The FCC has recently proposed to amend the rules to strengthen the
enforcement process. 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, any changes in the FCC's interpretation of the
1992 Cable Act and existing 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.
These provisions prohibit the Company from increasing the pre-TBS Transaction
pricing ratios which existed between large and small 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.
 
     Internationally, the expected entry of Poland and other eastern European
countries into the European Union may result in the imposition of local content
quotas or other restrictions on pay television services in those countries,
which may adversely affect services in which Home Box Office has an interest.
 
                           OTHER CABLE NETWORK ASSETS
 
THE ATLANTA BRAVES
 
     Through a wholly owned subsidiary, TBS owns the Atlanta Braves (the
'Braves'), a major league baseball club. 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.
 
                                      I-16
 

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     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 and expansion fees of Major League
Baseball and the national licensing activities of Major League Baseball
Enterprises.
 
     The Braves play their home games at Turner Field in Atlanta. The stadium
was originally constructed for the 1996 Summer Olympic Games and has been
converted for use by the Braves as a Major League Baseball stadium.
 
THE ATLANTA HAWKS
 
     Through wholly owned subsidiaries, TBS owns the Atlanta Hawks basketball
team (the 'Hawks'), a member of the NBA. The Hawks derive income from gate
receipts, concessions and related sales, local sponsorships and local media and
also share pro rata in proceeds from national media contracts and expansion fees
of the NBA and the national licensing activities of NBA Properties. The team is
subject to NBA regulations.
 
     A new, state-of-the-art arena adjacent to CNN Center is under construction
and will be the future home of the Hawks beginning in the 1999-2000 NBA season.
The arena is being developed by a TBS subsidiary and the cost of the arena will
be funded primarily with the proceeds from bonds issued by the City of
Atlanta-Fulton County Recreation Authority. TBS will contribute approximately
$20 million towards the cost of certain infrastructure improvements on the site
and, through a subsidiary, will operate the new arena.
 
ATLANTA THRASHERS
 
     TBS, through a wholly owned subsidiary, has been conditionally granted a
National Hockey League ('NHL') expansion franchise team to be known as the
Thrashers that will begin play in the 1999-2000 NHL season at the new arena also
to be used by the Atlanta Hawks. TBS must meet certain sales and other
objectives applicable to all other expansion teams prior to a formal grant of
franchise rights. The team will derive income from gate receipts, concessions
and related sales, local sponsorship and local media and will share pro rata in
proceeds from national media contracts and certain future expansion fees of the
NHL and the national licensing activities of NHL Enterprises. The team will be
subject to NHL regulations.
 
WRESTLING
 
     Through World Championship Wrestling, TBS produces wrestling programming
for TBS Superstation and TNT, the domestic syndication markets and pay-per-view
television.
 
                                   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, ENTERTAINMENT WEEKLY and
InSTYLE. 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.
 
     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 of readers.
 
                                      I-17
 

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     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, Florida. Some
of the development properties and overseas operations employ independent
fulfillment services and make their own arrangements for 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, which celebrates its 75th anniversary in 1998, 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 and TIME FOR KIDS, Primary Edition,
are in-school weekly news magazines aimed at elementary school students. 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 that covers and is designed to
appeal to enthusiasts in virtually all forms of recreational and competitive
sports. In addition, SPORTS ILLUSTRATED has created a special custom edition,
GOLF PLUS, to deliver advertisers more highly targeted audiences and has
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 sports news cable television network and
Internet site 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 NBA 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 has developed two PEOPLE
offspring that were launched during 1997: PEOPLE en Espanol, a Spanish-language
edition currently published ten times a year aimed primarily at Hispanic readers
in the United States, and TEEN PEOPLE, aimed at teenage girls. WHO WEEKLY is an
Australian version of PEOPLE.
 
     Time Inc. has other magazines also 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. MONEY publishes related products, such as the RETIRE WITH MONEY
newsletter, which provides consumer advice on retirement investments.
 
                                      I-18
 

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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 ten 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, COASTAL LIVING, a bi-monthly magazine for people who 'love the coast,'
and PROGRESSIVE FARMER, a monthly regional farming magazine. Southern Progress
has also 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, 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 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 eight
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 marketing, fulfillment and 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 WALLPAPER, acquired in 1997, 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. In 1998, American Express Publishing expects to
launch Travel & Leisure Golf magazine. 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 by wholesalers or directly from a Time Inc. subsidiary.
 
     Circulation drives 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 December 31, 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............................................................................   1,900,000
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
 

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     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 either through a magazine wholesaler network which services retail
outlets such as newsstands, supermarkets, convenience and drug stores or in some
cases directly to retailers.
 
     Warner Publisher Services ('WPS') is a major distributor of magazines and
paperback books sold through wholesalers in the United States and Canada. 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 Conde Nast, Petersen and Ziff-Davis.
 
ADVERTISING
 
     Advertising carried in Time Inc. magazines is predominantly consumer
advertising. In 1997, 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. 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................................................      12
ENTERTAINMENT WEEKLY...................................      19
MONEY..................................................      21
SOUTHERN LIVING........................................      23
</TABLE>
 
     The five leading categories of advertising carried in Time Inc. magazines
in 1997, according to PIB were, in descending order, domestic automobile
manufacturers, toiletries and cosmetics, computers, food and pharmaceuticals.
 
     Time Inc. also entered the local advertising market in 1997 with the
purchase of Media Networks, Inc. ('MNI'). MNI partners with the country's
leading national magazines, including several Time Inc. magazines, to offer
local marketers the opportunity to advertise to select targeted areas defined by
sectional postal centers.
 
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
1997, Time Inc. purchased paper principally from six independent manufacturers,
with the larger relationships 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 1997 increased slightly for all major
grades of paper for which Time Inc. has substantial demand.
 
     Printing and binding for Time Inc. magazines are accomplished primarily by
major domestic and international independent printing concerns in approximately
20 locations. Magazine printing contracts are either fixed-term or open-ended at
fixed prices with, in some cases, adjustments based on certain criteria.
 
                                      I-20


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                                     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 1997, Time Warner Trade Publishing placed 32 books on The
New York Times best-seller lists.
 
WARNER BOOKS
 
     Warner Books primarily publishes hardcover, mass market and trade paperback
books. Among its best selling hardcover books in 1997 were: 'Simple Abundance,'
by Sarah Ban Breathnach; 'The Notebook,' by Nicholas Sparks and 'Plum Island,'
by Nelson DeMille. Best selling mass market paperbacks in 1997 included 'Jack &
Jill,' by James Patterson and 'Absolute Power,' by David Baldacci.
 
     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 primarily engaged in on-line 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 1997 were: 'Gift of Fear,'
by Gavin DeBecker; 'Snow in August,' by Pete Hamill and 'Naked,' by David
Sedaris.
 
     Little, Brown handles book distribution for itself and Warner Books as well
as other publishers through its new state-of-the-art distribution center in
Indiana. 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.
 
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. In addition to continuity, it sells single
shot products and products in sets. Its products are sold by direct response,
including mail order, television and telephone, through retail, institutional
and learning channels, catalogs, and in some markets by independent
distributors. 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 introduced by Time Life during 1997 include 'What Life
is Like' and 'Student Library.' The Music division successfully released two
sets in 1997: 70's Dance Party and RIAA Gold & Platinum -- a compilation of rock
& roll hits over the past three decades certified 'gold' or 'platinum' by the
Recording Industry Association of America.
 
                                      I-21
 

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     Book editorial material is created by in-house staffs as well as through
outside publishers. Music and video rights are acquired through outside sources
and compiled internally into finished products. Time Life's domestic direct
response fulfillment activities are conducted from a centralized facility in
Richmond, Virginia. Fulfillment of other business lines is done through a
combination of in-house and outside fulfillment companies.
 
BOOK-OF-THE-MONTH CLUB
 
     Book-of-the-Month Club currently operates eleven distinct book clubs and
two continuity businesses with a combined membership of more than 4.5 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, 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 and other merchandise are offered through the clubs. Book-of-the-Month
Club's international businesses operate in over 40 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
 
     Time Inc. holds a 50% equity interest in 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 1997, postal rates remained constant.
 
     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 directly compete with other distributors operating
throughout the United States and Canada in the distribution of magazines and
paperback books.
 
                                      I-22


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                                     CABLE
 
     The Company's Cable business consists principally of interests in cable
television systems that, in general, are managed by Time Warner Cable, a
division of TWE. Of the approximately 12.6 million subscribers owned by the
Company, approximately 2.1 million are in systems owned by TWI Cable Inc. ('TWI
Cable'), a wholly owned subsidiary of Time Warner which is not a part of TWE,
and approximately 10.5 million are in systems owned by TWE. TWE's cable systems
include approximately 5.8 million subscribers in a joint venture between TWE and
Advance/Newhouse known as the TWE-A/N Partnership. Time Warner Cable generally
manages all such systems and receives a fee for management of the systems owned
by TWI Cable and the TWE-A/N Partnership.
 
                            CABLE TELEVISION SYSTEMS
 
GENERAL
 
     Time Warner Cable is the second-largest multiple system cable operator in
the United States. As of March 1, 1998, Time Warner Cable serves 12.6 million
cable subscribers geographically concentrated in 34 groupings of more than
100,000 subscribers each. This includes the approximately 5.8 million
subscribers in the TWE-A/N Partnership, in which TWE owns a 65.2% common equity
interest (and TWI Cable owns a 1.5% common equity interest) and is paid a fee to
manage. Approximately 58% 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
WGN), advertiser-supported video programming (such as ESPN and CNN) and premium
programming services (such as HBO, Cinemax, Showtime and The Movie Channel). In
many 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 the
technological upgrade of a substantial portion of its cable systems by the end
of 1998. As of December 31, 1997, more than half of Time Warner Cable's systems
have been upgraded. Such upgrades include the broad deployment of fiber and
electronics in order to provide expanded programming options, high-speed
Internet access and other service. As systems are designated for 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 to rebuild and
upgrade systems over a five-year period ending November 30, 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 bandwidth in its upgraded
systems for its high speed online service for personal computers, called Road
Runner'tm'. Road Runner provides Internet access and proprietary local, national
and international content through the cable network to customers' home (or small
office) computers. The service has been launched commercially in Time Warner
Cable's Akron/Canton; Albany; Binghamton; Columbus; El Paso; Hawaii; Memphis;
Portland, Maine; San Diego and Tampa systems, and will continue to expand into
other systems during 1998. In December 1997, Road Runner announced plans to
merge with US West's Media One Express, also a cable modem online service
provider. Based on current roll-outs in the Time Warner Cable and Media One
cable systems, at the time of the consummation of the merger, the venture's high
speed online services would immediately be available in at least 13 states
serving approximately 5 million homes.
 
     The number of subscribers managed by Time Warner Cable has grown primarily
as a result of the acquisition of cable systems, the formation of the TWE-A/N
Partnership and increases in the number of subscribers to its existing cable
television systems. Time Warner Cable has also sought to concentrate its
 
                                      I-23
 

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subscriber base in geographically-clustered systems through the exchange or
purchase of cable television systems, and expects to continue these efforts.
 
     In September 1997, the Company, TWE, the TWE-A/N Partnership and a
subsidiary of TCI signed a letter of intent to enter into a series of agreements
to, among other things, (i) form two new cable television joint ventures in the
Houston and south Texas areas that will be managed by TWE and will own cable
television systems serving an aggregate of approximately 1.1 million
subscribers, (ii) expand an existing joint venture in Kansas City, which is
managed by TWE, through the contribution by TCI of a contiguous cable television
system serving approximately 95,000 subscribers, and (iii) exchange various
cable television systems owned by Time Warner and TWE serving over 500,000
subscribers (of which cable television systems serving approximately 400,000
subscribers are owned by TWE) for other cable television systems of comparable
size in an effort to enhance each company's geographic clusters of cable
(collectively, the 'TCI Cable Transactions'). The TCI Cable Transactions are
expected to close periodically throughout 1998, subject to execution of
definitive agreements and customary closing conditions.
 
     In early 1998, Time Warner Cable transferred or beneficially assigned
ownership of franchises in 43 cable systems serving approximately 1.1 million
customers primarily in Florida, North Carolina and upstate New York from Paragon
Communications ('Paragon') and various TWI Cable-owned entities to the TWE-A/N
Partnership. As a result of this and related transactions, the TWE-A/N
Partnership serves approximately 5.8 million customers, and Paragon, which is
now 100% owned by wholly owned subsidiaries of the Company, serves approximately
770,000 customers primarily in New York City, Texas and California. Following
these transactions, the common equity of the TWE-A/N Partnership is owned
approximately as follows: 33.3% by Advance/Newhouse, 65.2% by TWE and 1.5%
indirectly by Time Warner.
 
     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
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.
 
     As of December 31, 1997, the TWE-A/N Partnership beneficially owned a 31%
equity interest in Primestar Partners L.P. ('Primestar'), a satellite
distribution company offering packages of programming services to customers
owning DTH receiving dishes, and Time Warner Satellite Services generally had
the non-exclusive right to distribute Primestar service to customers in Time
Warner Cable's service areas (including TWI Cable and the TWE-A/N Partnership)
and also in certain adjacent areas.
 
     In June 1997, TWE, Advance/Newhouse and the other partners of Primestar
entered into agreements to consolidate the separate Primestar direct broadcast
satellite distribution business of such partners (including Time Warner
Satellite Services) with the business of Primestar into a new company ('New
Primestar'), into which the partners will also contribute their respective
partnership interests. The restructuring is currently expected to close on or
about April 1, 1998. Thereafter, TCI Satellite Entertainment, Inc., a public
company that is one of the current partners of Primestar, is expected to merge
into New Primestar, subject to certain conditions, including regulatory
approval. If the merger is approved and completed, TWE's 24% equity ownership in
New Primestar will not be affected. In a separate pending transaction, New
Primestar would acquire certain high power satellite assets and FCC permits from
MCI Communications Corporation and The News Corporation Limited, in exchange for
nonvoting stock and notes of New Primestar (the 'News/MCI transaction'). This
transaction is subject to approval from the Department of Justice and the FCC.
If regulatory approvals are obtained and the News/MCI transaction is completed,
TWE would then have approximately 16% of the outstanding equity of New Primestar
on a fully diluted basis.
 
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
 
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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. It is
unknown whether the loss of any one popular supplier would 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. Rates for certain programming and for equipment and installation are
generally regulated pursuant to Federal law. See 'Regulation and
Legislation -- Rate Regulation,' below.
 
     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.
 
INTERNATIONAL
 
     TWE and the TWE-A/N Partnership collectively have a 53.75% interest in a
joint venture established to invest in, and further develop, cable television
systems and programming in Hungary. In France, TWE and TWE-A/N own 100% of Cite
Reseau and 49.9% of Rhone Vision Cable both of which were established to acquire
new franchises, build and operate cable systems in France. In China, TWE and the
TWE-A/N Partnership own 75% of the Beijing-Time Warner Cable Television
Engineering Company. In Japan, TWE and TWE-A/N beneficially own, directly or
indirectly, 25% of Titus Communications Corporation and 19.2% of Chofu Cable
Television Company. TWE sold its 13% indirect interest in Sky Network
Television, an over-the-air subscription service in New Zealand, in September
1997.
 
                           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 for public, educational and
governmental programming; (iv) leased access terms and conditions; (v)
horizontal and vertical ownership of cable systems; (vi) consumer protection and
customer service requirements; (vii) franchise renewals; (viii) television
broadcast signal carriage requirements 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 federal laws, 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, known as 'cable programming service tiers' ('CPST'), other than
per-channel or per-program services, in response to complaints filed by
franchising authorities; 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
 
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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 CPST services under certain limited circumstances.
 
     Under the 1996 Telecommunications Act, regulation of CPST rates is
scheduled to terminate on March 31, 1999. Regulation of both basic and CPST
rates also ceases for any cable system subject to 'effective competition.' The
1996 Telecommunications Act expanded 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 has found Time Warner
Cable to be subject to 'effective competition' in certain jurisdictions.
 
     The FCC's rate regulations employ a benchmark system for measuring the
reasonableness of existing basic and CPST 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 programming costs. Cost-based adjustments to these
capped rates can also be made in the event a cable operator adds or deletes
channels or significantly upgrades its system. 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 CPST services and associated equipment, and refunds can be
required.
 
     In November 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 November 30, 2000; and Time Warner Cable is allowed to increase the non-basic
service tier by $1.00 per year over the term of the Social Contract. 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. A petition
was also filed with the FCC seeking reconsideration of the Social Contract,
which is currently pending.
 
     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 WGN. Time Warner Cable has obtained any necessary
retransmission consents from all stations carried, which consents have varying
expiration dates. In
 
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those cases where the expiration date of particular agreements has not been
contractually varied from the original schedule set up by the 1996 Act, the next
three-year election between mandatory carriage and retransmission consent for
local commercial television stations will occur on October 1, 1999.
 
     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. Time Warner Cable obtained a temporary waiver from this rule, and is
now seeking a permanent waiver, so that it can continue to own certain Atlanta
area cable systems located within the Grade B signal coverage area of WTBS. The
FCC denied the permanent waiver request, but that denial is presently stayed
pending resolution of a petition for reconsideration. Finally, the 1992 Cable
Act prohibits common ownership, control or interest in cable television systems
and MMDS facilities or SMATV systems having overlapping service areas, except in
limited circumstances. The 1996 Telecommunications Act exempts cable systems
facing 'effective competition' from the MMDS and SMATV cross-ownership
restrictions.
 
     The FCC has initiated a rulemaking proceeding in which it asks what
restrictions, if any, should be placed on a cable operator's ownership of a DTH
service. This could affect Time Warner, in that TWE has an ownership interest in
Primestar, a DTH service, which is seeking to obtain FCC approval for the
transfer of certain DTH licenses. See 'Cable -- Cable Television
Systems -- General.'
 
     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 1992 Cable Act
also directed the FCC to adopt regulations establishing reasonable limits on the
number of cable subscribers an operator may reach through systems in which it
holds an attributable interest. The FCC has stayed the effectiveness of such
regulations pending final judicial resolution of a federal district court
decision finding the statutory ownership limit provision to be unconstitutional.
 
     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; closed captioning; equal employment opportunity; pole attachments;
restrictions on origination and cablecasting by cable system operators;
application of the rules governing political broadcasts;
 
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customer service; technical standards; home wiring; and limitations on
advertising contained in nonbroadcast children's programming. Pursuant to the
1996 Telecommunications Act, the FCC changed the formula for pole attachment
fees which will result in substantial increases in payments by cable operators
to utilities for pole attachment rights when telecommunications services are
delivered by cable systems. This new higher rate formula will be phased in
beginning in February 2001.
 
     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, 1998, 518 franchises serving approximately 2,600,000 subscribers expire
during the period ending December 31, 2000. Although Time Warner Cable has been
successful in the past in negotiating new franchise agreements, there can be no
assurance as to the renewal of franchises in the future.
 
     The 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
 
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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 permits to several companies for orbital slots
from which medium- or 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 June 1997, satellite-delivered DTH
services including Echostar, DirecTV, USSB and Primestar, a medium-power DTH
service partially owned by TWE, were reported to be serving over five million
subscribers. Echostar has announced that, unlike other DTH services, it 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 1.1 million subscribers nationwide as of June 1997. 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. One municipally-owned system is presently in
operation in a Time Warner Cable franchise area and several other municipalities
have indicated an interest in operating a cable system.
 
     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 (subject to the restriction
against acquisition of greater than 10% of existing cable systems described
under 'Regulation and Legislation -- Ownership,' above). 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, 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.
 
     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.
 
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                                   TELEPHONY
 
     Time Warner Communications, a subsidiary of TWE, is a facilities-based
competitive local exchange carrier ('CLEC') in selected metropolitan markets
across the United States, offering a wide range of business telephony services,
primarily to medium and large-sized business customers and other carriers. Time
Warner Communications' customers are principally telecommunications-intensive
businesses, long distance carriers, Internet service providers, wireless
communications companies and governmental entities. Such customers are offered a
wide range of integrated telecommunications services, including dedicated
transmission, local switched, data and video transmission services and certain
Internet services. As of March 1, 1998, Time Warner Communications had deployed
switches in 16 of its 19 metropolitan markets. Its networks have been
constructed primarily through licensing the use of fiber capacity from Time
Warner Cable.
 
     Time Warner Communications' business was commenced in 1993 by Time Warner
Cable, originally to provide residential and business telephony services
together with cable television. Since January 1997, Time Warner Communications
has focused exclusively on the business segments.
 
            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 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 Series
LMCN-V Common Stock. In June 1997, LMC and its affiliates received 6.4 million
additional shares of Series LMCN-V Common Stock pursuant to the provisions of an
option agreement between the Company and LMC and its affiliates. Shares of
Series LMCN-V Common Stock receive the same dividends and otherwise have the
same rights as shares of Time Warner Common Stock except that (a) holders of
Series LMCN-V 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 Series LMCN-V Common Stock adverse to such holders, and (b) unlike
shares of Time Warner Common Stock, shares of Series LMCN-V 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 Series LMCN-V Common Stock
is not transferable, except in limited circumstances, and is not listed on any
securities exchange.
 
     LMC exchanged its shares of Time Warner Common Stock for Series LMCN-V
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
Series LMCN-V 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.
 
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
 
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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).
 
     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.
 
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 'Cable Management
Committee,' below.
 
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     Cable Management Committee. Subject to obtaining necessary franchise and
other approvals, the businesses and operations of the cable television systems
of TWE and TWE-A/N are governed by a Cable Management Committee (the 'Management
Committee'). The systems that have been designated from time to time to be
governed by the management committee and with respect to which all necessary
franchise and other approvals have been obtained are referred to as the
'Designated Systems.' The Management Committee is comprised of six voting
members, three designated by US West and three designated by TWE. If US West at
any time owns less than 50% of the partnership interest which it owned, directly
or indirectly, as of September 15, 1993 or if a 'change in control' of US West
occurs, US West's right to designate any members of the Management Committee
will terminate. The Designated Systems are 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 Designated Systems, including, among other things, the sale, pledge or
encumbrance of assets of the Designated Systems, the acquisition of cable
assets, the making of commitments or expenditures relating to the Designated
Systems, in each case subject to agreed upon thresholds, certain decisions with
respect to design, architecture and designation of cable systems for upgrade and
the adoption of the annual business plan.
 
     Non-Voting Representatives and Committee Members. Each of ITOCHU and
Toshiba has the right to designate non-voting members to the Board of
Representatives and the Management Committee. In addition, Advance/Newhouse has
the right to designate a non-voting member to the Management Committee.
 
     Day-to-Day Operations. TWE is managed on a day-to-day basis by the officers
of TWE, and each of TWE's three principal partnership divisions is managed on a
day-to-day basis by the officers of such division. Upon the TWE Capitalization,
the officers of Time Warner also became officers of TWE and the officers of the
Time Warner General Partners became the officers of the corresponding
partnership divisions and the subdivisions thereof.
 
CERTAIN COVENANTS
 
     Covenant Not to Compete. For so long as any partner (or affiliate of any
partner) owns in excess of 5% of TWE and in the case of any Time Warner General
Partner, for one year thereafter, such partner (including its affiliates) is
generally prohibited from competing or owning an interest in the three principal
lines of business of TWE -- cable, cable programming and filmed entertainment
(including the ownership and operation of theme parks) -- as such businesses may
evolve, subject to certain agreed upon exceptions (including TBS), limited
passive investments and inadvertent violations. The covenant not to compete does
not prohibit (i) 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
 
                                      I-32
 

<PAGE>
<PAGE>

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 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
 
                                      I-33
 

<PAGE>
<PAGE>

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 date on which the Class A Partners
have received cash distributions of $500 million per $1 billion of investment,
and (b) 35% of the residual equity of TWE if such disposition occurs after such
date, (ii) no person or entity would own, directly or indirectly, a partnership
interest greater than that owned, directly or indirectly, by the Company, and
(iii) a subsidiary of the Company would be a managing general partner of TWE.
 
     No other dispositions are permitted, except that the Company may sell its
entire partnership interest subject to the Class A Partners' rights of first
refusal and 'tag-along' rights pursuant to which the Company must provide for
the concurrent sale of the partnership interests of the Class A Partners so
requesting.
 
                         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 15 'Financial Instruments -- Foreign Currency Risk
Management' to the consolidated financial statements set forth at pages F-26 and
F-51, respectively, herein. For the revenues of foreign operations, see Note 16
'Segment Information' to the consolidated financial statements set forth on page
F-55 herein.
 
                                   EMPLOYEES
 
     At December 31, 1997, the Company employed a total of approximately 67,900
persons. This number includes approximately 29,700 persons employed by TWE.
 
                                      I-34
 

<PAGE>
<PAGE>

ITEM 2. PROPERTIES
 
CORPORATE, TBS, PUBLISHING AND MUSIC
 
     The following table sets forth certain information as of December 31, 1997
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                                                            90,800 sq. ft. are sublet to
                                                                                outside tenants.
New York, New York             Business and editorial offices       1,502,000   Leased by the Company. Most
  Time & Life Bldg.            (Publishing and Corporate)                       leases expire in 2007.
  Rockefeller Center                                                            Approximately 33,000 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.
Lebanon, Indiana               Warehouse space (Publishing)           500,455   Leased by the Company. Lease
  121 N. Enterprise Blvd.                                                       expires in 2006.
Mechanicsburg,                 Office and warehouse space             358,000   Owned and occupied by the
  Pennsylvania                 (Publishing)                                     Company.
  1225 S. Market St.
Indianapolis, Indiana          Warehouse space (Publishing)           252,000   Owned and occupied by the
  4200 N. Industrial                                                            Company.
  Street
Olyphant,                      Manufacturing, warehouses,           1,058,000   Owned and occupied by the
  Pennsylvania                 distribution and office space                    Company.
  1400 and 1444 East           (Music)
  Lackawanna Avenue
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>

CABLE NETWORKS -- HBO, FILMED ENTERTAINMENT AND CABLE
 
     The following table sets forth certain information as of December 31, 1997
with respect to principal properties (over 250,000 square feet in area) owned or
leased by the Company's Cable Networks -- HBO, Filmed Entertainment 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
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)
Baltimore, Maryland       Warehouse (Filmed              387,000 sq. ft.      Owned by TWE.
  White Marsh             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 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 (the '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
 
                                      I-36
 

<PAGE>
<PAGE>

RICO claim, denying its material allegations and alleging defenses. After
certain discovery, the defendants, on January 29, 1997, moved for summary
judgment. 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 moved to dismiss
the newly-added counts on December 18, 1996. On August 14, 1997, the Court
granted the record company defendants' motion to dismiss the new ERISA claims
but denied the defendants' motion to dismiss the newly-added state law claims
for breach of contract and fraud and their motion for summary judgment on the
RICO claims. The Court also denied a motion by the Fund and the Fund Trustees to
dismiss the claims asserted against them. On January 20, 1998, the Court denied
plaintiffs' motions for class certification of the remaining claims against the
record company defendants and against the Fund and Fund Trustees. Accordingly,
the case is now limited to the individual claims of the 15 named plaintiffs,
which remain pending before the Court. Plaintiffs have filed a motion seeking
certification of the Court's Order of January 20, 1998, so that an appeal can
immediately be taken to the Eleventh Circuit Court of Appeals. Additionally,
plaintiffs have filed a motion seeking either entry of final judgment on the
ERISA claims dismissed by the Court's Order of August 14, 1997, or, in the
alternative, certification of that Order for immediate appeal. Both motions
remain pending.
 
     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 and provided information and produced documents as required by a 1997
decision of the United States District Court for the District of Columbia.
 
     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. The plaintiff, representing a class of direct purchasers of
recorded music compact discs ('CDs'), alleged that Warner Elektra Atlantic
Corporation ('WEA'), along with five other distributors of CDs, violated the
federal antitrust laws by engaging in a conspiracy to fix the prices of CDs, and
sought an injunction and treble damages. On January 9, 1996, the defendants'
motion to dismiss the amended complaint was granted and the action was
dismissed, with prejudice. Plaintiff appealed the dismissal to the United States
Court of Appeals for the Ninth Circuit, No. 96-55264. On July 3, 1997, the
United States Court of Appeals for the Ninth Circuit reversed the dismissal of
the amended complaint and remanded the case to the District Court, holding that
the amended complaint was sufficient to meet the pleading requirements of the
Federal Rules and that the action should proceed. On October 29, 1997, the
District Court stayed proceedings in the action due to the filing on May 12,
1997 of a Chapter 7 Petition under the U.S. Bankruptcy Code by plaintiff.
 
     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.
 
     As the Company has disclosed and discussed more fully in previous reports
on Form 10-K filed by the Company, three complaints (two on October 30, 1995 and
one on March 12, 1996) were filed in the Court of Chancery of the State of
Delaware in and for New Castle County 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. These complaints allege,
among other things, that in connection with the then proposed TBS Transaction,
some or all of the defendants violated various fiduciary duties owed to the
Company and its stockholders. Among other relief demanded, these complaints
sought an injunction against consummation of the TBS Transaction, an accounting
to the Company for individual defendants' alleged profits and plaintiffs'
alleged damages. There has been no activity in these actions since defendants
made motions to dismiss two of them in November 1995 and April 1996,
respectively.
 
     As the Company has disclosed and discussed more fully in previous reports
on Form 10-K filed by the Company, fifteen actions against TBS, the Company,
certain officers and directors of TBS or TWE, and other
 
                                      I-37
 

<PAGE>
<PAGE>

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') alleging, among other things, that the terms of the
TBS Transaction were unfair to TBS shareholders and that, in connection with the
TBS Transaction, the defendants acted fraudulently, had breached or aided and
abetted the breach of fiduciary common law and statutory duties owed to TBS
shareholders and that the vote of the TBS Board approving the TBS Transaction
did not comply with legal requirements. 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. Plaintiffs'
request for a preliminary injunction was denied in October 1996 and in December
1996, the Court granted defendants' motion for judgment on the pleadings with
respect to certain claims in the Third Amended Complaint and also granted
plaintiffs' motion for leave to file a fourth amended complaint. In January
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 14, 1997, defendants' motion for summary
judgment on plaintiffs' fourth amended complaint and defendants' motion for
final judgment on the Third Amended Complaint were both granted. On July 23,
1997, plaintiffs filed a notice of appeal from these decisions; the appeal has
now been fully briefed and is awaiting decision.
 
     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. By letter dated January 8, 1998, WEA was notified
by the Office of the Attorney General of the State of Florida that certain
documents that WEA had produced to its office were shared under a
confidentiality provision in the Florida statutes with the Office of the
Attorney General of the State of Illinois and the Office of the Attorney General
of the State of New York. To date, no action has been taken by the Attorney
Generals of these states.
 
     On March 19, 1997, Six Flags Theme Parks Inc. ('Six Flags') and its
wholly-owned subsidiary Six Flags Over Georgia, Inc. commenced a declaratory
judgment action in the Superior Court of Gwinnett County, Georgia, entitled Six
Flags Over Georgia, Inc. and Six Flags Theme Parks, Inc. v. Six Flags Fund, Ltd.
and Avram Salkin, as Trustee of the Claims Trust. The action sought, among other
things, a declaration and determination of the rights and obligations of the
partners of Six Flags Over Georgia, L.P. with respect to certain disputed
partnership matters and an accounting of all partnership affairs. The parties
have since been realigned, so that the original defendants are now the
plaintiffs in the action and Six Flags Entertainment Corporation, the parent
company of Six Flags that is 49% owned by TWE, and certain of its subsidiaries
and TWE are now the defendants against whom additional claims have been made.
These claims seek imposition of a constructive trust, compensatory damages of in
excess of $250 million and unspecified punitive damages for alleged breach of
fiduciary duty, conversion, fraud and conspiracy allegedly committed by the
counterclaim-defendants in connection with the management of the Six Flags Over
Georgia theme park. The parties are currently engaged in document discovery. TWE
and its 51% partner in Six Flags will retain financial responsibility for this
litigation following completion of the sale of Six Flags. (See Item 1.
'Entertainment -- Other Entertainment Assets').
 
     On April 11, 1997, the Washington and Dallas offices of the Federal Trade
Commission notified WEA that they had commenced a preliminary investigation into
whether WEA and others may be violating or have violated laws against unfair
competition by the adoption, implementation or maintenance of minimum advertised
pricing programs. On September 23, 1997, Warner Communications Inc. was served
by the Federal Trade Commission with a subpoena duces tecum calling for the
production of documents in connection with a nonpublic investigation into
whether the recorded music distribution companies and others may be engaging or
may have engaged in unfair methods of competition through the adoption,
implementation and maintenance of cooperative advertising programs that included
minimum advertised price provisions. WEA produced documents in response to the
subpoena.
 
                                      I-38
 

<PAGE>
<PAGE>

     On September 30, 1997, a purported class action was commenced in the United
States District Court for the Central District of California entitled Chandu
Dani d/b/a Compact Disc Warehouse and Record Revolution v. EMI Music
Distribution, Sony Music Entertainment, Inc., Warner Elektra Atlantic
Corporation, Universal Music and Video Distribution, Bertelsmann Music Group,
Inc. and Polygram Group Distribution, Inc., No. 97-7226. On October 16, 1997,
plaintiffs filed a first amended complaint. The plaintiffs, purporting to
represent a class of direct purchasers of CDs, allege that WEA, along with five
other distributors of CDs, violated the federal and state antitrust laws by
engaging in a conspiracy to fix the prices of CDs and seek an injunction and
treble damages. On December 22, 1997, WEA answered the action, denying the
material allegations of the amended complaint, asserting affirmative defenses
and demanding judgment against plaintiffs.
 
     On December 2, 1997, a purported class action was commenced in the United
States District Court for the Central District of California entitled Third
Street Jazz and Rock Holding Corporation v. EMI Music Distribution, Sony Music
Entertainment, Inc., Warner Elektra Atlantic Corporation, Universal Music and
Video Distribution, Bertelsmann Music Group, Inc. and PolyGram Group
Distribution, Inc., No. 97-8864. The claims asserted are substantially the same
as those asserted in the Chandu Dani action reported above. On December 24,
1997, WEA answered the action, denying the material allegations of the
complaint, asserting affirmative defenses and demanding judgment against
plaintiffs.
 
     On January 28, 1998, a purported class action was commenced in the United
States District Court for the Southern District of New York entitled Nathan
Muchnick, Inc. v. Sony Music Entertainment, Inc., PolyGram Group Distribution,
Inc., Bertelsmann Music Group, Inc., Universal Music and Video Distribution,
Warner Elektra Atlantic Corporation and EMI Music Distribution, No. 98 Civ.
0612. The claims asserted are substantially the same as those asserted in the
Chandu Dani action reported above. On February 23, 1998, WEA answered the
action, denying the material allegations of the complaint, asserting affirmative
defenses and demanding judgment against plaintiffs.
 
     On February 2, 1998, a complaint was filed by the Attorney General of the
State of Florida in The Circuit Court of the Thirteenth Judicial District in
Hillsborough Country Florida against American Family Publishers ('AFP'). AFP is
50% owned by the Company. This complaint, and publicity surrounding it and AFP's
sweepstakes solicitations, has resulted in the filing of additional actions
against AFP by the Attorney General of Connecticut and by various private
parties both as individuals and as purported class representatives. As of March
13, 1998, there have been 20 such actions filed against AFP in various state and
federal courts. Seven of these actions, including the action by the Florida
Attorney General, name as a party AFP's processing and customer service vendor,
Time Customer Service Inc., a wholly owned subsidiary of the Company. One
private action is filed against Time Warner 'doing business as American Family
Publishers.' All of the actions allege that AFP's sweepstakes magazine
solicitations misrepresent that the recipient has won the grand prize in AFP's
sweepstakes. The actions seek restitution, attorneys's fees and injunctive
relief. To date, no replies or motions have been filed. On March 16, 1998, AFP
and the Attorneys General of 32 states and the District of Columbia announced
the settlement of previously commenced investigations. AFP admitted no
wrongdoing and agreed to a payment in reimbursement of investigative expenses.
 
     By letter dated February 12, 1998, the New York State Attorney General
advised the Company of the termination of an antitrust investigation begun in
1996 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.
 
     On February 17, 1998, a purported class action was commenced in the Circuit
Court of Cocke County, Tennessee at Newport, entitled Ottinger & Silvey, et.
al., v. EMI Music Distribution, Inc., Sony Music Entertainment, Inc., Warner
Elektra Atlantic Corporation, UNI Distribution Corporation, Bertelsmann Music
Group, Inc., and Polygram Group Distribution, Inc. The action is brought on
behalf of persons who from January 29, 1993 to the present, purchased CDs
indirectly from the defendants in Alabama, Arizona, California, the District of
Columbia, Florida, Kansas, Maine, Michigan, Minnesota, Mississippi, New Mexico,
North Carolina, North Dakota, South Dakota, Tennessee, West Virginia and
Wisconsin, 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.
 
                                      I-39
 

<PAGE>
<PAGE>

     The Company and its subsidiaries are also subject to industry
investigations by certain government agencies and/or proceedings under the
antitrust laws that have been filed by private parties in which, in some cases,
other companies in the same or related industries are also defendants. The
Company and its subsidiaries have denied or will deny liability in all of these
actions. In all but a few similar past actions, the damages, if any, recovered
from the Company or the amounts, if any, for which the actions were settled were
small or nominal in relation to the damages sought; and it is the opinion of the
management of the Company that any settlements or adverse judgments in the
similar actions currently pending will not involve the payment of amounts or
have other results that would have a material adverse effect on the financial
condition of the Company.
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
     Not Applicable.
 
                                      I-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, 1998, of
such officer:
 
<TABLE>
<CAPTION>
                    NAME                        AGE                              OFFICE
---------------------------------------------   ---   ------------------------------------------------------------
<S>                                             <C>   <C>
Gerald M. Levin..............................   58    Chairman of the Board and Chief Executive Officer
R.E. Turner..................................   59    Vice Chairman of the Board
Richard D. Parsons...........................   49    President
Richard J. Bressler..........................   40    Executive Vice President and Chief Financial Officer
Peter R. Haje................................   63    Executive Vice President, General Counsel and Secretary
Timothy A. Boggs.............................   47    Senior Vice President
John A. LaBarca..............................   55    Senior Vice President and Controller
Philip R. Lochner, Jr. ......................   55    Senior Vice President
</TABLE>
 
     Set forth below are the principal positions held by each of the executive
officers named above since March 1, 1993:
 
<TABLE>
<S>                                      <C>
Mr. Levin..............................  Chairman of the Board of Directors and Chief Executive Officer since
                                           January 21, 1993.
 
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. Bressler...........................  Executive Vice President and Chief Financial Officer since January 15,
                                           1998. Prior to that, he served as Senior Vice President and Chief
                                           Financial Officer from March 16, 1995; as Senior Vice President,
                                           Finance from January 2, 1995; and as a Vice President prior to that.
 
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.
 
Mr. LaBarca............................  Senior Vice President and Controller since May 15, 1997. Prior to that,
                                           he served as Vice President and Controller from January 19, 1995; Vice
                                           President, Director of Internal Audit from May 1, 1993; and Senior
                                           Partner at Ernst & Young LLP 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, 1997, see 'Quarterly Financial
Information' at page F-62 herein, which information is incorporated herein by
reference. The approximate number of holders of record of the Company's Common
Stock as of January 30, 1998 was 25,000.
 
     For information on the frequency and amount of dividends paid with respect
to the Company's Common Stock during the two years ended December 31, 1997, see
'Quarterly Financial Information' at page F-62 herein, which information is
incorporated herein by reference.
 
     There is no established public trading market for the Company's Series
LMCN-V Common Stock, which as of January 30, 1998 was held of record by four
holders. Information with respect to the issuance of the outstanding shares of
Series LMCN-V Common Stock pursuant to Section 4(2) of the Securities Act of
1933 in connection with the TBS Transaction is set forth in Note 2, 'Mergers and
Acquisitions,' to the Company's consolidated financial statements included in
the Company's Quarterly Report on Form 10-Q for the quarter ended September 30,
1997.
 
ITEM 6. SELECTED FINANCIAL DATA
 
     The selected financial information of the Company for the five years ended
December 31, 1997 is set forth at pages F-60 and F-61 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-20 herein is incorporated herein by reference.
 
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
     The information set forth under the caption 'Interest Rate and Foreign
Currency Risk Management' at pages F-19 and F-20 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-21 through
F-57, F-63 and F-64, and F-58 herein are incorporated herein by reference.
 
     Quarterly Financial Information set forth at page F-62 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 1998 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 Turner Broadcasting System,
     Inc. for the quarterly period ended September 30, 1996 are incorporated
     herein by reference from pages 2 to 9 of the Quarterly Report on Form 10-Q
     for the nine months ended September 30, 1996 of Turner Broadcasting System,
     Inc. and are filed as an exhibit to this report.
 
          (iii) The financial statements of Turner Broadcasting System, Inc. and
     the report of independent accountants thereon are incorporated herein by
     reference from pages 31 to 53 of the Annual Report to Shareholders
     incorporated by reference into the Annual Report on Form 10-K for the year
     ended December 31, 1995 of Turner Broadcasting System, Inc. and are filed
     as an exhibit to this report.
 
          (iv) 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.
 
          (v) 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.
 
     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 10.19 listed on the
accompanying Exhibit Index identify management contracts or compensatory plans
or arrangements required to be filed as exhibits to this report, and such
listing is incorporated herein by reference.
 
     (b) Reports on Form 8-K.
 
          (i) The Company filed a Current Report on Form 8-K dated November 13,
     1997 setting forth in Item 7 certain pro forma financial statements of the
     Company and the Time Warner Entertainment Group as of and for the nine
     months ended September 30, 1997 and for the year ended December 31, 1996,
     giving effect to the transfer by a wholly owned subsidiary of Time Warner
     of cable television systems serving approximately 650,000 subscribers to
     the Time Warner Entertainment-Advance/Newhouse Partnership ('TWE-A/N')
     subject to approximately $1 billion of debt, in exchange for equity
     interests in TWE-A/N, as well as certain related transactions.
 
          (ii) The Company filed a Current Report on Form 8-K dated February 10,
     1998 setting forth in Item 5 the Company's results of operations for the
     quarter and year ended December 31, 1997.
 
                                      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, 1998
 
     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, 1998
 .........................................    Executive Officer (principal executive
            (GERALD M. LEVIN)                 officer)
 
         /s/ Richard J. Bressler            Executive Vice President and Chief Financial      March 25, 1998
 .........................................    Officer (principal financial officer)
          (RICHARD J. BRESSLER)
 
           /s/ John A. LaBarca              Senior Vice President and Controller              March 25, 1998
 .........................................    (principal accounting officer)
            (JOHN A. LABARCA)
 
             /s/ Merv Adelson               Director                                          March 25, 1998
 .........................................
              (MERV ADELSON)
 
           /s/ J. Carter Bacot              Director                                          March 25, 1998
 .........................................
            (J. CARTER BACOT)
 
        /s/ Stephen F. Bollenbach           Director                                          March 25, 1998
 .........................................
         (STEPHEN F. BOLLENBACH)
 
       /s/ Beverly Sills Greenough          Director                                          March 25, 1998
 .........................................
        (BEVERLY SILLS GREENOUGH)
 
          /s/ Gerald Greenwald              Director                                          March 25, 1998
 .........................................
            (GERALD GREENWALD)
 
           /s/ Carla A. Hills               Director                                          March 25, 1998
 .........................................
             (CARLA A. HILLS)
</TABLE>
 
                                      IV-2
 

<PAGE>
<PAGE>

 
<TABLE>
<CAPTION>
                SIGNATURE                                       TITLE                              DATE
------------------------------------------  ---------------------------------------------   -------------------
<C>                                         <S>                                             <C>
             /s/ Reuben Mark                                  Director                        March 25, 1998
 .........................................
              (REUBEN MARK)
 
           /s/ Michael A. Miles                               Director                        March 25, 1998
 .........................................
            (MICHAEL A. MILES)
 
          /s/ Richard D. Parsons                              Director                        March 25, 1998
 .........................................
           (RICHARD D. PARSONS)
 
          /s/ Donald S. Perkins                               Director                        March 25, 1998
 .........................................
           (DONALD S. PERKINS)
 
          /s/ Raymond S. Troubh                               Director                        March 25, 1998
 .........................................
           (RAYMOND S. TROUBH)
 
            /s/ R. E. Turner                                  Director                        March 25, 1998
 .........................................
              (R. E. TURNER)
 
       /s/ Francis T. Vincent, Jr.                            Director                        March 25, 1998
 .........................................
        (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-66
Consolidated Financial Statements:
     Balance Sheet..............................................................................    F-21      F-77
     Statement of Operations....................................................................    F-22      F-78
     Statement of Cash Flows....................................................................    F-23      F-79
     Statement of Shareholders' Equity and Partnership Capital..................................    F-24      F-80
     Notes to Consolidated Financial Statements.................................................    F-25      F-81
Report of Management............................................................................    F-58
Report of Independent Auditors..................................................................    F-59     F-105
Selected Financial Information..................................................................    F-60     F-106
Quarterly Financial Information.................................................................    F-62     F-107
Supplementary Information.......................................................................    F-63
Financial Statement Schedule II -- Valuation and Qualifying Accounts............................    F-65     F-108
</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 (the 'TBS Transaction'). As a result of this
transaction, a new parent company with the name 'Time Warner Inc.' replaced the
old parent company of the same name (now known as Time Warner Companies, Inc.,
'TW Companies'), and TW Companies and TBS became separate, wholly owned
subsidiaries of the new parent company. References herein to 'Time Warner' or
the 'Company' refer to TW Companies prior to October 10, 1996 and Time Warner
Inc. 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 and television
broadcasting; Cable Networks, consisting principally of interests in cable
television programming; Publishing, consisting principally of interests in
magazine publishing, book publishing and direct marketing; and Cable, consisting
principally of interests in cable television systems. A majority of Time
Warner's interests in filmed entertainment, television production, television
broadcasting and cable television systems, and a portion of its interests in
cable television programming are held through Time Warner Entertainment Company,
L.P. ('TWE'). Time Warner owns general and limited partnership interests in TWE
consisting of 74.49% of the pro rata priority capital ('Series A Capital') and
residual equity capital ('Residual Capital'), and 100% of the senior priority
capital ('Senior Capital') and junior priority capital ('Series B Capital'). The
remaining 25.51% limited partnership interests in the Series A Capital and
Residual Capital of TWE are held by a subsidiary of 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.
 
OVERVIEW
 
     Time Warner and the Entertainment Group each had a strong financial
performance in 1997, as measured by the operating performance of their
businesses and the improved strength of their financial condition, as more fully
described herein. This performance was driven by solid business fundamentals at
most of their businesses and a disciplined financial focus on cost management
and controlling capital spending.
 
USE OF EBITA
 
     During 1997, management concluded that the most appropriate measure for
evaluating the operating performance of Time Warner's and the Entertainment
Group's business segments is operating income before noncash amortization of
intangible assets ('EBITA'). Consistent with management's financial focus on
controlling capital spending, EBITA measures operating performance after charges
for depreciation. In addition, EBITA eliminates the uneven effect across all
business segments of considerable amounts of noncash amortization of intangible
assets recognized in business combinations accounted for by the purchase method,
including the $14 billion acquisition of Warner Communications Inc. in 1989, the
$6.2 billion acquisition of TBS in 1996 and the $2.3 billion of cable
acquisitions in 1996 and 1995. The exclusion of noncash amortization charges is
also consistent with management's belief that Time Warner's intangible assets,
such as cable television and sports franchises, music catalogues and copyrights,
film and television libraries and the goodwill associated with its brands, are
generally increasing in value and importance to Time Warner's business objective
of creating, extending and distributing recognizable brands and copyrights
throughout the world. As such, the following comparative discussion of the
results of operations of Time Warner and the Entertainment Group includes, among
other factors, an analysis of changes in business segment EBITA. However, EBITA
should be considered in addition to, not as a substitute for, operating income,
net income and other measures of financial performance reported in accordance
with generally accepted accounting principles.
 
                                      F-2
 

<PAGE>
<PAGE>

                                TIME WARNER INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
        OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
 
TRANSACTIONS AFFECTING COMPARABILITY OF RESULTS OF OPERATIONS
 
     Time Warner and the Entertainment Group completed a number of transactions
in 1996 and 1995 which have affected the comparability of each entity's results
of operations. For Time Warner, these transactions included the TBS Transaction
in 1996, the Cable Acquisitions in 1996 and 1995, the ITOCHU/Toshiba Transaction
in 1995, the Preferred Stock Refinancing in 1996 and certain other debt
refinancings in 1996 and 1995 (the 'TW Transactions'). For the Entertainment
Group, these transactions included the formation of the TWE-Advance/Newhouse
Partnership ('TWE-A/N') in 1995, the refinancing of TWE's bank debt and certain
asset sales in 1995, including the initial 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'). These transactions are more
fully discussed in the notes to the accompanying consolidated financial
statements.
 
     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 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
 
1997 VS. 1996
 
     EBITA and operating income for Time Warner and the Entertainment Group in
1997 and 1996 are as follows:
 
<TABLE>
<CAPTION>
                                                                        YEARS ENDED DECEMBER 31,
                                             -------------------------------------------------------------------------------
                                                             EBITA                               OPERATING INCOME
                                             -------------------------------------     -------------------------------------
                                             HISTORICAL    PRO FORMA    HISTORICAL     HISTORICAL    PRO FORMA    HISTORICAL
                                                1997         1996          1996           1997         1996          1996
                                             ----------    ---------    ----------     ----------    ---------    ----------
                                                                               (MILLIONS)
<S>                                          <C>           <C>          <C>            <C>           <C>          <C>
Time Warner:
Publishing................................     $  529       $   464       $  464         $  481       $   418       $  418
Music.....................................        467           653          653            166           361          361
Cable Networks-TBS........................        573           472          142            374           297           99
Filmed Entertainment-TBS..................        200          (116)          30            113          (202)           8
Cable.....................................        427           353          353            150            75           75
Intersegment elimination..................        (13)          (10)           5            (13)          (10)           5
                                             ----------    ---------    ----------     ----------    ---------    ----------
Total.....................................     $2,183       $ 1,816       $1,647         $1,271       $   939       $  966
                                             ----------    ---------    ----------     ----------    ---------    ----------
                                             ----------    ---------    ----------     ----------    ---------    ----------
Entertainment Group:
Filmed Entertainment-Warner Bros..........     $  404       $   379       $  379         $  281       $   254       $  254
Broadcasting-The WB Network...............        (88)          (98)         (98)           (88)          (98)         (98)
Cable Networks-HBO........................        391           328          328            391           328          328
Cable(1)..................................      1,184           917          917            877           606          606
                                             ----------    ---------    ----------     ----------    ---------    ----------
Total.....................................     $1,891       $ 1,526       $1,526         $1,461       $ 1,090       $1,090
                                             ----------    ---------    ----------     ----------    ---------    ----------
                                             ----------    ---------    ----------     ----------    ---------    ----------
</TABLE>
 
------------
 
(1) Includes net gains of approximately $200 million recognized in 1997 related
    to the sale or exchange of certain cable television systems.
 
     Time Warner had revenues of $13.294 billion, income of $301 million before
an extraordinary loss on the retirement of debt ($.03 loss per common share
after preferred dividend requirements) and net income of $246 million ($.13 loss
per common share after preferred dividend requirements) in 1997, compared to
revenues of $10.064 billion, a loss of $156 million before an extraordinary loss
on the retirement of debt ($.95 per
 
                                      F-3
 

<PAGE>
<PAGE>

                                TIME WARNER INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
        OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
 
common share) and a net loss of $191 million ($1.04 per common share) in 1996.
Time Warner's equity in the pretax income of the Entertainment Group was $686
million in 1997, compared to $290 million in 1996.
 
     Time Warner's historical results of operations include the operating
results of TBS from October 10, 1996. On a pro forma basis, giving effect to the
Time Warner Transactions that occurred in 1996 as if each of such transactions
had occurred at the beginning of 1996, Time Warner would have reported for the
year ended December 31, 1996, revenues of $12.799 billion, depreciation expense
of $368 million, EBITA of $1.816 billion, operating income of $939 million,
equity in the pretax income of the Entertainment Group of $290 million, a loss
before extraordinary item of $282 million ($1.04 per common share) and a net
loss of $317 million ($1.10 per common share). No pro forma financial
information has been presented for Time Warner for the year ended December 31,
1997 because all of such transactions are already reflected in the historical
financial statements of Time Warner.
 
     Time Warner's operating results improved from a pro forma net loss of $317
million for the year ended December 31, 1996 to net income of $246 million for
the year ended December 31, 1997. As discussed more fully below, this
improvement principally resulted from an overall increase in Time Warner's EBITA
and operating income, a significant increase in income from its equity in the
pretax income of the Entertainment Group and a $200 million pretax gain
recognized in 1997 in connection with the redemption of certain mandatorily
redeemable preferred securities and the related disposal of its interest in
Hasbro, Inc., offset in part by a $20 million increase in extraordinary losses
on the retirement of debt recorded in each period. On a historical basis, such
underlying operating trends were mitigated by an overall increase in interest
expense principally relating to the assumption of approximately $2.8 billion of
debt in the TBS Transaction, and an increase in noncash amortization of
intangible assets, also relating to the TBS Transaction. On a historical basis,
after preferred dividend requirements that increased by $62 million due to the
April 1996 issuance of Series M Preferred Stock, Time Warner's net loss
applicable to common shares improved to $73 million for the year ended December
31, 1997, compared to $448 million for the year ended December 31, 1996. This
improvement, as well as the dilutive effect from issuing 179.8 million shares of
common stock in connection with the TBS Transaction, resulted in a net loss per
common share of $.13 for the year ended December 31, 1997, compared to a $1.04
net loss per common share for the year ended December 31, 1996.
 
     On a historical basis, the Entertainment Group had revenues of $11.328
billion, income of $642 million before an extraordinary loss on the retirement
of debt and net income of $619 million in 1997, compared to revenues of $10.861
billion and net income of $220 million in 1996. As discussed more fully below,
the Entertainment Group's net income increased significantly in 1997 as compared
to 1996 due to an overall increase in EBITA and operating income generated by
its business segments, including approximately $200 million of net gains
recognized in 1997 related to the sale or exchange of certain cable television
systems, and the recognition of an approximate $250 million gain in 1997 related
to the sale of TWE's interest in E! Entertainment Television, Inc. These
increases were offset in part by the recognition of a $23 million extraordinary
loss on the retirement of debt in 1997 and an increase in minority interest
expense related to TWE-A/N.
 
     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 $4.290 billion, compared to $4.117
billion in 1996. EBITA increased to $529 million from $464 million. Operating
income increased to $481 million from $418 million. Excluding
 
                                      F-4
 

<PAGE>
<PAGE>

                                TIME WARNER INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
        OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
 
the effect of operations that were either recently sold or acquired, revenues
benefited from a significant increase in magazine advertising revenues, as well
as increases in circulation and direct marketing revenues. Contributing to the
revenue gains were increases achieved by People, Sports Illustrated, Time,
Entertainment Weekly, In Style and direct marketer Book-of-the-Month Club. EBITA
and operating income increased principally as a result of the revenue gains and,
to a lesser extent, continued cost savings.
 
     Music.  Revenues decreased to $3.691 billion, compared to $3.949 billion in
1996. EBITA decreased to $467 million from $653 million. Operating income
decreased to $166 million from $361 million. Despite the Music division having a
leading domestic market share for the year of 20%, the decline in revenues
principally related to softness in the overexpanded U.S. retail marketplace,
artist delays affecting the timing of releases of new product and a decline in
international recorded music sales. EBITA and operating income decreased
principally as a result of the decline in revenues and lower results from direct
marketing activities, offset in part by certain one-time gains. Management
expects that these domestic and international trends will continue through the
first quarter of 1998, after which the Music division is expected to benefit
from the release of new products from popular established artists.
 
     Cable Networks-TBS.  Cable Networks results reflect the acquisition of TBS
effective in October 1996. Such operating results are not comparable to the
prior year and, accordingly, are discussed on a pro forma basis.
 
     Revenues increased to $2.900 billion, compared to $2.477 billion on a pro
forma basis in 1996. EBITA increased to $573 million from $472 million.
Operating income increased to $374 million from $297 million. Revenues benefited
from increases in advertising and subscription revenues. Advertising revenues
increased due to a strong overall advertising market for the division's major
branded networks, including TNT, TBS Superstation, CNN and Cartoon Network.
Subscription revenues increased as a result of higher rates and an increase in
subscriptions, primarily at TNT, CNN, Cartoon Network and Turner Classic Movies.
EBITA and operating income increased principally as a result of the revenue
gains, offset in part by start-up costs for new networks, including the sports
news network CNN/SI and the Spanish-language news network CNN en Espanol.
 
     On December 31, 1997, the TBS Superstation was converted from an
advertiser-supported broadcast super-station to a copyright-paid, cable
television service, which allows it to charge cable operators for the right to
carry its cable television programming. The creation of this new subscription
revenue stream is expected to contribute positively to operating results
beginning in 1998.
 
     Filmed Entertainment-TBS.  Filmed Entertainment results reflect the
acquisition of TBS effective in October 1996. Such operating results are not
comparable to the prior year and, accordingly, are discussed on a pro forma
basis.
 
     Revenues increased to $1.531 billion, compared to $1.458 billion on a pro
forma basis in 1996. EBITA increased to $200 million from a loss of $116
million. Operating income increased to $113 million from a loss of $202 million.
Revenues benefited from increases in worldwide theatrical, home video and
television distribution revenues. EBITA and operating income increased
principally as a result of the revenue gains, merger-related cost savings and
the absence of approximately $200 million of write-offs recorded in 1996 that
related to disappointing results for theatrical releases.
 
     Cable.  Revenues increased to $997 million, compared to $909 million in
1996. EBITA increased to $427 million from $353 million. Operating income
increased to $150 million from $75 million. 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 advertising and pay-per-view revenues.
EBITA and operating income increased principally as a result of the revenue
gains, as well as gains of approximately $12 million recognized in 1997 in
connection with the sale of certain investments.
 
     Interest and Other, Net.  Interest and other, net, decreased to $1.044
billion in 1997, compared to $1.174 billion in 1996. Interest expense increased
to $1.049 billion, compared to $968 million, principally due to the
 
                                      F-5
 

<PAGE>
<PAGE>

                                TIME WARNER INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
        OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
 
assumption of approximately $2.8 billion of debt in the TBS Transaction. There
was other income, net, of $5 million in 1997 compared to other expense, net, of
$206 million in 1996, principally because of the recognition of a $200 million
pretax gain in 1997 in connection with the redemption of certain mandatorily
redeemable preferred securities and the related disposal of Time Warner's
interest in Hasbro, Inc. and lower losses from the reduction in carrying value
of certain investments, offset in part by costs associated with the Company's
receivables securitization program.
 
ENTERTAINMENT GROUP
 
     Filmed Entertainment-Warner Bros.  Revenues decreased to $5.472 billion,
compared to $5.648 billion in 1996. EBITA increased to $404 million from $379
million. Operating income increased to $281 million from $254 million. Revenues
decreased principally as a result of lower worldwide theatrical and home video
revenues, offset in part by increases in worldwide television distribution
revenues. EBITA and operating income increased principally as a result of
high-margin sales of library product that contributed to the strong performance
of worldwide television distribution operations, cost savings and certain
one-time gains, offset in part by higher depreciation principally relating to
the expansion of theme parks and consumer products operations.
 
     Broadcasting-The WB Network.  Revenues increased to $136 million, compared
to $87 million in 1996. EBITA and operating losses improved to a loss of $88
million from a loss of $98 million. The increase in revenues primarily resulted
from the expansion of programming in September 1996 to three nights of primetime
scheduling and the expansion of Kids' WB!, the network's animated programming
lineup on Saturday mornings and weekdays. The 1997 operating loss improved
principally as a result of the revenue gains and the effect of an increase in a
limited partner's interest in the network that occurred in early 1997. Due to
the start-up nature of this national broadcast operation and the addition of a
fourth night of primetime programming in January 1998, losses are expected to
continue.
 
     Cable Networks-HBO.  Revenues increased to $1.923 billion, compared to
$1.763 billion in 1996. EBITA and operating income increased to $391 million
from $328 million. Revenues benefited primarily from an increase in
subscriptions to 33.6 million from 32.4 million at the end of 1996. EBITA and
operating income improved principally as a result of the revenue gains and, to a
lesser extent, cost savings.
 
     Cable.  Revenues increased to $4.243 billion, compared to $3.851 billion in
1996. EBITA increased to $1.184 billion from $917 million. Operating income
increased to $877 million from $606 million. Revenues benefited from an 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 an increase in advertising and pay-per-view
revenues. EBITA and operating income increased principally as a result of the
revenue gains, as well as net gains of approximately $200 million recognized in
1997 in connection with the sale or exchange of certain cable systems. The
increases in EBITA and operating income were partially offset by higher
depreciation related to capital spending.
 
     As of December 31, 1997, including the wholly owned cable operations of TWI
Cable Inc. ('TWI Cable'), there were 12.6 million subscribers under the
management of the Entertainment Group's Cable division, as compared to 12.3
million subscribers at the end of 1996.
 
     Interest and Other, Net.  Interest and other, net, decreased to $357
million in 1997, compared to $524 million in 1996. Interest expense increased to
$494 million, compared to $478 million in 1996. There was other income, net, of
$137 million in 1997, compared to other expense, net, of $46 million in 1996,
principally due to higher gains on asset sales, including an approximate $250
million pretax gain on the sale of an interest in E! Entertainment Television,
Inc. recognized in 1997. This income was offset in part by higher losses from
reductions in the carrying value of certain investments and the dividend
requirements on preferred stock of a subsidiary issued in February 1997.
 
                                      F-6
 

<PAGE>
<PAGE>

                                TIME WARNER INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
        OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
 
1996 VS. 1995
 
     EBITA and operating income for Time Warner and the Entertainment Group in
1996 and 1995 are as follows:
 
<TABLE>
<CAPTION>
                                                                  YEARS ENDED DECEMBER 31,
                                            ---------------------------------------------------------------------
                                                          EBITA                          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................................. $  464   $  417   $  464   $  417    $  418    $  381  $  418  $  381
Music(1)...................................    653      595      653      595       361       321     361     321
Cable Networks-TBS.........................    472      445      142       --       297       267      99      --
Filmed Entertainment-TBS...................   (116)      28       30       --      (202)      (62)      8      --
Cable......................................    353      307      353       63        75        29      75      (5)
Intersegment elimination...................    (10)       6        5       --       (10)        6       5      --
                                            ------   ------   ------   ------    ------    ------  ------  ------
Total...................................... $1,816   $1,798   $1,647   $1,075    $  939    $  942  $  966  $  697
                                            ------   ------   ------   ------    ------    ------  ------  ------
                                            ------   ------   ------   ------    ------    ------  ------  ------
Entertainment Group:
Filmed Entertainment-Warner Bros........... $  379   $  377   $  379   $  377    $  254    $  253  $  254  $  253
Six Flags Theme Parks(2)...................     --       --       --       40        --        --      --      29
Broadcasting-The WB Network................    (98)     (66)     (98)     (66)      (98)      (66)    (98)    (66)
Cable Networks-HBO.........................    328      275      328      275       328       274     328     274
Cable......................................    917      842      917      810       606       533     606     502
                                            ------   ------   ------   ------    ------    ------  ------  ------
Total...................................... $1,526   $1,428   $1,526   $1,436    $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 $156 million before
an extraordinary loss on the retirement of debt ($.95 per common share) and a
net loss of $191 million ($1.04 per common share) in 1996, compared to revenues
of $8.067 billion, a loss of $124 million before an extraordinary loss on the
retirement of debt ($.46 per common share) 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 EBITA, operating income 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 connection with the Preferred Stock Refinancing, the Cable
Acquisitions and the ITOCHU/Toshiba Transaction, offset in part by the dilutive
effect from issuing 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
 
                                      F-7
 

<PAGE>
<PAGE>

                                TIME WARNER INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
        OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
 
$12.154 billion, depreciation expense of $368 million and $349 million, EBITA of
$1.816 billion and $1.798 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 $282 million and $230
million ($1.04 and $.96 per common share) and a net loss of $317 million and
$272 million ($1.10 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, depreciation expense of $644 million,
EBITA of $1.428 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 EBITA and 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 TWE-A/N. 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.
 
     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. EBITA increased to $464 million from $417 million. 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. EBITA 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. EBITA increased to $653 million from $595 million. 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
 
                                      F-8
 

<PAGE>
<PAGE>

                                TIME WARNER INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
        OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
 
domestic market share of 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 EBITA 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.
 
     Cable Networks-TBS.  Cable Networks results reflect the acquisition of TBS
effective in October 1996 and include revenues of $680 million, EBITA of $142
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. EBITA increased to $472 million from $445 million.
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. EBITA 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, EBITA of $30 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. EBITA decreased from $28 million in 1995 to a loss of
$116 million in 1996. 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, EBITA 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. EBITA increased to $353 million from $63 million. 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, EBITA of $307 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 FCC and an increase in
pay-per-view and advertising revenues. EBITA and operating income increased
principally as a result of revenue gains, offset in part by higher depreciation
relating to increased capital spending.
 
                                      F-9
 

<PAGE>
<PAGE>

                                TIME WARNER INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
        OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
 
     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 its 8.75% Convertible
Subordinated Debentures due 2015 (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. EBITA increased to $379 million from $377
million. 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. EBITA and operating income benefited principally from the revenue
gains, offset in large part by a $54 million increase in depreciation
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 Entertainment Corporation ('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. In February 1998, TWE entered into an agreement to sell its
remaining 49% interest. See Note 4 to the accompanying consolidated financial
statements.
 
     Broadcasting-The WB Network.  The WB Network recorded EBITA and operating
losses of $98 million on $87 million of revenues in 1996, compared to EBITA and
operating losses 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 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. EBITA increased to $328 million from $275 million.
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. EBITA 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. EBITA increased to $917 million from $810 million. 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 TWE-A/N
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, EBITA of $842 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 advertising
and pay-per-view revenues. EBITA and operating income increased principally as a
result of revenue gains, offset in part by higher depreciation relating to
increased capital spending.
 
                                      F-10
 

<PAGE>
<PAGE>

                                TIME WARNER INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
        OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
 
     As of December 31, 1996, including the wholly owned cable operations of TWI
Cable, there were 12.3 million subscribers under the management of the
Entertainment Group's Cable division, as compared to 10.4 million subscribers at
the end of 1995.
 
     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 assets. 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.
 
FINANCIAL CONDITION AND LIQUIDITY
DECEMBER 31, 1997
TIME WARNER
1997 FINANCIAL CONDITION
 
     At December 31, 1997, Time Warner had $11.8 billion of debt, $645 million
of available cash and equivalents (net debt of $11.2 billion), $533 million of
borrowings against future stock option proceeds, $575 million of mandatorily
redeemable preferred securities of subsidiaries, $1.9 billion of Series M
Preferred Stock and $9.4 billion of shareholders' equity, compared to $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 at December 31, 1996.
 
INVESTMENT IN TWE
 
     Time Warner's investment in TWE at December 31, 1997 consisted of interests
in 74.49% of the Series A Capital and Residual Capital of TWE, and 100% of the
Senior Capital and Series B Capital of TWE. Such priority capital interests
provide Time Warner (and with respect to the Series A Capital only, 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 $6 billion at December 31, 1997. 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 received a $535 million distribution relating to
its Senior Capital interest in 1997. Time Warner's remaining $1.1 billion Senior
Capital interest and any undistributed partnership income allocated thereto
(based on an 8% annual rate of return) are required to be distributed to Time
Warner in two annual installments on July 1, 1998 and 1999.
 
                                      F-11
 

<PAGE>
<PAGE>

                                TIME WARNER INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
        OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
 
COMMON STOCK REPURCHASE PROGRAM
 
     In November 1997, Time Warner's Board of Directors authorized a 20 million
share increase in Time Warner's existing common stock repurchase program that,
along with previous authorizations, will allow the Company to repurchase, from
time to time, up to 35 million shares of Time Warner common stock. Common stock
repurchases have been funded with borrowings under Time Warner's Stock Option
Proceeds Credit Facility, as described more fully below. The common stock
repurchased under the program is expected to continue to be used to satisfy
future share issuances related to the exercise of existing employee stock
options and the potential conversion of certain convertible securities. Actual
repurchases in any period will be subject to market conditions. As of December
31, 1997, Time Warner had acquired approximately 17.6 million shares of its
common stock for an aggregate cost of $800 million.
 
     In connection with Time Warner's expanded common stock repurchase program,
Time Warner entered into a new five-year, $1.3 billion revolving credit facility
(the 'Stock Option Proceeds Credit Facility') in early 1998, which replaced its
previously existing facility. Borrowings under the Stock Option Proceeds Credit
Facility are principally used to fund stock repurchases and approximately $125
million of future preferred dividend requirements on Time Warner's Series G, H,
I and J Preferred Stock as of December 31, 1997. At December 31, 1997 and 1996,
Time Warner had outstanding borrowings against future stock option proceeds of
$533 million and $488 million, respectively.
 
     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 preferred dividend requirements on its Series G, H, I
and J Preferred Stock, and has entered into certain escrow arrangements, Time
Warner's principal credit rating agencies similarly exclude such preferred
dividend requirements for purposes of evaluating Time Warner's coverage ratio.
See Note 8 to the accompanying consolidated financial statements for a summary
of the principal terms of the Stock Option Proceeds Credit Facility.
 
FINANCING TRANSACTIONS
 
     In 1997, Time Warner and its consolidated subsidiaries continued to
capitalize on favorable market conditions by completing a series of financing
transactions that has resulted in the refinancing of approximately $4.5 billion
of debt, which lowered interest rates, staggered debt maturities and, with
respect to the redemption of certain convertible securities, eliminated the
potential dilution from the conversion of such securities into 5.6 million
shares of Time Warner common stock. In addition to these debt refinancings, Time
Warner reduced debt by approximately $1 billion (excluding the approximate $100
million increase in debt relating to the noncash accretion of original issue
discounts on certain zero-coupon debt securities).
 
     As part of these debt refinancings, Time Warner, together with certain of
its consolidated and unconsolidated subsidiaries, entered into a new, five-year
revolving credit facility in November 1997 (the '1997 Credit Agreement') and
terminated its subsidiaries' financing arrangements under certain previously
existing bank credit facilities (the 'Old Credit Agreements'). This enabled Time
Warner to reduce its aggregate borrowing availability from $10.3 billion to $7.5
billion, lower interest rates and refinance outstanding borrowings under the Old
Credit Agreements in the amounts of approximately $2.4 billion by subsidiaries
of Time Warner and $2.1 billion by TWE. See Note 7 to the accompanying
consolidated financial statements for a summary of the principal terms of the
1997 Credit Agreement.
 
                                      F-12
 

<PAGE>
<PAGE>

                                TIME WARNER INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
        OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
 
CREDIT SIMPLIFICATION
 
     In December 1997, in order to simplify its credit structure, Time Warner
implemented a cross-corporate guarantee structure, whereby Time Warner and each
of TW Companies and TBS (the 'Guarantor Subsidiaries') have fully and
unconditionally guaranteed any outstanding publicly traded indebtedness of each
other and, along with TWI Cable, have similarly guaranteed each other's
outstanding borrowings under the 1997 Credit Agreement. As a result of
implementing this unified credit structure, the credit profile associated with
the indebtedness of Time Warner or any of the Guarantor Subsidiaries is
substantially the same.
 
CREDIT STATISTICS
 
     The combination of EBITA growth, controlled capital spending and debt
reduction has resulted in improvements in Time Warner's financial condition and
overall financial flexibility, as reflected in its strengthening financial
ratios. These ratios, consisting of commonly used financial measures such as
leverage and coverage ratios, are used by credit rating agencies and other
credit analysts to measure the ability of a company to repay debt (leverage) and
to pay interest and preferred dividends (coverage). As a result of the
improvements in Time Warner's financial performance, each of Standard & Poor's
and Moody's, Time Warner's principal credit rating agencies, recently improved
the credit rating outlook for Time Warner.
 
     The leverage and coverage ratios, on a historical basis for 1997 and on a
pro forma basis for 1996 and 1995, 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. The leverage ratio
represents the ratio of total debt, less available cash and equivalents, to
total business segment operating income before depreciation and amortization,
less corporate expenses ('Adjusted EBITDA'). The coverage ratio represents the
ratio of Adjusted EBITDA to total interest expense and/or preferred dividends.
 
<TABLE>
<CAPTION>
                                                                                                        PRO FORMA(a)
                                                                                       HISTORICAL    ------------------
                                                                                          1997        1996       1995
                                                                                       ----------    -------    -------
<S>                                                                                    <C>           <C>        <C>
Time Warner and Entertainment Group combined:
Leverage ratio......................................................................      3.2x         4.1x       4.3x
Interest coverage ratio (b).........................................................      3.5x         2.9x       2.5x
Interest and preferred dividends coverage ratio (b)(c)..............................      2.8x         2.3x       2.0x

Time Warner:
Leverage ratio......................................................................      4.5x         5.9x       5.7x
Interest coverage ratio (b).........................................................      2.5x         2.0x       1.9x
Interest and preferred dividends coverage ratio (b)(c)..............................      1.9x         1.5x       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 paid to TWE in connection with borrowings under Time
    Warner's $400 million credit agreement with TWE and excludes interest on
    borrowings under the Stock Option Proceeds Credit Facility.
 
(c) Includes dividends related to certain preferred securities of subsidiaries.
    Excludes preferred dividends related to Time Warner's Series G, H, I and J
    Preferred Stock, which Time Warner has committed to fund with borrowings
    under the Stock Option Proceeds Credit Facility.
 
     Time Warner's stand-alone leverage and coverage ratios for 1998 are
expected to be positively affected by the transfer of approximately $1 billion
of debt to TWE-A/N in connection with the TWE-A/N Transfers (as described more
fully hereinafter). The TWE-A/N Transfers will have no impact on the combined
financial ratios of Time Warner and the Entertainment Group.
 
                                      F-13
 

<PAGE>
<PAGE>

                                TIME WARNER INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
        OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
 
CASH FLOWS
 
     During 1997, Time Warner's cash provided by operations amounted to $1.408
billion and reflected $2.183 billion of EBITA from its Publishing, Music, Cable
Networks-TBS, Filmed Entertainment-TBS and Cable businesses, $382 million of
noncash depreciation expense, $479 million of distributions from TWE (excluding
$455 million representing the return of a portion of the Time Warner General
Partners' Senior Capital interest that has been classified as a source of cash
from investing activities) and $108 million from the securitization of
receivables, less $929 million of interest payments, $253 million of income
taxes, $81 million of corporate expenses and $481 million related to an increase
in other working capital requirements, balance sheet accounts and noncash items.
Cash provided by operations of $253 million in 1996 reflected $1.647 billion of
business segment EBITA, $307 million of noncash depreciation expense, $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 used by investing activities decreased to $45 million in 1997,
compared to $424 million in 1996, principally as a result of lower investment
spending and the receipt of $455 million of proceeds representing the return of
a portion of the Time Warner General Partners' Senior Capital interest in TWE,
offset in part by higher capital expenditures and a decrease in investment
proceeds. Capital expenditures increased to $574 million in 1997, compared to
$481 million in 1996, principally as a result of capital spending by the TBS
businesses acquired in October 1996.
 
     Cash used by financing activities was $1.232 billion in 1997, compared to
$500 million in 1996. The use of cash in 1997 principally resulted from
approximately $1 billion of debt reduction, the repurchase of approximately 6.2
million shares of Time Warner common stock at an aggregate cost of $344 million
and the payment of $338 million of dividends, offset in part by proceeds
received from the exercise of employee stock options. The use of cash in 1996
principally resulted from approximately $1.8 billion of debt reduction, the
repurchase of approximately 11.4 million shares of Time Warner common stock at
an aggregate cost of $456 million and the payment of $287 million of dividends,
offset in part by $488 million of borrowings against future stock option
proceeds and approximately $1.55 billion of net proceeds raised from the
issuance of 1.6 million shares of Series M Preferred Stock. The proceeds from
the Series M Preferred Stock were used to reduce debt.
 
     Cash used by financing activities excludes preferred dividend requirements
on Time Warner's Series M Preferred Stock that were paid in-kind, at Time
Warner's election, with additional shares of Series M Preferred Stock in 1997
and 1996. Time Warner elected to begin to use cash to satisfy such dividend
requirements in 1998, which is expected to increase annual cash dividend
payments by approximately $200 million.
 
     The assets and cash flows of TWE are restricted by certain borrowing and
partnership agreements and are unavailable to Time Warner except through the
payment of certain fees, reimbursements, cash distributions and loans, which are
subject to limitations. Under the 1997 Credit Agreement, TWE 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.
 
     Management believes that Time Warner's operating cash flow, cash and
equivalents and additional borrowing capacity are sufficient to fund its capital
and liquidity needs for the foreseeable future without distributions and loans
from TWE above those permitted by existing agreements.
 
                                      F-14
 

<PAGE>
<PAGE>

                                TIME WARNER INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
        OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
 
ENTERTAINMENT GROUP
 
1997 FINANCIAL CONDITION
 
     At December 31, 1997, the Entertainment Group had $6.0 billion of debt,
$322 million of cash and equivalents (net debt of $5.7 billion), $233 million of
preferred stock of a subsidiary, $1.1 billion of Time Warner General Partners'
Senior Capital and $6.4 billion of partners' capital, compared to $5.7 billion
of debt, $216 million of cash and equivalents (net debt of $5.5 billion), $1.5
billion of Time Warner General Partners' Senior Capital and $6.7 billion of
partners' capital at December 31, 1996.
 
CREDIT STATISTICS
 
     Entertainment Group leverage and coverage ratios for 1997, 1996 and 1995
were as follows:
 
<TABLE>
<CAPTION>
                                                                                         HISTORICAL
                                                                                       --------------    PRO FORMA
                                                                                       1997     1996      1995(a)
                                                                                       -----    -----    ---------
<S>                                                                                    <C>      <C>      <C>
Leverage ratio......................................................................   2.0x     2.4x        2.9x
Interest coverage ratio (b).........................................................   5.4x     4.8x        3.8x
</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.
 
(b) Includes dividends related to the preferred stock of a subsidiary.
 
     The Entertainment Group's leverage and coverage ratios for 1998 are
expected to be negatively affected by TWE-A/N's assumption of approximately $1
billion of debt in connection with the TWE-A/N Transfers (as described more
fully hereinafter). Nevertheless, management believes that the Entertainment
Group's operating cash flow will continue to be sufficient to service its debt
requirements.
 
CASH FLOWS
 
     In 1997, the Entertainment Group's cash provided by operations amounted to
$1.799 billion and reflected $1.891 billion of EBITA from the Filmed
Entertainment-Warner Bros., Broadcasting-The WB Network, Cable Networks-HBO and
Cable businesses, $956 million of noncash depreciation expense and $300 million
from the securitization of backlog, less $493 million of interest payments, $95
million of income taxes, $72 million of corporate expenses and $688 million
related to an increase in working capital requirements, other balance sheet
accounts and noncash items. Cash provided by operations of $1.912 billion in
1996 reflected $1.526 billion of business segment EBITA, $808 million of noncash
depreciation expense 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 used by investing activities was $1.217 billion in 1997, compared to
$1.253 billion in 1996, principally as a result of lower capital expenditures,
offset by a decrease in investment proceeds. Capital expenditures were $1.565
billion in 1997, compared to $1.719 billion in 1996.
 
     Cash used by financing activities was $476 million in 1997, compared to
$652 million in 1996, principally as a result of an increase in debt used to
fund cash distributions to Time Warner and the issuance of 250,000 shares of
preferred stock of a subsidiary for aggregate net proceeds of $243 million,
offset in part by a $706 million increase in distributions paid to Time Warner
and the absence of $169 million of collections on the note receivable from U S
WEST that was fully paid in 1996.
 
     Management believes that the Entertainment Group's operating cash flow,
cash and equivalents and additional borrowing capacity are sufficient to fund
its capital and liquidity needs for the foreseeable future.
 
                                      F-15
 

<PAGE>
<PAGE>

                                TIME WARNER INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
        OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
 
CABLE CAPITAL SPENDING
 
     Time Warner Cable has been engaged in a plan to upgrade the technological
capability and reliability of its cable television systems and develop new
services, which it believes will position the business for sustained, long-term
growth. Capital spending by Time Warner Cable, including the cable operations of
both Time Warner and TWE, amounted to $1.683 billion in 1997, compared to $1.563
billion in 1996. Capital spending includes over $100 million in each year
relating to Primestar, which is expected to be eliminated in 1998 upon the
consummation of the Primestar Transactions (as described more fully
hereinafter). Cable capital spending for 1998 is budgeted to be approximately
$1.6 billion and is expected to continue to be funded by cable operating cash
flow. In exchange for certain flexibility in establishing cable rate pricing
structures for regulated services that went into effect on January 1, 1996 and
consistent with Time Warner Cable's long-term strategic plan, Time Warner Cable
agreed with the FCC to invest a total of $4 billion in capital costs in
connection with the upgrade of its cable infrastructure, which is expected to be
substantially completed over a five-year period ending December 31, 2000. The
agreement with the FCC covers all of the cable operations of Time Warner Cable,
including the owned or managed cable television systems of Time Warner, TWE and
TWE-A/N. As discussed more fully below, management expects to continue to
finance such level of investment through cable operating cash flow and the
development of new revenue streams from expanded programming options, high-speed
Internet access, telephony and other services.
 
CABLE FINANCING STRATEGY
 
     Time Warner's cable financing strategy is to continue to use cable
operating cash flow to finance the level of capital spending necessary to
upgrade the technological capability of its cable television systems and develop
new services, while pursuing opportunities to reduce both existing debt and its
share of future funding requirements related to the cable television business
and related ancillary businesses. Consistent with this strategy, Time Warner,
TWE and TWE-A/N have recently announced or consummated certain transactions,
primarily consisting of (i) a series of transactions with TCI Communications,
Inc. ('TCI'), a subsidiary of Tele-Communications, Inc., to establish two, new
strategic joint ventures, expand an existing joint venture and exchange certain
cable television systems (collectively, the 'TCI Cable Transactions'), (ii) the
transfer of TWE's and TWE-A/N's direct broadcast satellite operations and
related assets to a separate entity, as well as certain related transactions and
(iii) the transfer by a wholly owned subsidiary of Time Warner of cable
television systems (or interests therein) serving approximately 650,000
subscribers to TWE-A/N, subject to approximately $1 billion of debt, in exchange
for common and preferred partnership interests therein, as well as certain
related transactions (collectively, the 'TWE-A/N Transfers'). Each of these
transactions is discussed more fully below.
 
TCI Cable Transactions
 
     In September 1997, Time Warner, TWE, TWE-A/N and TCI signed a letter of
intent to enter into a series of agreements to (i) form two cable television
joint ventures in the Houston and south Texas areas that will be managed by Time
Warner Cable, a division of TWE, and own cable television systems serving an
aggregate 1.1 million subscribers, subject to approximately $1.4 billion of
debt, (ii) expand an existing joint venture in Kansas City, which is managed by
Time Warner Cable, through the contribution by TCI of a contiguous cable
television system serving approximately 95,000 subscribers, subject to
approximately $200 million of debt, and (iii) exchange various cable television
systems serving over 500,000 subscribers for other cable television systems of
comparable size in an effort to enhance each company's geographic clusters of
cable television properties. The joint ventures will be accounted for under the
equity method of accounting.
 
                                      F-16
 

<PAGE>
<PAGE>

                                TIME WARNER INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
        OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
 
     As a result of these transactions, Time Warner expects to reduce combined
debt of itself and TWE by approximately $650 million, benefit from the
geographic clustering of cable television systems and increase the number of
subscribers under the management of Time Warner Cable by approximately 675,000
subscribers, thereby becoming the largest cable television operator in the U.S.
The TCI Cable Transactions are expected to close periodically throughout 1998
and are subject to the execution of definitive agreements by the parties and
customary closing conditions, including all necessary governmental and
regulatory approvals. There can be no assurance that such agreements will be
completed or that such approvals will be obtained.
 
Primestar Transactions
 
     In June 1997, TWE and the Advance/Newhouse Partnership ('Advance/Newhouse')
entered into agreements to transfer the direct broadcast satellite operations
conducted by TWE and TWE-A/N (the 'DBS Operations') and the 31% partnership
interest in Primestar Partners, L.P. held by TWE-A/N ('Primestar' and
collectively, the 'Primestar Assets') to a new holding company ('Newco') that is
ultimately expected to be the publicly traded parent of TCI Satellite
Entertainment, Inc. ('TSAT'). Newco will also own the DBS Operations and
Primestar partnership interests currently owned by TSAT and other existing
partners of Primestar. In exchange for contributing its interests in the
Primestar Assets, TWE will receive an approximate 24% equity interest in Newco
and realize approximately $260 million of debt reduction, as well as eliminate
its share of future funding requirements for these operations that will be
separately financed by Newco. In partial consideration for contributing its
indirect interest in certain of the Primestar Assets, Advance/Newhouse will
receive an approximate 6% equity interest in Newco. This transaction is referred
to herein as the 'Primestar Roll-up Transaction.'
 
     In a related transaction, Primestar also entered into an agreement in June
1997 with The News Corporation Limited, MCI Telecommunications Corporation and
American Sky Broadcasting LLC ('ASkyB'), pursuant to which Primestar (or, under
certain circumstances, Newco) will acquire certain assets relating to the
high-power, direct broadcast satellite business of ASkyB (the 'Primestar ASkyB
Transaction' and, when taken together with the Primestar Roll-up Transaction,
the 'Primestar Transactions'). In exchange for such assets, ASkyB will receive
non-voting securities of Newco that will be convertible into non-voting common
stock of Newco and, accordingly, will reduce TWE's equity interest in Newco to
approximately 16% on a fully diluted basis.
 
     The Primestar Transactions are not conditioned on each other and are
expected to close independently. The Primestar Roll-up Transaction is expected
to close on or about April 1, 1998. The Primestar ASkyB Transaction is expected
to close in 1998, subject to customary closing conditions, including all
necessary governmental and regulatory approvals, including the approval of the
FCC. There can be no assurance that such approvals will be obtained.
 
TWE-A/N Transfers
 
     In early 1998, Time Warner (through a wholly owned subsidiary) contributed
cable television systems (or interests therein) serving approximately 650,000
subscribers to TWE-A/N, subject to approximately $1 billion of debt, in exchange
for common and preferred partnership interests therein, and completed certain
related transactions. The cable television systems transferred to TWE-A/N were
formerly owned by TWI Cable, a wholly owned subsidiary of Time Warner, and
Paragon Communications ('Paragon'), a partnership formerly owning cable
television systems serving approximately 1 million subscribers that was wholly
owned by subsidiaries of Time Warner, with 50% beneficially owned in the
aggregate by TWE and TWE-A/N. The TWE-A/N Transfers reduced Time Warner's debt
by approximately $1 billion and increased the under-leveraged capitalization of
TWE-A/N and consequently, TWE. The debt assumed by TWE-A/N has been guaranteed
by TWI Cable and certain of its subsidiaries, including Paragon.
 
                                      F-17
 

<PAGE>
<PAGE>

                                TIME WARNER INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
        OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
 
     As part of the TWE-A/N Transfers, TWE and TWE-A/N exchanged substantially
all of their respective beneficial interests in Paragon for an equivalent share
of Paragon's cable television systems (or interests therein) serving
approximately 500,000 subscribers, resulting in wholly owned subsidiaries of
Time Warner owning 100% of the restructured Paragon entity, with less than 1%
beneficially held for TWE. Accordingly, effective as of January 1, 1998, Time
Warner will consolidate Paragon. Because this transaction represented an
exchange of TWE's and TWE-A/N's beneficial interests in Paragon for an
equivalent amount of its cable television systems, it did not have a significant
economic impact on Time Warner, TWE or TWE-A/N.
 
     In connection with the TWE-A/N Transfers, Advance/Newhouse made a capital
contribution to TWE-A/N in order to maintain its 33.3% common partnership
interest therein. Accordingly, TWE-A/N is now owned 65.2% by TWE, 33.3% by
Advance/Newhouse and 1.5% indirectly by Time Warner. The TWE-A/N Transfers will
be accounted for effective as of January 1, 1998. Time Warner did not recognize
a gain or loss on the TWE-A/N Transfers. TWE will continue to consolidate
TWE-A/N and Time Warner will account for its interest in TWE-A/N under the
equity method of accounting.
 
SIX FLAGS
 
     In February 1998, TWE entered into an agreement to sell its remaining 49%
interest in Six Flags to Premier Parks Inc. ('Premier'), a regional theme park
operator, for approximately $375 million of cash and $100 million of convertible
preferred stock. TWE expects to use the net proceeds from this transaction,
after taxes and transaction costs, to reduce debt. As part of the transaction,
TWE will continue to license its animated cartoon and comic book characters to
Six Flags's theme parks and will similarly license such rights to Premier's
theme parks in the United States and Canada under a long-term agreement covering
an aggregate of twenty-five existing and all future locations. The transaction
is expected to close in the second quarter of 1998, subject to customary closing
conditions, including the successful completion of certain equity offerings by
Premier.
 
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 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 the
potential exploitation of 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-
 
                                      F-18
 

<PAGE>
<PAGE>

                                TIME WARNER INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
        OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
 
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 $2.126 billion and $1.502 billion at December 31, 1997 and
1996, respectively (including amounts relating to the licensing of film product
to Time Warner's and TWE's cable television networks of $719 million in 1997 and
$463 million in 1996).
 
     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. In order to accelerate the
receipt of cash under these licensing contracts, TWE established a $600 million
securitization facility in 1997 and received approximately $300 million of net
proceeds thereunder. The remaining portion of backlog for which cash advances
have not already been received continues to have 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,
1997, Time Warner had interest rate swap contracts to pay floating-rates of
interest (average six-month LIBOR rate of 5.8%) and receive fixed-rates of
interest (average rate of 5.5%) on $2.3 billion notional amount of indebtedness,
which resulted in approximately 52% of Time Warner's underlying debt, and 46% of
the debt of Time Warner and the Entertainment Group combined, being subject to
variable interest rates. At December 31, 1996, Time Warner had interest rate
swap contracts on $2.3 billion notional amount of indebtedness.
 
     Based on Time Warner's variable-rate debt and related interest rate swap
contracts outstanding at December 31, 1997, 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 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 Contracts
 
     Time Warner uses foreign exchange contracts primarily to hedge the risk
that unremitted or future royalties and license fees owed to Time Warner or TWE
domestic companies for the sale or anticipated sale of U.S. copyrighted products
abroad may be adversely affected by changes in foreign currency exchange rates.
As part of its overall strategy to manage the level of exposure to the risk of
foreign currency exchange rate fluctuations, Time Warner hedges a portion of its
and TWE's combined foreign currency exposures anticipated over the ensuing
twelve month period. At December 31, 1997, Time Warner had effectively hedged
approximately half of the combined estimated foreign currency exposures that
principally relate to anticipated cash flows to be
 
                                      F-19
 

<PAGE>
<PAGE>

                                TIME WARNER INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
        OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
 
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 is reimbursed by or reimburses TWE 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, 1997, Time Warner had contracts for the sale of $507 million and
the purchase of $139 million of foreign currencies at fixed rates, compared to
contracts for the sale of $447 million and the purchase of $104 million of
foreign currencies at December 31, 1996.
 
     Based on the foreign exchange contracts outstanding at December 31, 1997,
each 5% devaluation of the U.S. dollar as compared to the level of foreign
exchange rates for currencies under contract at December 31, 1997 would result
in approximately $25 million of unrealized losses and $7 million of unrealized
gains on foreign exchange contracts involving foreign currency sales and
purchases, respectively. Conversely, a 5% appreciation of the U.S. dollar would
result in $25 million of unrealized gains and $7 million of unrealized losses,
respectively. At December 31, 1997, none of Time Warner's foreign exchange
purchase contracts relates to TWE's foreign currency exposure. However, with
regard to the $25 million of unrealized losses or gains on foreign exchange sale
contracts, Time Warner would be reimbursed by TWE, or would reimburse TWE,
respectively, for approximately $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.
 
Asian Financial Markets
 
     During 1997, the Asian financial markets experienced significant
instability. Because less than 5% of the combined revenues of Time Warner and
the Entertainment Group are derived from the sale of products and services in
Asia, management does not believe that the state of the Asian financial markets
poses a material risk to the operations of Time Warner and the Entertainment
Group.
 
YEAR 2000 TECHNOLOGY PREPAREDNESS
 
     Time Warner, together with its Entertainment Group, is currently working to
resolve the potential impact of the year 2000 on the processing of
time-sensitive information by its computerized information systems. Year 2000
issues may arise if computer programs have been written using two digits (rather
than four) to define the applicable year. In such case, programs that have
time-sensitive logic may recognize a date using '00' as the year 1900 rather
than the year 2000, which could result in miscalculations or system failures.
Management is in the process of completing a review of significant software and
equipment used in Time Warner's operations and, to the extent practicable, in
the operations of its key business partners, in order to determine if any year
2000 risks exist that may be material to Time Warner as a whole. This process
includes an assessment of year 2000 risks on an ongoing basis and the
identification of practical remediation measures that could be taken on a timely
basis to alter, validate or replace time-sensitive software and equipment.
Management has already begun implementing certain of these measures and intends
to complete its remediation efforts prior to any anticipated material impact on
its computerized information systems. Costs of addressing potential problems
have not been material to date and, based on preliminary information, are not
currently expected to have a material adverse impact on Time Warner's financial
position, results of operations or cash flows in future periods. However, if
Time Warner, its customers or vendors are unable to resolve such processing
issues in a timely manner, it could result in a material financial risk.
Accordingly, management plans to devote the resources it concludes are
appropriate to resolve all significant year 2000 issues in a timely manner.
 
                                      F-20


<PAGE>
<PAGE>

                                TIME WARNER INC.
                           CONSOLIDATED BALANCE SHEET
                                  DECEMBER 31,
                      (MILLIONS, EXCEPT PER SHARE AMOUNTS)
 
<TABLE>
<CAPTION>
                                                                                                  1997         1996
                                                                                                 -------      -------
<S>                                                                                              <C>          <C>
ASSETS
Current assets
Cash and equivalents..........................................................................   $   645      $   452
Receivables, less allowances of $991 and $976 million.........................................     2,447        2,421
Inventories...................................................................................       830          941
Prepaid expenses..............................................................................     1,089        1,007
                                                                                                 -------      -------
Total current assets..........................................................................     5,011        4,821
 
Noncurrent cash and equivalents...............................................................        --           62
Noncurrent inventories........................................................................     1,766        1,698
Investments in and amounts due to and from Entertainment Group................................     5,549        5,814
Other investments.............................................................................     1,495        1,919
Property, plant and equipment, net............................................................     2,089        1,986
Music catalogues, contracts and copyrights....................................................       928        1,035
Cable television and sports franchises........................................................     3,982        4,203
Goodwill......................................................................................    12,572       12,421
Other assets..................................................................................       771        1,105
                                                                                                 -------      -------
Total assets..................................................................................   $34,163      $35,064
                                                                                                 -------      -------
                                                                                                 -------      -------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable..............................................................................   $   912      $   715
Participations, royalties and programming costs payable.......................................     1,072        1,196
Debt due within one year......................................................................         8           11
Other current liabilities.....................................................................     2,379        2,090
                                                                                                 -------      -------
Total current liabilities.....................................................................     4,371        4,012
 
Long-term debt................................................................................    11,833       12,713
Borrowings against future stock option proceeds...............................................       533          488
Deferred income taxes.........................................................................     3,960        4,082
Unearned portion of paid subscriptions........................................................       672          679
Other liabilities.............................................................................     1,006          967
Company-obligated mandatorily redeemable preferred securities of subsidiaries holding solely
  subordinated notes and debentures of subsidiaries of the Company............................       575          949
Series M exchangeable preferred stock, $.10 par value, 1.9 and 1.7 million shares outstanding
  and $1.903 and $1.720 billion liquidation preference........................................     1,857        1,672
 
Shareholders' equity
Preferred stock, $.10 par value, 35.4 and 35.6 million shares outstanding, $3.539 and $3.559
  billion liquidation preference..............................................................         4            4
Series LMCN-V Common Stock, $.01 par value, 57.1 and 50.7 million shares outstanding..........         1            1
Common stock, $.01 par value, 519.0 and 508.4 million shares outstanding......................         5            5
Paid-in capital...............................................................................    12,680       12,250
Accumulated deficit...........................................................................    (3,334)      (2,758)
                                                                                                 -------      -------
Total shareholders' equity....................................................................     9,356        9,502
                                                                                                 -------      -------
Total liabilities and shareholders' equity....................................................   $34,163      $35,064
                                                                                                 -------      -------
                                                                                                 -------      -------
</TABLE>
 
See accompanying notes.
 
                                      F-21
 

<PAGE>
<PAGE>

                                TIME WARNER INC.
                      CONSOLIDATED STATEMENT OF OPERATIONS
                            YEARS ENDED DECEMBER 31,
                      (MILLIONS, EXCEPT PER SHARE AMOUNTS)
 
<TABLE>
<CAPTION>
                                                                                        1997         1996         1995
                                                                                       -------      -------      ------
<S>                                                                                    <C>          <C>          <C>
Revenues (a)........................................................................   $13,294      $10,064      $8,067
                                                                                       -------      -------      ------
 
Cost of revenues (a)(b).............................................................     7,542        5,922       4,682
Selling, general and administrative (a)(b)..........................................     4,481        3,176       2,688
                                                                                       -------      -------      ------
 
Operating expenses..................................................................    12,023        9,098       7,370
                                                                                       -------      -------      ------
 
Business segment operating income...................................................     1,271          966         697
Equity in pretax income of Entertainment Group (a)..................................       686          290         256
Interest and other, net (a).........................................................    (1,044)      (1,174)       (877)
Corporate expenses (a)..............................................................       (81)         (78)        (74)
                                                                                       -------      -------      ------
 
Income before income taxes..........................................................       832            4           2
Income taxes........................................................................      (531)        (160)       (126)
                                                                                       -------      -------      ------
Income (loss) before extraordinary item.............................................       301         (156)       (124)
Extraordinary loss on retirement of debt, net of $37, $22 and $26 million income tax
  benefit...........................................................................       (55)         (35)        (42)
                                                                                       -------      -------      ------
Net income (loss)...................................................................       246         (191)       (166)
Preferred dividend requirements.....................................................      (319)        (257)        (52)
                                                                                       -------      -------      ------
 
Net loss applicable to common shares................................................   $   (73)     $  (448)     $ (218)
                                                                                       -------      -------      ------
                                                                                       -------      -------      ------
 
Basic and diluted loss per common share:
Loss before extraordinary item......................................................   $  (.03)     $  (.95)     $ (.46)
                                                                                       -------      -------      ------
                                                                                       -------      -------      ------
 
Net loss............................................................................   $  (.13)     $ (1.04)     $ (.57)
                                                                                       -------      -------      ------
                                                                                       -------      -------      ------
 
Average common shares...............................................................     567.7        431.2       383.8
                                                                                       -------      -------      ------
                                                                                       -------      -------      ------
</TABLE>
 
------------
(a) Includes the following income (expenses) resulting from transactions with
    the Entertainment Group and other related companies for the years ended
    December 31, 1997, 1996 and 1995, respectively: revenues-$384 million, $224
    million and $211 million; cost of revenues-$(245) million, $(177) million
    and $(108) million; selling, general and administrative-$(53) million, $34
    million and $46 million; equity in pretax income of Entertainment Group-$5
    million, $(29) million and $(95) million; interest and other, net-$(36)
    million, $(33) million and $(27) million; and corporate expenses-$72
    million, $69 million and $64 million (Note 18).
 
<TABLE>
<S>                                                                                    <C>          <C>          <C>
(b) Includes depreciation and amortization expense of:..............................   $ 1,294      $   988      $  559
                                                                                       -------      -------      ------
                                                                                       -------      -------      ------
</TABLE>
 
See accompanying notes.
 
                                      F-22
 

<PAGE>
<PAGE>

                                TIME WARNER INC.
                      CONSOLIDATED STATEMENT OF CASH FLOWS
                            YEARS ENDED DECEMBER 31,
                                   (MILLIONS)
 
<TABLE>
<CAPTION>
                                                                                        1997         1996         1995
                                                                                       -------      -------      -------
<S>                                                                                    <C>          <C>          <C>
OPERATIONS
Net income (loss)...................................................................   $   246      $  (191)     $  (166)
Adjustments for noncash and nonoperating items:
Extraordinary loss on retirement of debt............................................        55           35           42
Depreciation and amortization.......................................................     1,294          988          559
Noncash interest expense............................................................        98           96          176
Excess (deficiency) of distributions over equity in pretax income of Entertainment
  Group.............................................................................      (207)         (62)         807
Equity in losses (income) of other investee companies, net of distributions.........        36          (53)         (16)
Changes in operating assets and liabilities:
    Receivables.....................................................................      (167)         (39)         (68)
    Inventories.....................................................................       (84)        (180)         (52)
    Accounts payable and other liabilities..........................................       501         (408)         160
    Other balance sheet changes.....................................................      (364)          67         (391)
                                                                                       -------      -------      -------
 
Cash provided by operations.........................................................     1,408          253        1,051
                                                                                       -------      -------      -------
 
INVESTING ACTIVITIES
Investments and acquisitions........................................................      (113)        (261)        (381)
Capital expenditures................................................................      (574)        (481)        (266)
Investment proceeds.................................................................       187          318          376
Proceeds received from return of Senior Capital contributed to TWE..................       455           --           --
                                                                                       -------      -------      -------
 
Cash used by investing activities...................................................       (45)        (424)        (271)
                                                                                       -------      -------      -------
 
FINANCING ACTIVITIES
Borrowings..........................................................................     5,413        3,431        2,023
Debt repayments.....................................................................    (6,394)      (5,271)      (2,693)
Borrowings against future stock option proceeds.....................................       230          488           --
Repayments of borrowings against future stock option proceeds.......................      (185)          --           --
Repurchases of Time Warner common stock.............................................      (344)        (456)          --
Issuance of Series M Preferred Stock................................................        --        1,550           --
Issuance of Company-obligated mandatorily redeemable preferred securities of
  subsidiaries......................................................................        --           --          949
Dividends paid......................................................................      (338)        (287)        (171)
Proceeds received from stock option and dividend reinvestment plans.................       454          105          106
Other, principally financing costs..................................................       (68)         (60)         (91)
                                                                                       -------      -------      -------
 
Cash provided (used) by financing activities........................................    (1,232)        (500)         123
                                                                                       -------      -------      -------
 
INCREASE (DECREASE) IN CASH AND EQUIVALENTS.........................................       131         (671)         903
 
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD (a).....................................       514        1,185          282
                                                                                       -------      -------      -------
 
CASH AND EQUIVALENTS AT END OF PERIOD (a)...........................................   $   645      $   514      $ 1,185
                                                                                       -------      -------      -------
                                                                                       -------      -------      -------
</TABLE>
 
------------
(a) Includes current and noncurrent cash and equivalents at December 31, 1996
    and 1995.
 
See accompanying notes.
 
                                      F-23
 

<PAGE>
<PAGE>

                                TIME WARNER INC.
                 CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
                                   (MILLIONS)
 
<TABLE>
<CAPTION>
                                                              PREFERRED      COMMON      PAID-IN    ACCUMULATED
                                                                STOCK        STOCK       CAPITAL      DEFICIT      TOTAL
                                                              ---------    ----------    -------    -----------    ------
<S>                                                           <C>          <C>           <C>        <C>            <C>
BALANCE AT DECEMBER 31, 1994...............................     $   1         $379       $ 2,588      $(1,820)     $1,148
Net loss...................................................                                              (166)       (166)
Decrease in unrealized gains on securities, net of $9
  million tax benefit......................................                                               (14)        (14)
Foreign currency translation adjustments...................                                                18          18
                                                                                                    -----------    ------
    Comprehensive income (loss)............................                                              (162)       (162)
Common stock dividends.....................................                                              (138)       (138)
Preferred stock dividends..................................                                    3          (52)        (49)
Issuance of common and preferred stock in the KBLCOM and
  Summit acquisitions......................................        14            3         1,367                    1,384
Issuance of preferred stock in the ITOCHU/Toshiba
  Transaction..............................................        15                      1,335                    1,350
Shares issued pursuant to stock option, dividend
  reinvestment and benefit plans...........................                      4           122                      126
Other......................................................                      2             7           (1)          8
                                                                  ---        -----       -------    -----------    ------
BALANCE AT DECEMBER 31, 1995...............................        30          388         5,422       (2,173)      3,667
Net loss...................................................                                              (191)       (191)
Increase in unrealized gains on securities, net of $11
  million tax expense......................................                                                17          17
Foreign currency translation adjustments...................                                                 9           9
                                                                                                    -----------    ------
    Comprehensive income (loss)............................                                              (165)       (165)
Common stock dividends.....................................                                              (155)       (155)
Preferred stock dividends..................................                                              (257)       (257)
Issuance of common and preferred stock in the CVI
  acquisition..............................................         6            3           671                      680
Reduction in par value of common and preferred stock due to
  TBS Transaction..........................................       (32)        (387)          419                       --
Issuance of common stock in the TBS Transaction............                      2         6,025                    6,027
Repurchases of Time Warner common stock....................                                 (456)                    (456)
Shares issued pursuant to stock option, dividend
  reinvestment and benefit plans...........................                                  163           (8)        155
Other......................................................                                    6                        6
                                                                  ---        -----       -------    -----------    ------
BALANCE AT DECEMBER 31, 1996...............................         4            6        12,250       (2,758)      9,502
Net income.................................................                                               246         246
Decrease in unrealized gains on securities, net of $89
  million tax benefit (a)..................................                                              (128)       (128)
Foreign currency translation adjustments...................                                               (76)        (76)
                                                                                                    -----------    ------
    Comprehensive income (loss)............................                                                42          42
Common stock dividends.....................................                                              (204)       (204)
Preferred stock dividends..................................                                              (319)       (319)
Issuance of common stock in connection with the TBS
  Transaction..............................................                                   67                       67
Repurchases of Time Warner common stock....................                                 (344)                    (344)
Shares issued pursuant to stock option, dividend
  reinvestment and benefit plans...........................                                  711          (98)        613
Other......................................................                                   (4)           3          (1)
                                                                  ---        -----       -------    -----------    ------
BALANCE AT DECEMBER 31, 1997...............................     $   4         $  6       $12,680      $(3,334)     $9,356
                                                                  ---        -----       -------    -----------    ------
                                                                  ---        -----       -------    -----------    ------
</TABLE>
 
------------
(a) Includes a $13 million reduction related to realized gains on the sale of
    securities in 1997 that represents the turnaround of previous unrealized
    gains included in comprehensive income in prior periods, net of $9 million
    tax effect.
 
See accompanying notes.
 
                                      F-24


<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 (now known as Time Warner
Companies, Inc., 'TW Companies'), and TW Companies and TBS became separate,
wholly owned subsidiaries of the new parent company. References herein to 'Time
Warner' or the 'Company' refer to TW Companies prior to October 10, 1996 and
Time Warner Inc. 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 and television broadcasting; Cable
Networks, consisting principally of interests in cable television programming;
Publishing, consisting principally of interests in magazine publishing, book
publishing and direct marketing; and Cable, consisting principally of interests
in cable television systems. A majority of Time Warner's interests in filmed
entertainment, television production, television broadcasting and cable
television systems, and a portion of its interests in cable television
programming are held through Time Warner Entertainment Company, L.P. ('TWE').
Time Warner owns general and limited partnership interests in TWE consisting of
74.49% of the pro rata priority capital ('Series A Capital') and residual equity
capital ('Residual Capital'), and 100% of the senior priority capital ('Senior
Capital') and junior priority capital ('Series B Capital'). The remaining 25.51%
limited partnership interests in the Series A Capital and Residual Capital of
TWE are held by a subsidiary of 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, Atlantic Records, Elektra
Entertainment 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) leading cable
television networks, such as HBO, Cinemax, CNN, TNT and the TBS Superstation,
(5) 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 (6) Time
Warner Cable, currently 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 16). Except for
start-up losses incurred in connection with The WB Network, Time Warner's
principal business interests generate significant operating income and cash flow
from operations. The cash flow from operations generated by such business
interests is considerably greater than their operating income due to significant
amounts of noncash amortization of intangible assets recognized in various
acquisitions accounted for by the purchase method of accounting. Noncash
amortization of intangible assets recorded by Time Warner's business interests,
including the unconsolidated business interests of the Entertainment Group,
amounted to $1.342 billion in 1997, $1.117 billion in 1996 and $822 million in
1995.
 
                                      F-25
 

<PAGE>
<PAGE>

                                TIME WARNER INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
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 1997 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 18).
 
     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 a 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.
 
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.
 
                                      F-26
 

<PAGE>
<PAGE>

                                TIME WARNER INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     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. Thereafter,
feature films are distributed 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 the related 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.'
 
     Inventories of theatrical and television product are stated at the lower of
amortized cost or net realizable value. Cost principally consists of direct
production costs and production overhead. 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 animation library of
Hanna-Barbera Inc. and 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
 
                                      F-27
 

<PAGE>
<PAGE>

                                TIME WARNER INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
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 that 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 $244 million and $217 million at December 31,
1997 and 1996, respectively. Advertising expense, excluding theatrical and
television product, amounted to $1.080 billion in 1997, $1.050 billion in 1996
and $1.045 billion in 1995.
 
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 8).
 
FINANCIAL INSTRUMENTS
 
     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.
 
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
 
                                      F-28
 

<PAGE>
<PAGE>

                                TIME WARNER INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
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,
                                                                                                  ----------------
                                                                                                   1997      1996
                                                                                                  ------    ------
                                                                                                     (MILLIONS)
<S>                                                                                               <C>       <C>
Land and buildings.............................................................................   $  962    $  914
Cable television equipment.....................................................................      941       777
Furniture, fixtures and other equipment........................................................    1,337     1,337
                                                                                                  ------    ------
                                                                                                   3,240     3,028
Less accumulated depreciation..................................................................   (1,151)   (1,042)
                                                                                                  ------    ------
Total..........................................................................................   $2,089    $1,986
                                                                                                  ------    ------
                                                                                                  ------    ------
</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, film and
television libraries, 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 television 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, film
and television libraries, music catalogues, contracts and copyrights, and other
intangible assets are amortized over periods up to twenty years using the
straight-line method. Amortization of intangible assets amounted to $912 million
in 1997, $681 million in 1996 and $378 million in 1995. Accumulated amortization
of intangible assets at December 31, 1997 and 1996 amounted to $3.181 billion
and $2.452 billion, respectively.
 
     Time Warner periodically reviews the carrying value of acquired intangible
assets for each acquired entity 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. If it is determined that the carrying value of intangible assets will
not be recovered from the undiscounted future cash flows of the acquired
business, the
 
                                      F-29
 

<PAGE>
<PAGE>

                                TIME WARNER INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
carrying value of such intangible assets would be considered impaired and
reduced by a charge to operations in the amount of the impairment. An impairment
charge is measured as any deficiency in the amount of estimated undiscounted
future cash flows of the acquired business available 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. The subsequent realization of net
operating loss and investment tax credit carryforwards 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
 
     Effective December 31, 1997, Time Warner adopted FASB Statement No. 128,
'Earnings per Share' ('FAS 128'), which established simplified standards for
computing and presenting earnings per share information. The adoption of FAS 128
did not have any effect on Time Warner's financial statements.
 
     Basic 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. Diluted loss per common share
adjusts for the effect of convertible securities and stock options only in the
periods presented in which such effect would have been dilutive. Such effect was
not dilutive in any of the periods presented herein.
 
COMPREHENSIVE INCOME
 
     Effective January 1, 1997, Time Warner adopted FASB Statement No. 130,
'Reporting Comprehensive Income' ('FAS 130'). The new rules establish standards
for the reporting of comprehensive income and its components in financial
statements. Comprehensive income consists of net income and other gains and
losses affecting shareholders' equity that, under generally accepted accounting
principles, are excluded from net income. For Time Warner, such items consist
primarily of unrealized gains and losses on marketable equity investments and
foreign currency translation gains and losses. The adoption of FAS 130 did not
have a material effect on Time Warner's primary financial statements, but did
affect the presentation of the accompanying consolidated statement of
shareholders' equity.
 
                                      F-30
 

<PAGE>
<PAGE>

                                TIME WARNER INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
SEGMENT INFORMATION
 
     On December 31, 1997, Time Warner adopted FASB Statement No. 131,
'Disclosures about Segments of an Enterprise and Related Information' ('FAS
131'). The new rules establish revised standards for public companies relating
to the reporting of financial and descriptive information about their operating
segments in financial statements. The adoption of FAS 131 did not have a
material effect on Time Warner's primary financial statements, but did affect
the disclosure of segment information contained elsewhere herein (Note 16).
 
2. MERGERS AND ACQUISITIONS
 
TBS TRANSACTION
 
     On October 10, 1996, Time Warner acquired the remaining 80% interest in TBS
that it did not already own (the 'TBS Transaction'). As part of the transaction,
each of TW Companies and TBS became a separate, wholly owned subsidiary of Time
Warner which combines, for financial reporting purposes, the consolidated net
assets and operating results of TW Companies and TBS. Each issued and
outstanding share of each class of capital stock of TW Companies was converted
into one share of a substantially identical class of capital stock of Time
Warner.
 
     In connection with the TBS Transaction, Time Warner issued (i)
approximately 179.8 million shares of common stock (including 57.1 million
shares of a special class of non-redeemable common stock having 1/100th of a
vote per share on certain limited matters ('Series LMCN-V Common Stock') to
affiliates of Liberty Media Corporation ('LMC'), a subsidiary of
Tele-Communications, Inc.), in exchange for shares of TBS capital stock and
pursuant to a separate option agreement with LMC and its affiliates (the 'SSSI
Option Agreement') and (ii) approximately 14 million stock options to replace
all outstanding TBS stock options. Time Warner also assumed approximately $2.8
billion of indebtedness.
 
     Of the aggregate consideration issued in the TBS Transaction, 6.4 million
shares of Series LMCN-V Common Stock were issued to LMC and its affiliates in
June 1997 pursuant to the SSSI Option Agreement. The SSSI Option Agreement
enabled Time Warner to acquire substantially all of the assets of Southern
Satellite Systems, Inc. and its affiliates ('SSSI'), a subsidiary of LMC that
formerly provided uplink and distribution services for WTBS (the 'TBS
Superstation'), for approximately $213 million effective as of December 31,
1997, the date on which the TBS Superstation was converted to a copyright-paid,
cable television programming service.
 
     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 allocated to the net assets acquired in proportion to their
respective fair values, as follows: goodwill-$6.842 billion; other current and
noncurrent assets-$3.624 billion; long-term debt-$2.765 billion; deferred income
taxes-$117 million; and other current and noncurrent liabilities-$1.410 billion.
 
CABLE ACQUISITIONS
 
     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') 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.
 
                                      F-31
 

<PAGE>
<PAGE>

                                TIME WARNER INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     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, at such time, owned cable television systems
serving an additional 972,000 subscribers. The acquisition of the 50% interest
in Paragon resulted in it becoming wholly owned by subsidiaries of Time Warner,
with 50% beneficially owned in the aggregate by TWE and the TWE-Advance/Newhouse
Partnership (Note 3). 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')
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').
 
     In October 1996, Time Warner reorganized the legal ownership of its wholly
owned cable subsidiaries, whereby the equity ownership of KBLCOM and Summit was
contributed to CVI. In connection therewith, CVI was renamed TWI Cable Inc.
('TWI Cable').
 
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 Acquisitions, (iii) the 1995 formation of the
TWE-Advance/Newhouse Partnership (Note 3), (iv) the ITOCHU/Toshiba Transaction
(Note 4), (v) the Preferred Stock Refinancing (Note 11), (vi) Time Warner's and
TWE's 1996 and 1995 debt refinancings and (vii) certain asset sales in 1995,
including the sale of 51% of TWE's interest in Six Flags Entertainment
Corporation ('Six Flags') (Note 4), as if each of such transactions had occurred
at the beginning of the respective periods presented, 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 expense of $368 million and
$349 million, operating income before noncash amortization of intangible assets
of $1.816 billion and $1.798 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 $282 million and $230
million ($1.04 and $.96 per common share) and a net loss of $317 million and
$272 million ($1.10 and $1.04 per common share). No pro forma information has
been presented for 1997 because all of such transactions are already reflected
in the historical financial statements of Time Warner.
 
3. TWE-A/N TRANSFERS
 
     On April 1, 1995, TWE formed a cable television joint venture with the
Advance/Newhouse Partnership ('Advance/Newhouse') to which Advance/Newhouse and
TWE contributed cable television systems (or
 
                                      F-32
 

<PAGE>
<PAGE>

                                TIME WARNER INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
interests therein) serving approximately 4.5 million subscribers, as well as
certain foreign cable investments and programming investments that included an
aggregate 31% interest in Primestar Partners, L.P. ('Primestar'). Upon formation
of the TWE-Advance/Newhouse Partnership ('TWE-A/N'), TWE, which is the managing
partner, owned a 66.7% common partnership interest in TWE-A/N and
Advance/Newhouse owned a 33.3% common partnership interest. TWE consolidates the
partnership and the common partnership 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. In addition,
beginning on April 1, 1998, TWE or Advance/Newhouse can initiate a restructuring
of the partnership, in which Advance/Newhouse would withdraw from the
partnership and 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.
 
     In early 1998, Time Warner (through a wholly owned subsidiary) contributed
cable television systems (or interests therein) serving approximately 650,000
subscribers to TWE-A/N, subject to approximately $1 billion of debt, in exchange
for common and preferred partnership interests therein, and completed certain
related transactions (collectively, the 'TWE-A/N Transfers'). The cable
television systems transferred to TWE-A/N were formerly owned by TWI Cable and
Paragon, a partnership formerly owning cable television systems serving
approximately 1 million subscribers that, as previously described, was wholly
owned by subsidiaries of Time Warner, with 50% beneficially owned in the
aggregate by TWE and TWE-A/N. The debt assumed by TWE-A/N has been guaranteed by
TWI Cable and certain of its subsidiaries, including Paragon.
 
     As part of the TWE-A/N Transfers, TWE and TWE-A/N exchanged substantially
all of their respective beneficial interests in Paragon for an equivalent share
of Paragon's cable television systems (or interests therein) serving
approximately 500,000 subscribers, resulting in wholly owned subsidiaries of
Time Warner owning 100% of the restructured Paragon entity, with less than 1%
beneficially held for TWE. Accordingly, effective as of January 1, 1998, Time
Warner will consolidate Paragon. Because this transaction represented an
exchange of TWE's and TWE-A/N's beneficial interests in Paragon for an
equivalent amount of its cable television systems, it did not have a significant
economic impact on Time Warner, TWE or TWE-A/N.
 
     In connection with the TWE-A/N Transfers, Advance/Newhouse made a capital
contribution to TWE-A/N in order to maintain its 33.3% common partnership
interest therein. Accordingly, TWE-A/N is now owned 65.2% by TWE, 33.3% by
Advance/Newhouse and 1.5% indirectly by Time Warner. The TWE-A/N Transfers will
be accounted for effective as of January 1, 1998. Time Warner did not recognize
a gain or loss on the TWE-A/N Transfers. TWE will continue to consolidate
TWE-A/N and Time Warner will account for its interest in TWE-A/N under the
equity method of accounting.
 
                                      F-33
 

<PAGE>
<PAGE>

                                TIME WARNER INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
4. ENTERTAINMENT GROUP
 
     Time Warner's investment in and amounts due to and from the Entertainment
Group at December 31, 1997 and 1996 consists of the following:
 
<TABLE>
<CAPTION>
                                                                                                    DECEMBER 31,
                                                                                                  ----------------
                                                                                                   1997      1996
                                                                                                  ------    ------
                                                                                                     (MILLIONS)
<S>                                                                                               <C>       <C>
Investment in TWE..............................................................................   $5,577    $6,254
Stock option related distributions due from TWE................................................      417        93
Credit agreement debt due to TWE...............................................................     (400)     (400)
Other net liabilities due to TWE, principally related to home video distribution...............     (141)     (256)
                                                                                                  ------    ------
Investment in and amounts due to and from TWE..................................................    5,453     5,691
Investment in other Entertainment Group companies..............................................       96       123
                                                                                                  ------    ------
Total..........................................................................................   $5,549    $5,814
                                                                                                  ------    ------
                                                                                                  ------    ------
</TABLE>
 
PARTNERSHIP STRUCTURE
 
     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 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.
 
     Time Warner acquired the aggregate 11.22% limited partnership interests
previously held by subsidiaries 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.
 
PARTNERSHIP CAPITAL AND ALLOCATION OF INCOME
 
     Each partner's interest in TWE generally consists of the undistributed
priority capital and residual equity amounts that were initially assigned to
that partner or its predecessor based on the estimated fair value of the net
assets each contributed to TWE ('Undistributed 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, provides for the various priority capital rates of return as specified
in the table below. The sum of Undistributed 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
 
                                      F-34
 

<PAGE>
<PAGE>

                                TIME WARNER INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
Partners. Furthermore, the ultimate realization of Cumulative Priority Capital
could be affected by the fair value of TWE, which is subject to fluctuation.
 
     A summary of the priority of Undistributed Contributed Capital, Time
Warner's ownership of Undistributed Contributed Capital and Cumulative Priority
Capital at December 31, 1997 and priority capital rates of return thereon is as
set forth below:
 
<TABLE>
<CAPTION>
                                                                                         PRIORITY
                                                         UNDISTRIBUTED     CUMULATIVE     CAPITAL
                                                          CONTRIBUTED       PRIORITY     RATES OF        % OWNED BY
PRIORITY OF UNDISTRIBUTED CONTRIBUTED CAPITAL             CAPITAL(a)        CAPITAL      RETURN(b)      TIME WARNER
                                                         -------------     ----------    ---------     --------------
                                                                  (BILLIONS)
<S>                                                      <C>               <C>           <C>           <C>
Senior Capital........................................       $ 0.9           $  1.1         8.00%          100.00%
Series A Capital......................................         5.6             11.3        13.00%           74.49%
Series B Capital......................................         2.9(d)           6.0        13.25%          100.00%
Residual Capital......................................         3.3(d)           3.3(c)        --(c)         74.49%
</TABLE>
 
------------
 
(a) Excludes partnership income or loss allocated thereto.
(b) To the extent income allocations are concurrently distributed, the priority
    capital rates of return on the Series A Capital and Series B Capital are 11%
    and 11.25%, respectively.
(c) Residual Capital is not entitled to stated priority rates of return and, as
    such, its Cumulative Priority Capital is equal to its Undistributed
    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.
(d) The Undistributed Contributed Capital relating to the Series B Capital has
    priority over the priority returns on the Series A Capital. The
    Undistributed Contributed Capital relating to the Residual Capital has
    priority over the priority returns on the Series B Capital and the Series A
    Capital.
 
     Because Undistributed Contributed Capital is generally based on the fair
value of the net assets that each partner initially 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'). After any special tax allocations, partnership income is
allocated 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
Undistributed 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. TWE reported
net income of $614 million, $210 million and $73 million in 1997, 1996 and 1995,
respectively, no portion of which was allocated to the limited partners.
 
     The Series B Capital owned by the Time Warner General Partners may be
increased if certain operating performance targets are achieved over a ten-year
period ending on December 31, 2001. In addition, 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,
 
                                      F-35
 

<PAGE>
<PAGE>

                                TIME WARNER INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
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.
 
SUMMARIZED FINANCIAL INFORMATION OF THE ENTERTAINMENT GROUP
 
     Set forth below is summarized financial information of the Entertainment
Group, which reflects the formation by TWE of TWE-A/N effective as of April 1,
1995 (Note 3), the deconsolidation of Six Flags effective as of June 23, 1995
and the consolidation of Paragon effective as of July 6, 1995.
 
<TABLE>
<CAPTION>
                                                                                       YEARS ENDED DECEMBER 31,
                                                                                     ----------------------------
                                                                                      1997       1996       1995
                                                                                     -------    -------    ------
                                                                                              (MILLIONS)
<S>                                                                                  <C>        <C>        <C>
OPERATING STATEMENT INFORMATION
Revenues..........................................................................   $11,328    $10,861    $9,629
Depreciation and amortization.....................................................    (1,386)    (1,244)   (1,060)
Business segment operating income(1)..............................................     1,461      1,090       992
Interest and other, net(2)........................................................      (357)      (524)     (539)
Minority interest.................................................................      (305)      (207)     (133)
Income before income taxes........................................................       727        290       256
Income before extraordinary item..................................................       642        220       170
Net income........................................................................       619        220       146
</TABLE>
 
------------
 
(1) Includes net gains of approximately $200 million recognized in 1997 related
    to the sale or exchange of certain cable television systems.
(2) Includes a gain of approximately $250 million recognized in 1997 related to
    the sale of an interest in E! Entertainment Television, Inc.
 
<TABLE>
<CAPTION>
                                                                                         YEARS ENDED DECEMBER 31,
                                                                                        --------------------------
                                                                                         1997      1996      1995
                                                                                        ------    ------    ------
                                                                                                (MILLIONS)
<S>                                                                                     <C>       <C>       <C>
CASH FLOW INFORMATION
Cash provided by operations..........................................................   $1,799    $1,912    $1,495
Capital expenditures.................................................................   (1,565)   (1,719)   (1,653)
Investments and acquisitions.........................................................     (172)     (146)     (217)
Investment proceeds..................................................................      520       612     1,120
Borrowings...........................................................................    3,400       215     2,484
Debt repayments......................................................................   (3,085)     (716)   (3,596)
Issuance of preferred stock of subsidiary............................................      243        --        --
Collections on note receivable from U S WEST.........................................       --       169       602
Capital distributions................................................................     (934)     (228)   (1,063)
Other financing activities, net......................................................     (100)      (92)      (34)
Increase (decrease) in cash and equivalents..........................................      106         7      (862)
</TABLE>
 
<TABLE>
<CAPTION>
                                                                                                  DECEMBER 31,
                                                                                               ------------------
                                                                                                1997       1996
                                                                                               -------    -------
                                                                                                   (MILLIONS)
<S>                                                                                            <C>        <C>
BALANCE SHEET INFORMATION
Cash and equivalents........................................................................   $   322    $   216
Total current assets........................................................................     3,623      3,147
Total assets................................................................................    20,739     20,027
Total current liabilities...................................................................     3,976      4,092
Long-term debt..............................................................................     5,990      5,676
Minority interests..........................................................................     1,210      1,020
Preferred stock of subsidiary...............................................................       233         --
Time Warner General Partners' Senior Capital................................................     1,118      1,543
Partners' capital...........................................................................     6,430      6,681
</TABLE>
 
                                      F-36
 

<PAGE>
<PAGE>

                                TIME WARNER INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
CAPITAL DISTRIBUTIONS
 
     The assets and cash flows of TWE are restricted by the TWE partnership and
credit agreements and are unavailable for use by the partners except through the
payment of certain fees, reimbursements, cash distributions and loans, which are
subject to limitations.
 
     In July 1997, the Time Warner General Partners received a $535 million
distribution from TWE relating to their Senior Capital interests, thereby
increasing the cumulative cash distributions received from TWE on such interests
to $901 million. The Time Warner General Partners' remaining $1.1 billion Senior
Capital interests and any undistributed partnership income allocated thereto
(based on an 8% annual rate of return) are required to be distributed in two
annual installments on July 1, 1998 and 1999.
 
     At December 31, 1997 and 1996, the Time Warner General Partners had
recorded $417 million and $93 million, respectively, of stock option related
distributions due from TWE, based on closing prices of Time Warner common stock
of $62.00 and $37.50, respectively. Time Warner is paid when the options are
exercised. The Time Warner General Partners also receive tax-related
distributions from TWE on a current basis. During 1997, the Time Warner General
Partners received distributions from TWE in the amount of $934 million,
consisting of $535 million of Senior Capital distributions (representing the
return of $455 million of contributed capital and the distribution of $80
million of priority capital return), $324 million of tax-related distributions
and $75 million of stock option related distributions. 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 Senior Capital distributions (representing a
portion of the priority capital return), $680 million of tax-related
distributions and $17 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 capital distributions to its partners that are
also subject to certain limitations contained in the TWE partnership and credit
agreements.
 
TIME WARNER GENERAL PARTNER GUARANTEES
 
     Each Time Warner General Partner has guaranteed a pro rata portion of
approximately $5.8 billion of TWE's debt and accrued interest at December 31,
1997, based on the relative fair value of the net assets each Time Warner
General Partner (or its predecessor) contributed to TWE. Such indebtedness is
recourse to each Time Warner General Partner only to the extent of its
guarantee. 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.
 
SIX FLAGS
 
     In June 1995, TWE sold an initial 51% 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 was deconsolidated and TWE's remaining 49% interest in Six Flags has
been 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 was deferred by TWE principally as a
result of its guarantee of certain third-party, zero-coupon indebtedness of Six
Flags due in 1999.
 
     In February 1998, TWE entered into an agreement to sell its remaining 49%
interest in Six Flags to Premier Parks Inc. ('Premier'), a regional theme park
operator, for approximately $375 million of cash and $100 million of convertible
preferred stock. TWE expects to use the net proceeds from this transaction,
after taxes and transaction costs, to reduce debt. As part of the transaction,
TWE will continue to license its animated cartoon and comic book characters to
Six Flags's theme parks and will similarly license such rights to Premier's
 
                                      F-37
 

<PAGE>
<PAGE>

                                TIME WARNER INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
theme parks in the United States and Canada under a long-term agreement covering
an aggregate of twenty-five existing and all future locations. The transaction
is expected to close in the second quarter of 1998, subject to customary closing
conditions, including the successful completion of certain equity offerings by
Premier.
 
5. OTHER INVESTMENTS
 
   Time Warner's other investments consist of:
 
<TABLE>
<CAPTION>
                                                                                                    DECEMBER 31,
                                                                                                  ----------------
                                                                                                   1997      1996
                                                                                                  ------    ------
                                                                                                     (MILLIONS)
<S>                                                                                               <C>       <C>
Equity method investments......................................................................   $1,350    $1,392
Market value method investments................................................................       --       401
Cost method investments........................................................................      145       126
                                                                                                  ------    ------
Total..........................................................................................   $1,495    $1,919
                                                                                                  ------    ------
                                                                                                  ------    ------
</TABLE>
 
     Market value method investments at December 31, 1996 included 18.1 million
shares of common stock of Hasbro, Inc. ('Hasbro'). Such shares were used in
December 1997 to redeem certain Company-obligated mandatorily redeemable
preferred securities of a subsidiary. In connection with such redemption and the
related disposal of its interest in Hasbro, Time Warner recognized a $200
million pretax gain in 1997, which has been classified in interest and other,
net, in the accompanying consolidated statement of operations.
 
     In addition to TWE and its equity investees, companies accounted for using
the equity method include: The Columbia House Company partnerships (50% owned),
other music joint ventures (generally 50% owned), Cinamerica Theatres, L.P.
(sold in 1997, but previously 50% owned) and TBS (acquired in full in 1996, but
previously 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,
                                                                                        --------------------------
                                                                                         1997      1996      1995
                                                                                        ------    ------    ------
                                                                                                (MILLIONS)
<S>                                                                                     <C>       <C>       <C>
Revenues.............................................................................   $1,336    $1,773    $5,123
Depreciation and amortization........................................................      (13)      (29)     (219)
Operating income.....................................................................       80       173       547
Net income (loss)....................................................................      (36)       61       188
Current assets.......................................................................      792     1,002     2,272
Total assets.........................................................................    1,132     1,616     5,851
Current liabilities..................................................................      418       517     1,318
Long-term debt.......................................................................    1,303     1,360     3,826
Total liabilities....................................................................    1,791     1,999     5,886
Total shareholders' deficit or partners' capital.....................................     (659)     (383)      (35)
</TABLE>
 
                                      F-38
 

<PAGE>
<PAGE>

                                TIME WARNER INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
6. INVENTORIES
 
   Inventories consist of:
 
<TABLE>
<CAPTION>
                                                                          DECEMBER 31, 1997        DECEMBER 31, 1996
                                                                        ---------------------    ---------------------
                                                                        CURRENT    NONCURRENT    CURRENT    NONCURRENT
                                                                        -------    ----------    -------    ----------
                                                                                          (MILLIONS)
<S>                                                                     <C>        <C>           <C>        <C>
Film costs:
     Released, less amortization.....................................    $  68       $  228       $ 209       $  142
     Completed and not released......................................       88           48          54           --
     In process and other............................................       --          141          24          251
     Library, less amortization......................................       --        1,064          --        1,116
Programming costs, less amortization.................................      293          285         213          189
Magazines, books and recorded music..................................      381           --         441           --
                                                                        -------    ----------    -------    ----------
Total................................................................    $ 830       $1,766       $ 941       $1,698
                                                                        -------    ----------    -------    ----------
                                                                        -------    ----------    -------    ----------
</TABLE>
 
     Excluding the Library, the total cost incurred in the production of
theatrical and television product (including direct production costs, production
overhead and certain exploitation costs, such as film prints and home
videocassettes) amounted to $506 million in 1997 and $339 million in 1996; and
the total cost amortized amounted to $613 million and $239 million,
respectively. Excluding the Library, the unamortized cost of completed films at
December 31, 1997 amounted to $432 million, more than 90% of which is expected
to be amortized within three years after release.
 
7. LONG-TERM DEBT
 
   Long-term debt consists of:
 
<TABLE>
<CAPTION>
                                                              WEIGHTED AVERAGE                    DECEMBER 31,
                                                              INTEREST RATE AT                 ------------------
                                                             DECEMBER 31, 1997    MATURITIES    1997       1996
                                                             ------------------   ----------   -------    -------
                                                                                                   (MILLIONS)
<S>                                                          <C>                  <C>          <C>        <C>
Bank credit agreement borrowings..........................          6.4%             2002      $ 2,600    $ 3,207
Fixed-rate senior notes and debentures....................          8.1%          1998-2036      6,909      7,081
Variable-rate senior notes................................          5.1%          2009-2031      1,200        454
Zero-coupon senior notes..................................          5.0%             2013        1,124      1,971
                                                                                               -------    -------
Total.....................................................                                     $11,833    $12,713
                                                                                               -------    -------
                                                                                               -------    -------
</TABLE>
 
     Substantially all of Time Warner's long-term debt represents the
obligations of its wholly owned subsidiaries TW Companies, TBS and TWI Cable. In
December 1997, in order to simplify its credit structure, Time Warner
implemented a cross-corporate guarantee structure, whereby Time Warner and each
of TW Companies and TBS (the 'Guarantor Subsidiaries') have fully and
unconditionally guaranteed any outstanding publicly traded indebtedness of each
other and, along with TWI Cable, have similarly guaranteed each other's
outstanding borrowings under their joint bank credit agreement. As a result of
implementing this unified credit structure, the credit profile associated with
the indebtedness of Time Warner or any of the Guarantor Subsidiaries is
substantially the same.
 
FINANCING TRANSACTIONS
 
     During the past three years, in response to favorable market conditions and
in connection with certain acquisitions, Time Warner and its consolidated
subsidiaries have entered into a series of financing transactions that has
resulted in the refinancing of approximately $10.2 billion of debt and the
reduction of an additional $3.2 billion of debt. The debt refinancings have had
the positive effect of lowering interest rates, staggering debt
 
                                      F-39
 

<PAGE>
<PAGE>

                                TIME WARNER INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
maturities and, with respect to the redemption of certain convertible
securities, eliminating the potential dilution from the conversion of such
securities into 52.2 million shares of Time Warner common stock. In turn, the
reduction in debt, of which $2.5 billion was attributable to 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. In connection with these financing
transactions, Time Warner recognized an extraordinary loss on the retirement of
debt of $55 million in 1997, $35 million in 1996 and $42 million in 1995.
 
BANK CREDIT AGREEMENT
 
     As part of these debt refinancings, Time Warner, together with certain of
its consolidated and unconsolidated subsidiaries, entered into a new, five-year
revolving credit facility in November 1997 (the '1997 Credit Agreement') and
terminated its subsidiaries' financing arrangements under certain previously
existing bank credit facilities (the 'Old Credit Agreements'). This enabled Time
Warner to reduce its aggregate borrowing availability from $10.3 billion to $7.5
billion, lower interest rates and refinance outstanding borrowings under the Old
Credit Agreements in the amounts of approximately $2.4 billion by subsidiaries
of Time Warner and $2.1 billion by TWE.
 
     The 1997 Credit Agreement permits borrowings in an aggregate amount of up
to $7.5 billion, with no scheduled reduction in credit availability prior to
maturity in November 2002. The borrowers under the 1997 Credit Agreement are
Time Warner, TW Companies, TBS, TWI Cable, TWE and TWE-A/N. Borrowings under the
1997 Credit Agreement are limited to (i) $6 billion in the aggregate for Time
Warner, TW Companies, TBS and TWI Cable, (ii) $7.5 billion in the case of TWE
and (iii) $2 billion in the case of TWE-A/N, subject in each case to an
aggregate borrowing limit of $7.5 billion and certain other limitations and
adjustments. Such borrowings bear interest at specific rates for each of the
borrowers (generally equal to LIBOR plus a margin initially ranging from 35 to
40 basis points) and each borrower is required to pay a commitment fee on the
unused portion of its commitment (initially ranging from .125% to .15% per
annum), which margin and fee vary based on the credit rating or financial
leverage of the applicable borrower. Borrowings may be used for general business
purposes and unused credit is available to support commercial paper borrowings.
The 1997 Credit Agreement contains certain covenants generally for each borrower
relating to, among other things, additional indebtedness; liens on assets; cash
flow coverage and leverage ratios; and dividends, distributions and other
restricted cash payments or transfers of assets from the borrowers to their
respective shareholders, partners or affiliates.
 
VARIABLE-RATE NOTES
 
     Variable-rate notes at December 31, 1997 consist of $600 million principal
amount of Floating Rate Reset Notes due July 29, 2009 that are redeemable at the
election of the holders, in whole but not in part, on July 29, 1999 (the
'Two-Year Floating Rate Notes') and $600 million principal amount of Floating
Rate Reset Notes due December 30, 2031 that are similarly redeemable at the
election of the holders on December 30, 2001 (the 'Five-Year Floating Rate
Notes'). The Two-Year Floating Rate Notes bear interest at a floating rate equal
to LIBOR less 115 basis points until July 29, 1999, at which time, if not
redeemed, the interest rate will be reset at a fixed rate equal to 6.16% plus a
margin based upon the credit risk of TW Companies at such time. The Five-Year
Floating Rate Notes bear interest at a floating rate equal to LIBOR less 25
basis points until December 30, 2001, at which time, if not redeemed, the
interest rate will be reset at a fixed rate equal to 6.59% plus a margin based
upon the credit risk of TW Companies at such time.
 
                                      F-40
 

<PAGE>
<PAGE>

                                TIME WARNER INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
ZERO-COUPON NOTES
 
     At December 31, 1997, the only remaining debt securities convertible into
Time Warner common stock are the zero-coupon convertible notes due June 22,
2013. Such notes do not pay interest until maturity and 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. Subject to each holder's right to convert, Time Warner can elect to
redeem the notes any time after June 22, 1998 at the issue price plus accrued
original issue discount (calculated at 5% per annum). Holders also can elect to
have the notes redeemed at the issue price plus accrued original issue discount
on June 22, 1998, 2003 and 2008, subject to Time Warner's right to pay in whole
or in part with Time Warner common stock instead of cash. The equivalent
conversion price of Time Warner common stock at the first date of redemption is
$61.44 per share, and will be adjusted thereafter in proportion to changes in
the accrued original issue discount of each note. Unamortized original issue
discount on these zero-coupon notes was $1.291 billion and $1.345 billion at
December 31, 1997 and 1996, respectively.
 
CREDIT AGREEMENT WITH TWE
 
     Time Warner has a credit agreement with TWE that allows it to borrow up to
$400 million from TWE through September 15, 2000. Outstanding borrowings from
TWE in the amount of $400 million bear interest at LIBOR plus 1% per annum. All
amounts due to TWE under this agreement have been reclassified to Time Warner's
investment in and amounts due to and from the Entertainment Group in the
accompanying consolidated balance sheet.
 
INTEREST EXPENSE AND MATURITIES
 
     At December 31, 1997, 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 52% of Time
Warner's underlying debt being subject to variable interest rates (Note 15).
 
     Interest expense amounted to $1.049 billion in 1997, $968 million in 1996
and $877 million in 1995, including $19 million in 1997, $26 million in 1996 and
$28 million in 1995 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 7.2% and 7.5% at December 31, 1997 and 1996, respectively.
 
     Annual repayments of long-term debt for the five years subsequent to
December 31, 1997 consist of $500 million due in 1998, $500 million due in 2000
and $2.6 billion due in 2002. Such repayments exclude the aggregate repurchase
or redemption prices of $1.151 billion in 1998, $600 million in 1999 and $600
million in 2001 relating to certain debt securities, in the years in which the
holders thereof may first exercise their redemption options.
 
8. BORROWINGS AGAINST FUTURE STOCK OPTION PROCEEDS
 
     In connection with Time Warner's expanded common stock repurchase program
(Note 12), Time Warner entered into a new five-year, $1.3 billion revolving
credit facility (the 'Stock Option Proceeds Credit Facility') in early 1998,
which replaced its previously existing facility. Borrowings under the Stock
Option Proceeds Credit Facility are principally used to fund stock repurchases
and approximately $125 million of future preferred dividend requirements on Time
Warner's Series G, H, I and J Preferred Stock as of December 31, 1997. At
December 31, 1997 and 1996, Time Warner had outstanding borrowings against
future stock option proceeds of $533 million and $488 million, respectively.
 
     The Stock Option Proceeds Credit Facility initially provides for borrowings
of up to $1.3 billion, of which up to $125 million is reserved solely for the
payment of interest and fees thereunder. Borrowings under the
 
                                      F-41
 

<PAGE>
<PAGE>

                                TIME WARNER INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
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 in excess of $500 million
through March 2000, and thereafter in full on a cumulative basis, permanently
reduces the borrowing availability under the facility. At December 31, 1997,
based on a closing market price of Time Warner common stock of $62.00, 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 $2.3 billion, representing a 1.8 to 1 coverage ratio over the
related $1.3 billion 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 future 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 any excess of the unpaid, future preferred dividend
requirements on such series of convertible preferred stock over the borrowing
availability under the facility at any time. Under these arrangements, Time
Warner had placed 51 million shares in escrow at December 31, 1997, 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 105 million shares
held in escrow.
 
9. INCOME TAXES
 
   Domestic and foreign pretax income (loss) are as follows:
 
<TABLE>
<CAPTION>
                                                                                        YEARS ENDED DECEMBER 31,
                                                                                        ------------------------
                                                                                        1997     1996      1995
                                                                                        ----     -----     -----
                                                                                               (MILLIONS)
<S>                                                                                     <C>      <C>       <C>
Domestic.............................................................................   $728     $(193)    $(203)
Foreign..............................................................................    104       197       205
                                                                                        ----     -----     -----
Total................................................................................   $832     $   4     $   2
                                                                                        ----     -----     -----
                                                                                        ----     -----     -----
</TABLE>
 
     Current and deferred income taxes (tax benefits) provided are as follows:
 
<TABLE>
<CAPTION>
                                                                                        YEARS ENDED DECEMBER 31,
                                                                                        ------------------------
                                                                                        1997     1996      1995
                                                                                        ----     -----     -----
                                                                                               (MILLIONS)
<S>                                                                                     <C>      <C>       <C>
Federal:
     Current(1)......................................................................   $191     $  50     $  42
     Deferred........................................................................     49      (143)     (167)
Foreign:
     Current(2)......................................................................    205       230       215
     Deferred........................................................................     (3)      (16)        8
State and Local:
     Current(1)......................................................................     88        89        78
     Deferred........................................................................      1       (50)      (50)
                                                                                        ----     -----     -----
Total................................................................................   $531     $ 160     $ 126
                                                                                        ----     -----     -----
                                                                                        ----     -----     -----
</TABLE>
 
------------
 
(1) Includes utilization of tax carryforwards of $109 million in 1997, $77
    million in 1996 and $101 million in 1995. Excludes current federal and state
    and local tax benefits, respectively, of $132 million and $33 million in
    1997, $16 million and $4 million in 1996, and $9 million and $5 million in
    1995 resulting from the exercise of stock options and vesting of restricted
    stock awards, which were credited directly to paid-in-capital. Excludes
    current federal tax benefits of $30 million in 1997, $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 $114 million in 1997, $101 million in
    1996 and $102 million in 1995.
 
                                      F-42
 

<PAGE>
<PAGE>

                                TIME WARNER INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     The differences between income taxes expected at the U.S. federal statutory
income tax rate and income taxes provided are as set forth below. The
relationship between income before income taxes and income tax expense is most
affected by the amortization of goodwill and certain other financial statement
expenses that are not deductible for income tax purposes.
 
<TABLE>
<CAPTION>
                                                                                         YEARS ENDED DECEMBER 31,
                                                                                         ------------------------
                                                                                         1997     1996     1995
                                                                                         ----     ----     ----
                                                                                               (MILLIONS)
<S>                                                                                      <C>      <C>      <C>
Taxes on income at U.S. federal statutory rate........................................   $291     $  2     $  1
State and local taxes, net............................................................     58       26       18
Nondeductible goodwill amortization...................................................    170      131      100
Other nondeductible expenses..........................................................     11       10       10
Foreign income taxed at different rates, net of U.S. foreign tax credits..............      9        4        3
Other.................................................................................     (8)     (13)      (6)
                                                                                         ----     ----     ----
Total.................................................................................   $531     $160     $126
                                                                                         ----     ----     ----
                                                                                         ----     ----     ----
</TABLE>
 
     Significant components of Time Warner's net deferred tax liabilities are as
follows:
 
<TABLE>
<CAPTION>
                                                                                                    DECEMBER 31,
                                                                                                  ----------------
                                                                                                   1997      1996
                                                                                                  ------    ------
                                                                                                     (MILLIONS)
<S>                                                                                               <C>       <C>
Assets acquired in business combinations.......................................................   $3,352    $3,788
Depreciation and amortization..................................................................    1,152       912
Unrealized appreciation of certain marketable securities.......................................        4        91
Other..........................................................................................      449       463
                                                                                                  ------    ------
Deferred tax liabilities.......................................................................    4,957     5,254
                                                                                                  ------    ------
Tax carryforwards..............................................................................      327       458
Accrued liabilities............................................................................      381       322
Receivable allowances and return reserves......................................................      203       222
Other..........................................................................................       86       170
                                                                                                  ------    ------
Deferred tax assets............................................................................      997     1,172
                                                                                                  ------    ------
Net deferred tax liabilities...................................................................   $3,960    $4,082
                                                                                                  ------    ------
                                                                                                  ------    ------
</TABLE>
 
     U.S. income and foreign withholding taxes have not been recorded on
permanently reinvested earnings of foreign subsidiaries aggregating
approximately $875 million at December 31, 1997. 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, 1997 consisted of $745
million of net operating losses, $48 million of investment tax credits and $19
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
 
                                      F-43
 

<PAGE>
<PAGE>

                                TIME WARNER INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
tax credits which do not expire, the other U.S. federal tax carryforwards expire
in varying amounts as follows for income tax reporting purposes:
 
<TABLE>
<CAPTION>
                                                                                                  CARRYFORWARDS
                                                                                             -----------------------
                                                                                                NET       INVESTMENT
                                                                                             OPERATING       TAX
                                                                                              LOSSES       CREDITS
                                                                                             ---------    ----------
                                                                                                   (MILLIONS)
<S>                                                                                          <C>          <C>
1998......................................................................................     $   4         $  1
1999......................................................................................         3            1
2000......................................................................................         8           --
2001......................................................................................        27           --
Thereafter up to 2010.....................................................................       703           46
                                                                                             ---------        ---
                                                                                               $ 745         $ 48
                                                                                             ---------        ---
                                                                                             ---------        ---
</TABLE>
 
10. 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 PERCS
were mandatorily redeemable in December 1997 for an amount per PERCS equal to
the lesser of $54.41, and the market value of 1.5 shares of Hasbro common stock
on December 17, 1997, payable in cash or, at Time Warner's option, Hasbro common
stock. Pursuant to these terms, Time Warner redeemed the PERCS in December 1997
for all of its 18.1 million shares of Hasbro common stock. In connection with
this redemption and the related disposal of its interest in Hasbro, Time Warner
recognized a $200 million pretax gain in 1997, which has been classified in
interest and other, net, in the accompanying consolidated statement of
operations.
 
     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 TW Companies 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 Preferred Trust
Securities which amount to a full and unconditional guaranty (on a subordinated
basis) of its subsidiary's obligations with respect thereto.
 
11. 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 to a portion of
Time Warner's currently non-cash-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'). Time Warner is
authorized to issue up to 15.2 million shares of Series M Preferred Stock.
 
                                      F-44
 

<PAGE>
<PAGE>

                                TIME WARNER INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     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.
 
     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 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 generally 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 scheduled 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.
Time Warner is required to redeem any remaining outstanding shares of Series M
Preferred Stock on July 1, 2016 at the Mandatory Redemption Price, subject to
certain limitations 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.
 
     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') that would have terms
similar to those of the Series M 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. 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 having a principal amount equal to the liquidation preference of
the Series L Preferred Stock plus any accrued and unpaid dividends thereon.
 
12. SHAREHOLDERS' EQUITY
 
     Shareholders' equity of Time Warner at December 31, 1997 included 35.4
million shares of convertible preferred stock, 57.1 million shares of Series
LMCN-V Common Stock and 519 million shares of common stock (net of 39.4 million
shares of common stock in treasury). Time Warner is authorized to issue up to
250 million shares of preferred stock, up to 65 million shares of Series LMCN-V
Common Stock and up to 2 billion shares of common stock. At February 28, 1998,
there were approximately 25,000 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 November 1997, Time Warner's Board of Directors authorized a 20 million
share increase in Time Warner's existing common stock repurchase program that,
along with previous authorizations, will allow the
 
                                      F-45
 

<PAGE>
<PAGE>

                                TIME WARNER INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
Company to repurchase, from time to time, up to 35 million shares of Time Warner
common stock. Common stock repurchases have been funded with borrowings under
Time Warner's Stock Option Proceeds Credit Facility (Note 8). The common stock
repurchased under the program is expected to continue to be used to satisfy
future share issuances related to the exercise of existing employee stock
options and the potential conversion of certain convertible securities. Actual
repurchases in any period will be subject to market conditions. In 1997, Time
Warner acquired 6.2 million shares of its common stock, thereby increasing the
cumulative shares purchased under this program through 1997 to approximately
17.6 million shares at an aggregate cost of $800 million.
 
     During 1996 and 1995, Time Warner issued over 35 million shares of
convertible preferred stock in connection with the ITOCHU/Toshiba Transaction
and the Cable Acquisitions. Set forth below is a summary of the principal terms
of Time Warner's outstanding issues of convertible 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......................        3.1              6.6             1/4/96     1/4/01        1/4/01
Series F Preferred Stock......................        3.0              6.2             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, 1997...........................       35.4             73.7
                                                    -----            -----
                                                    -----            -----
</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
 
                                      F-46
 

<PAGE>
<PAGE>

                                TIME WARNER INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
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 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 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, 1997, Time Warner had convertible securities and
outstanding stock options that were convertible or exercisable into
approximately 180 million shares of common stock.
 
13. 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 made
subsequent to 1994 consistent with the method set forth under FASB Statement No.
123, 'Accounting for Stock-Based Compensation' ('FAS 123'), Time Warner's net
income (loss) and net loss per common share would have been changed to the pro
forma amounts indicated below:
 
<TABLE>
<CAPTION>
                                                                                       YEARS ENDED DECEMBER 31,
                                                                                     ----------------------------
                                                                                     1997        1996       1995
                                                                                     -----      ------      -----
                                                                                          (MILLIONS, EXCEPT
                                                                                          PER SHARE AMOUNTS)
<S>                                                                                  <C>        <C>         <C>
Net income (loss):
     As reported..................................................................   $ 246      $ (191)     $(166)
                                                                                     -----      ------      -----
                                                                                     -----      ------      -----
     Pro forma....................................................................   $ 200      $ (216)     $(178)
                                                                                     -----      ------      -----
                                                                                     -----      ------      -----
Net loss per common share:
     As reported..................................................................   $(.13)     $(1.04)     $(.57)
                                                                                     -----      ------      -----
                                                                                     -----      ------      -----
     Pro forma....................................................................   $(.21)     $(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 for 1996 and 1995 is
not comparable to the impact on pro forma net income for 1997, when the pro
forma effect of the three-year vesting period has been fully reflected.
 
     For purposes of applying FAS 123, 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 1997, 1996 and
1995: dividend yields of 1% in all periods; expected volatility of 21.9%, 21.7%
and 22.3%, respectively; risk-free interest rates of 6.4%, 6.1% and 7.1%,
respectively; and expected lives of 5 years in all periods. The weighted average
fair value of an option granted during the year was $13.15 ($7.76, net of
taxes), $11.55 ($6.81, net of taxes) and $11.95 ($7.05, net of taxes) for the
years ended December 31, 1997, 1996 and
 
                                      F-47
 

<PAGE>
<PAGE>

                                TIME WARNER INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
1995, respectively. In 1997 and 1996, Time Warner granted options to certain
executives at exercise prices exceeding the market price of Time Warner common
stock on the date of grant. These above-market options had a weighted average
exercise price and fair value of $64.89 and $12.58 ($7.42, net of taxes),
respectively, in 1997 and $52.88 and $8.87 ($5.23, net of taxes), respectively,
in 1996.
 
     A summary of stock option activity under all plans is as follows:
 
<TABLE>
<CAPTION>
                                                                                                          WEIGHTED-
                                                                                             THOUSANDS     AVERAGE
                                                                                                OF        EXERCISE
                                                                                              SHARES        PRICE
                                                                                             ---------    ---------
<S>                                                                                          <C>          <C>
Balance at January 1, 1995................................................................     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
Granted...................................................................................      8,272        44.82
Exercised.................................................................................    (16,316)       27.32
Cancelled.................................................................................       (471)       37.78
                                                                                             ---------
 
Balance at December 31, 1997..............................................................     89,352      $ 33.98
                                                                                             ---------
                                                                                             ---------
</TABLE>
 
<TABLE>
<CAPTION>
                                                                                               DECEMBER 31,
                                                                                        --------------------------
                                                                                         1997      1996      1995
                                                                                        ------    ------    ------
                                                                                               (THOUSANDS)
<S>                                                                                     <C>       <C>       <C>
Exercisable..........................................................................   72,808    82,697    66,242
Available for future grants..........................................................    6,385     8,032     7,884
</TABLE>
 
     The following table summarizes information about stock options outstanding
at December 31, 1997:
 
<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 12/31/97        LIFE           PRICE       AT 12/31/97        PRICE
-----------------    ----------      -----------     ---------     -----------      ---------
                     (THOUSANDS)                                   (THOUSANDS)
<S>                  <C>             <C>             <C>           <C>              <C>
    Under $17            1,639        2.1 years       $ 13.11          1,639         $ 13.11
$17.00 to $25.00        14,856        3.3 years       $ 21.15         14,856         $ 21.15
$25.01 to $35.00        20,659        4.0 years       $ 29.94         20,546         $ 29.92
$35.01 to $40.00        32,708        4.7 years       $ 36.89         27,993         $ 36.79
$40.01 to $50.00        17,620        7.4 years       $ 43.38          7,449         $ 42.51
$50.01 to $70.79         1,870        8.5 years       $ 59.03            325         $ 57.35
                     -----------                                   ------------
      Total             89,352        4.9 years       $ 33.98         72,808         $ 31.80
                     -----------                                   ------------
                     -----------                                   ------------
</TABLE>
 
                                      F-48
 

<PAGE>
<PAGE>

                                TIME WARNER INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     For options exercised by employees of TWE, Time Warner is reimbursed by TWE
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 29.5 million options held by employees of TWE at December 31, 1997,
21.5 million of which were exercisable.
 
14. 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 7% and 5% of plan assets at December 31, 1997 and 1996,
respectively.
 
     Pension expense included the following:
 
<TABLE>
<CAPTION>
                                                                                         YEARS ENDED DECEMBER 31,
                                                                                         ------------------------
                                                                                         1997      1996     1995
                                                                                         -----     ----     -----
                                                                                                (MILLIONS)
<S>                                                                                      <C>       <C>      <C>
Service cost..........................................................................   $  45     $ 49     $  29
Interest cost.........................................................................      68       64        53
Actual return on plan assets..........................................................    (162)     (90)     (137)
Net amortization and deferral.........................................................     101       37        89
                                                                                         -----     ----     -----
Total.................................................................................   $  52     $ 60     $  34
                                                                                         -----     ----     -----
                                                                                         -----     ----     -----
</TABLE>
 
     The status of funded pension plans is as follows:
 
<TABLE>
<CAPTION>
                                                                                                     DECEMBER 31,
                                                                                                     ------------
                                                                                                     1997    1996
                                                                                                     ----    ----
                                                                                                      (MILLIONS)
<S>                                                                                                  <C>     <C>
Accumulated benefit obligation (90% vested).......................................................   $650    $550
Effect of future salary increase..................................................................    246     210
                                                                                                     ----    ----
Projected benefit obligation......................................................................    896     760
Plan assets at fair value.........................................................................    839     704
                                                                                                     ----    ----
Projected benefit obligation in excess of plan assets.............................................    (57)    (56)
Unamortized actuarial losses......................................................................    (23)      2
Unamortized plan changes..........................................................................      2       3
Other.............................................................................................     --      (2)
                                                                                                     ----    ----
Accrued pension expense...........................................................................   $(78)   $(53)
                                                                                                     ----    ----
                                                                                                     ----    ----
</TABLE>
 
     The following assumptions were used in accounting for pension plans:
<TABLE>
<CAPTION>
                                                                            1997           1996            1995
                                                                         ----------     ----------     -----------
<S>                                                                    <C>              <C>            <C>
Weighted average discount rate................................              7.25%           7.75%          7.25%
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 $83 million in
1997, $67 million in 1996 and $51 million in 1995. Contributions
 
                                      F-49
 

<PAGE>
<PAGE>

                                TIME WARNER INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
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 boards of directors of the
participating companies.
 
15. 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.
 
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, 1997, Time Warner had interest rate swap contracts to pay
floating-rates of interest (average six-month LIBOR rate of 5.8%) and receive
fixed-rates of interest (average rate of 5.5%) on $2.3 billion notional amount
of indebtedness, which resulted in approximately 52% of Time Warner's underlying
debt, and 46% 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, 1997 is as follows: 1998-$700
million; 1999-$1.2 billion; and 2000-$400 million. At December 31, 1996, Time
Warner had interest rate swap contracts on $2.3 billion notional amount of
indebtedness.
 
     Based on the level of interest rates prevailing at December 31, 1997, the
fair value of Time Warner's fixed-rate debt exceeded its carrying value by $753
million and it would have cost $25 million to terminate the related interest
rate swap contracts, which combined is the equivalent of an unrealized loss of
$778 million. 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 its
interest rate swap contracts, which combined was the equivalent of an unrealized
loss of $274 million. Unrealized gains or losses on debt or interest rate swap
contracts do not result in the realization or expenditure of cash and are not
recognized for financial reporting purposes unless the debt is retired or the
contracts are terminated prior to their maturity.
 
                                      F-50
 

<PAGE>
<PAGE>

                                TIME WARNER INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
FOREIGN CURRENCY 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, 1997, 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, 1997, Time Warner had contracts for the sale
of $507 million and the purchase of $139 million of foreign currencies at fixed
rates, primarily Japanese yen (20% of contract value), English pounds (19%),
German marks (19%), Canadian dollars (15%) and French francs (15%), compared to
contracts for the sale of $447 million and the purchase of $104 million of
foreign currencies at December 31, 1996.
 
     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,
1997 and 1996 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, 1997, 1996 and 1995, Time Warner
recognized $27 million in gains, $15 million in gains and $20 million in losses,
respectively, and TWE recognized $14 million in gains, $6 million in gains and
$11 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.
 
16. SEGMENT INFORMATION
 
     Time Warner classifies its businesses into four fundamental areas:
Entertainment, consisting principally of interests in recorded music and music
publishing, filmed entertainment, television production and television
broadcasting; Cable Networks, consisting principally of interests in cable
television programming; Publishing, consisting principally of interests in
magazine publishing, book publishing and direct marketing; and Cable, consisting
principally of interests in cable television systems. A majority of Time
Warner's interests in filmed entertainment, television production, television
broadcasting and cable television systems, and a portion of its interests in
cable television programming are held by the Entertainment Group. The
Entertainment Group is not consolidated for financial reporting purposes.
 
     Information as to the operations of Time Warner and the Entertainment Group
in different business segments is set forth below based on the nature of the
products and services offered. Time Warner evaluates performance based on
several factors, of which the primary financial measure is business segment
operating income before noncash amortization of intangible assets ('EBITA'). The
accounting policies of the business segments are the same as those described in
the summary of significant accounting policies (Note 1). Intersegment sales are
accounted for at fair value as if the sales were to third parties.
 
     The operating results of Time Warner reflect the cable-related acquisitions
of Summit effective as of May 2, 1995, KBLCOM effective as of July 6, 1995 and
CVI effective as of January 4, 1996; and the cable networks and filmed
entertainment-related acquisition of TBS effective as of October 10, 1996. The
operating results of
 
                                      F-51
 

<PAGE>
<PAGE>

                                TIME WARNER INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
the Entertainment Group reflect the cable-related formation of TWE-A/N effective
as of April 1, 1995, the deconsolidation of Six Flags effective as of June 23,
1995 and the cable-related 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,
                                                                                     ----------------------------
                                                                                      1997       1996       1995
                                                                                     -------    -------    ------
                                                                                              (MILLIONS)
<S>                                                                                  <C>        <C>        <C>
REVENUES
Time Warner:
Publishing........................................................................   $ 4,290    $ 4,117    $3,722
Music.............................................................................     3,691      3,949     4,196
Cable Networks-TBS................................................................     2,900        680        --
Filmed Entertainment-TBS..........................................................     1,531        455        --
Cable.............................................................................       997        909       172
Intersegment elimination..........................................................      (115)       (46)      (23)
                                                                                     -------    -------    ------
Total.............................................................................   $13,294    $10,064    $8,067
                                                                                     -------    -------    ------
                                                                                     -------    -------    ------
Entertainment Group:
Filmed Entertainment-Warner Bros..................................................   $ 5,472    $ 5,648    $5,078
Six Flags Theme Parks.............................................................        --         --       227
Broadcasting-The WB Network.......................................................       136         87        33
Cable Networks-HBO................................................................     1,923      1,763     1,607
Cable.............................................................................     4,243      3,851     3,094
Intersegment elimination..........................................................      (446)      (488)     (410)
                                                                                     -------    -------    ------
Total.............................................................................   $11,328    $10,861    $9,629
                                                                                     -------    -------    ------
                                                                                     -------    -------    ------
</TABLE>
 
<TABLE>
<CAPTION>
                                                                                         YEARS ENDED DECEMBER 31,
                                                                                        --------------------------
                                                                                         1997      1996      1995
                                                                                        ------    ------    ------
                                                                                                (MILLIONS)
<S>                                                                                     <C>       <C>       <C>
EBITA(1)
Time Warner:
Publishing...........................................................................   $  529    $  464    $  417
Music(2).............................................................................      467       653       595
Cable Networks-TBS...................................................................      573       142        --
Filmed Entertainment-TBS.............................................................      200        30        --
Cable................................................................................      427       353        63
Intersegment elimination.............................................................      (13)        5        --
                                                                                        ------    ------    ------
Total................................................................................   $2,183    $1,647    $1,075
                                                                                        ------    ------    ------
                                                                                        ------    ------    ------
Entertainment Group:
Filmed Entertainment-Warner Bros.....................................................   $  404    $  379    $  377
Six Flags Theme Parks................................................................       --        --        40
Broadcasting-The WB Network..........................................................      (88)      (98)      (66)
Cable Networks-HBO...................................................................      391       328       275
Cable(3).............................................................................    1,184       917       810
                                                                                        ------    ------    ------
Total................................................................................   $1,891    $1,526    $1,436
                                                                                        ------    ------    ------
                                                                                        ------    ------    ------
</TABLE>
 
------------
 
(1) EBITA represents business segment operating income before noncash
    amortization of intangible assets. After deducting amortization of
    intangible assets, Time Warner's business segment operating income was
    $1.271 billion in 1997, $966 million in 1996 and $697 million in 1995.
    Similarly, business segment operating income of the Entertainment Group was
    $1.461 billion in 1997, $1.090 billion in 1996 and $992 million in 1995.
 
(2) Includes 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.
 
(3) Includes net gains of approximately $200 million recognized in 1997 related
    to the sale or exchange of certain cable television systems.
 
                                      F-52
 

<PAGE>
<PAGE>

                                TIME WARNER INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
<TABLE>
<CAPTION>
                                                                                        YEARS ENDED DECEMBER 31,
                                                                                        ------------------------
                                                                                         1997     1996     1995
                                                                                         ----     ----     ----
                                                                                               (MILLIONS)
<S>                                                                                      <C>      <C>      <C>
DEPRECIATION OF PROPERTY, PLANT AND EQUIPMENT
Time Warner:
Publishing............................................................................   $ 79     $ 71     $ 59
Music.................................................................................     83       91       95
Cable Networks-TBS....................................................................     87       20       --
Filmed Entertainment-TBS..............................................................      7        2       --
Cable.................................................................................    126      123       27
                                                                                         ----     ----     ----
Total.................................................................................   $382     $307     $181
                                                                                         ----     ----     ----
                                                                                         ----     ----     ----
Entertainment Group:
Filmed Entertainment-Warner Bros......................................................   $197     $167     $113
Six Flags Theme Parks.................................................................     --       --       20
Broadcasting-The WB Network...........................................................      1       --       --
Cable Networks-HBO....................................................................     22       22       18
Cable.................................................................................    736      619      465
                                                                                         ----     ----     ----
Total.................................................................................   $956     $808     $616
                                                                                         ----     ----     ----
                                                                                         ----     ----     ----
</TABLE>
 
<TABLE>
<CAPTION>
                                                                                        YEARS ENDED DECEMBER 31,
                                                                                        ------------------------
                                                                                         1997     1996     1995
                                                                                         ----     ----     ----
                                                                                               (MILLIONS)
<S>                                                                                      <C>      <C>      <C>
AMORTIZATION OF INTANGIBLE ASSETS(1)
Time Warner:
Publishing............................................................................   $ 48     $ 46     $ 36
Music.................................................................................    301      292      274
Cable Networks-TBS....................................................................    199       43       --
Filmed Entertainment-TBS..............................................................     87       22       --
Cable.................................................................................    277      278       68
                                                                                         ----     ----     ----
Total.................................................................................   $912     $681     $378
                                                                                         ----     ----     ----
                                                                                         ----     ----     ----
Entertainment Group:
Filmed Entertainment-Warner Bros......................................................   $123     $125     $124
Six Flags Theme Parks.................................................................     --       --       11
Broadcasting-The WB Network...........................................................     --       --       --
Cable Networks-HBO....................................................................     --       --        1
Cable.................................................................................    307      311      308
                                                                                         ----     ----     ----
Total.................................................................................   $430     $436     $444
                                                                                         ----     ----     ----
                                                                                         ----     ----     ----
</TABLE>
 
------------
(1) Amortization includes amortization relating to all business combinations
    accounted for by the purchase method, including the $14 billion acquisition
    of Warner Communications Inc. in 1989, the $6.2 billion acquisition of TBS
    in 1996 and the $2.3 billion of cable acquisitions in 1996 and 1995.
 
                                      F-53
 

<PAGE>
<PAGE>

                                TIME WARNER INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     Information as to the assets and capital expenditures of Time Warner and
the Entertainment Group is as follows:
 
<TABLE>
<CAPTION>
                                                                                            DECEMBER 31,
                                                                                    -----------------------------
                                                                                     1997       1996       1995
                                                                                    -------    -------    -------
                                                                                             (MILLIONS)
<S>                                                                                 <C>        <C>        <C>
ASSETS
Time Warner:
Publishing.......................................................................   $ 2,490    $ 2,418    $ 2,175
Music............................................................................     6,507      7,478      7,828
Cable Networks-TBS...............................................................     8,372      7,860         --
Filmed Entertainment-TBS.........................................................     2,950      3,232         --
Cable............................................................................     7,043      7,257      3,875
Entertainment Group(1)...........................................................     5,549      5,814      5,734
Corporate(2).....................................................................     1,252      1,005      2,520
                                                                                    -------    -------    -------
Total............................................................................   $34,163    $35,064    $22,132
                                                                                    -------    -------    -------
                                                                                    -------    -------    -------
Entertainment Group:
Filmed Entertainment-Warner Bros.................................................   $ 8,106    $ 8,111    $ 7,389
Broadcasting-The WB Network......................................................       113         67         63
Cable Networks-HBO...............................................................     1,080        997        935
Cable............................................................................    10,771     10,202      9,842
Corporate(2).....................................................................       669        650        731
                                                                                    -------    -------    -------
Total............................................................................   $20,739    $20,027    $18,960
                                                                                    -------    -------    -------
                                                                                    -------    -------    -------
</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.
 
<TABLE>
<CAPTION>
                                                                                         YEARS ENDED DECEMBER 31,
                                                                                        --------------------------
                                                                                         1997      1996      1995
                                                                                        ------    ------    ------
                                                                                                (MILLIONS)
<S>                                                                                     <C>       <C>       <C>
CAPITAL EXPENDITURES
Time Warner:
Publishing...........................................................................   $   77    $   76    $   70
Music................................................................................       87       142       121
Cable Networks-TBS...................................................................      113        34        --
Filmed Entertainment-TBS.............................................................        3         2        --
Cable................................................................................      282       215        56
Corporate............................................................................       12        12        19
                                                                                        ------    ------    ------
Total................................................................................   $  574    $  481    $  266
                                                                                        ------    ------    ------
                                                                                        ------    ------    ------
Entertainment Group:
Filmed Entertainment-Warner Bros.....................................................   $  144    $  340    $  294
Six Flags Theme Parks................................................................       --        --        43
Broadcasting-The WB Network..........................................................        1         2        --
Cable Networks-HBO...................................................................       19        29        20
Cable(1).............................................................................    1,401     1,348     1,293
Corporate............................................................................       --        --         3
                                                                                        ------    ------    ------
Total................................................................................   $1,565    $1,719    $1,653
                                                                                        ------    ------    ------
                                                                                        ------    ------    ------
</TABLE>
 
------------
 
(1) Cable capital expenditures were funded in part through collections on the
    US WEST Note Receivable in the amount of $169 million in 1996 and $602
    million in 1995 (Note 4). The U S WEST Note Receivable was fully collected
    during 1996.
 
                                      F-54
 

<PAGE>
<PAGE>

                                TIME WARNER INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     Information as to Time Warner's operations in different geographical areas
is as follows:
 
<TABLE>
<CAPTION>
                                                                                       YEARS ENDED DECEMBER 31,
                                                                                     ----------------------------
                                                                                      1997       1996       1995
                                                                                     -------    -------    ------
                                                                                              (MILLIONS)
<S>                                                                                  <C>        <C>        <C>
REVENUES(1)
Time Warner:
United States.....................................................................   $10,159    $ 7,262    $5,344
United Kingdom....................................................................       449        372       348
Germany...........................................................................       420        452       500
Japan.............................................................................       417        399       483
Canada............................................................................       262        209       213
France............................................................................       195        229       219
Other international...............................................................     1,392      1,141       960
                                                                                     -------    -------    ------
Total.............................................................................   $13,294    $10,064    $8,067
                                                                                     -------    -------    ------
                                                                                     -------    -------    ------
Entertainment Group:
United States.....................................................................   $ 9,096    $ 8,727    $7,647
United Kingdom....................................................................       488        383       338
Germany...........................................................................       284        374       247
Japan.............................................................................       172        196       245
Canada............................................................................       137        157       144
France............................................................................       152        143       141
Other international...............................................................       999        881       867
                                                                                     -------    -------    ------
Total.............................................................................   $11,328    $10,861    $9,629
                                                                                     -------    -------    ------
                                                                                     -------    -------    ------
</TABLE>
 
------------
 
(1) Revenues are attributed to countries based on location of customer.
 
     Because a substantial portion of Time Warner's international revenues is
derived from the sale of U.S. copyrighted products abroad, assets located
outside the United States are not material.
 
17. COMMITMENTS AND CONTINGENCIES
 
     Time Warner's total rent expense amounted to $237 million in 1997, $192
million in 1996 and $174 million in 1995. The minimum rental commitments under
noncancellable long-term operating leases are: 1998-$235 million; 1999-$221
million; 2000-$205 million; 2001-$188 million; 2002-$175 million and after
2002 - $980 million.
 
     Time Warner's minimum commitments and guarantees under certain programming,
licensing, artists, athletes, franchise and other agreements aggregated
approximately $6.4 billion at December 31, 1997, which are payable principally
over a five-year period. Such amounts do not include the Time Warner General
Partner guarantees of approximately $5.8 billion of TWE's debt and accrued
interest.
 
     Pending legal proceedings are substantially limited to litigation
incidental to the businesses of Time Warner and alleged damages in connection
with class action lawsuits. In the opinion of management, the ultimate
resolution of these matters will not have a material effect on the financial
statements of Time Warner.
 
18. 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.
 
                                      F-55
 

<PAGE>
<PAGE>

                                TIME WARNER INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
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 $72 million, $69 million and $64 million in 1997, 1996 and 1995,
respectively.
 
     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.
Similarly, Time Warner receives fees from TWE's cable television systems for the
right to carry cable television programming provided by Time Warner'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.
 
     Time Warner has a credit agreement with TWE that allows it to borrow up to
$400 million from TWE through September 15, 2000. Outstanding borrowings from
TWE in the amount of $400 million bear interest at LIBOR plus 1% per annum.
 
     In addition to transactions with TWE and other Entertainment Group
companies, Time Warner has had transactions with the Columbia House Company
partnerships, Comedy Partners, L.P., Six Flags and other equity investees of
Time Warner and the Entertainment Group, generally with respect to sales of
products and services in the ordinary course of business.
 
19. ADDITIONAL FINANCIAL INFORMATION
 
CASH FLOWS
 
     As of December 31, 1997, Time Warner had certain accounts receivable
securitization facilities, which provide for the accelerated receipt of up to
$700 million of cash on available receivables. In connection with each of these
securitization facilities, Time Warner sells, on a revolving and nonrecourse
basis, certain of its accounts receivables ('Pooled Receivables') to a wholly
owned, special purpose entity which, in turn, sells a percentage ownership
interest in the Pooled Receivables to a third-party, commercial paper conduit
sponsored by a financial institution. These securitization transactions have
been accounted for as a sale in accordance with FASB Statement No. 125,
'Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities.' Accordingly, accounts receivables sold under this
securitization program have been reflected as a reduction in receivables in the
accompanying consolidated balance sheet. Net proceeds received under this
securitization program were $108 million in 1997, $147 million in 1996 and $35
million in 1995.
 
                                      F-56
 

<PAGE>
<PAGE>

                                TIME WARNER INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     Additional financial information with respect to cash flows is as follows:
 
<TABLE>
<CAPTION>
                                                                                        YEARS ENDED DECEMBER 31,
                                                                                        ------------------------
                                                                                         1997     1996     1995
                                                                                         ----     ----     ----
                                                                                               (MILLIONS)
<S>                                                                                      <C>      <C>      <C>
Cash payments made for interest.......................................................   $929     $839     $659
Cash payments made for income taxes...................................................    305      382      302
Tax-related distributions received from TWE...........................................    324      215      680
Income tax refunds received...........................................................     52       44       24
Noncash dividends.....................................................................    185      122       --
</TABLE>
 
     Noncash financing activities in 1997 included the redemption of the PERCS
in exchange for Time Warner's interest in Hasbro (Note 10). 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 4) and the $1.8 billion
redemption of Time Warner's Redeemable Reset Notes due August 15, 2002 in
exchange for other debt securities.
 
OTHER CURRENT LIABILITIES
 
     Other current liabilities consist of:
 
<TABLE>
<CAPTION>
                                                                                                    DECEMBER 31,
                                                                                                  ----------------
                                                                                                   1997      1996
                                                                                                  ------    ------
                                                                                                     (MILLIONS)
<S>                                                                                               <C>       <C>
Accrued expenses...............................................................................   $1,716    $1,410
Accrued compensation...........................................................................      430       351
Accrued income taxes...........................................................................       28        81
Deferred revenues..............................................................................      205       248
                                                                                                  ------    ------
Total..........................................................................................   $2,379    $2,090
                                                                                                  ------    ------
                                                                                                  ------    ------
</TABLE>
 
                                      F-57


<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                          Executive Vice President and
Chief Executive Officer                                              Chief Financial Officer
</TABLE>
 
                                      F-58
 

<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, 1997 and 1996, and the related consolidated
statements of operations, cash flows and shareholders' equity for each of the
three years in the period ended December 31, 1997. Our audits also included the
financial statement schedule and supplementary information listed in the Index
at Item 14(a). These financial statements, schedule and supplementary
information are the responsibility of Time Warner's management. Our
responsibility is to express an opinion on these financial statements, schedule
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, 1997 and 1996, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31,
1997, in conformity with generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule 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 10, 1998
 
                                      F-59


<PAGE>
<PAGE>

                                TIME WARNER INC.
                         SELECTED FINANCIAL INFORMATION
 
     The selected financial information for each of the five years in the period
ended December 31, 1997 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 1996 reflects (a) the TBS
Transaction, including the assumption of approximately $2.8 billion of
indebtedness, (b) the use of approximately $1.55 billion of net proceeds from
the issuance of 1.6 million shares of Series M exchangeable preferred stock,
having an aggregate liquidation preference of $1.6 billion, to reduce
outstanding indebtedness and (c) the acquisition of CVI, including the
assumption or incurrence of approximately $2 billion of indebtedness. The
selected historical financial information for 1995 reflects (a) the acquisitions
of KBLCOM and Summit, including the assumption or incurrence of approximately
$1.3 billion of indebtedness and (b) the exchange by Toshiba and ITOCHU of their
direct and indirect interests in TWE.
 
<TABLE>
<CAPTION>
                                                                              YEARS ENDED DECEMBER 31,
                                                                  ------------------------------------------------
SELECTED OPERATING STATEMENT INFORMATION                           1997       1996       1995      1994      1993
                                                                  -------    -------    ------    ------    ------
                                                                        (MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S>                                                               <C>        <C>        <C>       <C>       <C>
Revenues.......................................................   $13,294    $10,064    $8,067    $7,396    $6,581
Depreciation and amortization..................................    (1,294)      (988)     (559)     (437)     (424)
Business segment operating income (a)..........................     1,271        966       697       713       591
Equity in pretax income of Entertainment Group (b).............       686        290       256       176       281
Interest and other, net (c)....................................    (1,044)    (1,174)     (877)     (724)     (718)
Income (loss) before extraordinary item........................       301       (156)     (124)      (91)     (164)
Net income (loss) (d)..........................................       246       (191)     (166)      (91)     (221)
Net loss applicable to common shares (after preferred
  dividends)...................................................       (73)      (448)     (218)     (104)     (339)
Per share of common stock:
     Basic and diluted net loss (d)............................   $ (0.13)   $ (1.04)   $(0.57)   $(0.27)   $(0.90)
     Dividends.................................................   $  0.36    $  0.36    $ 0.36    $ 0.35    $ 0.31
Average common shares..........................................     567.7      431.2     383.8     378.9     374.7
</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)  Time Warner's equity in the pretax income of the Entertainment Group for
      the year ended December 31, 1997 includes approximately $450 million of
      net gains relating to the sale or exchange of certain assets.
 
 (c)  Interest and other, net, for the year ended December 31, 1997 includes a
      $200 million pretax gain relating to Time Warner's redemption of certain
      mandatorily redeemable preferred securities of a subsidiary and the
      related disposal of Time Warner's interest in Hasbro, Inc.
 
 (d)  Net income (loss) for each of the years ended December 31, 1997, 1996,
      1995 and 1993 includes an extraordinary loss on the retirement of debt of
      $55 million ($.10 per common share), $35 million ($.09 per common share),
      $42 million ($.11 per common share) and $57 million ($.15 per common
      share), respectively. In addition, the net loss for the year ended
      December 31, 1993 includes an unusual charge of $70 million ($.19 per
      common share) from the effect of changes in the income tax laws on Time
      Warner's deferred income tax liability.
 
                                      F-60
 

<PAGE>
<PAGE>

 
<TABLE>
<CAPTION>
                                                                                 DECEMBER 31,
                                                              ---------------------------------------------------
SELECTED BALANCE SHEET INFORMATION                             1997       1996       1995       1994       1993
                                                              -------    -------    -------    -------    -------
                                                                                  (MILLIONS)
<S>                                                           <C>        <C>        <C>        <C>        <C>
Cash and equivalents (a)...................................   $   645    $   514    $ 1,185    $   282    $   200
Total assets...............................................    34,163     35,064     22,132     16,716     16,892
Debt due within one year...................................         8         11         34        355        120
Long-term debt.............................................    11,833     12,713      9,907      8,839      9,291
Borrowings against future stock option proceeds............       533        488         --         --         --
Company-obligated mandatorily redeemable preferred
  securities of subsidiaries...............................       575        949        949         --         --
Series M exchangeable preferred stock......................     1,857      1,672         --         --         --
Shareholders' equity:
     Preferred stock liquidation preference................     3,539      3,559      2,994        140        140
     Equity applicable to common stock.....................     5,817      5,943        673      1,008      1,230
     Total shareholders' equity............................     9,356      9,502      3,667      1,148      1,370
Total capitalization.......................................    24,162     25,335     14,557     10,342     10,781
</TABLE>
 
------------
 
 (a)  Includes $62 million of noncurrent cash and equivalents at December 31,
      1996 that was held in escrow for purposes of funding certain preferred
      dividend requirements.
 
                                      F-61
 

<PAGE>
<PAGE>

                                TIME WARNER INC.
                  QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
                                                                                            BASIC         DILUTED
                                             EQUITY IN                   NET INCOME        EARNINGS       EARNINGS
                             OPERATING        PRETAX                       (LOSS)         (LOSS) PER     (LOSS) PER     DIVIDENDS
                             INCOME OF       INCOME OF        NET       APPLICABLE TO       COMMON         COMMON          PER
                             BUSINESS      ENTERTAINMENT     INCOME        COMMON           SHARE          SHARE         COMMON
  QUARTER       REVENUES     SEGMENTS          GROUP         (LOSS)       SHARES(e)         (e)(f)         (e)(f)         SHARE
------------    --------     ---------     -------------     ------     -------------     ----------     ----------     ---------
                                              (MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S>             <C>          <C>           <C>               <C>        <C>               <C>            <C>            <C>
1997
1st (a)(b)       $3,034       $   194          $ 318         $  35          $ (43)          $(0.08)        $(0.08)        $0.09
2nd               3,193           345            108            30            (49)           (0.09)         (0.09)         0.09
3rd (a)           3,231           263             96           (35)          (116)           (0.20)         (0.20)         0.09
4th (a)(b)        3,836           469            164           216            135             0.23           0.22          0.09
Year             13,294         1,271            686           246            (73)           (0.13)         (0.13)         0.36

1996 (c)
1st (d)          $2,068       $   110          $ 116         $(119)         $(153)          $(0.39)        $(0.39)        $0.09
2nd (d)           2,139           215             93           (40)          (110)           (0.28)         (0.28)         0.09
3rd               2,157           139             61           (91)          (167)           (0.43)         (0.43)         0.09
4th               3,700           502             20            59            (18)           (0.03)         (0.03)         0.09
Year             10,064           966            290          (191)          (448)           (1.04)         (1.04)         0.36
 
<CAPTION>
 
               AVERAGE             COMMON STOCK
               COMMON              ------------
  QUARTER      SHARES          HIGH             LOW
------------   ------          ----             ----
              (MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S>             <C>      <C>              <C>
1997
1st (a)(b)     558.9     $     45         $     36 3/8
2nd            561.0           50 3/4           40 3/8
3rd (a)        573.3           56 3/8           38 1/2
4th (a)(b)     577.5           62               53
Year           567.7           62               36 3/8

1996 (c)
1st (d)        391.7     $     45 1/4     $     37 1/4
2nd (d)        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           431.2           45 1/4           29 3/4
</TABLE>
 
------------
 
 (a)  Net income (loss) for each of the first, third and fourth quarters of 1997
      includes an extraordinary loss on the retirement of debt of $17 million
      ($.03 per common share), $7 million ($.01 per common share) and $31
      million ($.06 per common share), respectively. In addition, net income for
      the fourth quarter of 1997 includes an after-tax gain of approximately
      $120 million ($.20 per common share) relating to Time Warner's redemption
      of certain mandatorily redeemable preferred securities of a subsidiary and
      the related disposal of its interest in Hasbro, Inc.
 
 (b)  Time Warner's equity in the pretax income of the Entertainment Group for
      the first quarter of 1997 includes a $250 million pretax gain relating to
      the sale of TWE's interest in E! Entertainment Television, Inc. Time
      Warner's equity in the pretax income of the Entertainment Group for 1997
      also includes net gains of approximately $200 million for the year
      relating to the sale or exchange of certain cable television systems, of
      which approximately $160 million was recorded in the fourth quarter of
      1997.
 
 (c)  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.
 
 (d)  Net loss for each of the first and second quarters of 1996 includes an
      extraordinary loss on the retirement of debt of $26 million ($.07 per
      common share) and $9 million ($.02 per common share), respectively.
 
 (e)  After preferred dividend requirements.
 
 (f)  Per common share amounts for the quarters and full years have each been
      calculated separately. Accordingly, quarterly amounts may not add to the
      annual amounts because of differences in the average common shares
      outstanding during each period and, with regard to diluted per common
      share amounts only, because of the inclusion of the effect of potentially
      dilutive securities only in the periods in which such effect would have
      been dilutive.
 
                                      F-62
 

<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. ('Time Warner') 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 (now known as Time Warner Companies, Inc., 'TW Companies') and TW
Companies and TBS became separate, wholly owned subsidiaries of the new parent
company. Time Warner, TW Companies and TBS have fully and unconditionally
guaranteed all of the outstanding publicly traded indebtedness of each other.
 
     Set forth below is summarized financial information of each of TW Companies
and TBS presented for the information of their respective debtholders.
Summarized financial information of TW Companies presented below includes TW
Companies'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 Time Warner's basis of accounting. 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.
 
TW COMPANIES
 
<TABLE>
<CAPTION>
                                                                                        YEARS ENDED DECEMBER 31,
                                                                                       ---------------------------
OPERATING STATEMENT INFORMATION                                                         1997      1996       1995
                                                                                       ------    -------    ------
                                                                                               (MILLIONS)
<S>                                                                                    <C>       <C>        <C>
Revenues............................................................................   $8,950    $ 8,951    $8,067
Depreciation and amortization.......................................................     (914)      (902)     (559)
Business segment operating income (a)...............................................      763        853       697
Equity in pretax income of Entertainment Group (b)..................................      727        290       256
Interest and other, net (c).........................................................     (755)    (1,096)     (877)
Income (loss) before extraordinary item.............................................      291       (145)     (124)
Net income (loss) (d)...............................................................      240       (180)     (166)
</TABLE>
 
<TABLE>
<CAPTION>
                                                                                                  DECEMBER 31,
                                                                                               ------------------
BALANCE SHEET INFORMATION                                                                       1997       1996
                                                                                               -------    -------
                                                                                                   (MILLIONS)
<S>                                                                                            <C>        <C>
Total current assets........................................................................   $ 3,823    $ 3,529
Investments in and amounts due to and from Entertainment Group..............................     5,590      5,814
Total assets................................................................................    25,625     25,595
Total current liabilities...................................................................     2,911      2,831
Long-term debt..............................................................................    11,085     11,002
Total liabilities...........................................................................    18,860     18,532
TW Companies-obligated mandatorily redeemable preferred securities of subsidiaries holding
  solely subordinated notes and debentures of TW Companies..................................       575        949
Series M exchangeable preferred stock (e)...................................................        --      1,672
Shareholders' equity (e)....................................................................     6,190      4,442
</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)  TW Companies' equity in the pretax income of the Entertainment Group for
      the year ended December 31, 1997 includes approximately $450 million of
      net pretax gains relating to the sale or exchange of certain assets.
 (c)  Interest and other, net, for the year ended December 31, 1997 includes a
      $200 million pretax gain relating to Time Warner's redemption of certain
      mandatorily redeemable preferred securities of a subsidiary and the
      related disposal of TW Companies' interest in Hasbro, Inc.
 (d)  The net income or loss for each of the years ended December 31, 1997, 1996
      and 1995 includes an extraordinary loss on the retirement of debt of $51
      million, $35 million and $42 million, respectively.
 (e)  TW Companies was recapitalized in 1997. In connection with such
      recapitalization, all outstanding shares of preferred stock held by Time
      Warner were exchanged or converted into an aggregate of approximately 128
      thousand shares of common stock of TW Companies.
 
                                      F-63
 

<PAGE>
<PAGE>

TBS
 
<TABLE>
<CAPTION>
                                                                          THREE        NINE MONTHS
                                                        YEAR ENDED     MONTHS ENDED       ENDED        YEAR ENDED
                                                       DECEMBER 31,    DECEMBER 31,    SEPTEMBER 30,   DECEMBER 31,
                                                           1997            1996            1996            1995
                                                       ------------    ------------    ------------    ------------
                                                                                (MILLIONS)
<S>                                                    <C>             <C>             <C>             <C>
OPERATING STATEMENT INFORMATION
Revenues............................................      $4,366          $1,124          $2,735          $3,412
Depreciation and amortization.......................        (380)            (86)           (141)           (188)
Business segment operating income...................         508             113             123             415
Interest and other, net.............................        (231)            (62)           (143)           (215)
Income before extraordinary item....................          90               3             (20)            103
Net income (loss) (a)...............................          86               3             (20)            103
</TABLE>
 
<TABLE>
<CAPTION>
                                                                                                  DECEMBER 31,
                                                                                               ------------------
                                                                                                1997       1996
                                                                                               -------    -------
                                                                                                   (MILLIONS)
<S>                                                                                            <C>        <C>
BALANCE SHEET INFORMATION
Total current assets........................................................................   $ 1,183    $ 1,286
Total assets................................................................................    11,319     11,092
Total current liabilities...................................................................       954        934
Long-term debt..............................................................................       748      1,711
Debt due to Time Warner.....................................................................     1,722        985
Total liabilities...........................................................................     3,978      3,989
Shareholders' equity........................................................................     7,341      7,103
</TABLE>
 
------------
 
 (a)  Net income for the year ended December 31, 1997 includes an extraordinary
      loss on the retirement of debt of $4 million.
 
                                      F-64
 

<PAGE>
<PAGE>

                                TIME WARNER INC.
                SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
                  YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
 
<TABLE>
<CAPTION>
                                                                          ADDITIONS
                                                            BALANCE AT    CHARGED TO                         BALANCE
                                                            BEGINNING     COSTS AND                          AT END
                       DESCRIPTION                          OF PERIOD      EXPENSES       DEDUCTIONS        OF PERIOD
---------------------------------------------------------   ----------    ----------      ----------        ---------
                                                                                   (MILLIONS)
<S>                                                         <C>           <C>             <C>               <C>
1997:
Reserves deducted from accounts receivable:
     Allowance for doubtful accounts.....................     $  236       $    379        $   (304)(c)       $ 311
     Reserves for sales returns and allowances...........        740          2,599          (2,659)(d)(e)      680
                                                            ----------    ----------      ----------        ---------
          Total..........................................     $  976       $  2,978        $ (2,963)          $ 991
                                                            ----------    ----------      ----------        ---------
                                                            ----------    ----------      ----------        ---------
Reserves deducted from amounts due to publishers
  (accounts payable)
     Allowance for magazine and book returns.............     $ (179)      $ (1,070)       $  1,078(e)        $(171)
                                                            ----------    ----------      ----------        ---------
                                                            ----------    ----------      ----------        ---------
 
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)
                                                            ----------    ----------      ----------        ---------
                                                            ----------    ----------      ----------        ---------
</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-65


<PAGE>
<PAGE>

                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
 
     TWE classifies its business interests into three fundamental areas:
Entertainment, consisting principally of interests in filmed entertainment,
television production and television broadcasting; Cable Networks, consisting
principally of interests in cable television programming; and Cable, consisting
principally of interests in cable television systems. TWE also manages the cable
properties owned by Time Warner and the combined cable television operations are
conducted under the name of Time Warner Cable. Capitalized terms are as defined
and described in the accompanying consolidated financial statements, or
elsewhere herein.
 
OVERVIEW
 
     TWE had a strong financial performance in 1997, as measured by the
operating performance of its businesses and the improved strength of its
financial condition, as more fully discussed herein. This performance was driven
by solid business fundamentals at its businesses and a disciplined financial
focus on cost management and controlling capital spending.
 
USE OF EBITA
 
     During 1997, management concluded that the most appropriate measure for
evaluating the operating performance of TWE's business segments is operating
income before noncash amortization of intangible assets ('EBITA'). Consistent
with management's financial focus on controlling capital spending, EBITA
measures operating performance after charges for depreciation. In addition,
EBITA eliminates the uneven effect across all business segments of considerable
amounts of noncash amortization of intangible assets recognized in business
combinations accounted for by the purchase method, including Time Warner's $14
billion acquisition of Warner Communications Inc. in 1989 and $1.3 billion
acquisition of the minority interest in American Television and Communications
Corporation in 1992. The exclusion of noncash amortization charges is also
consistent with management's belief that TWE's intangible assets, such as cable
television franchises, film and television libraries and the goodwill associated
with its brands, are generally increasing in value and importance to TWE's
business objective of creating, extending and distributing recognizable brands
and copyrights throughout the world. As such, the following comparative
discussion of the results of operations of TWE includes, among other factors, an
analysis of changes in business segment EBITA. However, EBITA should be
considered in addition to, not as a substitute for, operating income, net income
and other measures of financial performance reported in accordance with
generally accepted accounting principles.
 
TRANSACTIONS AFFECTING COMPARABILITY OF RESULTS OF OPERATIONS
 
     TWE completed a number of transactions in 1995 that have affected the
comparability of its operating results for such year. These 1995 transactions
include the formation of the TWE-Advance/Newhouse Partnership ('TWE-A/N'), the
consolidation of Paragon Communications ('Paragon'), the refinancing of its bank
debt, the reacquisition of the Time Warner Service Partnership Assets and
certain asset sales, including the initial sale of 51% of TWE's interest in Six
Flags Entertainment Corporation ('Six Flags'), all of which are more fully
discussed herein. Such transactions are collectively referred to herein as the
'1995 Transactions.'
 
     In order to enhance comparability, the following discussion of results of
operations for TWE is supplemented, where appropriate, by pro forma financial
information that gives effect to the 1995 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-66
 

<PAGE>
<PAGE>

                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
        OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
 
RESULTS OF OPERATIONS
 
1997 VS. 1996
 
     EBITA and operating income for TWE in 1997 and 1996 are as follows:
 
<TABLE>
<CAPTION>
                                                                                YEARS ENDED DECEMBER 31,
                                                                         ---------------------------------------
                                                                               EBITA           OPERATING INCOME
                                                                         -----------------     -----------------
                                                                          1997       1996       1997       1996
                                                                         ------     ------     ------     ------
                                                                                       (MILLIONS)
<S>                                                                      <C>        <C>        <C>        <C>
Filmed Entertainment-Warner Bros......................................   $  387     $  367     $  264     $  242
Broadcasting-The WB Network...........................................      (88)       (98)       (88)       (98)
Cable Networks-HBO....................................................      391        328        391        328
Cable(1)..............................................................    1,184        917        877        606
                                                                         ------     ------     ------     ------
Total.................................................................   $1,874     $1,514     $1,444     $1,078
                                                                         ------     ------     ------     ------
                                                                         ------     ------     ------     ------
</TABLE>
 
------------
 
(1)  Includes net gains of approximately $200 million recognized in 1997 related
     to the sale or exchange of certain cable television systems.
 
     TWE had revenues of $11.318 billion, income of $637 million before an
extraordinary loss on the retirement of debt and net income of $614 million for
the year ended December 31, 1997, compared to revenues of $10.852 billion and
net income of $210 million for the year ended December 31, 1996.
 
     As discussed more fully below, TWE's net income increased significantly in
1997 as compared to 1996 due to an overall increase in EBITA and operating
income generated by its business segments, including approximately $200 million
of net gains recognized in 1997 related to the sale or exchange of certain cable
television systems, and the recognition of an approximate $250 million gain in
1997 related to the sale of TWE's interest in E! Entertainment Television, Inc.
These increases were offset in part by the recognition of a $23 million
extraordinary loss on the retirement of debt in 1997 and an increase in minority
interest expense related to TWE-A/N.
 
     As a U.S. partnership, TWE is not subject to U.S. federal and state income
taxation. Income and withholding taxes of $85 million in the year ended December
31, 1997, and $70 million in the year ended December 31, 1996, have been
provided for the operations of TWE's domestic and foreign subsidiary
corporations.
 
     Filmed Entertainment-Warner Bros.  Revenues decreased to $5.462 billion,
compared to $5.639 billion in 1996. EBITA increased to $387 million from $367
million. Operating income increased to $264 million from $242 million. Revenues
decreased principally as a result of lower worldwide theatrical and home video
revenues, offset in part by increases in worldwide television distribution
revenues. EBITA and operating income increased principally as a result of
high-margin sales of library product that contributed to the strong performance
of worldwide television distribution operations, cost savings and certain
one-time gains, offset in part by higher depreciation principally relating to
the expansion of theme parks and consumer products operations.
 
     Broadcasting-The WB Network.  Revenues increased to $136 million, compared
to $87 million in 1996. EBITA and operating losses improved to a loss of $88
million from a loss of $98 million. The increase in revenues primarily resulted
from the expansion of programming in September 1996 to three nights of primetime
scheduling and the expansion of Kids' WB!, the network's animated programming
lineup on Saturday mornings and weekdays. The 1997 operating loss improved
principally as a result of the revenue gains and the effect of an increase in a
limited partner's interest in the network that occurred in early 1997. Due to
the start-up nature of this national broadcast operation and the addition of a
fourth night of primetime programming in January 1998, losses are expected to
continue.
 
                                      F-67
 

<PAGE>
<PAGE>

                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
        OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
 
     Cable Networks-HBO.  Revenues increased to $1.923 billion, compared to
$1.763 billion in 1996. EBITA and operating income increased to $391 million
from $328 million. Revenues benefited primarily from an increase in
subscriptions to 33.6 million from 32.4 million at the end of 1996. EBITA and
operating income improved principally as a result of the revenue gains and, to a
lesser extent, cost savings.
 
     Cable.  Revenues increased to $4.243 billion, compared to $3.851 billion in
1996. EBITA increased to $1.184 billion from $917 million. Operating income
increased to $877 million from $606 million. Revenues benefited from an 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 Federal Communications Commission (the 'FCC') and an
increase in advertising and pay-per-view revenues. EBITA and operating income
increased principally as a result of the revenue gains, as well as net gains of
approximately $200 million recognized in 1997 in connection with the sale or
exchange of certain cable systems. The increases in EBITA and operating income
were partially offset by higher depreciation relating to capital spending.
 
     As of December 31, 1997, including the wholly owned cable operations of
Time Warner, there were 12.6 million subscribers under the management of TWE's
cable division, as compared to 12.3 million subscribers at the end of 1996.
 
     Interest and Other, Net.  Interest and other, net, decreased to $345
million, compared to $522 million in 1996. Interest expense increased to $490
million, compared to $475 million in 1996. There was other income, net, of $145
million in 1997, compared to other expense, net, of $47 million in 1996,
principally due to higher gains on asset sales, including an approximate $250
million pretax gain on the sale of an interest in E! Entertainment Television,
Inc. recognized in 1997. This income was offset in part by higher losses from
reductions in the carrying value of certain investments and the dividend
requirements on preferred stock of a subsidiary issued in February 1997.
 
1996 VS. 1995
 
     EBITA and operating income for TWE in 1996 and 1995 are as follows:
 
<TABLE>
<CAPTION>
                                                                                 YEARS ENDED DECEMBER 31,
                                                                           -------------------------------------
                                                                                                    OPERATING
                                                                                 EBITA               INCOME
                                                                           -----------------     ---------------
                                                                            1996       1995       1996      1995
                                                                           ------     ------     ------     ----
                                                                                        (MILLIONS)
<S>                                                                        <C>        <C>        <C>        <C>
Filmed Entertainment-Warner Bros........................................   $  367     $  352     $  242     $228
Six Flags Theme Parks(1)................................................       --         40         --       29
Broadcasting-The WB Network.............................................      (98)       (66)       (98)     (66)
Cable Networks-HBO......................................................      328        275        328      274
Cable...................................................................      917        803        606      495
                                                                           ------     ------     ------     ----
Total...................................................................   $1,514     $1,404     $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 1995 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, depreciation
expense of $635 million, EBITA of $1.396 billion, operating income of $962
million, income before extraordinary item of $172 million and net income of $148
million. No pro forma financial
 
                                      F-68
 

<PAGE>
<PAGE>

                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
        OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
 
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
EBITA and 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 TWE-A/N. 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.
 
     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. EBITA increased to $367 million from $352
million. 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. EBITA and operating income benefited principally from the revenue
gains, offset in large part by a $51 million increase in depreciation
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. In February 1998, TWE entered into an
agreement to sell its remaining 49% interest. See Note 2 to the accompanying
consolidated financial statements.
 
     Broadcasting-The WB Network.  The WB Network recorded EBITA and operating
losses of $98 million on $87 million of revenues in 1996, compared to EBITA and
operating losses 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 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. EBITA increased to $328 million from $275 million.
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. EBITA 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. EBITA increased to $917 million from $803 million. 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
TWE-A/N effective as of April 1, 1995 and the consolidation of Paragon effective
as of July 6, 1995.
 
     On a pro forma basis, TWE's Cable division had 1995 revenues of $3.368
billion, EBITA of $837 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 advertising and
pay-per-view revenues. EBITA and operating income increased principally as a
result of revenue gains, offset in part by higher depreciation relating to
increased capital spending.
 
                                      F-69
 

<PAGE>
<PAGE>

                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
        OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
 
     As of December 31, 1996, including the wholly owned cable operations of
Time Warner, there were 12.3 million subscribers under the management of TWE's
cable division, as compared to 10.4 million subscribers at the end of 1995.
 
     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 assets. 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.
 
FINANCIAL CONDITION AND LIQUIDITY
DECEMBER 31, 1997
 
1997 FINANCIAL CONDITION
 
     At December 31, 1997, TWE had $6.0 billion of debt, $322 million of cash
and equivalents (net debt of $5.7 billion), $233 million of preferred stock of a
subsidiary, $1.1 billion of Time Warner General Partners' Senior Capital and
$6.3 billion of partners' capital, compared to $5.7 billion of debt, $216
million of cash and equivalents (net debt of $5.5 billion), $1.5 billion of Time
Warner General Partners' Senior Capital and $6.6 billion of partners' capital at
December 31, 1996.
 
DEBT REFINANCINGS
 
     In November 1997, TWE and TWE-A/N, together with Time Warner Inc. and
certain of its consolidated subsidiaries, entered into a new, five-year
revolving credit facility (the '1997 Credit Agreement') and terminated their
previously existing bank credit facility (the 'Old Credit Agreement'). This
enabled TWE to reduce its aggregate borrowing availability from $8.3 billion to
$7.5 billion, lower interest rates and refinance approximately $2.1 billion of
its outstanding borrowings under the Old Credit Agreement. See Note 5 to the
accompanying consolidated financial statements for a summary of the principal
terms of the 1997 Credit Agreement.
 
CREDIT STATISTICS
 
     The combination of EBITA growth and controlled capital spending has
resulted in improvements in TWE's financial condition and overall financial
flexibility, as reflected in its strengthening financial ratios. These ratios,
consisting of commonly used financial measures such as leverage and coverage
ratios, are used by credit rating agencies and other credit analysts to measure
the ability of a company to repay debt (leverage) and to pay interest
(coverage). The leverage ratio represents the ratio of total debt, less cash to
total business segment operating income before depreciation and amortization,
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 1997 and 1996 and on a pro forma basis for 1995 are as set
forth below:
 
                                      F-70
 

<PAGE>
<PAGE>

                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
        OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
 
<TABLE>
<CAPTION>
                                                                                        HISTORICAL
                                                                                       -------------     PRO FORMA
                                                                                       1997     1996      1995(a)
                                                                                       ----     ----     ---------
<S>                                                                                    <C>      <C>      <C>
Leverage ratio......................................................................   2.1x     2.4x        3.0x
Interest coverage ratio(b)..........................................................   5.4x     4.7x        3.7x
</TABLE>
 
------------
 
 (a)  Pro forma ratios for 1995 give effect to the 1995 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.
 
 (b)  Includes dividends related to the preferred stock of a subsidiary.
 
     TWE's leverage and coverage ratios for 1998 are expected to be negatively
affected by TWE-A/N's assumption of approximately $1 billion of debt in
connection with the TWE-A/N Transfers (as described more fully hereinafter).
Nevertheless, management believes that TWE's operating cash flow will continue
to be sufficient to service its debt requirements.
 
CASH FLOWS
 
     In 1997, TWE's cash provided by operations amounted to $1.834 billion and
reflected $1.874 billion of EBITA from the Filmed Entertainment-Warner Bros.,
Broadcasting-The WB Network, Cable Networks-HBO and Cable businesses, $940
million of noncash depreciation expense and $300 million from the securitization
of backlog, less $493 million of interest payments, $95 million of income taxes,
$72 million of corporate expenses and $620 million related to an increase in
working capital requirements, other balance sheet accounts and noncash items.
Cash provided by operations of $1.912 billion in 1996 reflected $1.514 billion
of business segment EBITA, $799 million of noncash depreciation expense 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 used by investing activities was $1.252 billion in 1997, compared to
$1.253 billion in 1996, principally as a result of lower capital expenditures,
offset by a decrease in investment proceeds. Capital expenditures were $1.565
billion in 1997, and $1.719 billion in 1996.
 
     Cash used by financing activities was $476 million in 1997, compared to
$652 million in 1996, principally as a result of an increase in debt used to
fund cash distributions to Time Warner and the issuance of 250,000 shares of
preferred stock of a subsidiary for aggregate net proceeds of $243 million,
offset in part by a $706 million increase in distributions paid to Time Warner
and the absence of $169 million of collections on the note receivable from U S
WEST that was fully paid in 1996.
 
     Management believes that TWE's operating cash flow, cash and equivalents
and additional borrowing capacity are sufficient to fund its capital and
liquidity needs for the foreseeable future.
 
CABLE CAPITAL SPENDING
 
     Time Warner Cable has been engaged in a plan to upgrade the technological
capability and reliability of its cable television systems and develop new
services, which it believes will position the business for sustained, long-term
growth. Capital spending by TWE's Cable division amounted to $1.401 billion in
1997, compared to $1.348 billion in 1996. Capital spending includes over $100
million in each year relating to Primestar, which is expected to be eliminated
in 1998 upon the consummation of the Primestar Transactions (as described more
fully hereinafter). Capital spending by TWE's Cable division for 1998 is
budgeted to be approximately $1.4 billion and is expected to continue to be
funded by cable operating cash flow. In exchange for certain flexibility in
establishing cable rate pricing structures for regulated services that went into
effect on January 1, 1996 and
 
                                      F-71
 

<PAGE>
<PAGE>

                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
        OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
 
consistent with Time Warner Cable's long-term strategic plan, Time Warner Cable
agreed with the FCC to invest a total of $4 billion in capital costs in
connection with the upgrade of its cable infrastructure, which is expected to be
substantially completed over a five-year period ending December 31, 2000. The
agreement with the FCC covers all of the cable operations of Time Warner Cable,
including the owned or managed cable television systems of TWE, TWE-A/N and Time
Warner. As discussed more fully below, management expects to continue to finance
such level of investment through cable operating cash flow and the development
of new revenue streams from expanded programming options, high-speed Internet
access, telephony and other services.
 
CABLE FINANCING STRATEGY
 
     Time Warner's and TWE's cable financing strategy is to continue to use
cable operating cash flow to finance the level of capital spending necessary to
upgrade the technological capability of its cable television systems and develop
new services, while pursuing opportunities to reduce both existing debt and its
share of future funding requirements related to the cable television business
and related ancillary businesses. Consistent with this strategy, Time Warner,
TWE and TWE-A/N have recently announced or consummated certain transactions,
primarily consisting of (i) a series of transactions with TCI Communications,
Inc. ('TCI'), a subsidiary of Tele-Communications, Inc., to establish two, new
strategic joint ventures, expand an existing joint venture and exchange certain
cable television systems (collectively, the 'TCI Cable Transactions'), (ii) the
transfer of TWE's and TWE-A/N's direct broadcast satellite operations and
related assets to a separate entity, as well as certain related transactions and
(iii) the transfer by a wholly owned subsidiary of Time Warner of cable
television systems (or interests therein) serving approximately 650,000
subscribers to TWE-A/N, subject to approximately $1 billion of debt, in exchange
for common and preferred partnership interests therein, as well as certain
related transactions (collectively, the 'TWE-A/N Transfers'). Each of these
transactions is discussed more fully below.
 
TCI Cable Transactions
 
     In September 1997, Time Warner, TWE, TWE-A/N and TCI signed a letter of
intent to enter into a series of agreements to (i) form two cable television
joint ventures in the Houston and south Texas areas that will be managed by TWE
and own cable television systems serving an aggregate 1.1 million subscribers,
subject to approximately $1.4 billion of debt, (ii) expand an existing joint
venture in Kansas City, which is managed by TWE, through the contribution by TCI
of a contiguous cable television system serving approximately 95,000
subscribers, subject to approximately $200 million of debt, and (iii) exchange
various cable television systems owned by Time Warner and TWE serving over
500,000 subscribers (of which cable television systems serving approximately
400,000 subscribers are owned by TWE) for other cable television systems of
comparable size in an effort to enhance each company's geographic clusters of
cable television properties. The joint ventures will be accounted for under the
equity method of accounting.
 
     As a result of these transactions, TWE expects to reduce debt by
approximately $500 million, benefit from the geographic clustering of cable
television systems and increase the number of subscribers under its management
by approximately 675,000 subscribers, thereby becoming the largest cable
television operator in the U.S. The TCI Cable Transactions are expected to close
periodically throughout 1998 and are subject to the execution of definitive
agreements by the parties and customary closing conditions, including all
necessary governmental and regulatory approvals. There can be no assurance that
such agreements will be completed or that such approvals will be obtained.
 
Primestar Transactions
 
     In June 1997, TWE and the Advance/Newhouse Partnership ('Advance/Newhouse')
entered into agreements to transfer the direct broadcast satellite operations
conducted by TWE and TWE-A/N (the 'DBS Operations') and the 31% partnership
interest in Primestar Partners, L.P. held by TWE-A/N ('Primestar' and
 
                                      F-72
 

<PAGE>
<PAGE>

                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
        OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
 
collectively, the 'Primestar Assets') to a new holding company ('Newco') that is
ultimately expected to be the publicly traded parent of TCI Satellite
Entertainment, Inc. ('TSAT'). Newco will also own the DBS Operations and
Primestar partnership interests currently owned by TSAT and other existing
partners of Primestar. In exchange for contributing its interests in the
Primestar Assets, TWE will receive an approximate 24% equity interest in Newco
and realize approximately $260 million of debt reduction, as well as eliminate
its share of future funding requirements for these operations that will be
separately financed by Newco. In partial consideration for contributing its
indirect interest in certain of the Primestar Assets, Advance/Newhouse will
receive an approximate 6% equity interest in Newco. This transaction is referred
to herein as the 'Primestar Roll-up Transaction.'
 
     In a related transaction, Primestar also entered into an agreement in June
1997 with The News Corporation Limited, MCI Telecommunications Corporation and
American Sky Broadcasting LLC ('ASkyB'), pursuant to which Primestar (or, under
certain circumstances, Newco) will acquire certain assets relating to the
high-power, direct broadcast satellite business of ASkyB (the 'Primestar ASkyB
Transaction' and, when taken together with the Primestar Roll-up Transaction,
the 'Primestar Transactions'). In exchange for such assets, ASkyB will receive
non-voting securities of Newco that will be convertible into non-voting common
stock of Newco and, accordingly, will reduce TWE's equity interest in Newco to
approximately 16% on a fully diluted basis.
 
     The Primestar Transactions are not conditioned on each other and are
expected to close independently. The Primestar Roll-up Transaction is expected
to close on or about April 1, 1998. The Primestar ASkyB Transaction is expected
to close in 1998, subject to customary closing conditions, including all
necessary governmental and regulatory approvals, including the approval of the
FCC. There can be no assurance that such approvals will be obtained.
 
TWE-A/N Transfers
 
     In early 1998, Time Warner (through a wholly owned subsidiary) contributed
cable television systems (or interests therein) serving approximately 650,000
subscribers to TWE-A/N, subject to approximately $1 billion of debt, in exchange
for common and preferred partnership interests therein, and completed certain
related transactions. The cable television systems transferred to TWE-A/N were
formerly owned by TWI Cable Inc. ('TWI Cable'), a wholly owned subsidiary of
Time Warner, and Paragon, a partnership formerly owning cable television systems
serving approximately 1 million subscribers that was previously wholly owned by
subsidiaries of Time Warner, with 50% beneficially owned in the aggregate by TWE
and TWE-A/N. The TWE-A/N Transfers increased the under-leveraged capitalization
of TWE-A/N and consequently, TWE. The debt assumed by TWE-A/N has been
guaranteed by TWI Cable and certain of its subsidiaries, including Paragon.
 
     As part of the TWE-A/N Transfers, TWE exchanged substantially all of its
beneficial interests in Paragon for an equivalent share of Paragon's cable
television systems (or interests therein) serving approximately 500,000
subscribers. TWE, in turn, transferred such systems and certain related assets
to TWE-A/N in exchange for TWE-A/N's beneficial interest in Paragon and in
satisfaction of certain pre-existing obligations to TWE-A/N. This resulted in
wholly owned subsidiaries of Time Warner owning 100% of the restructured Paragon
entity, with less than 1% beneficially held for TWE. Accordingly, effective as
of January 1, 1998, TWE will deconsolidate Paragon. Because this transaction
represented an exchange of TWE's and TWE-A/N's beneficial interests in Paragon
for an equivalent amount of its cable television systems, it did not have a
significant economic impact on Time Warner, TWE or TWE-A/N.
 
     In connection with the TWE-A/N Transfers, Advance/Newhouse made a capital
contribution to TWE-A/N in order to maintain its 33.3% common partnership
interest therein. Accordingly, TWE-A/N is now owned
 
                                      F-73
 

<PAGE>
<PAGE>

                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
        OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
 
65.2% by TWE, 33.3% by Advance/Newhouse and 1.5% indirectly by Time Warner. The
TWE-A/N Transfers will be accounted for effective as of January 1, 1998.
 
SIX FLAGS
 
     In February 1998, TWE entered into an agreement to sell its remaining 49%
interest in Six Flags to Premier Parks Inc. ('Premier'), a regional theme park
operator, for approximately $375 million of cash and $100 million of convertible
preferred stock. TWE expects to use the net proceeds from this transaction,
after taxes and transaction costs, to reduce debt. As part of the transaction,
TWE will continue to license its animated cartoon and comic book characters to
Six Flags's theme parks and will similarly license such rights to Premier's
theme parks in the United States and Canada under a long-term agreement covering
an aggregate of twenty-five existing and all future locations. The transaction
is expected to close in the second quarter of 1998, subject to customary closing
conditions, including the successful completion of certain equity offerings by
Premier.
 
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 the potential
exploitation of 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, basic cable, network and syndicated television
exhibition, amounted to $2.126 billion at December 31, 1997, compared to $1.502
billion at December 31, 1996 (including amounts relating to TWE's cable
television networks of $238 million and $189 million, respectively, and to Time
Warner's cable television networks of $481 million in 1997 and $274 million in
1996).
 
     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
 
                                      F-74
 

<PAGE>
<PAGE>

                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
        OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
 
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. In order to
accelerate the receipt of cash under these licensing contracts, TWE established
a $600 million securitization facility in 1997 and received approximately $300
million of net proceeds thereunder. The remaining portion of backlog for which
cash advances have not already been received continues to have 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
 
Foreign Exchange Contracts
 
     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, 1997, 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 are generally 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, 1997,
Time Warner had contracts for the sale of $507 million and the purchase of $139
million of foreign currencies at fixed rates. Of Time Warner's $368 million net
sale contract position, none of the foreign exchange purchase contracts and $105
million of the foreign exchange sale contracts related to TWE's foreign currency
exposure, compared to contracts for the sale of $102 million of foreign
currencies at December 31, 1996.
 
     Based on Time Warner's outstanding foreign exchange contracts related to
TWE's exposure at December 31, 1997, each 5% devaluation of the U.S. dollar as
compared to the level of foreign exchange rates for currencies under contract at
December 31, 1997 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, 1997 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.
 
Asian Financial Markets
 
     During 1997, the Asian financial markets experienced significant
instability. Because less than 5% of TWE's revenues are derived from the sale of
products and services in Asia, management does not believe that the state of the
Asian financial markets poses a material risk to TWE's operations.
 
                                      F-75
 

<PAGE>
<PAGE>

                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
        OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
 
YEAR 2000 TECHNOLOGY PREPAREDNESS
 
     TWE is currently working to resolve the potential impact of the year 2000
on the processing of time-sensitive information by its computerized information
systems. Year 2000 issues may arise if computer programs have been written using
two digits (rather than four) to define the applicable year. In such case,
programs that have time-sensitive logic may recognize a date using '00' as the
year 1900 rather than the year 2000, which could result in miscalculations or
system failures. Management is in the process of completing a review of
significant software and equipment used in TWE's operations and, to the extent
practicable, in the operations of its key business partners, in order to
determine if any year 2000 risks exist that may be material to TWE as a whole.
This process includes an assessment of year 2000 risks on an ongoing basis and
the identification of practical remediation measures that could be taken on a
timely basis to alter, validate or replace time-sensitive software. Management
has already begun implementing certain of these measures and intends to complete
its remediation efforts prior to any anticipated material impact on its
computerized information systems. Costs of addressing potential problems have
not been material to date and, based on preliminary information, are not
currently expected to have a material adverse impact on TWE's financial
position, results of operations or cash flows in future periods. However, if
TWE, its customers or vendors are unable to resolve such processing issues in a
timely manner, it could result in a material financial risk. Accordingly,
management plans to devote the resources it concludes are appropriate to resolve
all significant year 2000 issues in a timely manner.
 
                                      F-76


<PAGE>
<PAGE>

                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
                           CONSOLIDATED BALANCE SHEET
                                  DECEMBER 31,
                                   (MILLIONS)
 
<TABLE>
<CAPTION>
                                                                                                  1997         1996
                                                                                                 -------      -------
<S>                                                                                              <C>          <C>
ASSETS
CURRENT ASSETS
Cash and equivalents..........................................................................   $   322      $   216
Receivables, including $385 and $383 million due from Time Warner,
  less allowances of $424 and $373 million....................................................     1,914        1,637
Inventories...................................................................................     1,204        1,134
Prepaid expenses..............................................................................       182          159
                                                                                                 -------      -------
Total current assets..........................................................................     3,622        3,146
 
Noncurrent inventories........................................................................     2,254        2,263
Loan receivable from Time Warner..............................................................       400          400
Investments...................................................................................       315          351
Property, plant and equipment, net............................................................     6,557        5,999
Cable television franchises...................................................................     3,063        3,054
Goodwill......................................................................................     3,859        3,996
Other assets..................................................................................       661          764
                                                                                                 -------      -------
Total assets..................................................................................   $20,731      $19,973
                                                                                                 -------      -------
                                                                                                 -------      -------
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES
Accounts payable..............................................................................   $ 1,123      $   935
Participations and programming costs payable..................................................     1,176        1,393
Debt due within one year......................................................................         8            7
Other current liabilities, including $184 and $82 million due to Time Warner..................     1,667        1,740
                                                                                                 -------      -------
Total current liabilities.....................................................................     3,974        4,075
 
Long-term debt................................................................................     5,990        5,676
Other long-term liabilities, including $477 and $138 million due to Time Warner...............     1,873        1,085
Minority interests............................................................................     1,210        1,020
Preferred stock of subsidiary holding solely a mortgage note of its parent....................       233           --
Time Warner General Partners' Senior Capital..................................................     1,118        1,543
 
PARTNERS' CAPITAL
Contributed capital...........................................................................     7,537        7,537
Undistributed partnership earnings (deficit)..................................................    (1,204)        (963)
                                                                                                 -------      -------
Total partners' capital.......................................................................     6,333        6,574
                                                                                                 -------      -------
Total liabilities and partners' capital.......................................................   $20,731      $19,973
                                                                                                 -------      -------
                                                                                                 -------      -------
</TABLE>
 
See accompanying notes.
 
                                      F-77
 

<PAGE>
<PAGE>

                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
                      CONSOLIDATED STATEMENT OF OPERATIONS
                            YEARS ENDED DECEMBER 31,
                                   (MILLIONS)
 
<TABLE>
<CAPTION>
                                                                                        1997         1996         1995
                                                                                       -------      -------      ------
<S>                                                                                    <C>          <C>          <C>
Revenues (a)........................................................................   $11,318      $10,852      $9,517
                                                                                       -------      -------      ------
Cost of revenues (a)(b).............................................................     7,406        7,441       6,597
Selling, general and administrative (a)(b)..........................................     2,468        2,333       1,960
                                                                                       -------      -------      ------
Operating expenses..................................................................     9,874        9,774       8,557
                                                                                       -------      -------      ------
Business segment operating income...................................................     1,444        1,078         960
Interest and other, net (a).........................................................      (345)        (522)       (580)
Minority interest...................................................................      (305)        (207)       (133)
Corporate services (a)..............................................................       (72)         (69)        (64)
                                                                                       -------      -------      ------
Income before income taxes..........................................................       722          280         183
Income taxes........................................................................       (85)         (70)        (86)
                                                                                       -------      -------      ------
Income before extraordinary item....................................................       637          210          97
Extraordinary loss on retirement of debt............................................       (23)          --         (24)
                                                                                       -------      -------      ------
Net income..........................................................................   $   614      $   210      $   73
                                                                                       -------      -------      ------
                                                                                       -------      -------      ------
</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, 1997, 1996 and 1995, respectively: revenues-$431 million, $198 million
    and $56 million; cost of revenues-$(167) million, $(95) million and $(54)
    million; selling, general and administrative-$18 million, $(38) million and
    $(61) million; interest and other, net-$30 million, $30 million and $24
    million; and corporate expenses-$(72) million, $(69) million and $(64)
    million (Note 14).
 
<TABLE>
<S>                                                                                    <C>          <C>          <C>
(b) Includes depreciation and amortization expense of:..............................   $ 1,370      $ 1,235      $1,039
                                                                                       -------      -------      ------
                                                                                       -------      -------      ------
</TABLE>
 
See accompanying notes.
 
                                      F-78
 

<PAGE>
<PAGE>

                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
                      CONSOLIDATED STATEMENT OF CASH FLOWS
                            YEARS ENDED DECEMBER 31,
                                   (MILLIONS)
 
<TABLE>
<CAPTION>
                                                                                        1997         1996         1995
                                                                                       -------      -------      -------
<S>                                                                                    <C>          <C>          <C>
OPERATIONS
Net income..........................................................................   $   614      $   210      $    73
Adjustments for noncash and nonoperating items:
Extraordinary loss on retirement of debt............................................        23           --           24
Depreciation and amortization.......................................................     1,370        1,235        1,039
Equity in losses of investee companies, net of distributions........................        57           38           84
Changes in operating assets and liabilities:
    Receivables.....................................................................      (273)         (50)        (159)
    Inventories.....................................................................      (114)        (637)        (118)
    Accounts payable and other liabilities..........................................       393          970          679
    Other balance sheet changes.....................................................      (236)         146         (103)
                                                                                       -------      -------      -------
 
Cash provided by operations.........................................................     1,834        1,912        1,519
                                                                                       -------      -------      -------
 
INVESTING ACTIVITIES
Investments and acquisitions........................................................      (172)        (146)        (203)
Capital expenditures................................................................    (1,565)      (1,719)      (1,535)
Investment proceeds.................................................................       485          612        1,050
                                                                                       -------      -------      -------
 
Cash used by investing activities...................................................    (1,252)      (1,253)        (688)
                                                                                       -------      -------      -------
 
FINANCING ACTIVITIES
Borrowings..........................................................................     3,400          215        2,484
Debt repayments.....................................................................    (3,085)        (716)      (3,596)
Issuance of preferred stock of subsidiary...........................................       243           --           --
Collections on note receivable from U S WEST........................................        --          169          602
Capital distributions...............................................................      (934)        (228)      (1,088)
Other...............................................................................      (100)         (92)         (95)
                                                                                       -------      -------      -------
 
Cash used by financing activities...................................................      (476)        (652)      (1,693)
                                                                                       -------      -------      -------
 
INCREASE (DECREASE) IN CASH AND EQUIVALENTS.........................................       106            7         (862)
 
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD.........................................       216          209        1,071
                                                                                       -------      -------      -------
 
CASH AND EQUIVALENTS AT END OF PERIOD...............................................   $   322      $   216      $   209
                                                                                       -------      -------      -------
                                                                                       -------      -------      -------
</TABLE>
 
See accompanying notes.
 
                                      F-79
 

<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, 1994...................     $ 1,663        $ 7,398         $  (394)        $ (771)      $ 6,233
Net income.....................................                                         73                           73
Decrease in unrealized gains on securities.....                                         (4)                          (4)
Foreign currency translation adjustments.......                                         --                           --
                                                                                -------------                  ---------
    Comprehensive income.......................                                         69                           69
Distributions..................................        (366)                          (421)                        (421)
Reacquisition of Time Warner Service
  Partnership Assets...........................                        124                                          124
Allocation of income...........................         129                           (129)                        (129)
Collections....................................                                                       602           602
                                                  -----------    -----------    -------------       -----      ---------
BALANCE AT DECEMBER 31, 1995...................       1,426          7,522            (875)          (169)        6,478
Net income.....................................                                        210                          210
Increase in unrealized gains on securities.....                                          4                            4
Foreign currency translation adjustments.......                                         14                           14
                                                                                -------------                  ---------
    Comprehensive income.......................                                        228                          228
Distributions..................................                                       (199)                        (199)
Capital contributions..........................                         15                                           15
Allocation of income...........................         117                           (117)                        (117)
Collections....................................                                                       169           169
                                                  -----------    -----------    -------------       -----      ---------
BALANCE AT DECEMBER 31, 1996...................       1,543          7,537            (963)            --         6,574
Net income.....................................                                        614                          614
Increase in unrealized gains on securities.....                                          7                            7
Foreign currency translation adjustments.......                                        (29)                         (29)
                                                                                -------------                  ---------
    Comprehensive income.......................                                        592                          592
Distributions..................................        (535)                          (723)                        (723)
Allocation of income...........................         110                           (110)                        (110)
                                                  -----------    -----------    -------------       -----      ---------
BALANCE AT DECEMBER 31, 1997...................     $ 1,118        $ 7,537         $(1,204)        $   --       $ 6,333
                                                  -----------    -----------    -------------       -----      ---------
                                                  -----------    -----------    -------------       -----      ---------
</TABLE>
 
See accompanying notes.
 
                                      F-80


<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 and television broadcasting; 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) HBO and
Cinemax, the leading pay television services and (4) Time Warner Cable,
currently the second largest operator of cable television systems in the U.S.
 
     The operating results of TWE's various business interests are presented
herein as an indication of financial performance (Note 12). Except for start-up
losses incurred in connection with The WB Network, TWE's principal business
interests generate significant operating income and cash flow from operations.
The cash flow from operations generated by such business interests is
considerably greater than their operating income due to significant amounts of
noncash amortization of intangible assets recognized principally in Time Warner
Companies, Inc.'s ('Time Warner')* $14 billion acquisition of Warner
Communications Inc. ('WCI') in 1989 and $1.3 billion acquisition of the minority
interest in American Television and Communications Corporation ('ATC') in 1992,
a portion of which cost was allocated to TWE upon the capitalization of the
partnership. Noncash amortization of intangible assets recorded by TWE's
businesses amounted to $430 million in 1997, $436 million in 1996 and $444
million in 1995.
 
     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. Certain of
Time Warner's subsidiaries are the general partners of TWE ('Time Warner General
Partners').
 
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
Communications ('Paragon') effective as of July 6, 1995. Certain
reclassifications have been made to the prior years' financial statements to
conform to the 1997 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
 
------------
 
* 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 (now known as Time
  Warner Companies, Inc., 'TW Companies'), and TW Companies and TBS became
  separate, wholly owned subsidiaries of the new parent company. Unless the
  context indicates otherwise, references herein to 'Time Warner' refer to TW
  Companies.
 
                                      F-81
 

<PAGE>
<PAGE>

                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
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 controlling voting interest ('subsidiaries'), as if
TWE and its subsidiaries were a single company. Significant intercompany
accounts and transactions between the consolidated companies have been
eliminated. Significant accounts and transactions between TWE and its partners
and affiliates are disclosed as related party transactions (Note 14).
 
     Investments in companies in which TWE has significant influence, but less
than a controlling voting interest, are accounted for using the equity method.
Under the equity method, only TWE's investment in and amounts due to and from
the equity investee are included in the consolidated balance sheet, only TWE's
share of the investee's earnings is included in the consolidated operating
results, and only the dividends, cash distributions, loans or other cash
received from the investee, less any additional cash investments, loan
repayments or other cash paid to the investee are included in the consolidated
cash flows.
 
     Investments in companies in which TWE does not have a controlling interest
or an ownership and voting interest so large as to exert significant influence
are accounted for at market value if the investments are publicly traded and
there are no resale restrictions, or at cost, if the sale of a publicly traded
investment is restricted or if the investment is not publicly traded. Unrealized
gains and losses on investments accounted for at market value are reported in
partners' capital until the investment is sold, at which time the realized gain
or loss is included in income. Dividends and other distributions of earnings
from both market value and cost method investments are included in income when
declared.
 
FOREIGN CURRENCY
 
     The financial position and operating results of substantially all 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 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
 
                                      F-82
 

<PAGE>
<PAGE>

                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
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 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. Thereafter,
feature films are distributed 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 the related 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 $2.126 billion and $1.502 billion
at December 31, 1997 and 1996, respectively (including amounts relating to the
licensing of film product to TWE's cable television networks of $238 million and
$189 million, respectively, and to Time Warner's cable television networks of
$481 million and $274 million, respectively).
 
     Inventories of theatrical and television product are stated at the lower of
amortized cost or net realizable value. Cost principally consists of direct
production costs and production overhead. 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-83
 

<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 that
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 $288 million in 1997, $332 million in 1996 and $241 million in 1995.
 
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.
 
FINANCIAL INSTRUMENTS
 
     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.
 
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,
                                                                                              -------------------
                                                                                               1997        1996
                                                                                              -------     -------
                                                                                                  (MILLIONS)
<S>                                                                                           <C>         <C>
Land and buildings.........................................................................   $   804     $   780
Cable television equipment.................................................................     7,423       6,602
Furniture, fixtures and other equipment....................................................     2,310       2,129
                                                                                              -------     -------
                                                                                               10,537       9,511
Less accumulated depreciation..............................................................    (3,980)     (3,512)
                                                                                              -------     -------
Total......................................................................................   $ 6,557     $ 5,999
                                                                                              -------     -------
                                                                                              -------     -------
</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, film and television libraries
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.
 
                                      F-84
 

<PAGE>
<PAGE>

                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
However, accounting recognition is not given to any increasing asset value that
may be associated with the collection of the underlying copyrighted material.
Additionally, costs incurred to create or extend brands, such as the start-up of
The WB Network, generally result in losses over an extended development period
and are recognized as a reduction of income as incurred, while any corresponding
brand value created is not recognized as an intangible asset in the consolidated
balance sheet. On the other hand, intangible assets acquired in business
combinations accounted for by the purchase method of accounting are capitalized
and amortized over their expected useful life as a noncash charge against future
results of operations. Accordingly, the intangible assets reported in the
consolidated balance sheet do not reflect the fair value of TWE's internally
generated intangible assets, but rather are limited to intangible assets
resulting from certain acquisitions in which the cost of the acquired companies
exceeded the fair value of their tangible assets at the time of acquisition.
 
     TWE amortizes goodwill over periods up to forty years using the
straight-line method. Cable television franchises, film and television libraries
and other intangible assets are amortized over periods up to twenty years using
the straight-line method. Amortization of intangible assets amounted to $430
million in 1997, $436 million in 1996 and $444 million in 1995. Accumulated
amortization of intangible assets at December 31, 1997 and 1996 amounted to
$3.020 billion and $2.623 billion, respectively.
 
     TWE periodically reviews the carrying value of acquired intangible assets
for each acquired entity 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. If it is
determined 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 reduced by a
charge to operations in the amount of the impairment. An impairment charge is
measured as any deficiency in the amount of estimated undiscounted future cash
flows of the acquired business available 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
prescribed by FASB Statement No. 109, 'Accounting for Income Taxes.'
 
COMPREHENSIVE INCOME
 
     Effective January 1, 1997, TWE adopted FASB Statement No. 130, 'Reporting
Comprehensive Income' ('FAS 130'). The new rules establish standards for the
reporting of comprehensive income and its components in financial statements.
Comprehensive income consists of net income and other gains and losses affecting
partners' capital that, under generally accepted accounting principles, are
excluded from net income. For TWE, such items consist primarily of unrealized
gains and losses on marketable equity investments and foreign currency
translation gains and losses. The adoption of FAS 130 did not have a material
effect on TWE's primary financial statements, but did affect the presentation of
the accompanying consolidated statement of partnership capital.
 
SEGMENT INFORMATION
 
     On December 31, 1997, TWE adopted FASB Statement No. 131, 'Disclosures
about Segments of an Enterprise and Related Information' ('FAS 131'). The new
rules establish revised standards for public companies relating to the reporting
of financial and descriptive information about their operating segments in
financial statements. The adoption of FAS 131 did not have a material effect on
TWE's primary financial statements, but did affect the disclosure of segment
information contained elsewhere herein (Note 12).
 
                                      F-85
 

<PAGE>
<PAGE>

                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
2. ACQUISITIONS AND DISPOSITIONS
 
TCI CABLE TRANSACTIONS
 
     In September 1997, Time Warner Inc., TWE, the TWE-Advance/Newhouse
Partnership ('TWE-A/N') and TCI Communications, Inc. ('TCI'), a subsidiary of
Tele-Communications, Inc., signed a letter of intent to enter into a series of
agreements to (i) form two cable television joint ventures in the Houston and
south Texas areas that will be managed by TWE and own cable television systems
serving an aggregate 1.1 million subscribers, subject to approximately $1.4
billion of debt, (ii) expand an existing joint venture in Kansas City, which is
managed by TWE, through the contribution by TCI of a contiguous cable television
system serving approximately 95,000 subscribers, subject to approximately $200
million of debt, and (iii) exchange various cable television systems owned by
Time Warner and TWE and serving over 500,000 subscribers (of which cable
television systems serving approximately 400,000 subscribers are owned by TWE)
for other cable television systems of comparable size in an effort to enhance
each company's geographic clusters of cable television properties (collectively,
the 'TCI Cable Transactions'). The joint ventures will be accounted for under
the equity method of accounting.
 
     As a result of these transactions, TWE expects to reduce debt by
approximately $500 million, benefit from the geographic clustering of cable
television systems and increase the number of subscribers under its management
by approximately 675,000 subscribers. The TCI Cable Transactions are expected to
close periodically throughout 1998, subject to the execution of definitive
agreements by the parties and customary closing conditions, including all
necessary governmental and regulatory approvals. There can be no assurance that
such agreements will be completed or that such approvals will be obtained.
 
PRIMESTAR TRANSACTIONS
 
     In June 1997, TWE and the Advance/Newhouse Partnership ('Advance/Newhouse')
entered into agreements to transfer the direct broadcast satellite operations
conducted by TWE and TWE-A/N (the 'DBS Operations') and the 31% partnership
interest in Primestar Partners, L.P. held by TWE-A/N ('Primestar' and
collectively, the 'Primestar Assets') to a new holding company ('Newco') that is
ultimately expected to be the publicly traded parent of TCI Satellite
Entertainment, Inc. ('TSAT'). Newco will also own the DBS Operations and
Primestar partnership interests currently owned by TSAT and other existing
partners of Primestar. In exchange for contributing its interests in the
Primestar Assets, TWE will receive an approximate 24% equity interest in Newco
and realize approximately $260 million of debt reduction, as well as eliminate
its share of future funding requirements for these operations that will be
separately financed by Newco. In partial consideration for contributing its
indirect interest in certain of the Primestar Assets, Advance/Newhouse will
receive an approximate 6% equity interest in Newco. This transaction is
collectively referred to herein as the 'Primestar Roll-up Transaction.'
 
     In a related transaction, Primestar also entered into an agreement in June
1997, with The News Corporation Limited, MCI Telecommunications Corporation
('MCI') and American Sky Broadcasting LLC ('ASkyB'), pursuant to which Primestar
(or, under certain circumstances, Newco) will acquire certain assets relating to
the high-power, direct broadcast satellite business of ASkyB (the 'Primestar
ASkyB Transaction' and, when taken together with the Primestar Roll-up
Transaction, the 'Primestar Transactions'). In exchange for such assets, ASkyB
will receive non-voting securities of Newco that will be convertible into
non-voting common stock of Newco and, accordingly, will reduce TWE's equity
interest in Newco to approximately 16% on a fully diluted basis.
 
     The Primestar Transactions are not conditioned on each other and are
expected to close independently. The Primestar Roll-up Transaction is expected
to close on or about April 1, 1998. The Primestar ASkyB Transaction is expected
to close in 1998, subject to customary closing conditions, including all
necessary governmental and
 
                                      F-86
 

<PAGE>
<PAGE>

                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
regulatory approvals, including the approval of the Federal Communications
Commission. There can be no assurance that such approvals will be obtained.
 
TWE-A/N TRANSFERS
 
     In April 1995, TWE formed a cable television joint venture with
Advance/Newhouse to which Advance/Newhouse and TWE contributed cable television
systems (or interests therein) serving approximately 4.5 million subscribers, as
well as certain foreign cable investments and programming investments that
included an aggregate 31% interest in Primestar. Upon formation of TWE-A/N, TWE,
which is the managing partner, owned a 66.7% common partnership interest therein
and Advance/Newhouse owned a 33.3% common partnership interest. TWE consolidates
the partnership and the common partnership 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. In addition,
beginning on April 1, 1998, TWE or Advance/Newhouse can initiate a restructuring
of the partnership, in which Advance/Newhouse would withdraw from the
partnership and 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.
 
     In early 1998, Time Warner (through a wholly owned subsidiary) contributed
cable television systems (or interests therein) serving approximately 650,000
subscribers to TWE-A/N, subject to approximately $1 billion of debt, in exchange
for common and preferred partnership interests therein, and completed certain
related transactions (collectively, the 'TWE-A/N Transfers'). The cable
television systems transferred to TWE-A/N were formerly owned by TWI Cable Inc.
('TWI Cable'), a wholly owned subsidiary of Time Warner, and Paragon, a
partnership formerly owning cable television systems serving approximately 1
million subscribers that was previously wholly owned by subsidiaries of Time
Warner, with 50% beneficially owned in the aggregate by TWE and TWE-A/N. The
debt assumed by TWE-A/N has been guaranteed by TWI Cable and certain of its
subsidiaries, including Paragon.
 
     As part of the TWE-A/N Transfers, TWE exchanged substantially all of its
beneficial interest in Paragon for an equivalent share of Paragon's cable
television systems (or interests therein) serving approximately 500,000
subscribers. TWE, in turn, transferred such systems and certain related assets
to TWE-A/N in exchange for TWE-A/N's beneficial interest in Paragon and in
satisfaction of certain pre-existing obligations to TWE-A/N. This resulted in
wholly owned subsidiaries of Time Warner owning 100% of the restructured Paragon
entity, with less than 1% beneficially held for TWE. Accordingly, effective as
of January 1, 1998, TWE will deconsolidate Paragon. Because this transaction
represented an exchange of TWE's and TWE-A/N's beneficial interests in Paragon
for an equivalent amount of its cable television systems, it did not have a
significant economic impact on Time Warner, TWE or TWE-A/N.
 
     In connection with the TWE-A/N Transfers, Advance/Newhouse made a capital
contribution to TWE-A/N in order to maintain its 33.3% common partnership
interest therein. Accordingly, TWE-A/N is now owned 65.2% by TWE, 33.3% by
Advance/Newhouse and 1.5% indirectly by Time Warner. The TWE-A/N Transfers will
be accounted for effective as of January 1, 1998.
 
SALE OR EXCHANGE OF CABLE TELEVISION SYSTEMS
 
     In 1997, in an effort to enhance its geographic clustering of cable
television properties, TWE sold or exchanged various cable television systems.
As a result of these transactions, TWE recognized net, pretax gains of
approximately $200 million, which have been included in operating income in the
accompanying consolidated statement of operations.
 
                                      F-87
 

<PAGE>
<PAGE>

                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
SIX FLAGS
 
     In June 1995, TWE sold an initial 51% 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 was deconsolidated and TWE's remaining 49% interest in Six Flags has
been 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 was deferred by TWE principally as a
result of its guarantee of certain third-party, zero-coupon indebtedness of Six
Flags due in 1999.
 
     In February 1998, TWE entered into an agreement to sell its remaining 49%
interest in Six Flags to Premier Parks Inc. ('Premier'), a regional theme park
operator, for approximately $375 million of cash and $100 million of convertible
preferred stock. TWE expects to use the net proceeds from this transaction,
after taxes and transaction costs, to reduce debt. As part of the transaction,
TWE will continue to license its animated cartoon and comic book characters to
Six Flags's theme parks and will similarly license such rights to Premier's
theme parks in the United States and Canada under a long-term agreement covering
an aggregate of twenty-five existing and all future locations. The transaction
is expected to close in the second quarter of 1998, subject to customary closing
conditions, including the successful completion of certain equity offerings by
Premier.
 
PRO FORMA FINANCIAL INFORMATION
 
     Along with the formation of TWE-A/N and the partial sale of Six Flags in
1995, TWE completed a number of other transactions that also affected the
comparability of its 1995 operating results (the '1995 Transactions'). The pro
forma effect of these transactions on 1995 operating results is set forth below.
No pro forma information has been presented for 1997 and 1996 because such
transactions are already reflected in TWE's historical financial statements for
such periods and, with regard to the acquisitions and dispositions announced or
closed subsequent to 1995 as described above, there was no material effect on
the comparability of the accompanying consolidated financial statements.
 
     On a pro forma basis, giving effect to the 1995 Transactions, including (i)
the formation of TWE-A/N, (ii) the refinancing of approximately $2.6 billion of
bank debt, (iii) the consolidation of Paragon, (iv) the reacquisition of the
Time Warner Service Partnership Assets (Note 8), (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 expense of $635 million,
operating income before noncash amortization of intangible assets of $1.396
billion, operating income of $962 million, income before extraordinary item of
$172 million and net income of $148 million.
 
                                      F-88
 

<PAGE>
<PAGE>

                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
3. INVENTORIES
  TWE's inventories consist of:
 
<TABLE>
<CAPTION>
                                                                                     DECEMBER 31,
                                                                   -------------------------------------------------
                                                                            1997                       1996
                                                                   ----------------------     ----------------------
                                                                   CURRENT     NONCURRENT     CURRENT     NONCURRENT
                                                                   -------     ----------     -------     ----------
                                                                                      (MILLIONS)
<S>                                                                <C>         <C>            <C>         <C>
Film costs:
     Released, less amortization................................   $  545        $  658       $  544        $  535
     Completed and not released.................................      170            50          168            42
     In process and other.......................................       27           595           21           704
     Library, less amortization.................................       --           612           --           664
Programming costs, less amortization............................      382           339          319           318
Merchandise.....................................................       80            --           82            --
                                                                   -------     ----------     -------     ----------
Total...........................................................   $1,204        $2,254       $1,134        $2,263
                                                                   -------     ----------     -------     ----------
                                                                   -------     ----------     -------     ----------
</TABLE>
 
     Excluding the Library, the total cost incurred in the production of
theatrical and television product (including direct production costs, production
overhead and certain exploitation costs, such as film prints and home
videocassettes) amounted to $2.360 billion in 1997, $2.543 billion in 1996 and
$2.011 billion in 1995; and the total cost amortized amounted to $2.329 billion,
$1.998 billion and $2 billion, respectively. Excluding the Library, the
unamortized cost of completed films at December 31, 1997 amounted to $1.423
billion, more than 90% of which is expected to be amortized within three years
after release.
 
4. INVESTMENTS
  TWE's investments consist of:
 
<TABLE>
<CAPTION>
                                                                                                   DECEMBER 31,
                                                                                                -------------------
                                                                                                 1997        1996
                                                                                                -------     -------
                                                                                                    (MILLIONS)
<S>                                                                                             <C>         <C>
Equity method investments....................................................................    $ 238       $ 298
Cost method investments......................................................................       77          53
                                                                                                -------     -------
Total........................................................................................    $ 315       $ 351
                                                                                                -------     -------
                                                                                                -------     -------
</TABLE>
 
     In the first quarter of 1997, TWE sold its 58% interest in E! Entertainment
Television, Inc. A pretax gain of approximately $250 million relating to this
sale has been included in the accompanying consolidated statement of operations.
 
                                      F-89
 

<PAGE>
<PAGE>

                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     At December 31, 1997, companies accounted for using the equity method
included: 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 (25% to 50% owned) and
Courtroom Television Network (33% owned). A summary of combined financial
information as reported by the equity investees of TWE is set forth below:
 
<TABLE>
<CAPTION>
                                                                                       YEARS ENDED DECEMBER 31,
                                                                                     ----------------------------
                                                                                      1997       1996       1995
                                                                                     ------     ------     ------
                                                                                              (MILLIONS)
<S>                                                                                  <C>        <C>        <C>
Revenues..........................................................................   $2,207     $1,823     $1,450
Depreciation and amortization.....................................................     (235)      (197)      (195)
Operating income (loss)...........................................................      118         62         (9)
Net loss..........................................................................      (82)      (138)      (168)
Current assets....................................................................      412        624        455
Total assets......................................................................    3,046      3,193      2,416
Current liabilities...............................................................      993        431        405
Long-term debt....................................................................    1,625      2,853      1,778
Total liabilities.................................................................    2,734      2,829      2,323
Total shareholders' equity or partners' capital...................................      312        340         93
</TABLE>
 
5. LONG-TERM DEBT
 
<TABLE>
<CAPTION>
                                                              WEIGHTED AVERAGE                     DECEMBER 31,
                                                              INTEREST RATE AT                   -----------------
                                                              DECEMBER 31, 1997    MATURITIES     1997       1996
                                                              -----------------    -----------   ------     ------
                                                                                                    (MILLIONS)
<S>                                                           <C>                  <C>           <C>        <C>
Bank credit agreement borrowings...........................          6.4%             2002       $1,970     $1,555
Commercial paper...........................................          6.2%             1998          210        310
Fixed-rate senior notes and debentures.....................          8.6%           2002-2033     3,810      3,811
                                                                                                 ------     ------
Total......................................................                                      $5,990     $5,676
                                                                                                 ------     ------
                                                                                                 ------     ------
</TABLE>
 
BANK CREDIT AGREEMENT
 
     In November 1997, TWE and TWE-A/N, together with Time Warner Inc. and
certain of its consolidated subsidiaries, entered into a new, five-year
revolving credit facility (the '1997 Credit Agreement') and terminated their
previously existing bank credit facility (the 'Old Credit Agreement'). This
enabled TWE to reduce its aggregate borrowing availability from $8.3 billion to
$7.5 billion, lower interest rates and refinance approximately $2.1 billion of
its outstanding borrowings under the Old Credit Agreement. In connection
therewith, TWE recognized an extraordinary loss of $23 million in 1997. In
addition, TWE recognized a $24 million extraordinary loss in 1995 related to 
certain other bank refinancings.
 
     The 1997 Credit Agreement permits borrowings in an aggregate amount of up
to $7.5 billion, with no scheduled reduction in credit availability prior to
maturity in November 2002. The borrowers under the 1997 Credit Agreement are
TWE, TWE-A/N, Time Warner Inc., TW Companies, TBS and TWI Cable. Borrowings
under the 1997 Credit Agreement are limited to (i) $7.5 billion in the case of
TWE, (ii) $2 billion in the case of TWE-A/N and (iii) $6 billion in the
aggregate for Time Warner Inc., TW Companies, TBS and TWI Cable, subject in each
case to an aggregate borrowing limit of $7.5 billion and certain other
limitations and adjustments. Such borrowings bear interest at specific rates for
each of the borrowers (generally equal to LIBOR plus a margin initially equal to
40 basis points for TWE and 35 basis points for TWE-A/N) and each borrower is
required to pay a commitment fee on the unused portion of its commitment
(initially equal to .15% per annum for TWE and .125% per annum for TWE-A/N),
which margin and fee vary based on the credit rating or financial leverage of
the applicable borrower. Borrowings may be used for general business purposes
and unused credit is available to support commercial paper borrowings. The 1997
Credit Agreement contains certain covenants generally for each borrower relating
to, among other things, additional indebtedness; liens on assets;
 
                                      F-90
 

<PAGE>
<PAGE>

                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
cash flow coverage and leverage ratios; and dividends, distributions and other
restricted cash payments or transfers of assets from the borrowers to their
respective shareholders, partners or affiliates.
 
TIME WARNER GENERAL PARTNER GUARANTEES
 
     Each Time Warner General Partner has guaranteed a pro rata portion of
approximately $5.8 billion of TWE's debt and accrued interest thereon based on
the relative fair value of the net assets each Time Warner General Partner (or
its predecessor) 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 majority consent
of the holders of the notes and debentures to terminate the Time Warner General
Partner Guarantees. 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 AND MATURITIES
 
     Interest expense was $490 million in 1997, $475 million in 1996 and $571
million in 1995. The weighted average interest rate on TWE's total debt was 7.8%
at December 31, 1997 and 1996.
 
     Annual repayments of long-term debt for the five years subsequent to
December 31, 1997 consist only of $2.78 billion due in 2002. This includes all
borrowings under the 1997 Credit Agreement, as well as any commercial paper
borrowings supported thereby. TWE has the intent and ability under the 1997
Credit Agreement to continue to refinance its commercial paper borrowings on a
long-term basis.
 
6. INCOME TAXES
  Domestic and foreign pretax income (loss) are as follows:
 
<TABLE>
<CAPTION>
                                                                                       YEARS ENDED DECEMBER 31,
                                                                                       ------------------------
                                                                                       1997      1996      1995
                                                                                       ----      ----      ----
                                                                                              (MILLIONS)
<S>                                                                                    <C>       <C>       <C>
Domestic............................................................................   $654      $263      $191
Foreign.............................................................................     68        17        (8)
                                                                                       ----      ----      ----
Total...............................................................................   $722      $280      $183
                                                                                       ----      ----      ----
                                                                                       ----      ----      ----
</TABLE>
 
     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,
                                                                                         ------------------------
                                                                                         1997      1996      1995
                                                                                         ----      ----      ----
                                                                                                (MILLIONS)
<S>                                                                                      <C>       <C>       <C>
Federal:
     Current(1).......................................................................   $  2      $  4      $ 7
     Deferred.........................................................................    (10)       (3)      (5 )
Foreign:
     Current(2).......................................................................     69        86       74
     Deferred.........................................................................     22       (21)       6
State and local:
     Current..........................................................................      4         5        7
     Deferred.........................................................................     (2)       (1)      (3 )
                                                                                         ----      ----      ----
Total income taxes....................................................................   $ 85      $ 70      $86
                                                                                         ----      ----      ----
                                                                                         ----      ----      ----
</TABLE>
 
------------
 
(1) Includes utilization of Six Flags's tax carryforwards in the amount of $16
million in 1995.
(2) Includes foreign withholding taxes of $58 million in 1997, $54 million in
1996 and $60 million in 1995.
 
                                      F-91
 

<PAGE>
<PAGE>

                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     The financial statement basis of TWE's assets exceeds the corresponding tax
basis by $8.1 billion at December 31, 1997, principally as a result of
differences in accounting for depreciable and amortizable assets for financial
statement and income tax purposes.
 
7. PREFERRED STOCK OF SUBSIDIARY
 
     In February 1997, a newly formed, substantially owned subsidiary of TWE
(the 'REIT') issued 250,000 shares of preferred stock ('REIT Preferred Stock').
The REIT is intended to qualify as a real estate investment trust under the
Internal Revenue Code of 1986, as amended. TWE used the aggregate net proceeds
from the transaction of $243 million to reduce its bank debt. The sole asset of
the REIT is a $432 million mortgage note payable by TWE, which has been secured
by certain real estate owned by TWE or its affiliates.
 
     Each share of REIT Preferred Stock is entitled to a liquidation preference
of $1,000 and entitles the holder thereof to receive cumulative cash dividends,
payable quarterly, at the rate of 14.253% per annum through December 30, 2006
and 1% per annum thereafter, which results in an effective dividend yield of
8.48%. Shares of REIT Preferred Stock are redeemable only in the event of
certain changes or proposed changes to the tax laws or regulations to the effect
that dividends paid by the REIT or interest paid under the mortgage note would
not be fully deductible for federal income tax purposes. TWE has the right to
liquidate or dissolve the REIT at any time after December 30, 2006 or, at any
time prior thereto, upon the approval of the holders of at least two-thirds of
the outstanding shares of REIT Preferred Stock.
 
8. TWE PARTNERS' CAPITAL
 
PARTNERSHIP CAPITAL AND ALLOCATION OF INCOME
 
     Each partner's interest in TWE generally consists of the undistributed
priority capital and residual equity amounts that were initially assigned to
that partner or its predecessor based on the estimated fair value of the net
assets each contributed to the partnership ('Undistributed 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, provides for the various priority capital
rates of return as specified in the table below. The sum of Undistributed
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-92
 

<PAGE>
<PAGE>

                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     A summary of the priority of Undistributed Contributed Capital, ownership
of Undistributed Contributed Capital and Cumulative Priority Capital at December
31, 1997 and priority capital rates of return thereon is set forth below:
 
<TABLE>
<CAPTION>
                                                                                                             LIMITED
                                                                                PRIORITY       TIME         PARTNERS
                                                UNDISTRIBUTED    CUMULATIVE     CAPITAL       WARNER     ---------------
                                                 CONTRIBUTED      PRIORITY      RATES OF     GENERAL      TIME      U S
PRIORITY OF UNDISTRIBUTED CONTRIBUTED CAPITAL    CAPITAL(a)       CAPITAL      RETURN(B)     PARTNERS    WARNER    WEST
---------------------------------------------   -------------    ----------    ----------    --------    ------    -----
                                                        (BILLIONS)                                        (OWNERSHIP%)
<S>                                             <C>              <C>           <C>           <C>         <C>       <C>
Senior Capital...............................       $ 0.9          $  1.1          8.00%      100.00%       --       --
Series A Capital.............................         5.6            11.3         13.00%       63.27%    11.22 %   25.51%
Series B Capital.............................         2.9(d)          6.0         13.25%      100.00%       --       --
Residual Capital.............................         3.3(d)          3.3(c)         --(c)     63.27%    11.22 %   25.51%
</TABLE>
 
------------
 
(a) Excludes partnership income or loss allocated thereto.
 
(b) To the extent income allocations are concurrently distributed, the priority
    capital rates of return on the Series A Capital and Series B Capital are 11%
    and 11.25%, respectively.
 
(c) Residual Capital is not entitled to stated priority rates of return and, as
    such, its Cumulative Priority Capital is equal to its Undistributed
    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.
 
(d) The Undistributed Contributed Capital relating to the Series B Capital has
    priority over the priority returns on the Series A Capital. The
    Undistributed Contributed Capital relating to the Residual Capital has
    priority over the priority returns on the Series B Capital and the Series A
    Capital.
 
     Because Undistributed Contributed Capital is generally based on the fair
value of the net assets that each partner initially 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'). After any special tax allocations, partnership income is
allocated 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
Undistributed 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 Series B Capital owned by subsidiaries of Time Warner may be increased
if certain operating performance targets are achieved over a ten-year period
ending on December 31, 2001. In addition, 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.
 
                                      F-93
 

<PAGE>
<PAGE>

                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
CAPITAL DISTRIBUTIONS
 
     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 July 1997, the Time Warner General Partners received a $535 million
distribution from TWE relating to their Senior Capital interests (representing
the return of $455 million of contributed capital and the distribution of $80
million of priority capital return), which, when taken together with a $366
million distribution in 1995 (representing a portion of the priority capital
return) increased the cumulative cash distributions received from TWE on such
interests to $901 million. The Time Warner General Partners' remaining $1.1
billion Senior Capital interests and any undistributed partnership income
allocated thereto (based on an 8% annual rate of return) are required to be
distributed in two annual installments on July 1, 1998 and 1999.
 
     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,
1997 and 1996, TWE had recorded a liability for Stock Option Distributions of
$417 million and $93 million, respectively, based on the unexercised options and
the market prices at such dates of $62.00 and $37.50, respectively, per Time
Warner common share. This liability reflects the accrual of $399 million and $50
million of Stock Option Distributions in 1997 and 1995, respectively, when the
market price of Time Warner common stock increased during such periods, and the
reversal of $16 million of previously accrued Stock Option Distributions in 1996
when the market price of Time Warner common stock declined. TWE paid Stock
Option Distributions to Time Warner in the amount of $75 million in 1997, $13
million in 1996 and $17 million in 1995.
 
     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 are paid to the partners on a current basis. TWE paid Tax
Distributions to the Time Warner General Partners in the amount of $324 million
in 1997, $215 million in 1996 and $680 million in 1995 (of which $334 million
was accrued in prior periods).
 
     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
 
                                      F-94
 

<PAGE>
<PAGE>

                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
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 in 1995, which was recorded as a reduction of Time
Warner General Partners' Series B Capital.
 
     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. Such
cash distributions will generally be made on a priority and pro rata basis with
respect to each partner's interest in the Series A Capital, Series B Capital and
Residual Capital. However, cash distributions to the Time Warner General
Partners with respect to their Series A Capital and Residual Capital interests
will be deferred until the limited partners receive aggregate distributions
(excluding Tax Distributions) of approximately $800 million. Similarly, cash
distributions with respect to the Time Warner General Partners' Series B Capital
interest will be deferred until the limited partners receive aggregate
distributions of $1.6 billion. 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, 1997, no cash distributions have been made to the limited
partners. In addition, if a division of TWE or a substantial portion thereof is
sold, the net proceeds of such sale, less expenses and proceeds used to repay
outstanding debt, will be required to be distributed with respect to the
partners' partnership interests. Similar distributions are required to be made
in the event of a financing or refinancing of debt. Subject to any limitations
on the incurrence of additional debt contained in the TWE partnership and credit
agreements, and the Indenture, TWE may borrow funds to make distributions.
 
9. STOCK OPTION PLANS
 
     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
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," 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 made subsequent to 1994 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,
                                                                                        ------------------------
                                                                                         1997     1996      1995
                                                                                         ----     ----      ----
                                                                                               (MILLIONS)
<S>                                                                                      <C>      <C>       <C>
Net income:
     As reported......................................................................   $614     $210      $73
                                                                                         ----     ----      ----
                                                                                         ----     ----      ----
     Pro forma........................................................................   $584     $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 for 1996 and 1995 is
not comparable to the impact on pro forma net income for 1997, when the pro
forma effect of the three-year vesting period has been fully reflected.
 
     For purposes of applying FAS 123, 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
 
                                      F-95
 

<PAGE>
<PAGE>

                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
to TWE employees in 1997, 1996 and 1995: dividend yields of 1% in all periods;
expected volatility of 22.2%, 21.7% and 22.3%, respectively; risk-free interest
rates of 6.3%, 5.7% and 6.6%, respectively; and expected lives of 5 years in all
periods. The weighted average fair value of an option granted to TWE employees
during the year was $12.18, $10.43 and $11.46 and for the years ended December
31, 1997, 1996 and 1995, respectively. In 1996, Time Warner granted options to
certain TWE executives at exercise prices exceeding the market price of Time
Warner common stock on the date of grant. These above-market options had a
weighted average exercise price and fair value of $48.51 and $6.82.
 
     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, 1995...............................................................     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
 
Granted..................................................................................      3,920         41.35
Exercised................................................................................     (3,523)        28.74
Cancelled(a).............................................................................     (1,206)        33.52
                                                                                            ---------
Balance at December 31, 1997.............................................................     29,502       $ 36.56
                                                                                            ---------
                                                                                            ---------
</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,
                                                                                        --------------------------
                                                                                         1997      1996      1995
                                                                                        ------    ------    ------
                                                                                               (THOUSANDS)
<S>                                                                                     <C>       <C>       <C>
Exercisable..........................................................................   21,511    22,772    21,846
</TABLE>
 
                                      F-96
 

<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, 1997:
 
<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 12/31/97       LIFE         PRICE     AT 12/31/97      PRICE
------------------------------------------------------  -----------    -----------   ---------   ------------   ---------
                                                        (THOUSANDS)                              (THOUSANDS)
<S>                                                     <C>            <C>           <C>         <C>            <C>
Under $17.............................................        245       2.4 years     $ 16.63          245       $ 16.63
$17.00 to $25.00......................................      2,132       2.5 years     $ 21.73        2,132       $ 21.73
$25.01 to $35.00......................................      4,724       3.9 years     $ 29.16        4,672       $ 29.11
$35.01 to $40.00......................................     12,364       4.8 years     $ 36.76        9,068       $ 36.43
$40.01 to $50.00......................................      9,917       6.7 years     $ 43.26        5,394       $ 42.51
$50.01 to $60.41......................................        120       9.1 years     $ 58.68           --            --
                                                        ------------                             ------------
Total.................................................     29,502       5.2 years     $ 36.56       21,511       $ 34.68
                                                        ------------                             ------------
                                                        ------------                             ------------
</TABLE>
 
     TWE reimburses Time Warner for the use of Time Warner stock options on the
basis described in Note 8.
 
10. BENEFIT PLANS
 
     TWE and its divisions have defined benefit pension plans covering
substantially all domestic employees. Pension benefits are based on formulas
that reflect the employees' years of service and compensation levels during
their employment period. Qualifying plans are funded in accordance with
government pension and income tax regulations. Plan assets are invested in
equity and fixed income securities. Time Warner's common stock represents
approximately 7% and 5% of plan assets at December 31, 1997 and 1996,
respectively.
 
     Pension expense included the following:
 
<TABLE>
<CAPTION>
                                                                                         YEARS ENDED DECEMBER 31,
                                                                                         ------------------------
                                                                                         1997      1996      1995
                                                                                         ----      ----      ----
                                                                                                (MILLIONS)
<S>                                                                                      <C>       <C>       <C>
Service cost..........................................................................   $ 33      $ 33      $ 20
Interest cost.........................................................................     31        28        21
Actual return on plan assets..........................................................    (71)      (27)      (55)
Net amortization and deferral.........................................................     45         7        37
                                                                                         ----      ----      ----
Total.................................................................................   $ 38      $ 41      $ 23
                                                                                         ----      ----      ----
                                                                                         ----      ----      ----
</TABLE>
 
                                      F-97
 

<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,
                                                                                                   -------------
                                                                                                   1997     1996
                                                                                                   ----     ----
                                                                                                    (MILLIONS)
<S>                                                                                                <C>      <C>
Accumulated benefit obligation (90% vested).....................................................   $275     $212
Effect of future salary increases...............................................................    157      124
                                                                                                   ----     ----
Projected benefit obligation....................................................................    432      336
Plan assets at fair value.......................................................................    364      284
                                                                                                   ----     ----
Projected benefit obligation in excess of plan assets...........................................    (68)     (52)
Unamortized actuarial losses....................................................................     (1)       1
Unamortized plan changes........................................................................      3        3
Other...........................................................................................     (1)      (2)
                                                                                                   ----     ----
Accrued pension expense.........................................................................   $(67)    $(50)
                                                                                                   ----     ----
                                                                                                   ----     ----
</TABLE>
 
     The following assumptions were used in accounting for pension plans:
 
<TABLE>
<CAPTION>
                                                                                         1997     1996     1995
                                                                                         -----    -----    -----
<S>                                                                                      <C>      <C>      <C>
Weighted average discount rate........................................................   7.25%    7.75%    7.25%
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 $29 million in 1997, $30 million in
1996 and $21 million in 1995. Employees of TWE's operations in foreign countries
participate to varying degrees in local pension plans, which in the aggregate
are not significant.
 
     Certain TWE employees also participate in Time Warner's savings and profit
sharing plans, as to which the expense amounted to $30 million in 1997, $28
million in 1996 and $25 million in 1995. 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.
 
11. FINANCIAL INSTRUMENTS
 
     The carrying value of TWE's financial instruments approximates fair value,
except for differences with respect to long-term, fixed-rate debt and certain
differences related to cost method investments and other financial instruments
which are not significant.
 
LONG-TERM DEBT
 
     Based on the level of interest rates prevailing at December 31, 1997, the
fair value of TWE's fixed-rate debt exceeded its carrying value by $532 million
which represents an unrealized loss. 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 also 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.
 
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
 
                                      F-98
 

<PAGE>
<PAGE>

                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
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, 1997, 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, 1997,
Time Warner had contracts for the sale of $507 million and the purchase of $139
million of foreign currencies at fixed rates. Of Time Warner's $368 million net
sale contract position, none of the foreign exchange purchase contracts and $105
million of the foreign exchange sale contracts related to TWE's foreign currency
exposure, primarily Japanese yen (27% of net contract position related to TWE),
French francs (24%), German marks (11%) and Canadian dollars (12%), compared to
a net sale contract position of $102 million of foreign currencies at December
31, 1996.
 
     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,
1997 and 1996. 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, 1997, 1996 and 1995, TWE recognized $14 million in
gains, $6 million in gains and $11 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.
 
12. SEGMENT INFORMATION
 
     TWE classifies its business interests into three fundamental areas:
Entertainment, consisting principally of interests in filmed entertainment,
television production and television broadcasting; Cable Networks, consisting
principally of interests in cable television programming; and Cable, consisting
principally of interests in cable television systems.
 
     Information as to the operations of TWE in different business segments is
set forth below based on the nature of the products and services offered. TWE
evaluates performance based on several factors, of which the primary financial
measure is business segment operating income before noncash amortization of
intangible assets ('EBITA'). The accounting policies of the business segments
are the same as those described in the summary of significant accounting
policies (Note 1). Intersegment sales are accounted for at fair value as if the
sales were to third parties.
 
     The operating results of TWE reflect the cable-related formation of TWE-A/N
effective as of April 1, 1995, the deconsolidation of Six Flags effective as of
June 23, 1995 and the cable-related 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.
 
                                      F-99
 

<PAGE>
<PAGE>

                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
<TABLE>
<CAPTION>
                                                                                       YEARS ENDED DECEMBER 31,
                                                                                     ----------------------------
                                                                                      1997       1996       1995
                                                                                     -------    -------    ------
                                                                                              (MILLIONS)
<S>                                                                                  <C>        <C>        <C>
REVENUES
Filmed Entertainment-Warner Bros..................................................   $ 5,462    $ 5,639    $5,069
Six Flags Theme Parks.............................................................        --         --       227
Broadcasting-The WB Network.......................................................       136         87        33
Cable Networks-HBO................................................................     1,923      1,763     1,593
Cable.............................................................................     4,243      3,851     3,005
Intersegment elimination..........................................................      (446)      (488)     (410)
                                                                                     -------    -------    ------
Total.............................................................................   $11,318    $10,852    $9,517
                                                                                     -------    -------    ------
                                                                                     -------    -------    ------
</TABLE>
 
<TABLE>
<CAPTION>
                                                                                         YEARS ENDED DECEMBER 31,
                                                                                        --------------------------
                                                                                         1997      1996      1995
                                                                                        ------    ------    ------
                                                                                                (MILLIONS)
<S>                                                                                     <C>       <C>       <C>
EBITA(1)
Filmed Entertainment-Warner Bros.....................................................   $  387    $  367    $  352
Six Flags Theme Parks................................................................       --        --        40
Broadcasting-The WB Network..........................................................      (88)      (98)      (66)
Cable Networks-HBO...................................................................      391       328       275
Cable(2).............................................................................    1,184       917       803
                                                                                        ------    ------    ------
Total................................................................................   $1,874    $1,514    $1,404
                                                                                        ------    ------    ------
                                                                                        ------    ------    ------
</TABLE>
 
------------
 
(1) EBITA represents business segment operating income before noncash
    amortization of intangible assets. After deducting amortization of
    intangible assets, TWE's business segment operating income was $1.444
    billion in 1997, $1.078 billion in 1996 and $960 million in 1995.
(2) Includes net gains of approximately $200 million recognized in 1997 related
    to the sale or exchange of certain cable television systems.
 
<TABLE>
<CAPTION>
                                                                                        YEARS ENDED DECEMBER 31,
                                                                                        ------------------------
                                                                                         1997     1996     1995
                                                                                         ----     ----     ----
                                                                                               (MILLIONS)
<S>                                                                                      <C>      <C>      <C>
DEPRECIATION OF PROPERTY, PLANT AND EQUIPMENT
Filmed Entertainment-Warner Bros......................................................   $181     $158     $107
Six Flags Theme Parks.................................................................     --       --       20
Broadcasting-The WB Network...........................................................      1       --       --
Cable Networks-HBO....................................................................     22       22       16
Cable.................................................................................    736      619      452
                                                                                         ----     ----     ----
Total.................................................................................   $940     $799     $595
                                                                                         ----     ----     ----
                                                                                         ----     ----     ----
</TABLE>
 
                                     F-100
 

<PAGE>
<PAGE>

                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
<TABLE>
<CAPTION>
                                                                                        YEARS ENDED DECEMBER 31,
                                                                                        ------------------------
                                                                                         1997     1996     1995
                                                                                         ----     ----     ----
                                                                                               (MILLIONS)
<S>                                                                                      <C>      <C>      <C>
AMORTIZATION OF INTANGIBLE ASSETS(1)
Filmed Entertainment-Warner Bros......................................................   $123     $125     $124
Six Flags Theme Parks.................................................................     --       --       11
Broadcasting-The WB Network...........................................................     --       --       --
Cable Networks-HBO....................................................................     --       --        1
Cable.................................................................................    307      311      308
                                                                                         ----     ----     ----
Total.................................................................................   $430     $436     $444
                                                                                         ----     ----     ----
                                                                                         ----     ----     ----
</TABLE>
 
------------
 
(1) Amortization includes amortization relating to all business combinations
    accounted for by the purchase method, including Time Warner's $14 billion
    acquisition of WCI in 1989 and $1.3 billion acquisition of the minority
    interest in ATC in 1992.
 
     Information as to the assets and capital expenditures of TWE is as follows:
 
<TABLE>
<CAPTION>
                                                                                            DECEMBER 31,
                                                                                    -----------------------------
                                                                                     1997       1996       1995
                                                                                    -------    -------    -------
                                                                                             (MILLIONS)
<S>                                                                                 <C>        <C>        <C>
ASSETS
Filmed Entertainment-Warner Bros.................................................   $ 8,098    $ 8,057    $ 7,334
Six Flags Theme Parks............................................................        --         --         --
Broadcasting-The WB Network......................................................       113         67         63
Cable Networks-HBO...............................................................     1,080        997        935
Cable............................................................................    10,771     10,202      9,842
Corporate(1).....................................................................       669        650        731
                                                                                    -------    -------    -------
Total............................................................................   $20,731    $19,973    $18,905
                                                                                    -------    -------    -------
                                                                                    -------    -------    -------
</TABLE>
 
------------
 
(1) Consists principally of cash, cash equivalents and other investments.
 
<TABLE>
<CAPTION>
                                                                                      YEARS ENDED DECEMBER 31,
                                                                                    ----------------------------
                                                                                     1997       1996       1995
                                                                                    ------     ------     ------
                                                                                             (MILLIONS)
<S>                                                                                 <C>        <C>        <C>
CAPITAL EXPENDITURES
Filmed Entertainment-Warner Bros.................................................   $  144     $  340     $  294
Six Flags Theme Parks............................................................       --         --         43
Broadcasting-The WB Network......................................................        1          2         --
Cable Networks-HBO...............................................................       19         29         20
Cable(1).........................................................................    1,401      1,348      1,178
                                                                                    ------     ------     ------
Total............................................................................   $1,565     $1,719     $1,535
                                                                                    ------     ------     ------
                                                                                    ------     ------     ------
</TABLE>
 
------------
 
(1) Cable capital expenditures were funded in part through collections on the
    US WEST Note Receivable in the amount of $169 million in 1996 and $602
    million in 1995 (Note 1). The U S WEST Note Receivable was fully collected
    during 1996.
 
                                     F-101
 

<PAGE>
<PAGE>

                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     Information as to TWE's operations in different geographical areas is as
follows:
 
<TABLE>
<CAPTION>
                                                                                       YEARS ENDED DECEMBER 31,
                                                                                     ----------------------------
                                                                                      1997       1996       1995
                                                                                     -------    -------    ------
                                                                                              (MILLIONS)
<S>                                                                                  <C>        <C>        <C>
REVENUES(1)
United States.....................................................................   $ 9,086    $ 8,718    $7,535
United Kingdom....................................................................       488        383       338
Germany...........................................................................       284        374       247
Japan.............................................................................       172        196       245
France............................................................................       152        143       141
Canada............................................................................       137        157       144
Other international...............................................................       999        881       867
                                                                                     -------    -------    ------
Total.............................................................................   $11,318    $10,852    $9,517
                                                                                     -------    -------    ------
                                                                                     -------    -------    ------
</TABLE>
 
------------
 
(1) Revenues are attributed to countries based on location of customer.
 
     Because a substantial portion of TWE's international revenues is derived
from the sale of U.S. copyrighted products abroad, assets located outside the
United States are not material.
 
13. COMMITMENTS AND CONTINGENCIES
 
     TWE's total rent expense amounted to $218 million in 1997, $205 million in
1996 and $176 million in 1995. The minimum rental commitments under
noncancellable long-term operating leases are: 1998-$178 million; 1999-$171
million; 2000-$163 million; 2001-$160 million; 2002-$151 million and after
2002-$859 million.
 
     TWE's minimum commitments and guarantees under certain programming,
licensing, franchise and other agreements aggregated approximately $7.4 billion
at December 31, 1997, which are payable principally over a five-year period.
 
     Pending legal proceedings are substantially limited to litigation
incidental to the businesses of TWE. In the opinion of management, the ultimate
resolution of these matters will not have a material effect on the consolidated
financial statements.
 
14. RELATED PARTY TRANSACTIONS
 
     In the normal course of conducting their businesses, TWE units have had
various transactions with Time Warner units, generally on terms resulting from a
negotiation 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 $72 million, $69 million and $64 million in 1997, 1996 and
1995, respectively.
 
     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 technological upgrade of TWE's cable systems. TWE has made
cumulative payments to U S WEST of $70 million under this arrangement and the
remaining installment is scheduled to be paid on September 15, 1998.
 
     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
 
                                     F-102
 

<PAGE>
<PAGE>

                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
systems also pay fees to TWE for the right to carry cable television programming
provided by TWE's cable networks. Similarly, TWE's cable television systems pay
fees to Time Warner for the right to carry cable television programming provided
by Time Warner'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 has a credit agreement with TWE that allows it to borrow up to
$400 million from TWE through September 15, 2000. Outstanding borrowings from
TWE in the amount of $400 million bear interest at LIBOR plus 1% per annum.
 
     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, Comedy Partners, L.P., Six Flags
and other equity investees of Time Warner and the Entertainment Group, generally
with respect to sales of products and services in the ordinary course of
business.
 
15. ADDITIONAL FINANCIAL INFORMATION
 
CASH FLOWS
 
     TWE established an asset securitization facility on December 31, 1997,
which effectively provides for the accelerated receipt of up to $600 million of
cash through the year 2000 on available licensing contracts. Assets securitized
under this facility consist of cash contracts for the licensing of theatrical
and television product for broadcast network and syndicated television
exhibition, under which revenues have not been recognized because such product
is not available for telecast until a later date ('Backlog Contracts'). In
connection with this securitization facility, TWE sells, on a revolving and
nonrecourse basis, certain of its Backlog Contracts ('Pooled Backlog Contracts')
to a wholly owned, special purpose entity which, in turn, sells a percentage
ownership interest in the Pooled Backlog Contracts to a third-party, commercial
paper conduit sponsored by a financial institution.
 
     Because the Backlog Contracts securitized under this facility consist of
cash contracts for the licensing of theatrical and television product that have
already been produced, the recognition of revenue for such completed product is
only dependent upon the commencement of the availability period for telecast
under the terms of the licensing agreements. Accordingly, the proceeds received
under the program are classified as deferred revenues in long-term liabilities
in the accompanying consolidated balance sheet. Net proceeds of approximately
$300 million were received under this securitization program in 1997.
 
                                     F-103
 

<PAGE>
<PAGE>

                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     Additional financial information with respect to cash flows is as follows:
 
<TABLE>
<CAPTION>
                                                                                        YEARS ENDED DECEMBER 31,
                                                                                        ------------------------
                                                                                         1997     1996     1995
                                                                                         ----     ----     ----
                                                                                               (MILLIONS)
<S>                                                                                      <C>      <C>      <C>
Cash payments made for interest.......................................................   $493     $513     $571
Cash payments made for income taxes, net..............................................     95       74       75
Noncash capital contributions (distributions), net....................................    399       (1)      50
</TABLE>
 
     Noncash investing activities in 1995 included the formation of TWE-A/N in
April 1995 (Note 2) and the reacquisition of the Time Warner Service Partnership
Assets in September 1995 (Note 8).
 
OTHER CURRENT LIABILITIES
 
     Other current liabilities consist of:
 
<TABLE>
<CAPTION>
                                                                                                  DECEMBER 31,
                                                                                                -----------------
                                                                                                 1997       1996
                                                                                                ------     ------
                                                                                                   (MILLIONS)
<S>                                                                                             <C>        <C>
Accrued expenses.............................................................................   $1,159     $1,200
Accrued compensation.........................................................................      253        247
Deferred revenues............................................................................      255        293
                                                                                                ------     ------
Total........................................................................................   $1,667     $1,740
                                                                                                ------     ------
                                                                                                ------     ------
</TABLE>
 
                                     F-104


<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, 1997 and 1996, and the
related consolidated statements of operations, cash flows and partnership
capital for each of the three years in the period ended December 31, 1997. 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, 1997 and 1996, and the consolidated results of its operations and its cash
flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles. 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 10, 1998
 
                                     F-105


<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, 1997 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 TWE-A/N 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.
 
<TABLE>
<CAPTION>
                                                                           YEARS ENDED DECEMBER 31,
                                                              ---------------------------------------------------
SELECTED OPERATING STATEMENT INFORMATION                       1997       1996       1995       1994       1993
                                                              -------    -------    -------    -------    -------
                                                                                  (MILLIONS)
<S>                                                           <C>        <C>        <C>        <C>        <C>
Revenues...................................................   $11,318    $10,852    $ 9,517    $ 8,460    $ 7,946
Depreciation and amortization..............................    (1,370)    (1,235)    (1,039)      (943)      (902)
Business segment operating income(1).......................     1,444      1,078        960        848        883
Interest and other, net(2).................................      (345)      (522)      (580)      (587)      (551)
Income before extraordinary item...........................       637        210         97        161        208
Net income(3)..............................................       614        210         73        161        198
</TABLE>
 
<TABLE>
<CAPTION>
                                                                                 DECEMBER 31,
                                                              ---------------------------------------------------
SELECTED BALANCE SHEET INFORMATION                             1997       1996       1995       1994       1993
                                                              -------    -------    -------    -------    -------
                                                                                  (MILLIONS)
<S>                                                           <C>        <C>        <C>        <C>        <C>
Cash and equivalents.......................................   $   322    $   216    $   209    $ 1,071    $ 1,338
Total assets...............................................    20,731     19,973     18,905     18,662     17,963
Debt due within one year...................................         8          7         47         32         24
Long-term debt.............................................     5,990      5,676      6,137      7,160      7,125
Preferred stock of subsidiary..............................       233         --         --         --         --
Time Warner General Partners' Senior Capital...............     1,118      1,543      1,426      1,663      1,536
Partners' capital..........................................     6,333      6,574      6,478      6,233      6,000
</TABLE>
 
------------
 
(1) Includes net gains of approximately $200 million recognized in 1997 related
    to the sale or exchange of certain cable television systems.
(2) Includes a gain of approximately $250 million in 1997 related to the sale of
    an interest in E! Entertainment Television, Inc.
(3) Net income for each of the years ended December 31, 1997, 1995 and 1993
    includes an extraordinary loss on the retirement of debt of $23 million, $24
    million and $10 million, respectively.
 
                                     F-106
 

<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>
1997
1st(1)............................................................................   $  2,600     $   329      $320
2nd...............................................................................      2,728         320        82
3rd...............................................................................      2,855         335        81
4th(2)(3).........................................................................      3,135         460       131
Year..............................................................................     11,318       1,444       614
 
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
</TABLE>
 
------------
 
(1) Net income in the first quarter of 1997 includes a gain of approximately
    $250 million related to the sale of an interest in E! Entertainment
    Television, Inc.
(2) Operating income for 1997 includes net gains of approximately $200 million
    for the year relating to the sale or exchange of certain cable television
    systems, of which approximately $160 million was recorded in the fourth
    quarter of 1997.
(3) Net income for the fourth quarter of 1997 includes an extraordinary loss on
    the retirement of debt of $23 million.
 
                                     F-107
 

<PAGE>
<PAGE>

                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
                SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
                  YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
 
<TABLE>
<CAPTION>
                                                                                  ADDITIONS
                                                                    BALANCE AT    CHARGED TO                   BALANCE
                                                                    BEGINNING     COSTS AND                    AT END
                           DESCRIPTION                              OF PERIOD      EXPENSES     DEDUCTIONS    OF PERIOD
-----------------------------------------------------------------   ----------    ----------    ----------    ---------
                                                                                        (MILLIONS)
<S>                                                                 <C>           <C>           <C>           <C>
1997:
Reserves deducted from accounts receivable:
     Allowance for doubtful accounts.............................      $195          $113         $  (90)(a)    $ 218
     Reserves for sales returns and allowances...................       178           289           (261)(b)      206
                                                                    ----------    ----------    ----------    ---------
          Total..................................................      $373          $402         $ (351)       $ 424
                                                                    ----------    ----------    ----------    ---------
                                                                    ----------    ----------    ----------    ---------
 
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
                                                                    ----------    ----------    ----------    ---------
                                                                    ----------    ----------    ----------    ---------
</TABLE>
 
------------
 
(a) Represents uncollectible receivables charged against the reserve.
(b) Represents returns or allowances applied against the reserve.
 
                                     F-108






<PAGE>
<PAGE>

                                 EXHIBIT INDEX
 
<TABLE>
<CAPTION>
                                                                                                         SEQUENTIAL
 EXHIBIT                                                                                                    PAGE
  NUMBER                                           DESCRIPTION                                             NUMBER
----------  ------------------------------------------------------------------------------------------   ----------
<S>        <C>                                                                                         <C>
  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 Registration Statement on Form S-4 filed with the Commission on
              October 11, 1996 (Registration No. 333-11471) (the "S-8 Registration Statement")).......     *
 
  3.(i)(b)  Certificate of Increase of the Number of Shares of Series Common Stock of the Registrant
              Designated as Series LMCN-V Common Stock as filed with the Secretary of State of the
              State of Delaware on August 13, 1997 (which is incorporated herein by reference to
              Exhibit 3.(i)(b) to the Registrant's Quarterly Report on Form 10-Q for the quarter ended
              September 30, 1997).....................................................................     *
 
  3.(i)(c)  Certificate of Amendment of Restated Certificate of Incorporation of the Registrant as
              filed with the Secretary of State of the State of Delaware on May 19, 1997 (which is
              incorporated herein by reference to Exhibit 3.(i)(c) to the Registrant's Quarterly
              Report on Form 10-Q for the quarter ended June 30, 1997 (the "June 1997 Form 10-Q"))....     *
 
  3.(i)(d)  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)(e)  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)(f)  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)(g)  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)(h)  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)(i)  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)(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 E Convertible Preferred
              Stock of the Registrant as filed with the Secretary of State of the State of Delaware on
              November 13, 1996 (which is incorporated herein by reference to Exhibit 3.i(h) to the
              Registrant's Annual Report on Form 10-K for the year ended December 31, 1996 (the "1996
              Form 10-K"))............................................................................     *
</TABLE>
 
                                       1
 

<PAGE>
<PAGE>

<TABLE>
<CAPTION>
                                                                                                         SEQUENTIAL
 EXHIBIT                                                                                                    PAGE
  NUMBER                                           DESCRIPTION                                             NUMBER
----------  ------------------------------------------------------------------------------------------   ----------
<S>         <C>                                                                                          <C>
  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 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).....     *
  3.(i)(l)  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 (which is incorporated herein by reference to Exhibit 3.(i)(j) to the
              Registrant's 1996 Form 10-K)............................................................     *
  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 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)(n)  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)(o)  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)(p)  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)(q)  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 May 22, 1997 (which are incorporated herein by reference
              to Exhibit 3.(ii) to the Registrant's June 1997 Form 10-Q)..............................     *
  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"), Time
              Warner Companies, Inc. ("TWCI"), certain of TWCI's subsidiaries that are parties thereto
              and The Bank of New York ("BONY"), 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 BONY, 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"))................................................................     *
</TABLE>
 
                                       2
 

<PAGE>
<PAGE>

<TABLE>
<CAPTION>
                                                                                                         SEQUENTIAL
 EXHIBIT                                                                                                    PAGE
  NUMBER                                           DESCRIPTION                                             NUMBER
----------  ------------------------------------------------------------------------------------------   ----------
<S>         <C>                                                                                          <C>
  4.4       Third Supplemental Indenture, dated as of October 12, 1993, among TWE, TWCI, certain of
              TWCI's subsidiaries that are parties thereto and BONY, 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 BONY, 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")).......................................     *
  4.6       Fifth Supplemental Indenture, dated as of December 28, 1994, among TWE, TWCI, certain of
              TWCI's subsidiaries that are parties thereto and BONY, 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)................................................................     *
  4.7       Sixth Supplemental Indenture, dated as of September 29, 1997, among TWE, TWCI, certain of
              TWCI's subsidiaries that are parties thereto and BONY, as Trustee.......................
  4.8       Seventh Supplemental Indenture, dated as of December 29, 1997, among TWE, TWCI, certain of
              TWCI's subsidiaries that are parties thereto and BONY, as Trustee.......................
  4.9       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 (File No. 1-8637))....................................................     *
  4.10      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)................................     *
  4.11      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)..........     *
  4.12      Third Supplemental Indenture dated as of December 31, 1996 among the Registrant, TWCI and
              Chase Manhattan, as Trustee (which is incorporated herein by reference to Exhibit 4.10
              to the Registrant's 1996 Form 10-K).....................................................     *
  4.13      Fourth Supplemental Indenture dated as of December 17, 1997 among the Registrant, TWCI,
              Turner Broadcasting System, Inc. ("TBS") and Chase Manhattan, as Trustee (which is
              incorporated herein by reference to Exhibit 4.4 to the Registrant's, TWCI's and TBS's
              Registration Statement on Form S-4 (Registration Nos. 333-45703, 333-45703-02 and
              333-45703-01) filed with the Commission on February 5, 1998 (the "1998 Form S-4"))......     *
  4.14      Fifth Supplemental Indenture dated as of January 12, 1998 among the Registrant, TWCI, TBS
              and Chase Manhattan, as Trustee (which is incorporated herein by reference to Exhibit
              4.5 to the Registrant's, TWCI's and TBS's 1998 Form S-4)................................     *
  4.15      Sixth Supplemental Indenture dated as of March 17, 1998 among the Registrant, TWCI, TBS
              and Chase Manhattan, as Trustee.........................................................
  4.16      Trust Agreement effective as of April 1, 1998 among the Registrant, as Grantor, and U.S.
              Trust Company of California, N.A., as Trustee...........................................
 10.1       Time Warner 1986 Stock Option Plan, as amended through March 20, 1997.....................
 10.2       1988 Stock Incentive Plan of Time Warner Inc., as amended through March 20, 1997..........
 10.3       Time Warner 1989 Stock Incentive Plan, as amended through March 20, 1997..................
 10.4       Time Warner 1994 Stock Option Plan, as amended through March 20, 1997.....................
 10.5       Time Warner Corporate Group Stock Incentive Plan, as amended through March 20, 1997.......
 10.6       Time Warner 1997 Stock Option Plan (which is incorporated herein by reference to Annex A
              to the Registrant's definitive Proxy Statement dated March 28, 1997 used in connection
              with the Registrant's 1997 Annual Meeting of Stockholders)..............................     *
 10.7       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 of TWCI's
              Annual Report on Form 10-K for the year ended December 31, 1993 ("TWCI's 1993 Form
              10-K")).................................................................................     *
</TABLE>
 
                                       3
 

<PAGE>
<PAGE>

<TABLE>
<CAPTION>
                                                                                                         SEQUENTIAL
 EXHIBIT                                                                                                    PAGE
  NUMBER                                           DESCRIPTION                                             NUMBER
----------  ------------------------------------------------------------------------------------------   ----------
<S>         <C>                                                                                          <C>
 10.8       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).....................     *
 
 10.9       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)...................................................................................     *
 
 10.10      Time Warner Retirement Plan for Outside Directors, as amended through May 16, 1996 (which
              is incorporated herein by reference to Exhibit 10.9 to the Registrant's 1996 Form
              10-K)...................................................................................     *
 
 10.11      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)......     *
 
 10.12      Amended and Restated Employment Agreement effective as of January 1, 1998, between the
              Registrant and Gerald M. Levin..........................................................
 
 10.13      Amended and Restated Employment Agreement effective as of January 1, 1998, between the
              Registrant and R.E. Turner ("Turner")...................................................
 
 10.14      Amended and Restated Employment Agreement effective as of January 1, 1998, between the
              Registrant and Richard D. Parsons.......................................................
 
 10.15      Amended and Restated Employment Agreement effective as of January 1, 1998 between the
              Registrant and Peter R. Haje............................................................
 
 10.16      Amended and Restated Employment Agreement effective as of January 1, 1998, between the
              Registrant and Richard J. Bressler......................................................
 
 10.17      Amended and Restated Employment Agreement effective as of January 1, 1998, between the
              Registrant and Timothy A. Boggs.........................................................
 
 10.18      Amended and Restated Employment Agreement effective as of January 1, 1998, between the
              Registrant and John A. LaBarca..........................................................
 
 10.19      Amended and Restated Employment Agreement effective as of January 1, 1998, between the
              Registrant and Philip R. Lochner, Jr. ..................................................
 
 10.20      Second Amended and Restated LMC Agreement dated as of September 22, 1995 among TWCI,
              Liberty Media Corporation ("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 TWCI's Current Report on Form 8-K dated
              September 6, 1996 ("TWCI's September 1996 Form 8-K"))...................................     *
 
 10.21      Agreement Containing Consent Order dated August 14, 1996 among TWCI, TBS, Tele-
              Communications, Inc., 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") (which is incorporated herein by reference to
              Exhibit 10.22 to the Registrant's 1996 Form 10-K).......................................     *
 
 10.23      Investors Agreement (No. 1) dated as of October 10, 1996 among the Registrant, Turner,
              Turner Outdoor and Turner Partners (which is incorporated herein by reference to Exhibit
              10.23 to the Registrant's 1996 Form 10-K)...............................................     *
 
 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") (which is incorporated herein by reference to Exhibit
              10.24 to the Registrant's 1996 Form 10-K)...............................................     *
 
 10.25      Registration Rights Agreement dated as of October 10, 1996 among the Registrant, Turner,
              Turner Outdoor, Turner Foundation, Turner Trust and Turner Partners (which is
              incorporated herein by reference to Exhibit 10.25 to the Registrant's 1996 Form 10-K)...     *
</TABLE>
 
                                       4
 

<PAGE>
<PAGE>

<TABLE>
<CAPTION>
                                                                                                         SEQUENTIAL
 EXHIBIT                                                                                                    PAGE
  NUMBER                                           DESCRIPTION                                             NUMBER
----------  ------------------------------------------------------------------------------------------   ----------
<S>         <C>                                                                                          <C>
 10.26      Credit Agreement dated as of November 10, 1997 among the Registrant, TWCI, TWE, TBS, Time
              Warner Entertainment-Advance/Newhouse Partnership ("TWE-A/N Partnership"), and TWI Cable
              Inc., as Credit Parties, Chase Manhattan, as Administrative Agent, Bank of America
              National Trust and Savings Association, BONY and Morgan Guaranty Trust Company of New
              York, as Documentation and Syndication Agents and Chase Securities Inc., as Arranger....
 10.27      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") ("TWE Partnership Agreement, as amended") (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)....     *
 10.28      Admission Agreement, dated as of May 16, 1993, between TWE and US WEST, Inc. ("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)............................................................     *
 10.29      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)...................................................................................     *
 10.30      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")).......     *
 10.31      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).....................     *
 10.32      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)...............     *
 10.33      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-AN 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"))..............................     *
 10.34      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)....................................................................................     *
 10.35      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).................................................     *
 10.36      Amended and Restated Transaction Agreement, dated as of October 27, 1997 among Advance
              Publications, Advance/Newhouse, TWE, TW Holding Co. and TWE-AN Partnership (which is
              incorporated herein by reference to Exhibit 99(c) to the Registrant's Current Report on
              Form 8-K dated October 27, 1997)........................................................     *
 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 unaudited financial statements of TBS for the quarterly period ended September 30,
              1996 (which is incorporated herein by reference to the Quarterly Report on Form 10-Q of
              TBS for the nine months ended September 30, 1996).......................................     *
 99.2       The 1995 financial statements and report of independent accountants thereon of TBS (which
              is incorporated herein by reference to the Annual Report on Form 10-K of TBS for the
              year ended December 31, 1995)...........................................................     *
</TABLE>
 
                                       5
 

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<PAGE>

<TABLE>
<CAPTION>
                                                                                                         SEQUENTIAL
 EXHIBIT                                                                                                    PAGE
  NUMBER                                           DESCRIPTION                                             NUMBER
----------  ------------------------------------------------------------------------------------------   ----------
<S>         <C>                                                                                          <C>
 99.3       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"))..................................................................................     *
 99.4       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 Savings Plan for the period ended December
              31, 1997 (to be filed by amendment).....................................................
 99.6       Annual Report on Form 11-K of the Time Warner Thrift Plan for the year ended December 31,
              1997 (to be filed by amendment).........................................................
 99.7       Annual Report on Form 11-K of the TWC Savings Plan for the year ended December 31, 1997
              (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.
 
                                       6


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