<PAGE>
________________________________________________________________________________

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

                                   FORM 10-K
                ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                      THE SECURITIES EXCHANGE ACT OF 1934
                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999.
                         COMMISSION FILE NUMBER 1-12259

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

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

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

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<S>                                            <C>
                   DELAWARE                                      13-3527249
       (STATE OR OTHER JURISDICTION OF                        (I.R.S. EMPLOYER
        INCORPORATION OR ORGANIZATION)                      IDENTIFICATION NO.)

     75 ROCKEFELLER PLAZA, NEW YORK, N.Y.                          10019
   (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                      (ZIP CODE)
</TABLE>

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

       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 484-8000

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

          SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

<TABLE>
<CAPTION>
                                                              NAME OF EACH EXCHANGE
                    TITLE OF EACH CLASS                        ON WHICH REGISTERED
                    -------------------                       ---------------------
<S>                                                          <C>
COMMON STOCK, $.01 PAR VALUE                                 NEW YORK STOCK EXCHANGE
RIGHTS TO PURCHASE SERIES A PARTICIPATING CUMULATIVE         NEW YORK STOCK EXCHANGE
  PREFERRED STOCK
</TABLE>

          SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
                                      NONE

    Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes [x]  No [ ]

    Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [x]

    As of the close of business on March 14, 2000, there were 1,194,082,138
shares of registrant's Common Stock and 114,123,884 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 14, 2000) was approximately $94.16 billion.

                      DOCUMENTS INCORPORATED BY REFERENCE:

<TABLE>
<CAPTION>
           DESCRIPTION OF DOCUMENT                         PART OF THE FORM 10-K
           -----------------------                         ---------------------
<S>                                            <C>
Portions of the Definitive Proxy Statement to        Part III (Item 10 through Item 13)
                       be
   used in connection with the registrant's
     2000 Annual Meeting of Stockholders.
</TABLE>

________________________________________________________________________________





<PAGE>

                              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 the Publishing division, TWI Cable
and the Time Warner General and Limited Partners.(1)

Time Warner General and Limited Partners own 100% of the Music division and
74.49% of Time Warner Entertainment Company, L.P. ("TWE"). TWE is also
25.51%-owned by MediaOne Limited Partner(2)

TWE owns 100% of Time Warner Cable, Cable Networks-HBO and Filmed
Entertainment-Warner Bros., and 64.8% of the TWE-A/N Partnership (Cable).
The TWE-A/N Partnership is also 1.9%-owned by TWI Cable and 33-1/3%-owned
by Advance/Newhouse.(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 that
are 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.






<PAGE>
                                     PART I

ITEM 1. BUSINESS

    Time Warner Inc. (the 'Company' or 'Time Warner') is the world's leading
media and entertainment company. The Company classifies its business interests
into six fundamental areas:

     Cable Networks, consisting principally of interests in cable television
     programming;

     Publishing, consisting principally of interests in magazine publishing,
     book publishing and direct marketing;

     Music, consisting principally of interests in recorded music and music
     publishing;

     Filmed Entertainment, consisting principally of interests in filmed
     entertainment, television production, and television broadcasting;

     Cable, consisting principally of interests in cable television systems; and

     Digital Media, consisting principally of interests in Internet-related and
     digital media businesses.

    The Company is a holding company that derives its operating income and cash
flow from its investments in its subsidiaries. For convenience, the terms the
'Registrant,' 'Company' and 'Time Warner' are used in this report to refer to
both the parent company and collectively to the parent company and the
subsidiaries through which its various businesses are conducted, unless the
context otherwise requires.

TWE

    Time Warner Entertainment Company, L.P. ('TWE') is a Delaware limited
partnership that was formed 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. Currently, 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 junior
priority capital. The remaining 25.51% limited partnership interests in the
Series A Capital and Residual Capital of TWE are held by a subsidiary of
MediaOne Group, Inc. ('MediaOne'). In accordance with the partnership's
governing documents, as a result of MediaOne's August 1999 notice of intent to
terminate its covenant not to compete with TWE, MediaOne's right to participate
in the management of TWE's businesses terminated immediately and irrevocably.
MediaOne retains only certain protective governance rights pertaining to certain
limited, significant matters affecting TWE as a whole. As a result of this
significant reduction in MediaOne's rights, the Company consolidated TWE and
certain related companies for financial reporting purposes during 1999. The
termination of the covenant not to compete is necessary for MediaOne to complete
its proposed merger with AT&T Corp. ('AT&T'). See also 'Management's Discussion
and Analysis of Results of Operations and Financial Condition -- Investment in
TWE' at page F-3.

RECENT EVENTS

    On January 10, 2000, the Company and America Online, Inc. ('America Online')
announced a strategic merger of equals (the 'AOL Merger') to create the world's
leading media and communications company. America Online is a world leader in
interactive services, web brands, Internet technologies and electronic commerce
services. The AOL Merger will be structured as an all-stock transaction pursuant
to which the Company's common stockholders will receive 1.5 shares of a new
holding company, to be named AOL Time Warner Inc., for each share of the
Company's common stock they own. Following completion of the AOL Merger, America
Online and the Company will each become a wholly owned subsidiary of AOL Time
Warner Inc. America Online's stockholders will receive one share of AOL Time
Warner Inc. common stock for each share of America Online common stock they own.

    Initially, half of the 16 directors of AOL Time Warner will be selected by
America Online and half will be selected by Time Warner. Stephen Case, the
Chairman and Chief Executive Officer of America Online, will become Chairman of
the Board of AOL Time Warner and Gerald Levin, the Chairman and Chief Executive

                                      I-1





<PAGE>
Officer of Time Warner, will become Chief Executive Officer. AOL Time Warner
will be headquartered in New York City with additional executive offices in
Dulles, Virginia. Among other things, the AOL Merger is subject to regulatory
approvals and the approvals of the Company's and of America Online's
stockholders. Additional information on the AOL Merger is provided in
'Management's Discussion and Analysis of Results of Operations and Financial
Condition -- America Online-Time Warner Merger' at pages F-2 and F-3 and in
Note 20, 'Subsequent Events -- America Online-Time Warner Merger,' to the
Company's consolidated financial statements, at pages F-64 and F-65 herein.

    On January 24, 2000, the Company and Britain's EMI Group plc announced
that they had agreed to combine their global music operations into two
equally-owned ventures to be collectively known as Warner EMI Music. Under the
agreement, Time Warner will nominate six of the new company's 11-member Board of
Directors. Warner EMI Music will be headquartered in New York, with its non-U.S.
operations based in London. Completion of the transaction is subject to
regulatory approvals and approval by EMI shareholders. Additional information on
the formation of the joint venture is provided in 'Management's Discussion and
Analysis of Results of Operations and Financial Condition -- Warner-EMI Music
Merger' at page F-3 herein and in Note 20, 'Subsequent Events -- Warner-EMI
Music Merger' to the Company's consolidated financial statements at page F-65
herein.

CAUTION CONCERNING FORWARD-LOOKING STATEMENTS

    This Annual Report on Form 10-K includes certain 'forward-looking
statements' within the meaning of the Private Securities Litigation Reform Act
of 1995. These statements are based on management's current expectations and are
naturally subject to uncertainty and changes in circumstances. Actual results
may vary materially from the expectations contained herein due to changes in
economic, business, competitive, technological and/or regulatory factors. More
detailed information about those factors is set forth on pages F-19 and F-20 of
'Management's Discussion and Analysis of Results of Operations and Financial
Condition.' Time Warner is under no obligation to (and expressly disclaims any
such obligation to) update or alter its forward-looking statements whether as a
result of new information, future events or otherwise.

                                 CABLE NETWORKS

    The Company's Cable Networks business consists principally of domestic and
international basic cable networks and pay television programming services and
the operation of World Championship Wrestling and sports franchises. The basic
cable networks (collectively, the 'Turner Networks') owned by Turner
Broadcasting System, Inc. ('TBS'), a wholly owned subsidiary, constitute the
principal component of the Company's basic cable networks. TBS also operates
several large advertiser-supported online sites, including the CNN family of
Internet destinations. Pay television programming consists of the multichannel
HBO and Cinemax pay television programming services (collectively, the 'Home Box
Office Services'), operated by the Home Box Office division of TWE ('Home Box
Office').

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, general entertainment, all-news, financial and
all-sports news programming and include three of the top five rated basic cable
networks in 1999. Through TWE's Home Box Office division, the Company
distributes HBO, the leading domestic pay-TV service, as well as Cinemax. HBO
and Cinemax offer uncut, commercial-free motion pictures and high-quality
original programming, such as feature motion pictures, mini-series and
television series produced specifically by or for HBO. In addition, HBO offers
sporting and special entertainment events, such as concerts and comedy shows.

    The Turner Networks and the Home Box Office Services (collectively, the
'Networks') distribute their programming via cable and other distribution
technologies, including satellite distribution. The Networks generally enter
into separate multi-year agreements, known as affiliation agreements, with
distributors that have

                                      I-2





<PAGE>
agreed to carry such Networks. With the proliferation of new cable networks and
services, competition for cable carriage on the limited available analog channel
capacity has intensified.

    The programming produced for the Company's Networks is generally transmitted
via satellites to receivers located at local operations centers for each
affiliated cable company, or to home satellite dish receivers. Individual dish
owners wishing to receive programming from one of the satellite distribution
companies must purchase a consumer decoder and arrange for its activation.

    The Turner Networks (other than Turner Classic Movies, which is commercial
free) generate their revenue principally from the sale of advertising time and
from receipt of monthly per subscriber fees paid by cable system operators, DTH
distribution companies, hotels and other customers (known as affiliates) that
have contracted to receive and distribute such networks. The Home Box Office
Services and Turner Classic Movies, 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 the Home
Box Office Services are 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 the Networks' revenue from affiliates that are
large DTH distribution companies or multiple system cable operators, such as
AT&T, has increased. The Networks 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 respective Networks by
the larger affiliates are good, the loss of one or more of them as distributors
of any individual network or service could have a material adverse effect on
their respective businesses.

    Advertising revenue on 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 number 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 audiences, 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 generally
command a high CPM for their advertising time.

                                TURNER NETWORKS

DOMESTIC NETWORKS

    TBS's entertainment networks include two general entertainment networks, TBS
Superstation, with approximately 78.5 million subscribers in the U.S. as of
December 31, 1999, and TNT, with approximately 77.1 million subscribers in the
U.S.; as well as Cartoon Network, with approximately 60.9 million subscribers in
the U.S.; and Turner Classic Movies, a 24-hour, commercial-free network which
presents classic films from TBS's MGM, RKO and pre-1950 Warner Bros. film
libraries which had approximately 37.7 million subscribers in the U.S.
Programming for these entertainment networks is derived, in part, 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. In October 1999, TBS launched Turner
South, a new regional entertainment network featuring movies and sitcoms from
the Turner library and original programming targeted to viewers in the
Southeast, as well as regional news and sports, and on April 1, 2000, TBS will
launch Boomerang, a digital network featuring classic cartoons.

    TBS has acquired programming rights from the National Basketball Association
(the 'NBA') to televise a certain number of regular season and playoff games on
TBS Superstation and TNT 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 Superstation also televises 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 made to Major League Baseball's
central fund for distribution to all Major League Baseball clubs. Through a
joint venture with NBC,

                                      I-3





<PAGE>
TBS has also acquired rights to televise certain NASCAR Winston Cup and Busch
Series races on TBS and TNT from 2001-2006. Rights fees will be paid by the
TBS/NBC joint venture to NASCAR and then redistributed to owners of the tracks
hosting races and to the race teams.

    CNN is a 24-hour per day cable television news service which has more than
77 million subscribers in the U.S. Together with CNN International ('CNNI'), CNN
reached more than 200 million locations in 212 countries and territories as of
December 31, 1999. In addition to Headline News, which provides updated half-
hour newscasts throughout each day, CNN has expanded its brand franchise to
include CNNfn, featuring business and consumer news; and CNN/Sports Illustrated,
a venture with Sports Illustrated, a Time Warner publication, featuring sports
news and features. The Company has also expanded into a number of special market
networks.

    CNN operates 35 news bureaus, of which ten are located in the United States
and 25 are located around the world. In addition, a network of satellite
newsgathering trucks, portable satellite uplinks and a network of domestic and
international broadcast television affiliates on six continents permit CNN to
report live from virtually anywhere in the world. These affiliate arrangements,
from which CNN obtains substantial news coverage, are generally pursuant to
contracts having terms of one or more years.

INTERNATIONAL NETWORKS

    CNNI is distributed to multiple distribution platforms for delivery to cable
systems, broadcasters, hotels and other viewers around the world on a network of
16 regional satellites. CNN en Espanol, a Spanish language all-news network in
Latin America, as of December 31, 1999 had 8.5 million subscribers. TBS also
distributes region specific versions of TNT and Cartoon Network on either a
single channel basis or a combined channel basis, and Turner Classic Movies in
approximately 120 countries around the world. Each such network features all or
a portion of its schedule in more than one language through dubbing or
subtitling.

    CNN+, a Spanish language 24-hour news network, was launched for distribution
in Spain and Andorra in early 1999 in a 50/50 joint venture between TBS and
Sogecable, S.A., an affiliate of Canal+. As of December 31, 1999, CNN+ reached
820,000 households. In October 1999, TBS launched CNN Turk, a Turkish language
24-hour news network, through a joint venture with the Dogan Media Group.
Cartoon Network Japan is a Japanese language, all animation (including a
significant amount of locally sourced, Japanese product) 24-hour network which,
as of December 31, 1999, reached more than 1.6 million households. Cartoon
Network Japan is a joint venture owned 40% by TBS, 40% by ITOCHU Corporation and
20% by Time Warner Entertainment Japan Inc. ('TWE Japan'), which is 37.25% owned
by Time Warner.

    n-tv, a German language news network currently reaching nearly 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 HBO 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.

INTERNET SITES

    In addition to its cable networks, TBS operates various advertiser-supported
Internet sites. Cartoon Network.com is a popular advertiser-supported site for
children ages two to eleven. CNN News Group operates multiple sites, primarily
through CNN Interactive. These sites are among the most-visited online
destinations for news and information, with more than 6 billion pages viewed in
1999. CNN Interactive operates CNN.com as its general news service and online
companion to CNN and six additional web sites, including AllPolitics.com, a U.S.
political newssite produced in conjunction with Time magazine and Congressional
Quarterly; myCNN.com, a personalized news site operated by Oracle technology;
and additional online services in Spanish, Portuguese, Swedish, Danish,
Norwegian and Italian. The CNN News Group also produces two other major news
sites: CNNfn.com, a unit of CNN Financial News, and CNN/SI.com, a sports site
developed jointly with Sports Illustrated.

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<PAGE>
    In addition to producing content for the Internet, CNN Interactive produces
and distributes CNN digital content for other platforms and technologies,
including pagers, push technology, European teletext and certain mobile
telephone technologies.

                                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 35.7 million subscriptions as of
December 31, 1999.

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, the films' box office
performances.

    Both HBO and Cinemax are made available in a multichannel format, allowing
subscribers to receive through participating distribution affiliates up to six
separately programmed channels of HBO (such as HBO-Family, providing G and
PG-rated programming only, or HBO-Zone, offering a younger, hipper programming
mix) and four separately programmed channels of Cinemax programming (such as
ThrillerMax or ActionMax).

    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 it has acquired exclusive rights to exhibit 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 award-winning pay television
original movies and mini-series, sporting events such as boxing matches, sports
documentaries and sports news programs, including 'Real Sports with Bryant
Gumbel,' as well as dramatic and comedy specials and series, such as 'The
Sopranos,' and concert events, family programming and documentaries.

OTHER INTERESTS

    Time Warner Sports, a division of Home Box Office, operates TVKO
Pay-Per-View from HBO, an entity that distributes pay-per-view prize fights and
other pay-per-view programming.

    In 1999, Home Box Office's own production company, HBO Independent
Productions, produced 'Everybody Loves Raymond,' now in its fourth season on
CBS. Divisions of Home Box Office also produce comedy programming for HBO,
such as "The Chris Rock Show," and for other networks.

INTERNATIONAL

    HBO Ole, a 29.4%-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 a 23% interest,
distributes Portuguese-language pay television movie services in Brazil. TWE
also has a

                                      I-5





<PAGE>
40% interest in HBO Asia, a movie-based pay television service which, together
with Cinemax, is 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 the Home Box Office division of 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 62 million homes at year-end 1999.

    The Company, through TWE, also holds a 50% interest in Court TV, which was
available in approximately 37.5 million homes at year-end 1999. Court TV is an
advertiser-supported basic cable television service whose newly expanded
programming includes coverage of live and taped legal proceedings during the day
and a mix featuring popular crime television series in syndication and real
crime stories in the evening.

                                  COMPETITION

    Each of the Networks competes with other television programming services for
distribution on the limited number of analog channels available on cable and
other television 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, online activities and
other forms of news, information and entertainment. In addition, the 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 TBS's Internet
sites compete for advertising with numerous direct competitors and other media.

    The Networks' production divisions compete with other producers and
distributors of programs for air time on broadcast networks, independent
commercial television stations, and pay and basic cable television networks.

                           OTHER CABLE NETWORK ASSETS

WORLD CHAMPIONSHIP WRESTLING

    Through World Championship Wrestling ('WCW'), TBS produces wrestling
programming for TBS Superstation and TNT, the domestic syndication markets and
pay-per-view television. In addition to television programming, WCW is involved
in ancillary businesses such as licensing and merchandising from which it
derives revenues worldwide.

SPORTS FRANCHISES

    Through wholly owned subsidiaries, TBS owns the Atlanta Braves of Major
League Baseball, the Atlanta Hawks of the National Basketball Association, and
the Atlanta Thrashers of the National Hockey League. Each sports team is subject
to the team rules and regulations of the league to which it belongs.

    The teams derive income from gate receipts, advertising and related sales,
suite sales, local sponsorships and local media, and share pro rata in proceeds
from national media contracts and licensing activities of the relevant league,
as well as expansion fees.

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<PAGE>
                                   PUBLISHING

    The Company's Publishing business is conducted primarily by Time Inc., a
wholly owned subsidiary of the Company, either directly or through its
subsidiaries. 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, People, Sports Illustrated, Fortune, Money, Entertainment Weekly and
In Style. These magazines generally appeal to the broad consumer market.

    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.

    Magazine production and distribution activities are generally centralized.
Fulfillment activities for Time Inc.'s magazines are generally administered from
a centralized facility in Tampa, Florida. Some properties employ independent
fulfillment services and make their own arrangements for production and
distribution.

    Time Inc. continues to expand its core magazine businesses through the
development of product extensions. These are generally managed by the individual
magazines and involve new magazines, specialized editions aimed at particular
readership groups, and publication of editorial content through different media,
such as the Internet, books and television. Time Inc. expects to launch five new
magazines in 2000, including Real Simple, a lifestyle magazine about simplifying
your life slated to be launched at the end of March, and eCompany Now, a
business magazine for the Internet economy developed by Fortune to be launched
in early May.

    Time Inc.'s various magazines also generate revenue from their online sites
through advertising, fee-based downloads of or access to premium content,
selected e-commerce offerings, and the licensing of digital content.

DESCRIPTION OF MAGAZINES

    Time Inc.'s magazines and their areas of editorial focus are summarized
below:

    Time summarizes the news and interprets the week's events, both national and
international, across a spectrum of topics, which includes: politics, business,
entertainment, sports, societal trends and health. Time for Kids is a classroom
publication with editions created for students in grades 2 through 6. Time
Digital, formerly a supplement of Time, is being launched as a regular frequency
magazine in 2000. Time also has five weekly English-language editions that
circulate outside the United States: Time Asia, Time Atlantic, Time Canada, Time
Latin America and Time South Pacific.

    Sports Illustrated is a weekly newsmagazine that covers a variety of
competitive sports. New venues for its editorial content have also been
developed, including CNN/Sports Illustrated, a sports news cable television
network and web site that is operated as a joint venture between Sports
Illustrated and CNN. Sports Illustrated for Women covering women's sports, and
Sports Illustrated for Kids, which is intended primarily for pre-teenagers, are
also extensions of the Sports Illustrated franchise.

    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 prominence due to personal challenges or acts of heroism.
People's most recent offspring are: People en Espanol, a Spanish-language
edition aimed primarily at Hispanic readers in the United States, and Teen
People, aimed at teenage readers. Who Weekly is an Australian version of People.

    Time Inc. has other magazines also directed at readers' interests in
celebrities and entertainers. In Style is a monthly magazine that focuses on
celebrity lifestyles and includes reports and advice on beauty and fashion.

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Entertainment Weekly is a weekly magazine that includes reviews and reports on
television, movies, video, music, books and multimedia.

    Fortune is a bi-weekly magazine that reports on worldwide economic and
business developments and 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,
that reports primarily on personal finance and provides information on topics
such as investing, planning for retirement and financing children's college
education. Time Inc. also publishes, under an agreement with American Express
Publishing Corporation, FSB (Fortune Small Business), formerly titled Your
Company, a bi-monthly magazine focusing on success stories, growth advice and
operational issues for small businesses. In 1998, Time Inc. acquired Mutual
Funds, a monthly magazine featuring extensive reports on mutual funds and
stories about personal financial planning.

    Life is a monthly magazine that features photographic essays of important
news events, prominent personalities and meaningful vignettes of the lives of
ordinary people. Time Inc. has announced that Life will cease regular
publication following its May 2000 issue. Life also publishes hardcover
books that include contemporary and historical photographs of note from its
extensive collection.

    Southern Progress Corporation ('Southern Progress') publishes several
regional magazines including Southern Living, a monthly regional home, garden,
food and travel magazine focused on the South; and Sunset, The Magazine of
Western Living. Southern Progress also publishes the following: Cooking Light,
which is published ten times a year and promotes health and fitness through
active lifestyles and good nutrition; Southern Accents, a bi-monthly magazine
that features architecture, fine homes and gardens, arts and travel; Coastal
Living, a bi-monthly magazine for people who 'love the coast;' Progressive
Farmer, a monthly regional farming magazine; and Health, a women's consumer
magazine about health and fitness published nine times in 1999.

    Time Publishing Ventures, Inc. ('TPV') manages Time Inc.'s specialty
publishing titles. Parents and families are addressed by the Parenting Group
Inc., which publishes Parenting, Baby Talk and Family Life (acquired in 1999).
TPV publishes This Old House magazine ten times a year pursuant to a licensing
arrangement with public television station WGBH in Boston and based on the
popular home renovation television series.

    Time Inc.'s international operations include both regional versions of some
of its core magazines, including Time, People, In Style and Fortune, as well as
publications whose editorial content and focus are outside the United States.
Such magazines include Wallpaper, 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, Food & Wine and Departures.

    Time Inc. Custom Publishing is a marketing division of Time Inc. producing
magazines and newsletters for corporate clients utilizing content from Time Inc.
magazines and archival photography from the Time Inc. photography collection, as
well as original content.

ADVERTISING

    Advertising carried in Time Inc. magazines is predominantly consumer
advertising, including domestic automobile manufacturers, media and movies,
computers, financial, food, and toiletries and cosmetics. In 1999, Time Inc.
magazines accounted for a leading 22.6% of the total advertising revenue in
consumer magazines, as measured by the Publishers Information Bureau (PIB).
People, Time and Sports Illustrated were ranked 1, 2 and 3, respectively by PIB,
and Time Inc. had eight of the 30 leading magazines in terms of advertising
dollars.

CIRCULATION

    Circulation drives the advertising rate base, which is the guaranteed
minimum paid circulation level on which advertising rates are based. Single
copies of magazines are sold through retail news dealers and other outlets which
are supplied by wholesalers or directly through a Time Inc. subsidiary. Time
Inc.'s magazines are, however, sold primarily by subscription and delivered to
subscribers through the mail. Subscriptions are sold by

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<PAGE>
direct mail and online solicitation, subscription sales agencies, television
and telephone solicitation and insert cards in Time Inc. magazines and other
publications. A wholly owned subsidiary of Time Inc. is a 50% partner in
American Family Enterprises ('AFE'), whose principal business is selling
magazine subscriptions through the use of sweepstakes and other promotions.
The sale of subscriptions through AFE has declined, partly as a result of
certain litigation involving AFE.

    Time Distribution Services Inc. ('TDS') is responsible for the national
distribution and marketing of single copies of Time Inc. magazines and other
publications. TDS distributes periodicals either directly to retailers or
through a magazine wholesaler network which services retail outlets such as
newsstands, supermarkets, convenience and drug stores. Warner Publisher Services
Inc. ('WPS') is a major distributor of magazines and paperback books sold
through wholesalers in the United States and Canada.

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
1999, Time Inc. purchased paper principally from six independent manufacturers.

    Printing and binding for Time Inc. magazines are performed 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.

                                DIRECT MARKETING

TIME LIFE

    Time Life Inc. is one of the nation's largest direct marketers of continuity
series of books, music and videos. In addition to continuity series, it sells
single 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.

    Editorial material for its books 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, to a lesser extent, outside fulfillment companies.

BOOK-OF-THE-MONTH CLUB

    Effective as of February 2000, Book-of-the-Month Club, Inc. ('BOMC') formed
a joint venture with Bertelsmann Inc.'s Doubleday book clubs business to operate
the U.S. book clubs of BOMC and Doubleday jointly. BOMC contributed to the joint
venture ten of its book clubs and two continuity businesses with a combined U.S.
membership of more than 4.2 million.

    Two of BOMC's clubs, Book-of-the-Month Club and Quality Paperback Book Club,
are general interest clubs. Other clubs specialize in history, business,
children's books, women's lifestyle, spiritual, self-help and health topics, or
the books of a particular author. In addition, multimedia, audio and video
products and other merchandise are offered through the clubs.

    BOMC acquires the rights from publishers to manufacture and distribute books
and then has them printed by independent printing concerns. BOMC operates its
own fulfillment and warehousing operations in Mechanicsburg, Pennsylvania.

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<PAGE>
                                     BOOKS

TRADE PUBLISHING

    Time Inc.'s trade publishing operations are conducted primarily by Time
Warner Trade Publishing Inc. through its two major publishing houses, Warner
Books and Little, Brown. In 1999, Time Warner Trade Publishing placed 36 books
on The New York Times best-seller lists. Warner Books primarily publishes
hardcover, mass market and trade paperback books. 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.

    Time Warner Trade Publishing handles book distribution for Little, Brown and
Warner Books, as well as other publishers, through its state-of-the-art
distribution center in Indiana. The marketing of trade books is primarily to
retail stores, online outlets 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.

    Time Warner Audiobooks develops and markets audio versions of books and
other materials published by both Warner Books and Little, Brown.

OXMOOR HOUSE

    Oxmoor House, Inc., a subsidiary of Southern Progress, markets how-to books
on a wide variety of topics including food and crafts. Leisure Arts, Inc., also
a subsidiary of Southern Progress, is a well-established publisher and
distributor of instructional leaflets, continuity books series and magazines for
the needlework and crafts markets. Sunset Books, managed by Oxmoor House,
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.

                                  POSTAL RATES

    Postal costs represent a significant operating expense for the Company's
publishing activities.

    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 audience and advertising with
numerous other publishers and retailers, as well as other media. These
businesses compete for advertising directed at the general public and also
advertising directed at more focused demographic groups.

    Time Inc.'s circulation efforts, as well as those of most other magazine
publishers, have been adversely affected by developments in two principal
distribution channels. The effectiveness of sweepstakes-based subscription
efforts has declined significantly and recent consolidation among independent
magazine wholesalers has resulted in decreased efficiencies for Time Inc. in
retail magazine distribution.

    Time Inc.'s direct marketing operations compete with other direct marketers
through all media for the consumer's attention. In addition to the traditional
media sources for product sales, the Internet is becoming a strong vehicle in
the direct marketing business.

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<PAGE>
                                     MUSIC

    The Company's worldwide recorded music and music publishing businesses are
conducted under the umbrella name, Warner Music Group ('WMG'). In January 2000,
the Company announced that it had entered into an agreement to combine its
global music operations with that of Britain's EMI Group plc (the 'Warner-EMI
Merger') to form two equally-owned ventures to be collectively known as Warner
EMI Music. (See below.)

                                 RECORDED MUSIC

    In the United States, the Company's recorded music business is principally
conducted through WMG's Warner Bros. Records Inc., Atlantic Recording
Corporation, Elektra Entertainment Group Inc. and London-Sire Records Inc. and
their affiliated labels, as well as through the WEA Inc. companies. WMG's
recorded music activities are also conducted in 67 countries outside the United
States through various subsidiaries, affiliates and non-affiliated licensees.

    The WEA Inc. companies include WEA Manufacturing Inc., which manufactures
compact discs (CDs), audio and videocassettes, CD-ROMs and DVDs for WMG's record
labels, Warner Home Video and 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'), an
independent distribution company specializing in alternative rock music with a
focus on new artists.

DOMESTIC

    WMG's record labels in the United States -- Warner Bros., Atlantic, Elektra
and London-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, rap, reggae, folk, blues, gospel
and Christian music. Among the artists and albums that resulted in significant
U.S. sales for WMG during 1999 were: Kid Rock, Cher, Red Hot Chili Peppers,
Sugar Ray, Everlast, GooGoo Dolls, Faith Hill, Metallica, Brandy, Austin Powers:
The Spy Who Shagged Me soundtrack, Jewel and Busta Rhymes.

    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. WEA Manufacturing is
also the largest manufacturer of DVDs in the world. 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. CDs and audio
cassettes are also increasingly being sold directly to consumers through
Internet retailers such as CDnow and amazon.com. Artists generally receive
royalties based upon the sales of their recordings and music videos, and many
receive non-refundable advance payments which are recoupable from such
royalties.

    At the same time a record is being distributed, 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 outlets and often made available for
viewing on Internet music sites. Label personnel may also help organize a
concert tour that will further promote a new album. On January 19, 2000, WMG
entered into a consent order with the staff of the Federal Trade Commission (the
'Consent Order') with respect to the FTC's investigation of the Company's
practices related to minimum advertised price. Among other things, WMG has
agreed that for seven years it will not make the receipt of any funds for
cooperative advertising of its recorded music product contingent upon the price
or price level at which such product is advertised or promoted. The Consent
Order remains subject to approval by the FTC Commissioners, which has not yet
been obtained.

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<PAGE>
    In addition to newly released records, each of WMG's labels markets and
sells albums from their extensive catalogues of prior releases, in which the
labels generally continue to own the copyright in perpetuity. Rhino Records
specializes in compilations and reissues 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. WMG labels also enter into agreements with
unaffiliated third-party record labels such as Curb Records to manufacture and
distribute for a fee recordings that are marketed under the owner's proprietary
label.

    WMG has actively pursued new media opportunities. A leader in establishing
the DVD Audio format, WMG was a major force in the Madison Project, which tested
the sale to consumers of digitally downloaded music, and has made investments in
companies that stream recordings or music videos digitally. WMG's record labels'
online sites collectively experience the second-largest traffic volume among all
the major music companies.

    Through a 50/50 joint venture, WMG and Sony Music Entertainment Inc.
('Sony') have operated The Columbia House Company, a direct marketer of CDs,
audio and videocassettes in North America. In July 1999, Time Warner announced
an agreement with Sony to merge Columbia House with CDnow, Inc., a music and
video e-commerce company. Since that time, the parties had been pursuing the
receipt of regulatory approvals, but such approvals had not been received by the
March 13, 2000 termination date set forth in the merger agreement and at that
time the parties agreed to terminate the agreement. As a result, the merger will
not occur. On terminating the merger agreement Time Warner and Sony also each
elected to make an investment of $10.5 million in CDnow's common stock, in
addition to the $15 million of convertible loans each committed to make on
entering into the merger agreement.

INTERNATIONAL

    The Warner Music International ('WMI') division of WMG operates through
various subsidiaries and affiliates and their non-affiliated licensees in 67
countries around the world. 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. Significant album sales for WMI in
1999 were generated by the following artists: Cher, Red Hot Chili Peppers, Eric
Clapton, The Coors, Madonna, Luis Miguel, Mana and Phil Collins.

    In most cases, WMI also markets and distributes the records 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 records. 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 recently acquired London Records, a leading British independent
recording company. Its artists include Faith No More, Fine Young Cannibals and
Salt `n' Pepa.

                                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
Eric Clapton, Comden & Green, George and Ira Gershwin, Michael Jackson, Madonna
and Cole Porter. Warner/Chappell also administers the music of several
television and motion picture companies, including Lucasfilm, Ltd. and Hallmark
Entertainment.

                                      I-12





<PAGE>
    Warner/Chappell also owns Warner Bros. Publications and CPP/Belwin, two of
the world's largest publishers of printed music. These two companies market
publications throughout the world containing the works of such artists as
Alabama, The Grateful Dead, Led Zeppelin, Madonna, Bob Seger and many others.

    The principal source of revenues to Warner/Chappell is 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.

                               WARNER-EMI MERGER

    On January 24, 2000, Time Warner and Britain's EMI Group plc announced that
they had agreed to combine their global music operations into two equally-owned
ventures to be collectively known as Warner EMI Music. EMI's labels include
Angel/Blue Note Records, Capitol Records, Priority Records and Virgin Records.
EMI's roster of artists includes Garth Brooks, Janet Jackson, The Rolling Stones
and Spice Girls and its vast back catalogue includes the recordings of The
Beatles, Frank Sinatra and Nat King Cole. EMI's music publishing assets include
songs written by Diane Warren, Enya, Sting, Third Eye Blind, The Prodigy and
Robbie Williams. The Warner EMI Music Board of Directors will consist of 11
members, six designated by Time Warner and five designated by EMI. Roger Ames,
Chairman and Chief Executive Officer of WMG, will be the Chief Executive
Officer, and Ken Berry, CEO of EMI Recorded Music, will be the Chief Operating
Officer. Richard Parsons, President of Time Warner, and Eric Nicoli, Chairman of
EMI Group plc, will serve as Co-Chairmen. The new company will be headquartered
in New York with most of its non-U.S. operations based in London. Completion of
the transaction is subject to certain regulatory approvals and approval by EMI
shareholders. There can be no assurance that such approvals will be obtained.
Additional information on the formation of the joint ventures is provided in
'Management's Discussion and Analysis of Results of Operations and Financial
Condition -- Warner-EMI Music Merger' at page F-3 herein and in Note 20,
'Subsequent Events -- Warner-EMI Music Merger,' to the Company's consolidated
financial statements, at page F-65 herein.

                                  COMPETITION

    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. The competition among
record companies for such talent is intense, as is the competition among
companies to sell the recordings created by these artists. The recorded music
business continues to be adversely affected by counterfeiting of both audio
cassettes and CDs, piracy and parallel imports and may be affected by a
consumer's ability to download quality sound reproductions from the Internet
without authorization from the Company. In response, the recorded music industry
has engaged in a coordinated effort to develop a secure technology for digital
music delivery. In addition, the recorded music business also has 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 one of 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. In addition, the vast majority of WMG's music publishing revenues
are subject to rate regulation either by government entities or by collecting
societies throughout the world.

                              FILMED ENTERTAINMENT

    The Company's Filmed Entertainment businesses produce and distribute
theatrical motion pictures, television shows, animation and other programming,
distribute home video product, operate The WB Television Network, license rights
to the Company's characters, operate retail stores featuring consumer products
based on the Company's characters and brands and operate motion picture
theaters. All of the foregoing businesses are principally conducted by Warner
Bros., which is a division of TWE. The filmed entertainment business also

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<PAGE>
includes New Line Cinema Corporation ('New Line') 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 businesses
are wholly owned by the Company.

WARNER BROS. FEATURE FILMS

    Warner Bros. Pictures produces feature films both wholly on its own and
under co-financing arrangements with others. Warner Bros. Pictures also acquires
for distribution completed films produced and financed by others. Acquired
distribution rights may be limited to specified territories, media and/or
periods of time. The terms of Warner Bros. Pictures' 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.

    Warner Bros. Pictures' strategy includes building movie franchises, which
will continue with the planned expansion of The Matrix into a series of films
and the introduction in 2001 of the first of a series of Harry Potter motion
pictures. Warner Bros. Pictures has also announced a strategic effort to release
films with a diversified mix of genres, talent and budgets. In response to the
rising cost of producing theatrical films, Warner Bros. Pictures has entered
into a number of joint venture agreements with other companies to co-finance
films, decreasing its financial risk while in most cases retaining substantially
all worldwide distribution rights. During 1999, Warner Bros. Pictures released a
total of 25 motion pictures for theatrical exhibition, of which six were wholly
financed by Warner Bros. Pictures and 19 were produced by or with others. 1999
releases from Warner Bros. Pictures (both wholly financed and co-produced)
included Analyze This, Any Given Sunday, Pokemon -- The First Movie, The Green
Mile, The Matrix, Three Kings and Wild Wild West. A total of 24 motion pictures
are currently slated to be released during 2000, of which four are wholly
financed by Warner Bros. Pictures and 20 are produced by or with others.

    Warner Bros. Pictures' joint venture arrangements include: (i) Bel-Air
Entertainment, a joint venture with Canal+ to co-finance on primarily a 50/50
basis the production, overhead and development costs of 10 to 20 motion pictures
through 2003; (ii) a joint venture with Village Roadshow Pictures to co-finance
under a 50/50 cost sharing arrangement the production of up to 40 motion
pictures through 2005; (iii) an exclusive arrangement with Alcon Entertainment
('Alcon') under which Warner Bros. Pictures will have substantially all
worldwide distribution rights in a minimum of 10 motion pictures produced and
financed by Alcon; and (iv) an arrangement with a wholly owned subsidiary of
Universal Pictures ('Universal') to co-finance on a 50/50 basis through 2000
certain motion pictures produced or acquired by Castle Rock, a subsidiary of
Time Warner, under which Warner Bros. and Universal each acquire distribution
rights in the U.S. and Canada to half of the Castle Rock pictures produced under
this arrangement and international distribution rights to the other half on an
alternating basis.

    Warner Bros. Pictures has distribution servicing agreements with Morgan
Creek Productions Inc. ('Morgan Creek') through June 2003 pursuant to which,
among other things, Warner Bros. provides domestic distribution services for all
Morgan Creek pictures and certain foreign distribution services for selected
pictures. Warner Bros. Pictures will also distribute eight motion pictures
produced by Franchise Entertainment LLC through its domestic servicing
arrangements with Morgan Creek.

NEW LINE, CASTLE ROCK AND OTHER FILMED ENTERTAINMENT

    Theatrical films are also produced and distributed by New Line and Castle
Rock, which are wholly owned subsidiaries of TBS. New Line is a leading
independent producer and distributor of theatrical motion pictures with two film
divisions, New Line Cinema and Fine Line Features. New Line's 1999 releases
included the hit Austin Powers: The Spy Who Shagged Me. A total of 24 motion
pictures are currently slated for theatrical release by New Line during 2000.
Certain of Castle Rock's films are currently being co-financed and distributed
under an arrangement with Warner Bros. and Universal (see, 'Warner Bros. Feature
Films' above).

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<PAGE>
    Castle Rock Television produced the critically acclaimed and highly rated
Emmy Award-winning series Seinfeld, which is distributed by a third party for a
fee. Distributed throughout the world, Seinfeld began its first domestic
syndication cycle in September 1995, and in 1998 it was successfully sold to
broadcast television stations for a second syndication cycle commencing in 2001
as well as to TBS Superstation for basic cable exhibition commencing in 2002.

    TBS's filmed entertainment also includes the Hanna-Barbera, MGM and RKO
libraries, with distribution and licensing handled by Warner Bros.

HOME VIDEO

    Warner Home Video ('WHV') distributes for home video use pre-recorded
videocassettes and DVDs containing the filmed entertainment product of the
Company's Warner Bros. Pictures, WarnerVision Entertainment, Castle Rock, New
Line Cinema and Home Box Office divisions. WHV also distributes other companies'
product for which it has acquired the rights, including the distribution of DVDs
on behalf of Disney in Europe, the Middle East, Africa and Australia. Under
distribution agreements, WHV licenses video product and shares in revenues
generated by its customers.

    WHV sells its product in the United States and in major international
territories to retailers and wholesalers through its own sales force, with
warehousing and fulfillment handled by divisions of Warner Music Group and third
parties. In some international countries, WHV's product is distributed through
licensees. Videocassette product is manufactured under contract with independent
duplicators. DVD product is replicated by Warner Music Group companies and third
parties.

    In North America, WHV released five titles on videocassette for home rental
in 1999 with sales and licensed units exceeding one million units each: The
Matrix, Analyze This, Deep Blue Sea, Message in a Bottle and Rush Hour.
Additionally, WHV released 10 titles on videocassette in the North American
sell-through market that generated sales of more than one million units each.
Internationally, the following titles, among others, generated substantial home
video revenues in 1999: The Matrix, You've Got Mail, Lethal Weapon 4 and A
Perfect Murder.

    DVDs, capable of storing large volumes of digitized information -- enough
storage capacity for two full-length feature films on a double-sided or
dual-layered disc -- further increased their presence in the North American and
international markets during 1999. Since the inception of the format, WHV has
released over 500 titles on DVD in North America, of which 25 have generated
sales of more than 250,000 units each, headed by The Matrix, with sales in
excess of two million units. WHV is currently benefitting by releasing in DVD
format both first-run feature motion pictures and titles from WHV's extensive
catalogue.

TELEVISION

    Warner Bros. is one of the world's leading suppliers of television
programming. Warner Bros. both develops and produces new television series,
made-for-television movies, mini-series, reality-based entertainment shows and
animation programs and also distributes television programming for exhibition on
all U.S. networks, syndicated domestic television, cable syndication and a
growing array of international television distribution outlets. The distribution
library owned or managed by Warner Bros. currently has approximately 5,700
feature films, 32,000 television titles, 12,000 animated titles and 1,500
classic animated shorts.

    Warner Bros.' television programming is primarily produced by Warner Bros.
Television ('WBTV'), which produces primetime dramatic and comedy programming
for the major networks, and Telepictures Productions ('Telepictures'), which
specializes in reality-based and talk/variety series. Returning network
primetime series from WBTV include, among others, ER, Friends, The Drew Carey
Show, Whose Line Is It Anyway? and For Your Love, along with WBTV's newest
series, The West Wing. Telepictures is responsible for the development and
production of original programming primarily for syndicated television. In this
capacity, Telepictures has successfully launched, among others, The Rosie
O'Donnell Show.

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<PAGE>
    Warner Bros. Animation ('WBA') is responsible for the creation, development
and production of contemporary television and feature film 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 libraries. Animation programming is important to the Company as a
foundation for various product merchandising and marketing revenue streams as
well as being an important source of initial and on-going programming for
various distribution outlets, including those owned by the Company (including
Cartoon Network and Kids' WB!).

    WBA continues to be a leading producer of original children's animation
programming, including the series Batman Beyond and various direct-to-video
projects, and also continues to distribute the popular Pokemon animated series
in the U.S.

    The expansion of off-network, pay-per-view, pay and basic cable and
satellite broadcasting has increased distribution opportunities for the Warner
Bros. and TBS libraries. A typical sale of a new series produced by or for WBTV
to a major domestic network grants that network an option to carry such series
for four years, after which time WBTV 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.

    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. 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 has formed strategic alliances with some of the
world's leading satellite, cable and over-the-air television broadcasters, and
is also active in the development and production of both English and local
language television programming with international partners.

BACKLOG

    Backlog represents the 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. Backlog for all of Time
Warner's filmed entertainment companies amounted to $3.595 billion at
December 31, 1999, compared to $2.934 billion at December 31, 1998 (including
amounts relating to the intercompany licensing of film product to Time Warner's
cable television networks of $1.176 billion and $995 million as of December 31,
1999 and December 31, 1998, respectively). The backlog excludes advertising
barter contracts.

THE WB TELEVISION NETWORK

    The WB Television Network ('The WB') completed its fifth year of broadcast
operations in January 2000. During the l999/2000 broadcast season, The WB
expanded its primetime program line-up to six nights and is now airing 13 hours
of series programming from Sunday to Friday nights. The network's line-up
includes the family series 7th Heaven, as well as programming aimed at a teen
and young adult audience, such as Dawson's Creek, Charmed, Buffy the Vampire
Slayer, Felicity, Roswell, Popular and Angel.

    The WB's children's network, Kids' WB!, airs 19 hours of programming per
week with programming on weekday mornings, weekday afternoons and Saturday
mornings led by Pokemon, the No. 1-rated Saturday morning children's animation
series.

    As had been anticipated, during the fourth quarter of 1999 the WGN
Superstation discontinued its carriage of The WB programming and, as a result,
the total TV household coverage of The WB was reduced from approximately 90% to
83%. Seventy primary broadcast affiliates together with eight cable-only
affiliates provide

                                      I-16





<PAGE>
coverage for The WB in the top 99 markets. Additional coverage of approximately
5.4 million homes is provided by The WB 100+ Station Group, a partnership with
broadcast affiliates and cable operators in markets 100-212 that provides The WB
and syndicated programming to those markets.

    Tribune Broadcasting owns a 22.25% interest in The WB. Key employees of The
WB hold an 11% interest in the network.

CONSUMER PRODUCTS AND 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, Turner classic films and the literary
phenomenon Harry Potter.

    Warner Bros. Studio Stores operates 146 stores in the United States.
Fifty-four other stores are owned and operated by franchisees in 14 countries or
territories throughout the world. Warner Bros. Studio Stores has recently
commenced a plan to improve the performance of its stores, which includes the
closing of underperforming stores, the modification of other stores into
smaller, more efficient operations and the exploitation of potential e-commerce
opportunities. See also 'Management's Discussion and Analysis of Results of
Operations and Financial Condition,' at pages F-9 and F-10 and Note 3, 'Filmed
Entertainment Transactions -- 1999 Warner Bros. Retail Stores Write-Down,' to
the Company's consolidated financial statements at page F-36 herein for
additional information.

THEATERS

    Through joint ventures, Warner Bros. International Theatres at December 31,
1999 operated 107 multi-screen cinema complexes with 975 screens in 7 foreign
countries, including 30 theaters in Australia, 27 in the United Kingdom, 28 in
Japan, 10 in Portugal, 6 in Italy, 5 in Spain and 1 in Taiwan. In January 2000,
a partnership of a Warner Bros. affiliate and Viacom repurchased out of
bankruptcy a chain of theaters located in Colorado and California. The
partnership is in the process of disposing of a substantial number of the
acquired sites and may retain and operate a select few located primarily in
southern California.

                           OTHER ENTERTAINMENT ASSETS

THEME PARKS

    During 1999, Warner Bros. sold its interests in movie-related theme parks in
Germany and Spain to Premier Parks while retaining its interest in three parks
in Australia. Warner Bros. will continue to license its animated cartoon and
comic book characters to Premier's Six Flags theme parks in the United States
and Canada and has granted new licenses to Premier Parks for parks in Europe and
Central and South America.

DC COMICS AND MAD MAGAZINE

    TWE and a wholly owned subsidiary of 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.

                                      I-17





<PAGE>
                                  COMPETITION

    The production and distribution of theatrical motion pictures, television
and animation product and videocassettes/videodiscs/DVDs 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, writers,
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. 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. Network television is extremely competitive as
networks seek to attract audience share, television stations for affiliation,
advertisers and broadcast rights to television programming. 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 films and attracting patrons.

                                     CABLE

    The Company's Cable business consists principally of interests in cable
television systems that are generally managed by Time Warner Cable, a division
of TWE. Of the approximately 12.6 million subscribers served by the Company at
December 31, 1999, approximately 1.8 million are in systems owned by TWI Cable
Inc. ('TWI Cable'), a wholly owned subsidiary of Time Warner, and approximately
10.8 million are in systems owned or managed by TWE. TWE's cable systems include
approximately 6.7 million subscribers in a joint venture between TWE and
Advance/Newhouse known as TWE-A/N. TWE-A/N is owned 33.3% by Advance/Newhouse,
64.8% by TWE and 1.9% by TWI Cable. Time Warner Cable generally manages all such
systems and receives a fee for management of the systems owned by TWI Cable and
TWE-A/N.

                               SYSTEMS OPERATIONS

    Time Warner Cable is one of the largest operators of cable television
systems in the United States with approximately 90% of its customers served by
clustered cable systems (as described below) with 100,000 subscribers or more.

    Over the past several years, Time Warner Cable has pursued a strategy of
upgrading its existing cable systems generally to 750 MHz capability, based on a
hybrid fiber optic/coaxial cable architecture. Upgraded systems can deliver
increased channel capacity and provide two-way transmission capability, with
improved network management systems. Upgrading also permits Time Warner Cable to
roll out new and advanced services, including digital and high-definition
television ('HDTV') programming, high-speed Internet service, video-on-demand,
telephony and other services. See 'New Cable Services' below.

    Time Warner Cable entered into a Social Contract with the Federal
Communications Commission ('FCC') in 1996 that required upgrades of generally
all domestic systems managed by Time Warner Cable by December 31, 2000. Of those
cable systems which are covered by the Social Contract, approximately 85% had
completed upgrades by December 31, 1999 and average analog channel capacity had
increased from approximately 50 channels to approximately 75 channels. The total
capital investment to be made by Time Warner Cable for the upgrades is estimated
to be approximately $4 billion of which, by the end of 1999 approximately $3.75
billion had been spent.

    Apart from upgrades, Time Warner has made over $350 million of additional
capital available to Time Warner Cable in 2000 to accelerate the rollout of its
digital and Internet services, in order to take advantage of the positive
customer response rates and to better position itself against competitive
services such as DTH satellite services.

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<PAGE>
    As of December 31, 1999, Time Warner Cable had 34 distinct geographic system
groupings serving more than 100,000 subscribers. This clustering strategy has
enabled, among other things, significant cost and marketing efficiencies, more
effective pursuit of local and regional cable advertisers, the development of
local news channels and the roll-out of advanced services over a geographically
concentrated customer base.

    In 1999, Time Warner Cable (i) closed a series of asset exchanges with
certain subsidiaries of AT&T (successor to TCI) under which AT&T received
systems serving approximately 575,000 subscribers in areas not strategic to Time
Warner Cable and Time Warner Cable received systems of comparable aggregate size
adjacent to or near major clusters in Florida, Hawaii, Maine, New York, Ohio,
Texas and Wisconsin and (ii) exchanged cable television systems serving
approximately 314,000 subscribers in Boston and Atlanta for other systems of
comparable aggregate size owned by MediaOne in Ohio, Maine and Palm Springs, CA.
Time Warner Cable also in 1999 obtained sole control of partnerships previously
held with Fanch Communications, retaining cable television systems serving
approximately 158,000 subscribers and approximately $280 million of cash, and
releasing interests in other systems owned by such partnerships. Time Warner
Cable has agreed to exchange its Indianapolis system (approximately 120,000
subscribers) for Comcast's Tallahassee and Lake County, Florida systems
(approximately 130,000 subscribers) in an asset exchange expected to close in
the first half of 2000.

FRANCHISES

    Cable systems are constructed and operated under non-exclusive franchises
granted by state or local governmental authorities. Franchises typically contain
many conditions, such as time limitations on commencement or completion of
construction; conditions of service, including number of channels, provision of
free services to schools and other public institutions; and the maintenance of
insurance and indemnity bonds. Cable franchises are subject to various federal,
state and local regulations. See 'Regulation and Legislation' below.

PROGRAMMING

    Programming is generally made available to customers through programming
tiers, which are packages of different programming services provided for
prescribed monthly fees. The available analog channel capacity of Time Warner
Cable's systems has been expanding as system upgrades are completed. As Time
Warner Cable rolls out digital services in its systems, the number of channels
of video programming a customer may elect to receive are further increased such
that over 150 video channels are available.

    Video programming available to customers includes local and distant
broadcast television stations, cable programming services like CNN, TNT and
ESPN, and premium cable services like HBO, Cinemax, Showtime and Starz! The
terms and conditions of carriage of programming services are generally
established through affiliation agreements between the programmers and Time
Warner Cable. Many programming services impose a monthly license fee per
subscriber upon the cable operator. Programming costs generally have been
increasing sharply in recent years and depending on the terms of any specific
agreement, the cost of providing any cable programming service may continue to
rise. While Time Warner Cable sometimes has the right to cancel contracts, and
can in any event refuse to renew them, it is unknown whether the loss of any one
popular supplier would have a material adverse effect on Time Warner Cable's
operations.

SERVICE CHARGES AND ADVERTISING

    Subscribers to the Company's cable systems are charged monthly fees based on
the level of service selected, which fees in some cases include equipment
charges. A one-time installation fee is generally charged for connecting
subscribers to the cable television system. Although regulation of certain cable
programming rates ended on March 31, 1999, rates for 'basic' programming and for
equipment and installation continue to be regulated pursuant to federal law. See
'Regulation and Legislation' 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. Pay-per-view programming offers movies and special events, such as
boxing, for a

                                      I-19





<PAGE>
separate charge. Time Warner Cable's systems increasingly offer pay-per-view
services on an 'impulse' basis, permitting a subscriber to place an order over
the cable system through his or her remote control or cable set-top box.

    Subscription revenues continue to account for most of Time Warner Cable's
revenues, with pay-per-view and premium services contributing additional
revenues. Subscribers may discontinue purchasing services at any time.

    Time Warner Cable also generates revenue by selling advertising time to
national, regional and local businesses. Cable television operators receive an
allocation of advertising time availabilities on certain cable programming
services into which commercials can be inserted at the local system level. The
clustering of Time Warner Cable's systems expands the share of viewers that Time
Warner Cable reaches within a local DMA (Designated Market Area), which helps
local ad sales personnel to compete more effectively with broadcast and other
media. In addition, in many localities, contiguous cable system operators have
formed advertising interconnects to deliver locally inserted commercials across
wider geographic areas, replicating the reach of the broadcast stations as much
as possible. Twenty-two of Time Warner Cable's 39 field divisions participate in
a cable advertising interconnect.

                              LOCAL NEWS CHANNELS

    Time Warner Cable operates, alone or in partnerships, 24-hour local news
channels in New York City (NY1 News), Tampa Bay (Bay News 9), Orlando (Central
Florida News 13), Rochester, NY (R/News) and Austin (News 8 Austin).
Preparations to launch news channels are underway in two other large systems.

                               NEW CABLE SERVICES

DIGITAL CABLE SERVICES

    During 1999, Time Warner Cable began an aggressive roll-out of digital cable
service in many of its cable systems. As of December 31, 1999, Time Warner Cable
had approximately 430,000 digital service subscribers. Currently 30 of Time
Warner Cable's field divisions are offering digital cable, while the remaining
major divisions are expected to commence offering digital service in 2000. The
digital format of the signals allows them to be compressed so that they occupy
less bandwidth, which substantially increases the number of channels that can be
provided over a system. The digital set-top boxes delivered to subscribing
customers will offer a digital programming tier with up to 100 networks, CD
quality music services, more pay-per-view options, more channels of multiplexed
premium services, a digital interactive program guide, and other features such
as parental lockout options.

ROAD RUNNER

    In 1998, TWE, TWE-A/N, TWI Cable, MediaOne, and subsidiaries of Microsoft
Corp. ('Microsoft') and Compaq Computer Corp. ('Compaq') formed a joint venture
to operate and expand Time Warner Cable's and MediaOne's then-existing
high-speed online service business (the 'Road Runner Joint Venture'). The Road
Runner cable service provides high-speed Internet access and also offers content
optimized for broadband-capable networks. Road Runner affiliates with local
cable television system operators, principally Time Warner Cable and MediaOne,
in exchange for a percentage of the cable operator's retail revenue from
subscribers for the Road Runner service. Customers connect their personal
computers to the cable operators' two-way hybrid fiber optic/coaxial cable
system which, together with Road Runner's backbone network, enables customers to
access the Internet and Road Runner's content at speeds much greater than
traditional telephone modems.

    As of December 31, 1999, the Road Runner Joint Venture had affiliations in
37 localities and was available to approximately 13 million homes passed by
cable, and the service had approximately 550,000 subscribers (of which
approximately 330,000 are in Time Warner Cable systems). The Road Runner service
has been launched by Time Warner Cable in 23 of its 39 field divisions including
New York City. Roll-outs will continue during 2000. After conversion of all
outstanding preferred interests, the Road Runner Joint Venture is owned 8.6% by

                                      I-20





<PAGE>
TWI Cable, 20% by TWE, 26.3% by TWE-A/N, 25.1% by MediaOne, 10% by Microsoft and
10% by Compaq. See also Note 2, 'Cable Transactions -- Road Runner Joint
Venture' to the Company's consolidated financial statements at pages F-34
and F-35 herein.

    The Road Runner affiliates, including Time Warner Cable, have given the Road
Runner service certain rights of exclusivity with regard to high-speed Internet
services to residential subscribers' personal computers. However, as part of the
Company's ongoing discussions in connection with the proposed AOL Merger, the
Company has pledged to enter into agreements to provide multiple Internet
service providers (ISPs) on its cable systems, subject to existing contractual
limitations and partnership obligations; and the Company will endeavor to reach
accommodations with third parties to permit the implementation of multiple ISP
services as quickly as possible.

HDTV

    Pursuant to FCC order, television broadcast stations have been granted
additional over-the-air spectrum to provide, under a prescribed roll-out
schedule, high definition and digital television signals to the public. Time
Warner Cable's upgraded hybrid fiber optic/coaxial cable architecture should
provide a technologically superior means of distributing HDTV signals. To date,
Time Warner Cable has agreed to carry the high-definition television signals and
other digital signals that will be broadcast by television stations owned and
operated by the CBS and Fox networks; and Time Warner Cable is seeking similar
arrangements with other broadcasters. Time Warner Cable is also carrying the
HDTV version of HBO in certain areas.

VIDEO-ON-DEMAND

    By adding digital servers and software to its digital television service
platform, Time Warner Cable will be able to offer network-based 'true'
video-on-demand services, including 'virtual' VCR features such as pause, rewind
and fast forward. Time Warner Cable began testing of video-on-demand equipment
in 1999 in its Austin, Tampa Bay and Hawaii systems, and launched
video-on-demand service on a limited basis to customers in certain areas of
Hawaii in December 1999. Additional testing and launches in two or three
additional locations are expected in 2000.

                                   TELEPHONY

    Time Warner Telecom Inc. ('Time Warner Telecom') is a facilities-based
integrated communications provider that offers a wide range of business
telephony services in selected metropolitan areas across the United States. Time
Warner Telecom was formed in 1998 through a restructuring of the business
telephony operations of Time Warner Cable. Following Time Warner Telecom's
initial public offering of equity securities in May 1999, the Company's
aggregate interest in Time Warner Telecom as of December 31, 1999 was diluted to
approximately 48% of the equity.

    Time Warner Telecom's customers are principally medium and large-sized
telecommunications-intensive business end-users, 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. Its networks
have been constructed to date primarily through licensing the use of fiber
capacity from Time Warner Cable.

    Time Warner Cable is continuing to evaluate the most efficient and effective
way to offer residential telephony services to consumers, and is presently
exploring a strategy focused on Internet protocol, rather than circuit-switched,
telephony.

                                      I-21





<PAGE>
                                 INTERNATIONAL

    During 1999, TWE and TWE-A/N sold their interests in two cable systems in
France and, in addition, sold their interests in two cable and Internet access
services in Japan. As a result, Time Warner Cable no longer holds any interests
in cable systems outside the United States.

                                  COMPETITION

    Cable television systems face strong competition for viewer attention and
subscriptions from a wide variety of news, information and entertainment
providers. These include multichannel video providers like DTH, MMDS, SMATV
systems and telephone companies, other sources of video programs (such as
broadcast television and videocassettes) and additional sources for news,
entertainment and information, including the Internet. Cable television systems
also face strong competition from all media for advertising dollars.

    DTH. DTH services offer pre-packaged programming services that can be
received by relatively small and inexpensive receiving dishes. As of December
1999, satellite-delivered DTH services were reported to be serving over 11
million subscribers. (In addition to DTH, most cable programming is available to
owners of larger, more expensive C-Band satellite dishes.) Congress has recently
enacted legislation allowing carriage of local broadcast signals by DTH
providers under a copyright compulsory license similar to that granted to cable
television operators. DirectTV and Echostar have commenced offering local
broadcast signals in major metropolitan areas, with additional rollouts
scheduled. The ability of DTH providers to deliver local broadcast signals
reduces one advantage that cable operators previously had over DTH providers.

    MMDS/Wireless Cable. Wireless cable operators, including digital wireless
operators, use microwave technology to distribute video programming. Wireless
cable operators reportedly served over 800,000 subscribers nationwide as of June
1999.

    SMATV. Additional competition comes from private cable television systems
servicing condominiums, apartment complexes and certain other multiple unit
residential developments with local broadcast signals and many of the same
satellite-delivered program services offered by franchised cable television
systems. The operators of these private systems, known as SMATV systems, often
enter into exclusive agreements which preclude cable television operators from
serving residents of such private complexes, where state law permits.

    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 and two municipally-owned systems are presently in
operation in Time Warner Cable franchise areas.

    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,' below). Telephone companies are
now free to enter the retail video distribution business, including through DTH,
MMDS and SMATV, as traditional franchised cable system operators, or as
operators of 'open video systems' subject to certain local authorizations and
local fees.

    Additional Competition. In addition to multichannel video providers, cable
television systems compete with all other sources of news, information and
entertainment including over-the-air television broadcast reception, live
events, movie theaters, home video products, and the Internet. In recent years,
the FCC has adopted policies providing for authorization of new technologies and
a more favorable operating environment for certain existing technologies that
provide, or may provide, substantial additional competition for cable television
systems.

    'On-Line' Competition. Time Warner Cable's systems face competition from a
variety of companies that service customers with various other forms of
'on-line' services, including DSL high-speed Internet access services and
dial-up services over ordinary telephone lines. Monthly prices of these ISPs are
often comparable to cable offerings. Other developing new technologies, such as
Internet access via satellite or wireless connections, compete with cable and
cable on-line services as well.

                                      I-22





<PAGE>
                           REGULATION AND LEGISLATION

    The Company's cable television systems, cable network, television network
and original programming businesses are subject, in part, to regulation by the
FCC, and the cable television systems business is also subject to regulation by
some state governments and substantially all local governments. The following is
a summary of current federal laws and regulations affecting the growth and
operation of these businesses and a description of certain state and local laws.
In addition, various legislative and regulatory proposals under consideration
from time to time by Congress and various federal agencies have in the past
materially affected, and may in the future materially affect, the Company.

                         PROGRAMMING AND CABLE NETWORKS

    Under the 1992 Cable Act, the FCC has issued regulations which generally
prohibit vertically integrated programmers, which include the Turner Networks
and the Home Box Office Services, 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 Telecommunications Competition and Deregulation Act of 1996 (the '1996
Telecommunications Act') contains certain provisions relating to violent and
sexually explicit programming. In addition to requiring manufacturers to build
television sets with the capability of blocking certain coded programming (the
so-called 'V-chip'), pursuant to the 1996 Telecommunications Act the cable and
broadcasting industries developed voluntary ratings for video programming
containing violent, sexually explicit or other indecent content and agreed to
voluntarily transmit signals containing such ratings.

                                     CABLE

    The following discussion summarizes the significant federal, state and local
laws and regulations affecting the Company's cable television systems
operations.

    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 systems rates for basic
service, equipment and installation; (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.

    Rate Regulation. Under federal laws, nearly all cable television systems are
subject to local rate regulation for basic service pursuant to a formula
established by the FCC and enforced by local franchising authorities. The 1992
Cable Act required the FCC to review rates for nonbasic service tiers, known as
'cable programming service tiers' ('CPST'), comprised of cable programming
services other than per-channel or per-program services. However, pursuant to
the 1996 Telecommunications Act, regulation of CPST rates terminated on
March 31, 1999. Regulation of basic service 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 direct-to-home ('DTH').

    The FCC's rate regulations employ a benchmark system for measuring the
reasonableness of existing basic 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

                                      I-23





<PAGE>
rates can also be made in the event a cable operator adds or deletes channels or
significantly upgrades its system.

    Local franchising authorities are empowered to order a reduction of existing
rates that exceed the maximum permitted level for basic service and associated
equipment, and refunds can be required.

    Carriage of Broadcast Television Signals. The 1992 Cable Act allows
commercial television broadcast stations that 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 may seek monetary or non-monetary
compensation in return for granting retransmission consent. Local non-commercial
television stations are also given mandatory carriage rights, subject to certain
exceptions. Unlike commercial stations, non-commercial 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 retransmission consent agreements of at least three year
terms with the majority of broadcasters, but certain broadcasters have only
granted short-term arrangements to permit continued negotiations. If the parties
cannot agree on retransmission consent terms, Time Warner Cable may be forced to
delete the subject programming from one or more of its systems for an indefinite
period. The next three-year election between mandatory carriage and
retransmission consent for local commercial television stations will occur on
October 1, 2002.

    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 non-local
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' ('OVS') which are not subject to the full array of
regulatory obligations imposed on traditional cable systems, although OVS
operators can be required to obtain a franchise by a local governmental body
and/or to make payments in lieu of cable franchise fees. A number of separate
entities have been certified to operate open video systems in areas where the
Company operates cable systems, including New York City, Milwaukee, Kansas City
and a number of cities in Texas.

    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 the
outcome of a pending review by the FCC. 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. Finally, the 1992 Cable Act
prohibits common ownership, control or interest in cable television systems and
MMDS facilities or SMATV systems having overlapping service areas, except in
limited circumstances. The 1996 Telecommunications Act exempts cable systems
facing 'effective competition' from the MMDS and SMATV cross-ownership
restrictions.

                                      I-24





<PAGE>
    The 1992 Cable Act directed the FCC to adopt so-called subscriber-limit
rules, 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 promulgated a rule imposing a limit of 30% of all cable, DTH and
other multi-channel video provider subscribers nationwide. Pursuant to the 1992
Cable Act, the FCC has also adopted so-called channel-occupancy rules that, 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. Time Warner Cable is
a party to a federal-court challenge to the validity of both the
channel-occupancy rules and the subscriber-limit rules. Pending this challenge,
the FCC has voluntarily stayed the effectiveness of the subscriber-limit rules
(with the exception of certain reporting requirements) but not the
channel-occupancy rules.

    Other FCC Regulations. 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; customer service; technical standards; home wiring; and
limitations on advertising contained in nonbroadcast children's programming.

    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 a maximum of
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.

    Renewal and Transfer 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.

    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. Although Time Warner Cable has been successful in
the past in negotiating new franchise agreements, there can be no assurance as
to the approval of franchises in the future.

    A substantial number of Time Warner Cable's cable television franchises may
require local governmental approval in connection with the merger of America
Online and the Company, and a few states may impose similar requirements.
Applications have been submitted to appropriate state and local authorities
where such consent may be required. Other state and local authorities have been
provided notification of the pending merger.

                                      I-25





<PAGE>
                                 DIGITAL MEDIA

    During 1999, Time Warner created Time Warner Digital Media ('TW Digital
Media') to develop and implement a company-wide digital media strategy, to fund
and oversee digital media initiatives across Time Warner's divisions and to
identify and pursue digital media-related investment opportunities. TW Digital
Media also serves as a resource for other transactions in the new media and
digital area, including the Company's pending merger with America Online. As
part of the restructuring of Time Warner's digital initiatives, the Company also
closed the Pathfinder portal previously developed by Time Inc.

    TW Digital Media currently funds and participates in the oversight of the
development of the Company's significant Internet sites, including CNN.com,
CNNfn.com, CNN/SI.com, and Entertaindom.com. Entertaindom, launched in November
1999, is an advertiser-supported entertainment destination site featuring
entertainment-related information and services, a mix of content from both Time
Warner brands and third party content providers, including animated shorts,
music and multiplayer games, e-commerce and community sites, such as
ACMEcity.com, an entertainment-focused personal home page community. TW Digital
Media also funds and participates in the development of new digital media
business initiatives, including both online extensions of existing brands, such
as CartoonNetwork.com, InStyle.com, and TimeLife.com, as well as new brands,
such as Volume.com, a website targeting an African American audience.

    In December 1999, TW Digital Media launched a digital media investment fund
to invest up to $500 million in cash and non-cash (e.g., advertising and
promotion) currencies in non-controlling equity investments in companies engaged
in e-commerce, vertical and interactive content, technology, infrastructure and
other digital media-related activities. As of March 1, 2000, investments made by
the Company in digital media include OpenTV, ReplayTV, Intervu, Snowball,
Fortune City, WebMD, Bolt, Inc., ARTISTDirect, DealTime and NetSales.

                         DESCRIPTION OF AGREEMENT WITH
                           LIBERTY MEDIA CORPORATION

    The following description summarizes certain provisions of the Company's
agreement with Liberty Media Corporation (an affiliate of AT&T) and certain of
its subsidiaries (collectively, 'LMC') that was entered into in connection with
the merger of Turner Broadcasting System Inc. in 1996 (the 'TBS Transaction')
and the consent decree entered into by the Company with the FTC at that time
(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. In May 1999,
the terms of the Series LMCN-V Common Stock were amended which effectively
resulted in a two-for-one stock split. Each share of Series LMCN-V Common Stock
receives the same dividends and otherwise has the same rights as a share 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.

                                      I-26





<PAGE>
    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. Each share
of Series LMCN-V Common Stock is convertible into one share 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 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. The limited partnership interests in TWE are held by the Class A
Partners consisting of MediaOne 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. 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
MediaOne (the 'MediaOne Representatives').

    The Time Warner Representatives control all Board decisions except for
certain limited, significant matters affecting TWE as a whole, which matters
also require the approval of the MediaOne 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 MediaOne Representatives.

    CABLE MANAGEMENT COMMITTEE. Prior to August 1999, the businesses and
operations of the cable television systems ('Cable Systems') of TWE and the
TWE-A/N Partnership were governed by a Cable Management Committee (the
'Management Committee') comprised of six voting members, three designated by
MediaOne and three designated by TWE. In August 1999, TWE received a notice from
MediaOne concerning the termination of its covenant not to compete with TWE. As
a result of the termination notice and the operation of the TWE partnership
agreement, MediaOne's rights to participate in the management of TWE's
businesses,

                                      I-27





<PAGE>
including its rights to membership on the Management Committee, terminated
immediately and irrevocably. MediaOne retains its representation on
the TWE Board of Representatives as described above.

    DAY-TO-DAY OPERATIONS. TWE is managed on a day-to-day basis by the officers
of TWE, and each of TWE's principal divisions is managed on a day-to-day
basis by the officers of such division. The officers of Time Warner are also
officers of TWE.

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 principal
lines of business of TWE -- cable, cable programming and filmed entertainment
 -- 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) MediaOne from conducting cable
and certain regional programming businesses in the 14-state region in which US
WEST, Inc. 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. MediaOne will not be bound by the covenant not to compete
after August 2000.

    TRANSACTIONS WITH AFFILIATES. Subject to agreed upon exceptions for certain
types of arrangements, TWE has agreed not to enter into transactions with any
partner or any of its affiliates other than on an arm's-length basis.

REGISTRATION RIGHTS

    Within 60 days after June 30, 1999 and within 60 days after the last day of
each 18 month period after June 30, 1999, the Class A Partners holding,
individually or in the aggregate, at least 10% of the residual equity of TWE
will have the right to request that TWE reconstitute itself as a corporation
and register for sale in a public offering an amount of partnership interests
held by such Class A Partners determined by an investment banking firm so as to
maximize trading liquidity and minimize the initial public offering discount,
if any. Upon any such request, the parties will cause an investment banker to
determine the price at which the interests sought to be registered could be
sold in a public offering (the 'Appraised Value'). Upon determination of the
Appraised Value, TWE may elect either to register such interests or purchase
such interests at the Appraised Value, subject to certain adjustments. If TWE
elects to register the interests and the proposed public offering price (as
determined immediately prior to the time the public offering is to be declared
effective) is less than 92.5% of the Appraised Value, TWE will have a second
option to purchase such interests immediately prior to the time such public
offering would otherwise have been declared effective by the Securities
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, MediaOne 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

                                      I-28





<PAGE>
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 MediaOne, TWE will be required to elect either to
liquidate TWE within a two-year period or to purchase the interest of MediaOne
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.

    The consummation of the proposed AOL Merger will not constitute a "change
in control" of Time Warner under the foregoing provisions.

    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 MediaOne and the right to receive the partnership interests
in payment therefor.

    With respect to any of the put rights of the Class A Partners, TWE may pay
the applicable put price in cash or Marketable Securities (defined as any debt
or equity securities that are listed on a national securities exchange or quoted
on NASDAQ) issued by TWE (or if TWE assigns its obligation to pay the put price
to the Company, by the Company). The amount of any Marketable Securities
comprising the applicable put price shall be determined based on the market
price of such securities during the seven months following the closing of such
put transaction.

RESTRICTIONS ON TRANSFER BY TIME WARNER GENERAL PARTNERS

    TIME WARNER GENERAL PARTNERS. Any Time Warner General Partner is permitted
to dispose of any partnership interest (and any Time Warner General Partner and
any parent of any Time Warner General Partner may issue or sell equity) at any
time so long as, immediately after giving effect thereto, (i) the Company would
not own, directly or indirectly, less than (a) 43.75% of the residual equity of
TWE, if such disposition occurs prior to the date on which the Class A Partners
have received cash distributions of $500 million per $1 billion of investment,
and (b) 35% of the residual equity of TWE if such disposition occurs after such
date, (ii) no person or entity would own, directly or indirectly, a partnership
interest greater than that owned, directly or indirectly, by the Company, and
(iii) a subsidiary of the Company would be a managing general partner of TWE.


                                      I-29





<PAGE>

    No other dispositions are permitted, except that the Company may sell its
entire partnership interest subject to the Class A Partners' rights of first
refusal and 'tag-along' rights pursuant to which the Company must provide for
the concurrent sale of the partnership interests of the Class A Partners so
requesting.

                         CURRENCY RATES AND REGULATIONS

    The Company's foreign operations are subject to the risk of fluctuation in
currency exchange rates and to exchange controls. The Company cannot predict the
extent to which such controls and fluctuations in currency exchange rates may
affect its operations in the future or its ability to remit dollars from abroad.
See Note 1, 'Organization and Summary of Significant Accounting
Policies -- Foreign Currency Translation' and Note 15, 'Derivative Financial
Instruments -- Foreign Currency Risk Management' to the consolidated financial
statements set forth at pages F-26 and F-27 and F-56 through F-57, respectively,
herein. For the revenues of international operations, see Note 16, 'Segment
Information' to the consolidated financial statements set forth on page F-61
herein.

                                   EMPLOYEES

    At December 31, 1999, the Company employed a total of approximately 69,700
persons, including approximately 30,000 persons employed by TWE.

                                      I-30





<PAGE>
ITEM 2. PROPERTIES

CORPORATE, TBS, PUBLISHING AND MUSIC

    The following table sets forth certain information as of December 31, 1999
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                                                                  94,400 sq. ft. are sublet to
                                                                                      outside tenants.

New York, New York                  Business and editorial offices       1,522,400    Leased by the Company. Most leases
  Time & Life Bldg.                 (Publishing and Corporate)                        expire in 2017. Approximately
  Rockefeller Center                                                                  39,800 sq. ft. are sublet to
                                                                                      outside tenants.

New York, New York                  Offices (Music)                        273,800    Leased by the Company. Leases
  1290 Ave. of the                                                                    expire 2000-2012. Approximately
  Americas                                                                            66,100 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.
                                    retail, hotel and theatres                        are sublet to outside tenants.

Atlanta, Georgia                    Offices and studios (TBS)              436,000    Owned and occupied by the Company.
  1050 Techwood Dr.

Lebanon, Indiana                    Warehouse space (Publishing)           500,450    Leased by the Company. Lease
  121 N. Enterprise Blvd.                                                             expires in 2006.

Mechanicsburg,                      Office and warehouse space             358,000    Owned and occupied by the Company.
  Pennsylvania                      (Publishing)
  1225 S. Market St.

Indianapolis, Indiana               Warehouse space (Publishing)           253,000    Leased by the Company. Lease
  4200 N. Industrial                                                                  expires in 2009.
  Street

Olyphant,                           Manufacturing, warehouses,           1,012,000    Owned and occupied by the Company.
  Pennsylvania                      distribution and office space
  1400 and 1444 East                (Music)
  Lackawanna Avenue

Alsdorf, Germany                    Manufacturing, distribution and        269,000    Owned and occupied by the Company.
  Max-Planck Strasse 1-9            office space (Music)

Terre Haute, Indiana                Manufacturing and office space         269,000    Leased by the Company. Lease
  4025 3rd Parkway                  (Music)                                           expires in 2001.
</TABLE>

                                      I-31





<PAGE>
CABLE NETWORKS -- HBO, FILMED ENTERTAINMENT AND CABLE

    The following table sets forth certain information as of December 31, 1999
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          TYPE OF OWNERSHIP;
        LOCATION                   PRINCIPAL USE           FLOOR SPACE/ACRES    EXPIRATION DATE OF LEASE
        --------                   -------------           -----------------    ------------------------
<S>                       <C>                              <C>                <C>
New York, New York        Business offices                 350,000 sq. ft.    Leased by TWE.
  1100 and 1114           (HBO)                            and 244,000 sq.    Leases expire in 2018.
  Avenue of the                                            ft.
  Americas

Burbank, California       Sound stages, administrative,    3,303,000          Owned by TWE.
  The Warner Bros.        technical                        sq. ft. of
  Studio                  and dressing room                improved
                          structures, screening            space on 158
                          theaters, machinery and          acres(a)
                          equipment facilities, back
                          lot and parking lot and
                          other Burbank properties
                          (Filmed Entertainment)

Baltimore, Maryland       Warehouse (Filmed                387,200 sq. ft.    Owned by TWE.
  White Marsh             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

    Following the announcement of the proposed merger of the Company and America
Online, nine lawsuits were filed by certain of the Company's shareholders
against the Company, its Board of Directors and America Online in the Court of
Chancery of the State of Delaware between January 10 and January 13, 2000,
which allege breach of fiduciary duty and seek to enjoin the merger and
unspecified compensatory damages. The plaintiffs in these nine suits (Cohen v.
Levin et al., Zucker v. Levin et al., Masseo Investments Ltd v. Levin et al.,
Lacoff v. Levin et al., Bamdas v. Levin et al., Harad v. Levin et al.,
Feinberg v. Time Warner Inc. et al., Rosengarten v. Levin et al., Bernard v.
Time Warner Inc. et al.) have agreed to consolidate their complaints and no
action is required by defendants until such consolidation is ordered by the
Court.

    On June 24, 1997, plaintiffs in Six Flags Over Georgia LLC et al. v. Time
Warner Entertainment Company, L.P. et al., filed an amended complaint in the
Superior Court of Gwinnett County, Georgia, claiming that, inter alia,
defendants violated their fiduciary duties in operating the Six Flags Over
Georgia amusement park. On December 18, 1998, following a trial, a jury returned
a verdict in favor of plaintiffs. The total awarded to plaintiffs was
approximately $454 million in compensatory and punitive damages. Interest on the
judgment is accruing at the Georgia statutory rate of 12%. The case is now on
appeal to the Georgia Court of Appeals. Defendants have argued on appeal that,
because of legal errors in the trial court, they are entitled to judgment in
their favor, a new trial, or a reduced damage award. TWE and its 51% partner in
the amusement park have retained financial responsibility for this litigation
following their sale of the Six Flags companies to Premier Parks, Inc.

    On April 11, 1997, the Federal Trade Commission (FTC) notified
Warner-Elektra-Atlantic Corporation ('WEA Corp.') that it had commenced a
preliminary investigation into whether WEA Corp. and others may

                                      I-32





<PAGE>
have violated, or may be violating, laws against unfair competition by the
adoption, implementation, or maintenance of minimum advertising pricing
programs. In light of the Consent Order that WMG has entered into with the
FTC staff (see Item 1. Business -- Music, on page I-11), the Company expects
that the FTC will discontinue its investigation of WEA Corp. without further
action.

    On July 25, 1996, the Office of the Attorney General of the State of Florida
served WEA Corp. with a Civil Investigative Demand ('CID') 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 compact discs
(CDs) or conduct consisting of unfair methods of competition or unfair trade
practices in the sale and marketing of CDs. WEA Corp. has produced documents in
compliance with this CID. By letter dated January 9, 1998, WEA Corp. was
notified by the Office of the Attorney General of the State of Florida that
certain documents that WEA Corp. had produced to its office were shared under a
confidentiality provision of Florida law 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. The investigation remains open.

    On May 30, 1995, Digital Distribution Inc. d/b/a Compact Disc Warehouse v.
CEMA Distribution et al. was filed in U.S. District Court for the Central
District of California. The plaintiff, purportedly representing a class of
direct purchasers of CDs, claimed several companies that distribute CDs to
wholesalers and retailers, including WEA Corp., had violated federal antitrust
laws by engaging in a conspiracy to fix prices of CDs, and sought injunctive
relief and treble damages. The District Court granted the defendants' motion to
dismiss on January 9, 1996, but the U.S. Court of Appeals for the Ninth Circuit
subsequently reversed that decision. On April 22, 1998, the Judicial Panel on
Multidistrict Litigation consolidated the case with four other pending cases,
for pretrial purposes, in the Central District of California. These other cases
include: Chandu Dani d/b/a Compact Disc Warehouse and Record Revolution v. EMI
Music Distribution et al. (C.D. Cal. 1997); Obie, inc. d/b/a Chestnut Hill
Compact Disc v. EMI Music Distribution et al. (S.D.N.Y. 1997); Third Street
Jazz and Rock Holding Corporation v. EMI Music Distribution et al (C.D. Cal.
1997); and Nathan Muchnick, Inc. v. Sony Music Entertainment, Inc. et al.
(S.D.N.Y.1998). The District Court has scheduled trial to begin later this year.
Although management believes the case is without any merit, an adverse jury
verdict could result in a material loss to Time Warner. Due to the lack of
specificity to plaintiff's claims, a range of loss is not determinable at this
time.

    In Ottinger & Silvey et al. v. EMI Music Distribution, Inc. et al.,
plaintiffs commenced suit on February 17, 1998 in the Circuit Court of Cocke
County, Tennessee. Plaintiffs purport to bring the suit on behalf of all persons
who indirectly purchased CDs from January 29, 1993 to the present from six
companies (including WEA Corp.) 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. Plaintiffs claim that defendants are engaged in a conspiracy to fix
CD prices, in violation of the antitrust, unfair trade practices, and consumer
protection statutes of each of these jurisdictions. On May 11, 1998, defendants
filed a motion to dismiss the complaint for failure to state a cause of action.
Plaintiffs have not yet responded to the motion.

    In July 1999, the former President of Indonesia, H.M. Suharto, filed a
lawsuit in the Central Jakarta District Court in Indonesia against Time Inc.
Asia and certain individuals, alleging that the May 24, 1999 issue of the Asian
edition of Time Magazine defamed him in violation of Indonesian law. The
complaint seeks a public retraction and apology, as well as $27 billion in
compensatory damages for alleged harm to Suharto's reputation. In
November 1999, the Indonesian court denied Time's motion to dismiss the suit on
jurisdictional grounds. The parties are in the process of presenting written
evidence to the Indonesian Court; oral testimony is expected to begin later this
year.

    In Bartholdi Cable Company, Inc. v. Time Warner Inc. et al., plaintiff
(formerly known as Liberty Cable Company, Inc.) filed suit in U.S. District
Court for the Eastern District of New York on March 29, 1996 against the
Company, asserting various federal antitrust, Lanham Act, and state law claims.
On June 18, 1997, defendants asserted certain counterclaims against Bartholdi
and certain individuals. The Court has declined motions to dismiss plaintiffs'
claims and defendants' counterclaims. The Court has also denied defendants'
motion for summary judgment. Discovery is underway.



                                      I-33





<PAGE>
    In Parker et. al. v. Time Warner Entertainment et al., two individuals filed
suit in June 1998 against TWE and Time Warner Cable in the Eastern District of
New York on behalf of a purported nationwide class, asserting violations of the
federal Cable Act's privacy provisions, 47 U.S.C. 'SS' 551, related to
defendants' alleged disclosure of personally identifiable information about
plaintiffs, as well as related state law claims. The lawsuit seeks damages under
the Cable Act, restitution of profits, punitive damages, interest, costs, and
attorney's fees. In December 1998, defendants filed a motion to dismiss the
plaintiffs' amended complaint, which the Court initially granted, but denied on
reconsideration. On December 8, 1999, defendants filed a motion to deny class
certification, which is presently pending.

    On February 4, 1999, the United States Department of Justice served a CID on
various motion picture studios including Warner Bros., calling for the
production of certain information and documents about distribution licenses and
relationships between the movie studios, including New Line and Warner Bros.,
and movie theaters. The Company believes the investigation was prompted by
one theater owner's complaints regarding studio distribution practices. The
Company has not been given any indication that any relief will be sought by the
Department of Justice and, to date, has only been asked to produce documents
and information.

    Litigation relating to the 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.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

    Not applicable.

                       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 10, 2000, of
such officer.

<TABLE>
<CAPTION>
                NAME                   AGE                       OFFICE
                ----                   ---                       ------
<S>                                    <C>   <C>
Gerald M. Levin......................  60    Chairman of the Board and Chief Executive
                                             Officer
R.E. Turner..........................  61    Vice Chairman of the Board
Richard D. Parsons...................  51    President
Richard J. Bressler..................  42    Executive Vice President
Christopher P. Bogart................  34    Executive Vice President, General Counsel &
                                             Secretary
Joseph A. Ripp.......................  48    Executive Vice President and Chief Financial
                                             Officer
Edward I. Adler......................  46    Senior Vice President, Corporate Communications
Timothy A. Boggs.....................  49    Senior Vice President, Global Public Policy
Andrew J. Kaslow.....................  50    Senior Vice President, Human Resources
John A. LaBarca......................  57    Senior Vice President, Financial Operations
Joan N. Sumner.......................  40    Senior Vice President
</TABLE>

    Set forth below are the principal positions held by each of the executive
officers named above since March 1, 1995:

<TABLE>
<CAPTION>
<S>                                    <C>
Mr. Levin............................  Chairman of the Board of Directors and Chief Executive
                                         Officer since January 1993.
Mr. Turner...........................  Vice Chairman since the consummation of the TBS
                                         Transaction in October 1996. Prior to that, he
                                         served as Chairman of the Board and President of TBS
                                         from 1970.
Mr. Parsons..........................  President since February 1995.
</TABLE>

                                                  (table continued on next page)

                                      I-34





<PAGE>
(table continued from previous page)

<TABLE>
<S>                                    <C>
Mr. Bressler.........................  Executive Vice President of the Company and Chairman
                                         and Chief Executive Officer of Time Warner Digital
                                         Media since July 1999. Prior to that, he served as
                                         Executive Vice President and Chief Financial
                                         Officer from January 1998; and Senior Vice
                                         President and Chief Financial Officer from March
                                         1995.
Mr. Bogart...........................  Executive Vice President, General Counsel and
                                         Secretary since January 2000. Prior to that, he
                                         served as Vice President and Deputy General
                                         Counsel from March 1998 and as one of the
                                         Company's principal outside litigation counsel at
                                         Cravath, Swaine & Moore prior to that.
Mr. Ripp.............................  Executive Vice President and Chief Financial Officer
                                         since July 1999. Prior to that, he served as
                                         Executive Vice President, Chief Financial Officer
                                         and Treasurer of Time Inc., a wholly owned
                                         subsidiary of the Company, from April 1994.
Mr. Adler............................  Senior Vice President, Corporate Communications
                                         since January 2000. Prior to that, he served as Vice
                                         President, Corporate Communications from September
                                         1997; and Director of Media Relations from 1993.
Mr. Boggs............................  Senior Vice President, Global Public Policy since
                                         November 1999. Prior to that, he served as Senior
                                         Vice President from November 1992.
Mr. Kaslow...........................  Senior Vice President, Human Resources since January
                                         1999. Prior to that, he served as Senior Vice
                                         President, Human Resources at Becton Dickinson and
                                         Company (medical supplies and devices) from April
                                         1996 and prior to that he served as Vice
                                         President, Human Resources at Pepsico Inc.
                                         (beverages and snack foods), from September 1994.
Mr. LaBarca..........................  Senior Vice President, Financial Operations since
                                         February 2000. Prior to that, he served as Senior
                                         Vice President and Controller from May 1997; and
                                         Vice President and Controller from January 1995.
Ms. Sumner...........................  Senior Vice President since July 1999. Prior to
                                         that, she served as a Vice President from November
                                         1992.
</TABLE>

                                      I-35





<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, 1999, see 'Quarterly Financial
Information' at page F-71 herein, which information is incorporated herein by
reference. The number of holders of record of the Company's Common Stock as of
February 29, 2000 was approximately 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, 1999, see
'Quarterly Financial Information' at page F-71 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 February 29, 2000 was held of record by nine
holders.

ITEM 6. SELECTED FINANCIAL DATA.

    The selected financial information of the Company for the five years ended
December 31, 1999 is set forth at pages F-68 through F-70 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 page F-17 and F-18 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-66, F-72 through F-79 and F-67 herein are incorporated herein by reference.

    Quarterly Financial Information set forth at page F-71 herein is
incorporated herein by reference.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

    Not Applicable.

                                      II-1





<PAGE>
                                    PART III

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.

    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 2000 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>
                                    PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K

    (a)(1)-(2) Financial Statements and Schedules:

    The list of consolidated financial statements and schedules set forth in the
accompanying Index to Consolidated Financial Statements and Other Financial
Information at page F-1 herein is incorporated herein by reference. Such
consolidated financial statements and schedules are filed as part of this
report.

    All other financial statement schedules are omitted because the required
information is not applicable, or because the information required is included
in the consolidated financial statements and notes thereto.

    (3) Exhibits:

    The exhibits listed on the accompanying Exhibit Index are filed or
incorporated by reference as part of this report and such Exhibit Index is
incorporated herein by reference. Exhibits 10.1 through 10.31 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 January 10, 2000 in
which it reported in Item 5 that the Company and America Online, Inc. ('America
Online') entered into an Agreement and Plan of Merger and related agreements
with respect to the proposed merger of the Company and America Online (the 'AOL
Merger').

    (ii) The Company filed a Current Report on Form 8-K dated January 10, 2000
setting forth in Item 7 certain pro forma consolidated condensed financial
statements of the new holding company which will be formed in connection with
the AOL Merger, giving effect to the AOL Merger.

    (iii) The Company filed a Current Report on Form 8-K dated January 23, 2000
in which it reported in Item 5 that the Company and EMI Group plc ('EMI')
entered into a Combination Agreement pursuant to which the Company and EMI will
combine their respective music and music publishing businesses.

    (iv) The Company filed a Current Report on Form 8-K dated February 2, 2000
setting forth in Item 5 the Company's results of operations for the quarter and
year ended December 31, 1999.

    (v) The Company filed a Current Report on Form 8-K dated March 13, 2000 in
which it reported in Item 5 that the Company and Sony Music Entertainment Inc.
terminated their proposed merger with CDnow, Inc.

                                      IV-1





<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/ Christopher P. Bogart
                                             ...................................
                                                   CHRISTOPHER P. BOGART
                                                 EXECUTIVE VICE PRESIDENT,
                                               GENERAL COUNSEL AND SECRETARY

Date: March 28, 2000

    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     March 28, 2000
 .........................................    Chief Executive Officer (principal
            (GERALD M. LEVIN)                 executive officer)

          /s/ Joseph A. Ripp                Executive Vice President and Chief      March 28, 2000
 .........................................    Financial Officer (principal
             (JOSEPH A. RIPP)                 financial officer)

          /s/ James W. Barge                Vice President and Controller           March 28, 2000
 .........................................    (principal accounting officer)
             (JAMES W. BARGE)

           /s/ Merv Adelson                               Director                  March 28, 2000
 .........................................
              (MERV ADELSON)

         /s/ J. Carter Bacot                              Director                  March 28, 2000
 .........................................
            (J. CARTER BACOT)

      /s/ Stephen F. Bollenbach                           Director                  March 28, 2000
 .........................................
         (STEPHEN F. BOLLENBACH)

         /s/ John C. Danforth                             Director                  March 28, 2000
 .........................................
            (JOHN C. DANFORTH)

     /s/ Beverly Sills Greenough                          Director                  March 28, 2000
 .........................................
        (BEVERLY SILLS GREENOUGH)

         /s/ Gerald Greenwald                             Director                  March 28, 2000
 .........................................
            (GERALD GREENWALD)

          /s/ Carla A. Hills                              Director                  March 28, 2000
 .........................................
             (CARLA A. HILLS)

           /s/ Reuben Mark                                Director                  March 28, 2000
 .........................................
              (REUBEN MARK)
</TABLE>

                                      IV-2





<PAGE>

<TABLE>
<CAPTION>
                SIGNATURE                                  TITLE                         DATE
                ---------                                  -----                         ----
<C>                                         <S>                                   <C>
         /s/ Michael A. Miles                             Director                  March 28, 2000
 .........................................
            (MICHAEL A. MILES)

        /s/ Richard D. Parsons                            Director                  March 28, 2000
 .........................................
           (RICHARD D. PARSONS)

           /s/ R. E. Turner                               Director                  March 28, 2000
 .........................................
              (R. E. TURNER)

     /s/ Francis T. Vincent, Jr.                          Director                  March 28, 2000
 .........................................
        (FRANCIS T. VINCENT, JR.)
</TABLE>

                                      IV-3




<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-81
Consolidated Financial Statements:
    Balance Sheet...........................................   F-21      F-93
    Statement of Operations.................................   F-22      F-94
    Statement of Cash Flows.................................   F-23      F-95
    Statement of Shareholders' Equity and Partnership
      Capital...............................................   F-24      F-96
    Notes to Consolidated Financial Statements..............   F-25      F-97
Report of Management........................................   F-66
Report of Independent Auditors..............................   F-67     F-123
Selected Financial Information..............................   F-68     F-124
Quarterly Financial Information.............................   F-71     F-125
Supplementary Information...................................   F-72
Financial Statement Schedule II -- Valuation and Qualifying
  Accounts..................................................   F-80     F-126
</TABLE>

                                      F-1










<PAGE>
                                TIME WARNER INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

DESCRIPTION OF BUSINESS

    Time Warner Inc. ('Time Warner' or the 'Company') is the world's leading
media and entertainment company. Time Warner's principal business objective is
to create and distribute branded information and entertainment copyrights
throughout the world. Time Warner classifies its business interests into six
fundamental areas: Cable Networks, consisting principally of interests in cable
television programming; Publishing, consisting principally of interests in
magazine publishing, book publishing and direct marketing; Music, consisting
principally of interests in recorded music and music publishing; Filmed
Entertainment, consisting principally of interests in filmed entertainment,
television production and television broadcasting; Cable, consisting principally
of interests in cable television systems; and Digital Media, consisting
principally of interests in Internet-related and digital media businesses.

STRATEGIC OVERVIEW

    Time Warner had a strong financial performance in 1999, as measured by the
operating performance of its businesses and the improved strength of its
financial condition, as more fully described herein. This performance was driven
primarily by solid business fundamentals at most of its businesses and a
disciplined financial focus on cost management and controlled capital spending.
This financial performance enabled Time Warner to use its increasing free cash
flow and financial capacity to repurchase close to $2 billion of common stock in
1999, while continuing to invest in the growth of its businesses.

    Moreover, in early 2000, consistent with its ongoing strategy to focus on
growth opportunities across its businesses, Time Warner announced two
transactions of high strategic importance. These transactions consist of:

   - A proposed merger with America Online, Inc. ('America Online'), the world's
     leader in interactive services, web brands, Internet technologies and
     electronic commerce services; and

   - A proposed merger of the global operations of Time Warner's Music division
     and EMI Group plc ('EMI'), a leading recorded music company and music
     publisher.

    Each of these transactions is discussed separately below.

  America Online-Time Warner Merger

    In January 2000, Time Warner and America Online announced that they had
entered into an agreement to merge (the 'Merger') by forming a new holding
company named AOL Time Warner Inc. ('AOL Time Warner'). The Merger will create a
leading, fully integrated media and communications company that will combine
Time Warner's collection of media, entertainment and news brands and its
technologically advanced cable infrastructure with America Online's extensive
Internet franchises and technology. Management believes that the combined
company will be well positioned to expand the use of the Internet in consumers'
everyday lives and, accordingly, provide Time Warner's content businesses with
increased access to consumers through a new and growing distribution medium.
Management further believes that the Merger will result in significant new
business and other value-creation opportunities, including additional
opportunities for e-commerce, growth in subscribers for each company's products
and services, and cost and operating efficiencies from cross-promotional and
other opportunities.

    As part of the Merger, each issued and outstanding share of each class of
common stock of Time Warner will be converted into 1.5 shares of an identical
series of common stock of AOL Time Warner. In addition, each issued and
outstanding share of each class of preferred stock of Time Warner will be
converted into one share of preferred stock of AOL Time Warner, which will have
substantially identical terms except that such shares will be convertible into
approximately 6.25 shares of AOL Time Warner common stock. Lastly, each issued
and outstanding share of common stock of America Online will be converted into
one share of common stock of AOL Time Warner.

                                      F-2










<PAGE>
                                TIME WARNER INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
       OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION  --  (CONTINUED)

    As a result of the Merger, the former shareholders of America Online will
have an approximate 55% interest in AOL Time Warner and the former shareholders
of Time Warner will have an approximate 45% interest in the combined entity,
expressed on a fully diluted basis. The Merger is expected to be accounted for
by AOL Time Warner as an acquisition of Time Warner under the purchase method of
accounting for business combinations.

    The Merger is expected to close in the fall of 2000 and is subject to
customary closing conditions, including the approval of the shareholders of each
of America Online and Time Warner and all necessary regulatory approvals. There
can be no assurance that such approvals will be obtained.

  Warner-EMI Music Merger

    In January 2000, Time Warner and EMI announced they had entered into an
agreement to combine their global music operations into two jointly owned
ventures, to be referred to collectively as Warner EMI Music. Time Warner will
control the joint ventures through majority board representation, among other
factors, and is expected to account for the transaction under the purchase
method of accounting.

    The joint ventures will combine the domestic strength of Time Warner's Music
division with the international strength of EMI's music operations. Management
believes that this complementary strategic fit will better position the combined
company to capitalize on incremental growth opportunities relating to online
sales of music product, the digital distribution of music and the continuing
globalization of the music industry. In addition, management believes that the
combination will result in significant cost savings and operating efficiencies,
including economies of scale in manufacturing and distribution, consolidation of
duplicative functions and shared investment costs in new media and technology.
Management expects these synergies to approximate $400 million annually by the
end of the third year following the closing of the transaction. In order to
realize these synergies, management expects that the joint ventures will incur
up to $700 million of one-time costs.

    As part of the transaction, each company will contribute its music
operations to the joint ventures, subject to a comparable amount of debt. As of
December 31, 1999, EMI had approximately $1.5 billion of net debt. EMI
shareholders also will receive an aggregate, special cash dividend of
approximately $1.3 billion. This dividend is expected to be financed through a
combination of proceeds from debt incurred or assumed by the joint ventures and
consideration to be paid by Time Warner directly to EMI for a new class of EMI
equity securities. The new class of EMI equity securities to be held by
Time Warner will convert automatically into an 8% common equity interest in EMI,
on a fully diluted basis, if EMI's share price reaches `L'9 for a short period
of time within the first three-and-a-half years after closing.

    The transaction is expected to close by the end of 2000, subject to
customary closing conditions, including regulatory approvals and the approval of
EMI's shareholders. There can be no assurance that such approvals will be
obtained.

OTHER INVESTMENTS AND TRANSACTIONS

  Investment in TWE

    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 and digital media, 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 junior priority capital. The remaining
25.51% limited partnership interests in the Series A Capital and Residual
Capital of TWE are held by a subsidiary of MediaOne Group, Inc. ('MediaOne').

                                      F-3










<PAGE>
                                TIME WARNER INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
       OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION  --  (CONTINUED)

    Since 1993, Time Warner historically had not consolidated TWE and certain
related companies (the 'Entertainment Group') for financial reporting purposes
because MediaOne had rights that allowed it to participate in the management of
TWE's businesses. However, in August 1999, TWE received a notice from MediaOne
concerning the termination of its covenant not to compete with TWE. The
termination of that covenant is necessary for MediaOne to complete its proposed
merger with AT&T Corp. ('AT&T'). As a result of the termination notice and the
operation of the TWE partnership agreement, MediaOne's rights to participate in
the management of TWE's businesses terminated immediately and irrevocably.
MediaOne retains only certain protective governance rights pertaining to certain
limited matters affecting TWE as a whole. Because of this significant reduction
in MediaOne's rights, Time Warner has consolidated the Entertainment Group,
which substantially consists of TWE, in its 1999 financial statements,
retroactive to the beginning of 1999.

  Book-of-the-Month Club-Doubleday Merger

    In the first quarter of 2000, Time Warner formed a jointly owned book club
venture with Bertelsmann AG ('Bertelsmann'). The venture combined the domestic
operations of Time Warner's Book-of-the-Month Club with the domestic book club
operations of Doubleday Direct, Inc. ('Doubleday'), a leading consumer book club
group owned by Bertelsmann. The venture does not include Time Warner's book club
operations in the United Kingdom and Canada, which were sold directly to
Bertelsmann. In connection with this transaction, Time Warner will deconsolidate
its domestic book club operations in 2000 and account for its interest in the
joint venture under the equity method of accounting.

    The transaction combines two of the largest direct-marketing book club
operators in the United States. Management believes that the combination will
result in considerable cost savings and operating efficiencies, including
cross-promotional opportunities, consolidation of duplicative functions and cost
advantages through economies of scale. Moreover, management believes that the
use of the joint venture's eight million-plus existing club members will foster
the development of new incremental growth opportunities relating to online sales
of books.

  Columbia House-CDNOW Merger

    In July 1999, Time Warner announced an agreement with Sony Corporation of
America ('Sony') to merge their jointly owned music and video club operations of
Columbia House Company Partnerships ('Columbia House') with CDnow, Inc.
('CDNOW'), a music and video e-commerce company. Since that time, the parties
had been pursuing the receipt of regulatory approvals. While awaiting these
approvals, the March 13th termination date in the merger agreement was reached,
and the parties recently terminated the agreement. Accordingly, the merger will
not occur.

    In lieu of the merger, Time Warner and Sony each committed $25.5 million of
funding to CDNOW to help support the future growth of its business. Each
company's funding will be in the form of a $10.5 million equity investment and a
$15 million long-term convertible debt interest.

    Time Warner will continue to evaluate strategic alternatives for Columbia
House's operations. Those alternatives are focused primarily on ways to improve
Columbia House's declining operating performance, including online initiatives,
joint ventures and other strategic actions. In connection with some of these
alternatives, Time Warner may be required to record a significant, noncash
charge to reduce the carrying value of its interest in Columbia House.

  Digital Media Investment Fund

    In late 1999, Time Warner announced the formation of a $500 million venture
capital fund (the 'Digital Media Fund') to identify and invest in new
Internet-related and digital media businesses. The Digital Media

                                      F-4










<PAGE>
                                TIME WARNER INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
       OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION  --  (CONTINUED)

Fund is comprised of $250 million of cash and $250 million of advertising and
promotion across Time Warner's various content offerings. Digital Media Fund
investments are expected to focus on non-controlling equity stakes in companies
engaged in e-commerce, vertical and interactive content, technology,
infrastructure and other digital media-related activities.

USE OF EBITA

    Time Warner evaluates operating performance based on several factors,
including its primary financial measure of 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. These business combinations include the $14 billion
acquisition of Warner Communications Inc. in 1989, the $6.2 billion acquisition
of Turner Broadcasting System, Inc. ('TBS') in 1996 and the $2.3 billion of
cable acquisitions in 1996 and 1995, which created over $25 billion of
intangible assets that generally are being amortized over a twenty to forty year
period. 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, generally are
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 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.

COST SAVINGS

    Since 1997, Time Warner has been engaged in a company-wide cost management
program. The program's purpose is to control costs by identifying more efficient
ways of conducting its businesses. During 1999, Time Warner realized
approximately $300 million of incremental cost savings, thereby increasing the
aggregate cost reductions under this program to approximately $900 million
annually.

    As part of these cost savings initiatives, Time Warner implemented some
changes to its pension plans in 1999. As a result of these changes, and when
taken together with other changes in actuarial assumptions that include a 100
basis point increase in pension discount rates, Time Warner expects to reduce
its pension expense by approximately $60 million in 2000.

TRANSACTIONS AFFECTING COMPARABILITY OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION

  Consolidation of the Entertainment Group

    As previously described, Time Warner's 1999 operating results and financial
condition reflect the consolidation of the Entertainment Group, which
substantially consists of TWE, retroactive to the beginning of 1999. Time
Warner's 1998 and 1997 historical operating results and financial condition have
not been changed, but are no longer comparable to 1999 because the Entertainment
Group was reflected on an unconsolidated basis using the equity method of
accounting. Accordingly, in order to enhance comparability and make an analysis
of 1999 more meaningful, the following discussion of results of operations and
changes in financial condition and liquidity is based upon pro forma financial
information for 1998 as if the consolidation of the Entertainment Group had
occurred at the beginning of that period.


                                      F-5










<PAGE>
                                TIME WARNER INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
       OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION  --  (CONTINUED)


  Other Significant Transactions and Nonrecurring Items

    As more fully described herein, the comparability of Time Warner's operating
results has been affected by certain other significant transactions and
nonrecurring items in each period.

    For 1999, the significant, nonrecurring items included (i) net pretax gains
of approximately $2.247 billion relating to the sale or exchange of cable
television systems and investments, (ii) an approximate $115 million pretax gain
recognized in connection with the initial public offering of a 20% interest in
Time Warner Telecom Inc. (the 'Time Warner Telecom IPO'), an integrated
communications provider that provides telephony services to businesses,
(iii) an approximate $215 million net pretax gain recognized in connection with
the early termination and settlement of a long-term home video distribution
agreement, (iv) an approximate $97 million pretax gain recognized in connection
with the sale of an interest in CanalSatellite, a satellite television platform
servicing France and Monaco, (v) a one-time, noncash pretax charge of
approximately $106 million relating to Warner Bros.'s retail stores and (vi) an
extraordinary loss of $12 million relating to the retirement of debt.

    For 1998, the significant, nonrecurring items included (i) net pretax gains
of approximately $108 million recognized by Time Warner and TWE relating to the
sale or exchange of various cable television systems and investments, (ii) a
pretax charge of approximately $210 million principally to reduce TWE's carrying
value of its investment in Primestar, Inc. ('Primestar') and (iii) an increase
of $234 million in Time Warner's 1998 preferred dividend requirements relating
to the premium paid in connection with its redemption of Series M exchangeable
preferred stock ('Series M Preferred Stock').

    For 1997, the significant, nonrecurring items included (i) net pretax gains
of approximately $212 million recognized by Time Warner and TWE relating to the
sale or exchange of various cable television systems, (ii) a pretax gain of
approximately $250 million relating to TWE's sale of its interest in E!
Entertainment Television, Inc. ('E! Entertainment'), (iii) a pretax gain of $200
million relating to Time Warner's disposal of its interest in Hasbro, Inc.
('Hasbro') and (iv) an extraordinary loss of $55 million on the retirement of
debt.

    In order to meaningfully assess underlying operating trends, management
believes that the results of operations for each period should be analyzed after
excluding the effects of these significant nonrecurring items. As such, the
following discussion and analysis focuses on amounts and trends adjusted to
exclude the impact of these unusual items. However, unusual items may occur in
any period. Accordingly, investors and other financial statement users
individually should consider the types of events and transactions for which
adjustments have been made.

    In addition to the above significant and nonrecurring items, the
comparability of Time Warner's Cable division results has been affected further
by certain 1998 cable-related transactions, as described more fully in Note 2 to
the accompanying consolidated financial statements. While these transactions had
a significant effect on the comparability of the Cable division's EBITA and
operating income, principally due to the deconsolidation of the related
operations, they did not have a significant effect on the comparability of Time
Warner's net income and per share results.

1998 Stock Split

    Per common share and average common share amounts give effect to a
two-for-one common stock split that occurred on December 15, 1998.

                                      F-6










<PAGE>
                                TIME WARNER INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
       OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION  --  (CONTINUED)

RESULTS OF OPERATIONS

1999 VS. 1998

    As a result of the consolidation of the Entertainment Group in 1999, and in
accordance with Financial Accounting Standards Board Statement No. 131,
'Disclosures About Segments of an Enterprise and Related Information' ('FAS
131'), Time Warner restated its 1998 historical segment presentation to reflect
the combination of Time Warner's and the Entertainment Group's business
segments. EBITA and operating income are as follows:

<TABLE>
<CAPTION>
                                                                   YEARS ENDED DECEMBER 31,
                                                              -----------------------------------
                                                                   EBITA        OPERATING INCOME
                                                              ---------------   -----------------
                                                               1999     1998     1999      1998
                                                              ------   ------   -------   -------
                                                                          (MILLIONS)
<S>                                                           <C>      <C>      <C>       <C>
Cable Networks..............................................  $1,397   $1,160   $1,192    $  960
Publishing..................................................     679      607      627       569
Music.......................................................     452      493      179       213
Filmed Entertainment(a).....................................     997      695      796       479
Broadcasting -- The WB Network..............................     (92)     (93)     (96)      (96)
Cable(b)....................................................   3,927    1,694    3,364     1,101
Digital Media...............................................     (17)      --      (17)       --
Intersegment elimination....................................     (10)     (94)     (10)      (94)
                                                              ------   ------   ------    ------
Total.......................................................  $7,333   $4,462   $6,035    $3,132
                                                              ------   ------   ------    ------
                                                              ------   ------   ------    ------
Entertainment Group EBITA and operating income reported on
  an unconsolidated basis(c)................................      --   (2,166)      --    (1,636)
                                                              ------   ------   ------    ------
Total reported consolidated EBITA and operating income......  $7,333   $2,296   $6,035    $1,496
                                                              ------   ------   ------    ------
                                                              ------   ------   ------    ------
</TABLE>

---------

(a) 1999 results include a net pretax gain of approximately $215 million
    recognized in connection with the early termination and settlement of a
    long-term, home video distribution agreement and a pretax gain of $97
    million relating to the sale of an interest in CanalSatellite, offset in
    part by a one-time, noncash pretax charge of $106 million relating to Warner
    Bros.'s retail stores.

(b) The comparability of the Cable division's operating results has been
    affected by certain 1998 cable-related transactions in addition to net
    pretax gains related to the sale or exchange of certain cable television
    systems and investments of approximately $2.247 billion in 1999 and $108
    million in 1998.

(c) Represents amounts previously reported for the Entertainment Group, adjusted
    by intercompany eliminations and other consolidating adjustments necessary
    for Time Warner to reflect the Entertainment Group on a consolidated basis.

CONSOLIDATED RESULTS

    Time Warner had revenues of $27.333 billion, income of $1.960 billion before
an extraordinary loss on the retirement of debt and net income of $1.948 billion
in 1999, compared to revenues of $26.244 billion on a pro forma basis ($14.582
billion on a historical basis) and net income of $168 million in 1998. After
preferred dividend requirements, Time Warner had basic income per common share
before the extraordinary item of $1.51 in 1999, and $1.50 after, compared to a
net loss of $.31 per common share in 1998. On a diluted basis, income per common
share before the extraordinary item was $1.43 in 1999, and $1.42 after,
compared to a net loss of $.31 per common share in 1998.

    As previously described, in addition to the consolidation of the
Entertainment Group retroactive to the beginning of 1999, the comparability of
Time Warner's operating results for 1999 and 1998 has been further affected by
certain significant, nonrecurring items recognized in each period. These
nonrecurring items consisted of approximately $2.568 billion of net pretax gains
in 1999, compared to $102 million of net pretax losses in 1998. In addition, net
income in 1999 included an extraordinary loss on the retirement of debt of
$12 million.

                                      F-7










<PAGE>
                                TIME WARNER INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
       OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION  --  (CONTINUED)

Preferred dividend requirements in 1998 also included a $234 million one-time
increase relating to the premium paid in connection with Time Warner's
redemption of its Series M Preferred Stock. The aggregate net effect of these
items was an increase in basic net income per common share of $1.11 in 1999,
compared to a decrease of $.25 per common share in 1998. On a diluted basis, the
aggregate net effect of these items was an increase in basic net income per
common share of $1.03 in 1999, compared to a decrease of $.25 per common share
in 1998.

    Time Warner's net income increased to $1.948 billion in 1999, compared to
$168 million in 1998. However, excluding the significant effect of the
nonrecurring items referred to earlier, net income increased by $312 million to
$548 million in 1999 from $236 million in 1998. As discussed more fully below,
this improvement principally resulted from an overall increase in Time Warner's
business segment operating income, offset in part by higher losses from certain
investments accounted for under the equity method of accounting, higher interest
expense principally in connection with borrowings used to redeem Time Warner's
Series M Preferred Stock in December 1998 and higher income taxes due to the
increase in Time Warner's income. Similarly, normalized basic and diluted net
income per common share, excluding the effect of significant nonrecurring items,
increased to $.39, compared to a normalized net loss of $.06 per common
share in 1998. In addition to the factors discussed above, the improvement in
1999 normalized per share results reflects a $254 million reduction in preferred
dividend requirements principally relating to the redemption of Series M
Preferred Stock in late 1998.

    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.

BUSINESS SEGMENT RESULTS

    Cable Networks.  Revenues increased to $6.111 billion in 1999, compared to
$5.377 billion in 1998. EBITA increased to $1.397 billion in 1999 from $1.160
billion in 1998. Operating income increased to $1.192 billion in 1999 from $960
million in 1998. Revenues grew due to increases at the Turner cable networks
group and HBO. For the Turner cable networks group, revenues benefited from
increases in advertising and subscription revenues, offset in part by the
absence of revenues from the Goodwill Games sponsored in the summer of 1998. The
increase in advertising revenues was principally due to a strong overall
advertising market for most of the group's networks, including CNN, TBS
Superstation, TNT and Cartoon Network. The increase in subscription revenues was
principally due to an increase in subscriptions and higher rates, primarily led
by revenue increases at CNN, TBS Superstation, TNT and Turner Classic Movies.
For HBO, revenues benefited primarily from an increase in subscriptions to 35.7
million from 34.6 million at the end of 1998.

    Likewise, EBITA and operating income were higher due to increases at the
Turner cable networks group and HBO. For the Turner cable networks group, the
increase in EBITA and operating income was principally due to the revenue gains,
offset in part by higher programming costs and start-up costs for two new
entertainment networks. For HBO, the increase in EBITA and operating income was
principally due to the revenue gains, increased cost savings, and higher income
from Comedy Central, a 50%-owned equity investee.

    Publishing.  Revenues increased to $4.663 billion in 1999, compared to
$4.496 billion in 1998. EBITA increased to $679 million in 1999 from $607
million in 1998. Operating income increased to $627 million in 1999 from $569
million in 1998. Revenues in 1999 were affected negatively by the
deconsolidation of a direct-marketing operation, which is now being accounted
for under the equity method of accounting. Notwithstanding this change, revenues
increased primarily from significant, across-the-board growth in magazine
advertising revenues, primarily led by In Style, People, Fortune and Time.
Magazine circulation revenues also increased

                                      F-8










<PAGE>
                                TIME WARNER INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
       OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION  --  (CONTINUED)

principally as a result of higher subscription and newsstand revenues, led by
Time and Teen People, offset in part by higher commissions paid on subscriptions
sold by third-party agencies. EBITA and operating income increased principally
as a result of the revenue gains and increased cost savings. These increases
were offset in part by start-up costs for new magazine launches and lower
results from direct-marketing activities, including Book-of-the-Month Club and
American Family Enterprises, a 50%-owned equity investee. In addition, EBITA and
operating income for each period included some small one-time gains on the sale
of assets that, in the aggregate, were comparable in amount and, therefore, did
not have any significant effect on operating trends.

    Music.  Revenues decreased to $3.834 billion in 1999, compared to $4.025
billion in 1998. EBITA decreased to $452 million in 1999 from $493 million in
1998. Operating income decreased to $179 million in 1999 from $213 million in
1998. Revenues decreased primarily due to lower domestic and international
recorded music sales, as well as declines in music publishing operations. The
worldwide revenue decline principally related to less popular releases in
comparison to the prior year, as well as industry-wide softness in various
international markets, such as Brazil and Japan. EBITA and operating income
decreased principally as a result of the decline in worldwide revenues and lower
results from Columbia House, a 50%-owned equity investee, offset in part by
increased cost savings, lower artist royalty costs and higher income from DVD
manufacturing operations. Management expects that the revenue decline relating
to lower worldwide sales levels will continue into the first quarter of 2000,
which could continue to affect operating results negatively.

    Filmed Entertainment.  Revenues increased to $8.075 billion in 1999,
compared to $7.978 billion in 1998. EBITA increased to $997 million in 1999 from
$695 million in 1998. Operating income increased to $796 million in 1999 from
$479 million in 1998. Revenues grew due to increases at Warner Bros., offset in
part by revenue declines at the Turner filmed entertainment businesses, which
include New Line Cinema, Castle Rock Entertainment and certain film and
television libraries managed by Warner Bros. For Warner Bros., revenues
benefited from increases in worldwide theatrical, home video and television
distribution operations, offset in part by lower revenues from consumer products
operations. The increase in worldwide home video revenues primarily resulted
from increased sales of DVDs. For the Turner filmed entertainment businesses,
revenues decreased principally as a result of the absence in 1999 of significant
syndication revenues from the sale of second-cycle broadcasting rights for
Seinfeld in 1998, and fewer theatrical releases in 1999.

    EBITA and operating income were higher due to increases at Warner Bros. and
the Turner filmed entertainment businesses. For Warner Bros., the operating
results in 1999 were affected by various significant, nonrecurring items,
including an approximate $215 million net pretax gain recognized in connection
with the early termination and settlement of a long-term, home video
distribution agreement, a pretax gain of $97 million recognized in connection
with the sale of an interest in CanalSatellite and a one-time, noncash pretax
charge of $106 million relating to Warner Bros.'s retail stores. Excluding the
effect of these significant nonrecurring items, Warner Bros.'s EBITA and
operating income increased principally as a result of improved results from
worldwide theatrical, home video and domestic television syndication operations.
These improvements were offset in part by lower results from consumer products
operations and lower net gains on the sale of other assets. For the Turner
filmed entertainment businesses, EBITA and operating income increased
principally due to the absence of film write-offs relating to disappointing
results for theatrical releases of Castle Rock Entertainment in 1998, offset in
part by lower results from television distribution operations relating to the
absence in 1999 of significant syndication sales of broadcasting rights for
Seinfeld in 1998.

    The decline in Warner Bros.'s consumer products operations relates, in part,
to its retail stores. In the fourth quarter of 1999, Warner Bros. adopted a plan
designed to improve the performance of its retail stores. The plan is expected
to be executed largely over a three-year period and involves closing certain
underperforming stores, transforming other stores into smaller and more
efficient stores and exploiting potential e-commerce opportunities. As a result
of this plan, Warner Bros. recorded a noncash, pretax charge of $106 million to
reduce the carrying value of certain fixed assets and leasehold improvements
used in its retail stores. The charge

                                      F-9










<PAGE>
                                TIME WARNER INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
       OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION  --  (CONTINUED)

represented the excess of the carrying value of those assets over the discounted
future operating cash flows, adjusted to reflect a shorter recovery period due
to planned store closures.

    Broadcasting-The WB Network.  Revenues increased to $384 million in 1999,
compared to $260 million in 1998. EBITA improved to a loss of $92 million in
1999 from a loss of $93 million in 1998. Operating losses of $96 million were
the same in both 1999 and in 1998. Revenues increased principally as a result of
one additional night of weekly prime-time programming in comparison to the prior
year and advertising rate increases, offset in part by lower prime-time
television ratings. Prime-time television ratings were, and are expected to
continue to be, negatively affected by lower household delivery associated with
the WGN Superstation discontinuing its carriage of The WB Network's programming
beginning in the fall of 1999. The marginal EBITA loss improvement and flat
operating losses principally resulted from the fact that significant revenue
increases were offset by the combination of higher programming costs associated
with the expanded programming schedule and higher start-up costs associated with
The WB Network 100+ station group, a distribution alliance for The WB Network in
smaller markets.

    Cable.  Revenues increased to $5.374 billion in 1999, compared to $5.342
billion in 1998. EBITA increased to $3.927 billion in 1999 from $1.694 billion
in 1998. Operating income increased to $3.364 billion in 1999 from $1.101
billion in 1998. These operating results were affected by certain cable-related
transactions that occurred in 1998 (the '1998 Cable Transactions') and by net
pretax gains of $2.247 billion recognized in 1999 and $108 million in 1998
related to the sale or exchange of various cable television systems and
investments. The 1998 Cable Transactions principally resulted in the
deconsolidation of certain operations and are described more fully in Note 2 to
the accompanying consolidated financial statements. Excluding the effect of the
1998 Cable Transactions, revenues increased due to growth in basic cable
subscribers, increases in basic cable rates, increases in advertising and
pay-per-view revenues and an increase in revenues from providing Road
Runner-branded, high-speed online services. Similarly, excluding the effect of
the 1998 Cable Transactions and the one-time gains, EBITA and operating income
increased principally as a result of the revenue increases, offset in part by
higher programming costs.

    As of December 31, 1999 and 1998, there were 12.6 million subscribers under
the management of Time Warner's Cable division.

    Digital Media.  Digital Media operating results reflect start-up costs
associated with Time Warner's digital media businesses, including the November
1999 launch of Entertaindom, Time Warner's entertainment Web destination.
Digital Media had $17 million of operating losses on $1 million of revenues
during 1999. Due to the start-up nature of these businesses, losses are expected
to continue.

    Interest and Other, Net.  Interest and other, net, decreased to $1.897
billion of expense in 1999, compared to $2.050 billion of expense on a pro forma
basis in 1998. Interest expense increased to $1.519 billion in 1999, compared to
$1.451 billion on a pro forma basis in 1998. Interest expense increased
principally because of higher interest costs incurred in connection with the
$2.1 billion of borrowings used to redeem the Company's Series M Preferred Stock
in December 1998, offset in part by interest savings associated with the
Company's 1998 debt reduction efforts. Other expense, net, decreased to $378
million in 1999, compared to $599 million on a pro forma basis in 1998. The
decrease principally related to the recognition of an approximate $115 million
pretax gain in 1999 in connection with the Time Warner Telecom IPO and the
absence of an approximate $210 million pretax charge recorded in 1998 to reduce
the carrying value of an interest in Primestar, offset in part by higher losses
in 1999 from certain investments accounted for under the equity method of
accounting.

    Minority Interest.  Minority interest expense increased to $475 million in
1999, compared to $338 million on a pro forma basis in 1998. Minority interest
expense increased primarily due to the allocation of a portion of the higher net
pretax gains in 1999 relating to the sale or exchange of various cable
television systems and investments owned by the TWE-Advance/Newhouse Partnership
('TWE-A/N') to the minority owners of that partnership. Excluding the
significant effect of the gains recognized in each period, minority interest
expense

                                      F-10










<PAGE>
                                TIME WARNER INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
       OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION  --  (CONTINUED)

decreased slightly in 1999 principally due to a higher allocation of losses to a
minority partner in The WB Network.

1998 VS. 1997

    As a result of the consolidation of the Entertainment Group in 1999, and in
accordance with FAS 131, Time Warner restated its historical segment
presentation to reflect the combination of Time Warner's and the Entertainment
Group's business segments. EBITA and operating income are as follows:

<TABLE>
<CAPTION>
                                                                   YEARS ENDED DECEMBER 31,
                                                              -----------------------------------
                                                                   EBITA        OPERATING INCOME
                                                              ---------------   -----------------
                                                               1998     1997     1998      1997
                                                              ------   ------   -------   -------
                                                                          (MILLIONS)
<S>                                                           <C>      <C>      <C>       <C>
Cable Networks..............................................  $1,160   $  964   $  960    $  765
Publishing..................................................     607      529      569       481
Music.......................................................     493      467      213       166
Filmed Entertainment........................................     695      604      479       389
Broadcasting-The WB Network.................................     (93)     (88)     (96)      (88)
Cable(a)....................................................   1,694    1,611    1,101     1,011
Intersegment elimination....................................     (94)     (54)     (94)      (54)
                                                              ------   ------   ------    ------
Total.......................................................  $4,462   $4,033   $3,132    $2,670
                                                              ------   ------   ------    ------
                                                              ------   ------   ------    ------
Entertainment Group EBITA and operating income reported on
  an unconsolidated basis(b)................................  (2,166)  (1,850)  (1,636)   (1,399)
                                                              ------   ------   ------    ------
Total reported consolidated EBITA and operating income......  $2,296   $2,183   $1,496    $1,271
                                                              ------   ------   ------    ------
                                                              ------   ------   ------    ------
</TABLE>

---------

(a) The comparability of the Cable division's operating results has been
    affected by certain 1998 cable-related transactions in addition to net
    pretax gains of approximately $108 million in 1998 and $212 million in 1997
    related to the sale or exchange of certain cable television systems.

(b) Represents amounts previously reported for the Entertainment Group, adjusted
    by intercompany eliminations and other consolidating adjustments necessary
    for Time Warner to reflect the Entertainment Group on a consolidated basis.

CONSOLIDATED RESULTS

    Time Warner had revenues of $14.582 billion and net income of $168 million
in 1998, compared to revenues of $13.294 billion, income of $301 million before
an extraordinary loss on the retirement of debt and net income of $246 million
in 1997. Time Warner's equity in the pretax income of the Entertainment Group
was $356 million in 1998, compared to $686 million in 1997. After preferred
dividend requirements, Time Warner had basic and diluted loss per common share
of $.31 in 1998, compared to a loss of $.01 per common share before the
extraordinary item in 1997, and $.06 per common share after.

    As previously described, the comparability of Time Warner's and the
Entertainment Group's operating results for 1998 and 1997 has been affected by
certain significant, nonrecurring items recognized in each period. These
nonrecurring items amounted to $102 million of net pretax losses in 1998,
compared to approximately $660 million of net pretax gains in 1997. In addition,
preferred dividend requirements for 1998 included a $234 million one-time
increase relating to the premium paid in connection with Time Warner's
redemption of its Series M Preferred Stock. Lastly, 1997 included a $55 million
extraordinary loss on the retirement of debt. The aggregate net effect of these
significant, nonrecurring items was a decrease in income per common share of
$.25 in 1998, compared to an increase in income per common share of $.27 in
1997.

    Time Warner's net income decreased to $168 million in 1998, compared to net
income of $246 million in 1997. However, excluding the significant effect of the
nonrecurring items referred to above, net income

                                      F-11










<PAGE>
                                TIME WARNER INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
       OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION  --  (CONTINUED)

increased by $300 million to $236 million in 1998, compared to a net loss of $64
million in 1997. As discussed more fully below, this improvement principally
resulted from an overall increase in Time Warner's business segment operating
income, an increase in income from its equity in the pretax income of the
Entertainment Group and lower interest expense associated with Time Warner's
debt reduction efforts and certain cable system transfers in 1998 (the 'TWE-A/N
Transfers'), offset in part by higher losses from certain investments accounted
for under the equity method of accounting and lower gains on foreign exchange
contracts. The TWE-A/N Transfers are described more fully in Note 2 to the
accompanying financial statements. Similarly, normalized net loss per common
share, excluding the effect of significant nonrecurring items, was $.06 in 1998,
compared to a normalized net loss per common share of $.33 in 1997.

    The Entertainment Group had revenues of $12.256 billion and net income of
$331 million in 1998, compared to 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. Similarly, excluding the portion of the nonrecurring items
referred to above that was recognized by the Entertainment Group, net income
increased by $229 million to $465 million in 1998, compared to $236 million in
1997. As discussed more fully below, this improvement principally resulted from
an overall increase in the Entertainment Group's business segment operating
income (including the positive effect of the TWE-A/N Transfers), offset in part
by an increase in interest expense associated with the TWE-A/N Transfers and
higher losses from certain investments accounted for under the equity method of
accounting.

    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.

BUSINESS SEGMENT RESULTS

    Cable Networks.  Revenues increased to $5.377 billion in 1998, compared to
$4.823 billion in 1997. EBITA increased to $1.160 billion in 1998 from $964
million in 1997. Operating income increased to $960 million in 1998 from $765
million in 1997. Revenues grew due to increases at the Turner cable networks
group and HBO. For the Turner cable networks group, revenues benefited from an
increase in subscription and advertising revenues. The increase in subscription
revenues principally related to the conversion of TBS Superstation from an
advertiser-supported broadcast superstation to a copyright-paid, cable
television service, which allows TBS Superstation to charge cable operators for
the right to carry its cable television programming. Subscription revenues also
increased as a result of an increase in subscriptions, primarily at CNN, CNN
International, TNT/Cartoon Europe and Turner Classic Movies, and higher rates.
The increase in advertising revenues was principally due to a strong overall
advertising market for most of the division's networks, including TNT, Cartoon
Network, TNT/Cartoon Europe, CNN and CNN Headline News. For HBO, revenues
benefited primarily from an increase in subscriptions to 34.6 million from 33.6
million at the end of 1997.

    Likewise, EBITA and operating income were higher due to increases at the
Turner cable networks group and HBO. For the Turner cable networks group, the
increase in EBITA and operating income was principally due to the revenue gains
and lower programming costs at TNT, offset in part by higher programming costs
at CNN and losses associated with the Goodwill Games. For HBO, EBITA and
operating income improved principally as a result of the revenue gains and, to a
lesser extent, cost savings and higher income from Comedy Central.

    Publishing.  Revenues increased to $4.496 billion in 1998, compared to
$4.290 billion in 1997. EBITA increased to $607 million in 1998 from $529
million in 1997. Operating income increased to $569 million in 1998 from $481
million in 1997. Revenues benefited primarily from significant increases in
magazine

                                      F-12










<PAGE>
                                TIME WARNER INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
       OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION  --  (CONTINUED)

advertising revenues, as well as increases in magazine circulation revenues. The
increase in advertising revenues was principally due to a strong overall
advertising market for most of the division's magazines, primarily led by
People, Time, Entertainment Weekly, Fortune and In Style. The increase in
circulation revenues was principally due to higher subscription and newsstand
revenues, primarily led by the same magazines. EBITA and operating income
increased principally as a result of the revenue gains, cost savings and
one-time gains on the sale of certain assets, offset in part by lower results
from direct-marketing operations.

    Music.  Revenues increased to $4.025 billion in 1998, compared to $3.691
billion in 1997. EBITA increased to $493 million in 1998 from $467 million in
1997. Operating income increased to $213 million in 1998 from $166 million in
1997. Revenues benefited from an increase in domestic and international recorded
music sales principally relating to higher compact disc sales of a broad range
of popular releases from new and established artists and movie soundtracks, as
well as lower returns of product. EBITA and operating income increased
principally as a result of the revenue gains and cost savings, offset in part by
lower results from direct-marketing operations, higher artist costs and the
absence of certain one-time gains recognized in 1997.

    Filmed Entertainment.  Revenues increased to $7.978 billion in 1998,
compared to $7.003 billion in 1997. EBITA increased to $695 million in 1998 from
$604 million in 1997. Operating income increased to $479 million in 1998 from
$389 million in 1997. Revenues grew due to increases at Warner Bros. and the
Turner filmed entertainment business. For Warner Bros., revenues benefited from
a significant increase in licensing fees from television production and
distribution operations, principally relating to the initial off-network
domestic syndication availability of Friends and the initial off-network basic
cable availability of ER, as well as an increase in revenues from consumer
products licensing operations. For the Turner filmed entertainment businesses,
revenues benefited from a significant increase in syndication sales resulting
from the renewal by existing television station customers of second-cycle
broadcasting rights for Seinfeld, as well as an increase in worldwide theatrical
and home video revenues at New Line Cinema.

    Likewise, EBITA and operating income increased due to increases at Warner
Bros., offset in part by decreases at the Turner filmed entertainment
businesses, principally as a result of film write-offs relating to disappointing
results for theatrical releases of Castle Rock Entertainment in the first half
of 1998. For Warner Bros., EBITA and operating income benefited principally from
the revenue gains and cost savings, offset in part by lower international
syndication sales of library product and lower results from theatrical releases.
In addition, EBITA and operating income for each period included certain
one-time gains on the sale of assets that were comparable in amount and
therefore, did not have any significant effect on operating trends.

    Broadcasting-The WB Network.  Revenues increased to $260 million in 1998,
compared to $136 million in 1997. EBITA decreased to a loss of $93 million in
1998 from a loss of $88 million in 1997. Operating losses increased to $96
million in 1998 from $88 million in 1997. Revenues increased as a result of
higher advertising sales relating to improved television ratings and the
addition of a fourth night of prime-time programming in January 1998 and a fifth
night in September 1998. Despite the revenue increase, operating losses
increased because of a lower allocation of losses to a minority partner in the
network. However, excluding this minority interest effect, operating losses
improved principally as a result of the revenue gains, which outweighed higher
programming costs associated with the expanded programming schedule.

    Cable.  Revenues increased to $5.342 billion in 1998, compared to $5.240
billion in 1997. EBITA increased to $1.694 billion in 1998 from $1.611 billion
in 1997. Operating income increased to $1.101 billion in 1998 from $1.011
billion in 1997. These operating results were affected by the 1998 Cable
Transactions and by net pretax gains of $108 million recognized in 1998 and $212
million in 1997 related to the sale or exchange of various cable television
systems and investments. Excluding the effect of the 1998 Cable Transactions,
revenues increased principally as a result of an increase in basic cable
subscribers, increases in regulated cable rates and an increase in advertising
revenues. Similarly, excluding the effect of the 1998 Cable Transactions and the
one-time gains, EBITA and operating income increased principally as a result of
the revenue gains, offset in part by higher depreciation related to capital
spending.

                                      F-13










<PAGE>
                                TIME WARNER INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
       OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION  --  (CONTINUED)

    Interest and Other, Net.  The following is a discussion of interest and
other, net, included in the consolidated results of Time Warner and the
unconsolidated results of the Entertainment Group.

    Interest and other, net, at Time Warner increased to $1.128 billion of
expense in 1998, compared to $973 million of expense in 1997. Interest expense
decreased to $891 million in 1998, compared to $1.049 billion in 1997,
principally due to lower average debt levels associated with the Company's debt
reduction efforts and the TWE-A/N Transfers. There was other expense, net, of
$237 million in 1998 compared to other income, net of $76 million in 1997,
primarily due to lower investment-related income, as well as lower gains on
foreign exchange contracts and higher losses associated with the Company's asset
securitization program. The significant decrease in investment-related income
principally resulted from the absence of a $200 million pretax gain recognized
in 1997 in connection with the disposal of Time Warner's interest in Hasbro and
higher losses in 1998 from certain investments accounted for under the equity
method of accounting.

    Interest and other, net, at the Entertainment Group increased to $945
million of expense in 1998, compared to $338 million of expense in 1997.
Interest expense increased to $566 million in 1998, compared to $494 million in
1997, principally due to higher average debt levels associated with the TWE-A/N
Transfers. There was other expense, net, of $379 million in 1998, compared to
other income, net, of $156 million in 1997, primarily due to lower
investment-related income, as well as higher losses associated with TWE's asset
securitization program. The significant decrease in investment-related income
principally resulted from the absence of an approximate $250 million pretax gain
recognized in 1997 in connection with the sale of an interest in E!
Entertainment, the inclusion of an approximate $210 million charge recorded in
1998 principally to reduce the carrying value of an interest in Primestar and
higher losses in 1998 from certain investments accounted for under the equity
method of accounting.

    Minority Interest.  Minority interest, recognized by the Entertainment Group
on an unconsolidated basis, decreased to $284 million in 1998, compared to $324
million in 1997. Minority interest expense decreased primarily due to the
allocation of a portion of the higher net pretax gains in 1997 relating to the
sale or exchange of various cable television systems owned by TWE-A/N to the
minority owners of that partnership. Excluding the effect of the gains
recognized in each period, minority interest expense for 1998 and 1997 was
comparable in amount and did not have any significant effect on operating
trends.

FINANCIAL CONDITION AND LIQUIDITY

DECEMBER 31, 1999

1999 FINANCIAL CONDITION

    At December 31, 1999, Time Warner had $18.1 billion of debt, $1.3 billion of
available cash and equivalents (net debt of $16.8 billion), $1.2 billion of
borrowings against future stock option proceeds, $575 million of mandatorily
redeemable preferred securities of a subsidiary and $9.7 billion of
shareholders' equity, compared to $17.5 billion of debt, $529 million of
available cash and equivalents (net debt of $17.0 billion), $895 million of
borrowings against future stock option proceeds, $792 million of mandatorily
redeemable preferred securities of subsidiaries, and $8.9 billion of
shareholders' equity on a pro forma basis at December 31, 1998.

DEBT REFINANCINGS

    In 1999, Time Warner Companies, Inc., a wholly owned subsidiary of Time
Warner, redeemed all of its $600 million principal amount of Floating Rate Reset
Notes due July 29, 2009. The aggregate redemption cost of approximately $620
million was funded with borrowings under Time Warner's bank credit agreement. In
connection with this redemption, an extraordinary loss of $12 million was
recognized in the third quarter of 1999.

                                      F-14










<PAGE>
                                TIME WARNER INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
       OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION  --  (CONTINUED)

REDEMPTION OF REIT PREFERRED STOCK

    In March 1999, a subsidiary of TWE (the 'REIT') redeemed all of its shares
of preferred stock ('REIT Preferred Stock') at an aggregate cost of $217
million, which approximated net book value. The redemption was funded with
borrowings under TWE's bank credit agreement.

PREFERRED STOCK CONVERSIONS

    During 1999 and January 2000, Time Warner issued approximately 71.4 million
shares of common stock in connection with the conversion of approximately 17.2
million shares of convertible preferred stock. Because holders of preferred
stock are entitled to cash dividends at a preferential rate prior to conversion,
Time Warner's 1999 cash dividend requirements will be reduced in 2000 by
approximately $26 million. After giving effect to those conversions, there were
approximately 5.4 million shares of preferred stock outstanding that are
convertible into approximately 22.7 million shares of Time Warner common stock.

COMMON STOCK REPURCHASE PROGRAM

    In January 1999, Time Warner's Board of Directors authorized a new common
stock repurchase program that allows the Company to repurchase, from time to
time, up to $5 billion of common stock. This program was expected to be
completed over a three-year period. However, in connection with Time Warner's
agreement to merge with America Online, Time Warner currently has suspended its
stock repurchase program.

    During 1999, Time Warner acquired 28.4 million shares of its common stock at
an aggregate cost of $1.896 billion. These repurchases increased the cumulative
shares purchased under this and its previous common stock repurchase program
begun in 1996 to approximately 123.5 million shares at an aggregate cost of
$4.936 billion, or approximately $40 per share.

CASH FLOWS

    During 1999, Time Warner's cash provided by operations amounted to $3.953
billion and reflected $7.333 billion of business segment EBITA, $1.231 billion
of noncash depreciation expense, $213 million of proceeds from Time Warner's
asset securitization program, less $2.247 billion of net pretax gains on the
sale or exchange of cable television systems and investments, $1.406 billion of
interest payments, $377 million of income taxes, $163 million of corporate
expenses and $631 million related to an increase in working capital
requirements, other balance sheet accounts and noncash items. Cash provided by
operations on a pro forma basis in 1998 of $3.408 billion reflected $4.462
billion of business segment EBITA, $1.305 billion of noncash depreciation
expense, $183 million of proceeds from Time Warner's asset securitization
program, less $108 million of net pretax gains on the sale or exchange of cable
television systems, $1.343 billion of interest payments, $300 million of income
taxes, $158 million of corporate expenses and $633 million related to an
increase in working capital requirements, other balance sheet accounts and
noncash items.

    Cash used by investing activities was $1.930 billion in 1999, compared to
$908 million on a pro forma basis in 1998, principally as a result of higher
capital expenditures, an increase in cash used for investment and acquisitions
and a decrease in investment proceeds. Investment proceeds decreased largely
relating to the 1998 sale of TWE's remaining interest in Six Flags Entertainment
Corporation and the receipt of approximately $650 million of proceeds in 1998
upon the formation of a cable joint venture in Texas, offset in part by the
receipt of approximately $280 million of net proceeds in 1999 in connection with
an exchange of cable television systems. Capital expenditures increased to
$2.231 billion in 1999, compared to $2.115 billion on a pro forma basis in 1998.

    Cash used by financing activities was $1.181 billion in 1999, compared to
$2.938 billion on a pro forma basis in 1998. The use of cash in 1999 principally
resulted from the repurchase of approximately 28.4 million

                                      F-15










<PAGE>
                                TIME WARNER INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
       OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION  --  (CONTINUED)

shares of Time Warner common stock at an aggregate cost of $1.896 billion, the
redemption of REIT Preferred Stock at an aggregate cost of $217 million and the
payment of $289 million of dividends, offset in part by a $583 million increase
in net borrowings, $421 million of proceeds received from the exercise of
employee stock options and $348 million of borrowings against future stock
option proceeds. During 1998, Time Warner issued approximately $2.1 billion of
debt and used the proceeds therefrom to redeem its Series M Preferred Stock.
Dividends paid in 1999 were $235 million lower than in 1998, reflecting the
effect of Time Warner's redemption of its Series M Preferred Stock in December
1998.

    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 its bank 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.

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 amounted to $1.600 billion in
1999, compared to $1.676 billion in 1998. Cable capital spending for 2000 is
budgeted to be approximately $2 billion, reflecting higher spending on variable
capital to facilitate a more aggressive roll-out of Time Warner Cable's popular
digital cable and Road Runner-branded high-speed online service. Capital
spending by Time Warner Cable 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 and consistent with Time Warner
Cable's long-term strategic plan, Time Warner Cable agreed with the Federal
Communications Commission (the 'FCC') in 1996 to invest a total of $4 billion
in capital costs in connection with the upgrade of its cable infrastructure.
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 of December 31, 1999, Time Warner Cable had approximately
$250 million remaining under this commitment. Management expects to satisfy this
commitment by December 31, 2000 when Time Warner Cable's technological upgrade
of its cable television systems is scheduled to be completed.

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 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 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.

                                      F-16










<PAGE>
                                TIME WARNER INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
       OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION  --  (CONTINUED)

    Because Time Warner normally 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 current exploitation of DVDs, have historically generated significant
revenue opportunities through the repackaging and sale of such copyrighted
products in the new technological format. Accordingly, such intangible assets
have significant off-balance sheet asset value that is not fully reflected in
the consolidated balance sheet of Time Warner.

  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 for all of
Time Warner's filmed entertainment companies amounted to $3.595 billion at
December 31, 1999, compared to $2.934 billion on a pro forma basis at December
31, 1998 (including amounts relating to the licensing of film product to Time
Warner's cable television networks of $1.176 billion at December 31, 1999 and
$995 million at December 31, 1998).

    Because backlog generally relates to contracts for the licensing of
theatrical and television product which have already been produced, the
recognition of revenue for such completed product is principally only dependent
upon the commencement of the availability period for telecast under the terms of
the related licensing agreement. Cash licensing fees are collected periodically
over the term of the related licensing agreements or on an accelerated basis
using a $500 million securitization facility. The portion of backlog for which
cash has not already been received has significant off-balance sheet asset value
as a source of future funding. As of December 31, 1999, including cash received
under the securitization facility and other advanced payments, approximately
$700 million of cash licensing fees had been collected against the backlog. 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,
1999, 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 $400 million notional amount of indebtedness,
which resulted in approximately 34% of Time Warner's underlying debt being
subject to variable interest rates. At December 31, 1998, Time Warner had
interest rate swap contracts on $1.6 billion notional amount of indebtedness.

                                      F-17










<PAGE>
                                TIME WARNER INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
       OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION  --  (CONTINUED)


    Based on Time Warner's variable-rate obligations and related interest rate
swap contracts outstanding at December 31, 1999, 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 $19 million, including $1 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 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. At December 31, 1999, Time Warner had effectively hedged
approximately half of the estimated foreign currency exposures that principally
relate to anticipated cash flows to be remitted to the U.S. over the ensuing
twelve month period. To hedge this exposure, Time Warner used foreign exchange
contracts that generally have maturities of three months or less, which
generally will be 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, 1999, Time Warner had contracts
for the sale of $843 million and the purchase of $468 million of foreign
currencies at fixed rates, compared to contracts for the sale of $755 million
and the purchase of $259 million of foreign currencies at December 31, 1998.

    Based on the foreign exchange contracts outstanding at December 31, 1999,
each 5% devaluation of the U.S. dollar as compared to the level of foreign
exchange rates for currencies under contract at December 31, 1999 would result
in approximately $42 million of unrealized losses and $23 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 $42 million of unrealized gains and $23 million of unrealized losses,
respectively. Consistent with the nature of the economic hedge provided by such
foreign exchange contracts, such unrealized gains or losses largely 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.

EURO CONVERSION

    Effective January 1, 1999, the 'euro' was established as a single currency
valid in more than two-thirds of the member countries of the European Union.
These member countries have a three-year transitional period to physically
convert their sovereign currencies to the euro. By July 1, 2002, all
participating member countries must eliminate their currencies and replace their
legal tender with euro-denominated bills and coins. Notwithstanding this
transitional period, many commercial transactions are expected to become euro-
denominated well before the July 2002 deadline. Accordingly, Time Warner
continues to evaluate the short-term and long-term effects of the euro
conversion on its European operations, principally publishing, music, cable
networks and filmed entertainment.

    Time Warner believes that the most significant short-term impact of the euro
conversion is the need to modify its accounting and information systems to
handle an increasing volume of transactions during the transitional period in
both the euro and sovereign currencies of the participating member countries.
Time Warner has identified its accounting and information systems in need of
modification and an action plan has been formulated to address the nature and
timing of remediation efforts. Remediation efforts have begun and the plan is
expected to be substantially completed well before the end of the transitional
period. This timetable will be
                                      F-18










<PAGE>
                                TIME WARNER INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
       OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION  --  (CONTINUED)

adjusted, if necessary, to meet the anticipated needs of Time Warner's vendors
and customers. Based on preliminary information, costs to modify its accounting
and information systems have not been, and are not expected to be, material.

    Time Warner believes that the most significant long-term business risk of
the euro conversion may be increased pricing pressures for its products and
services brought about by heightened consumer awareness of possible cross-border
price differences. However, Time Warner believes that these business risks may
be offset to some extent by lower material costs, other cost savings and
marketing opportunities. Notwithstanding such risks, management does not believe
that the euro conversion will have a material effect on Time Warner's financial
position, results of operations or cash flows in future periods.

YEAR 2000 TECHNOLOGY PREPAREDNESS

    Time Warner, like most large companies, depends on many different computer
systems and other chip-based devices for the continuing conduct of its business.
The Company took various precautions related to the fact that many older
computer programs, computer hardware and chip-based devices might have failed to
recognize dates beginning on January 1, 2000 as being valid dates, and as a
result might have failed to operate or might have operated improperly as such
dates were introduced.

    During 1999, the Company completed its efforts to minimize the risk of
disruption related to Year 2000 issues. This program was described in the
Company reports filed with the Securities and Exchange Commission (the 'SEC').
To date, the Company has experienced few problems related to Year 2000
compliance, and the problems that have been identified have been addressed. The
Company is not aware of any remaining significant problems related to Year 2000
issues but is continuing to monitor the status of suppliers, vendors and other
entities with which it does business.

    Through the end of 1999, the Company, as a whole, incurred approximately
$150 million related to its Year 2000 remediation program, which started in
1996. These expenditures were funded from the Company's operating cash flow.
The Company anticipates that its remediation program, and related
expenditures, may continue into 2001 as temporary solutions to Year 2000
problems are replaced with upgraded equipment. Future expenditures are not
expected to be significant.

CAUTION CONCERNING FORWARD-LOOKING STATEMENTS

    The SEC encourages companies to disclose forward-looking information so that
investors can better understand a company's future prospects and make informed
investment decisions. This document, together with management's public
commentary related thereto, contains such 'forward-looking statements' within
the meaning of the Private Securities Litigation Reform Act of 1995,
particularly statements anticipating future growth in revenues, EBITA and cash
flow. Words such as 'anticipate,' 'estimate,' 'expects,' 'projects,' 'intends,'
'plans,' 'believes' and words and terms of similar substance used in connection
with any discussion of future operating or financial performance identify such
forward-looking statements. Those forward-looking statements are management's
present expectations of future events. As with any projection or forecast, they
are inherently susceptible to uncertainty and changes in circumstances, and the
Company is under no obligation to (and expressly disclaims any such obligation
to) update or alter its forward-looking statements whether as a result of such
changes, new information, future events or otherwise.

    Time Warner operates in highly competitive, consumer driven and rapidly
changing media and entertainment businesses that are dependent on government
regulation and economic, political and social conditions in the countries in
which they operate, consumer demand for their products and services,
technological developments and (particularly in view of technological changes)
protection of their intellectual property rights. Time Warner's actual results
could differ materially from management's expectations because of changes in
such factors. Some of the other factors that also could cause actual results to
differ from those
                                      F-19










<PAGE>
                                TIME WARNER INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
       OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION  --  (CONTINUED)

contained in the forward-looking statements include those
identified in Time Warner's other filings with the SEC and:

  -  For Time Warner's cable business, more aggressive than expected competition
     from new technologies and other types of video programming distributors,
     including DBS and DSL; increases in government regulation of basic cable or
     equipment rates or other terms of service (such as 'digital must-carry' or
     common carrier requirements); increased difficulty in obtaining franchise
     renewals; the failure of new equipment (such as digital set-top boxes) or
     services (such as digital cable and high-speed on-line services or
     telephony over cable or video on demand) to function properly, to appeal to
     enough consumers or to be available at reasonable prices and to be
     delivered in a timely fashion; and greater than expected increases in
     programming or other costs.

   - For Time Warner's cable programming and television businesses, greater than
     expected programming or production costs; public and cable operator
     resistance to price increases (and the negative impact on premium
     programmers of increases in basic cable rates); increased regulation of
     distribution agreements; the sensitivity of advertising to economic
     cyclicality; and greater than expected fragmentation of consumer viewership
     due to an increased number of programming services or the increased
     popularity of alternatives to television.

   - For Time Warner's film and television businesses, their ability to continue
     to attract and select desirable talent and scripts at manageable costs;
     increases in production costs generally; fragmentation of consumer leisure
     and entertainment time (and its possible negative effects on the broadcast
     and cable networks, which are significant customers of these businesses);
     continued popularity of merchandising; and the uncertain impact of
     technological developments such as DVD and the Internet.

   - For Time Warner's music business, its ability to continue to attract and
     select desirable talent at manageable costs; the timely completion of
     albums by major artists; the popular demand for particular artists and
     albums; its ability to continue to enforce and capitalize on its
     intellectual property rights in digital environments; its ability to
     complete its proposed transaction with EMI and integrate the businesses
     successfully; and the overall strength of global music sales.

   - For Time Warner's print media and publishing businesses, increases in
     paper, postal and distribution costs; the introduction and increased
     popularity of alternative technologies for the provision of news and
     information, such as the Internet; and fluctuations in advertiser and
     consumer spending.

   - For Time Warner's digital media businesses, their ability to locate and
     invest in profitable businesses, to develop products and services that are
     attractive, accessible and commercially viable in terms of content,
     technology and cost; their ability to manage costs and generate revenues;
     aggressive competition from existing and developing technologies and
     products; the resolution of issues concerning commercial activities via the
     Internet, including security, reliability, cost, ease of use and access;
     and the possibility of increased government regulation of new media
     services.

   - The risks related to the Company's merger with America Online, including
     the failure of the Time Warner or America Online shareholders to approve
     the Merger; the risk that the Time Warner and America Online businesses
     will not be integrated successfully; the costs related to the Merger; the
     inability to obtain, or meet conditions imposed for, governmental approvals
     for the Merger; and other factors generally affecting the businesses of the
     combined company.

    In addition, Time Warner's overall financial strategy, including growth in
operations, maintaining its financial ratios and strengthened balance sheet,
could be adversely affected by increased interest rates, failure to meet
earnings expectations, significant acquisitions or other transactions,
consequences of the euro conversion and changes in Time Warner's plans,
strategies and intentions.

                                      F-20










<PAGE>
                                TIME WARNER INC.
                           CONSOLIDATED BALANCE SHEET
                                  DECEMBER 31,
                      (MILLIONS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                                  1999            1998           1998
                                                              HISTORICAL(a)   PRO FORMA(a)   HISTORICAL(a)
                                                              -------------   ------------   -------------
<S>                                                           <C>             <C>            <C>
ASSETS
CURRENT ASSETS
Cash and equivalents........................................     $ 1,284        $   529         $   442
Receivables, less allowances of $1.682, $1.513 and
 $1.007 billion.............................................       4,931          4,640           2,885
Inventories.................................................       2,182          2,258             946
Prepaid expenses............................................       1,464          1,342           1,176
                                                                 -------        -------         -------
Total current assets........................................       9,861          8,769           5,449

Noncurrent inventories......................................       4,201          4,219           1,900
Investments in and amounts due to and from Entertainment
 Group......................................................          --             --           4,980
Other investments...........................................       2,096          1,665             794
Property, plant and equipment...............................       8,728          8,037           1,991
Music catalogues, contracts and copyrights..................         782            876             876
Cable television and sports franchises......................       8,472          6,943           2,868
Goodwill....................................................      15,458         15,830          11,919
Other assets................................................       1,641          1,612             863
                                                                 -------        -------         -------
Total assets................................................     $51,239        $47,951         $31,640
                                                                 -------        -------         -------
                                                                 -------        -------         -------

LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable............................................     $ 1,923        $ 1,966         $   996
Participations, royalties and programming costs payable.....       2,967          2,714           1,199
Debt due within one year....................................          22             25              19
Other current liabilities...................................       4,758          4,365           2,404
                                                                 -------        -------         -------
Total current liabilities...................................       9,670          9,070           4,618

Long-term debt..............................................      18,083         17,503          10,925
Borrowings against future stock option proceeds.............       1,243            895             895
Deferred income taxes.......................................       4,234          3,491           3,491
Unearned portion of paid subscriptions......................         762            741             741
Other liabilities...........................................       3,773          3,580           1,543
Minority interests..........................................       3,186          3,027              --
Mandatorily redeemable preferred securities of subsidiaries
 holding solely notes and debentures of subsidiaries of the
 Company....................................................         575            792             575

SHAREHOLDERS' EQUITY
Preferred stock, $.10 par value, 8.4, 22.6 and 22.6 million
 shares outstanding, $.840, $2.260 and $2.260 billion
 liquidation preference.....................................           1              2               2
Series LMCN-V common stock, $.01 par value, 114.1 million
 shares outstanding.........................................           1              1               1
Common stock, $.01 par value, 1.173, 1.118 and 1.118 billion
 shares outstanding.........................................          12             11              11
Paid-in capital.............................................      12,998         13,134          13,134
Accumulated deficit.........................................      (3,299)        (4,296)         (4,296)
                                                                 -------        -------         -------
Total shareholders' equity..................................       9,713          8,852           8,852
                                                                 -------        -------         -------
Total liabilities and shareholders' equity..................     $51,239        $47,951         $31,640
                                                                 -------        -------         -------
                                                                 -------        -------         -------
</TABLE>

---------
(a) The 1999 financial statements reflect the consolidation of the
    Entertainment Group, which substantially consists of TWE, retroactive to
    the beginning of 1999. Time Warner's historical financial statements for
    1998 have not been changed; however, in order to enhance comparability,
    pro forma financial statements for 1998 reflecting the consolidation of
    the Entertainment Group are presented supplementally (Note 1).

See accompanying notes.

                                      F-21










<PAGE>
                                TIME WARNER INC.
                      CONSOLIDATED STATEMENT OF OPERATIONS
                            YEARS ENDED DECEMBER 31,
                      (MILLIONS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                                  1999            1998           1998            1997
                                                              HISTORICAL(a)   PRO FORMA(a)   HISTORICAL(a)   HISTORICAL(a)
                                                              -------------   ------------   -------------   -------------
<S>                                                           <C>             <C>            <C>             <C>
Revenues(b).................................................    $ 27,333        $ 26,244        $14,582         $13,294
                                                                --------        --------        -------         -------
Cost of revenues(b)(c)......................................     (14,940)        (14,820)        (7,502)         (6,723)
Selling, general and administrative(b)(c)...................      (7,513)         (7,070)        (4,802)         (4,400)
Amortization of goodwill and other intangible assets........      (1,298)         (1,330)          (800)           (912)
Gain on sale or exchange of cable systems and
 investments(b).............................................       2,247             108             18              12
Gain on early termination of video distribution agreement...         215              --             --              --
Gain on sale of interest in CanalSatellite..................          97              --             --              --
Write-down of retail store assets...........................        (106)             --             --              --
                                                                --------        --------        -------         -------
Business segment operating income...........................       6,035           3,132          1,496           1,271
Equity in pretax income of Entertainment Group(b)...........          --              --            356             686
Interest and other, net(b)(d)...............................      (1,897)         (2,050)        (1,128)           (973)
Corporate expenses(b).......................................        (163)           (158)           (86)            (81)
Minority interest...........................................        (475)           (338)           (52)            (71)
                                                                --------        --------        -------         -------
Income before income taxes..................................       3,500             586            586             832
Income taxes................................................      (1,540)           (418)          (418)           (531)
                                                                --------        --------        -------         -------
Income before extraordinary item............................       1,960             168            168             301
Extraordinary loss on retirement of debt, net of $9 and $37
 million income tax benefit in 1999 and 1997,
 respectively...............................................         (12)             --             --             (55)
                                                                --------        --------        -------         -------
Net income..................................................       1,948             168            168             246
Preferred dividend requirements(e)..........................         (52)           (540)          (540)           (319)
                                                                --------        --------        -------         -------
Net income (loss) applicable to common shares...............    $  1,896        $   (372)       $  (372)        $   (73)
                                                                --------        --------        -------         -------
                                                                --------        --------        -------         -------
Income (loss) per common share before extraordinary item:
   Basic....................................................    $   1.51        $   (.31)       $  (.31)        $  (.01)
                                                                --------        --------        -------         -------
                                                                --------        --------        -------         -------
   Diluted..................................................    $   1.43        $   (.31)       $  (.31)        $  (.01)
                                                                --------        --------        -------         -------
                                                                --------        --------        -------         -------
Net income (loss) per common share:
   Basic....................................................    $   1.50        $   (.31)       $  (.31)        $  (.06)
                                                                --------        --------        -------         -------
                                                                --------        --------        -------         -------
   Diluted..................................................    $   1.42        $   (.31)       $  (.31)        $  (.06)
                                                                --------        --------        -------         -------
                                                                --------        --------        -------         -------
Average common shares:
   Basic....................................................     1,267.0         1,194.7        1,194.7         1,135.4
                                                                --------        --------        -------         -------
                                                                --------        --------        -------         -------
   Diluted..................................................     1,398.3         1,194.7        1,194.7         1,135.4
                                                                --------        --------        -------         -------
                                                                --------        --------        -------         -------
</TABLE>

---------
(a) The 1999 financial statements reflect the consolidation of the
    Entertainment Group, which substantially consists of TWE, retroactive to
    the beginning of 1999. Time Warner's historical financial statements for
    prior periods have not been changed; however, in order to enhance
    comparability, pro forma financial statements for 1998 reflecting the
    consolidation of the Entertainment Group are presented supplementally
    (Note 1).

(b) Includes the following income (expenses) resulting from transactions with
    related companies and, on a historical basis for 1998 and 1997, the
    Entertainment Group:

<TABLE>
<S>                                                           <C>             <C>            <C>             <C>
      Revenues............................................      $    506        $    511        $   487        $   384
      Cost of revenues....................................          (207)           (154)          (318)          (245)
      Selling, general and administrative.................           (29)            (23)           (40)           (53)
      Gain (loss) on sale or exchange of cable systems and
        investments.......................................           427              (4)            (4)            --
      Equity in pretax income of Entertainment Group......            --              --            105              5
      Interest and other, net.............................            12               1             (9)           (36)
      Corporate expenses..................................            --              --             72             72

(c) Includes depreciation expense of:.....................      $  1,231        $  1,305        $   378        $   382
                                                                --------        --------        -------        -------
                                                                --------        --------        -------        -------
</TABLE>

(d) Includes an approximate $115 million pretax gain recognized in the second
    quarter of 1999 in connection with the initial public offering of a 20%
    interest in Time Warner Telecom Inc.

(e) Preferred dividend requirements for 1998 include a one-time effect of $234
    million relating to the premium paid in connection with the redemption of
    the Company's 10 1/4% Series M exchangeable preferred stock ('Series M
    Preferred Stock'). See Note 11.

See accompanying notes.

                                      F-22










<PAGE>
                                TIME WARNER INC.
                      CONSOLIDATED STATEMENT OF CASH FLOWS
                            YEARS ENDED DECEMBER 31,
                                   (MILLIONS)

<TABLE>
<CAPTION>
                                                    1999                  1998                 1998                  1997
                                                HISTORICAL(a)         PRO FORMA(a)         HISTORICAL(a)         HISTORICAL(a)
                                                -------------         ------------         -------------         -------------
<S>                                          <C>                   <C>                  <C>                   <C>
OPERATIONS
Net income.................................        $ 1,948              $   168               $   168               $   246
Adjustments for noncash and nonoperating
 items:
   Extraordinary loss on retirement of
    debt...................................             12                   --                    --                    55
   Depreciation and amortization...........          2,529                2,635                 1,178                 1,294
   Amortization of film costs..............          2,294                2,478                   542                   379
   Noncash interest expense................              4                   30                    30                    98
   Gain on sale or exchange of cable
    systems and investments................         (2,247)                (108)                  (18)                  (12)
   Excess (deficiency) of distributions
    over equity in pretax income of
    Entertainment Group....................             --                   --                   342                  (207)
   Equity in losses of other investee
    companies after distributions..........            344                  267                   147                    36
Changes in operating assets and
 liabilities:
   Receivables.............................           (349)                (940)                 (597)                 (167)
   Inventories.............................         (2,321)              (2,962)                 (854)                 (463)
   Accounts payable and other
    liabilities............................          1,690                1,500                   810                   501
   Other balance sheet changes.............             49                  340                    97                  (352)
                                                   -------              -------               -------               -------

Cash provided by operations................          3,953                3,408                 1,845                 1,408
                                                   -------              -------               -------               -------

INVESTING ACTIVITIES
Consolidation of the Entertainment Group's
 cash and equivalents......................             87                   --                    --                    --
Investments and acquisitions...............           (870)                (548)                 (159)                 (113)
Capital expenditures.......................         (2,231)              (2,115)                 (512)                 (574)
Investment proceeds........................          1,084                1,755                   569                   187
Proceeds received from distribution of TWE
 Senior Capital............................             --                   --                   455                   455
                                                   -------              -------               -------               -------

Cash provided (used) by investing
 activities................................         (1,930)                (908)                  353                   (45)
                                                   -------              -------               -------               -------

FINANCING ACTIVITIES
Borrowings.................................          4,332                5,257                 3,743                 5,413
Debt repayments............................         (3,749)              (4,215)               (2,317)               (6,394)
Borrowings against future stock option
 proceeds..................................            348                1,015                 1,015                   230
Repayments of borrowings against future
 stock option proceeds.....................             --                 (653)                 (653)                 (185)
Redemption of mandatorily redeemable
 preferred securities of subsidiary........           (217)                  --                    --                    --
Repurchases of Time Warner common stock....         (1,896)              (2,240)               (2,240)                 (344)
Redemption of Series M Preferred Stock.....             --               (2,093)               (2,093)                   --
Dividends paid.............................           (289)                (524)                 (524)                 (338)
Proceeds received from stock option and
 dividend reinvestment plans...............            421                  740                   740                   454
Other......................................           (131)                (225)                  (72)                  (68)
                                                   -------              -------               -------               -------

Cash used by financing activities..........         (1,181)              (2,938)               (2,401)               (1,232)
                                                   -------              -------               -------               -------

INCREASE (DECREASE) IN CASH AND
 EQUIVALENTS...............................            842                 (438)                 (203)                  131

CASH AND EQUIVALENTS AT BEGINNING OF
 PERIOD....................................            442                  967                   645                   514
                                                   -------              -------               -------               -------

CASH AND EQUIVALENTS AT END OF PERIOD......        $ 1,284              $   529               $   442               $   645
                                                   -------              -------               -------               -------
                                                   -------              -------               -------               -------
</TABLE>

---------

(a) The 1999 financial statements reflect the consolidation of the
    Entertainment Group, which substantially consists of TWE, retroactive to
    the beginning of 1999. Time Warner's historical financial statements for
    prior periods have not been changed; however, in order to enhance
    comparability, pro forma financial statements for 1998 reflecting the
    consolidation of the Entertainment Group are presented supplementally
    (Note 1).

See accompanying notes.

                                      F-23










<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, 1996................................     $ 4       $11     $12,245     $(2,758)    $9,502
Net income..................................................                                       246        246
Foreign currency translation adjustments....................                                       (76)       (76)
Unrealized losses on securities, net of $89 million tax
   benefit(a)...............................................                                      (128)      (128)
                                                                                               -------     ------
   Comprehensive income.....................................                                        42         42

Common stock dividends......................................                                      (204)      (204)
Preferred stock dividends...................................                                      (319)      (319)
Issuance of common stock in connection with the TBS
   acquisition..............................................                            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        11      12,675      (3,334)     9,356
Net income..................................................                                       168        168
Foreign currency translation adjustments....................                                         4          4
Realized and unrealized losses on derivative financial
   instruments, net of $13 million tax benefit..............                                       (20)       (20)
Cumulative effect of change in accounting for derivative
   financial instruments, net of $3 million tax benefit.....                                       (18)       (18)
                                                                                               -------     ------
   Comprehensive income.....................................                                       134        134

Common stock dividends......................................                                      (216)      (216)
Preferred stock dividends...................................                                      (540)      (540)
Issuance of common stock in connection with the conversion
   of zero-coupon convertible notes due 2013................                         1,150                  1,150
Issuance of common stock in connection with the conversion
   of convertible preferred stock...........................      (2)        1         151        (150)        --
Repurchases of Time Warner common stock.....................                (1)     (2,239)                (2,240)
Shares issued pursuant to stock option, dividend
   reinvestment and benefit plans...........................                 1       1,397        (190)     1,208
                                                                 ---       ---     -------     -------     ------
BALANCE AT DECEMBER 31, 1998................................       2        12      13,134      (4,296)     8,852
Net income..................................................                                     1,948      1,948
Foreign currency translation adjustments....................                                       (63)       (63)
Unrealized gains on securities, net of $147 million tax
   provision................................................                                       221        221
Realized and unrealized gains on derivative financial
   instruments, net of $6 million tax provision.............                                         9          9
                                                                                               -------     ------
   Comprehensive income.....................................                                     2,115      2,115

Common stock dividends......................................                                      (228)      (228)
Preferred stock dividends...................................                                       (52)       (52)
Issuance of common stock in connection with the conversion
   of convertible preferred stock...........................      (1)        1          23         (23)        --
Repurchases of Time Warner common stock.....................                        (1,896)                (1,896)
Shares issued pursuant to stock option, dividend
   reinvestment and benefit plans...........................                         1,737        (815)       922
                                                                 ---       ---     -------     -------     ------
BALANCE AT DECEMBER 31, 1999................................     $ 1       $13     $12,998     $(3,299)    $9,713
                                                                 ---       ---     -------     -------     ------
                                                                 ---       ---     -------     -------     ------
</TABLE>

---------
(a) Includes a $13 million reduction (net of a $9 million tax effect) related to
    realized gains on the sale of securities in 1997.

See accompanying notes.

                                      F-24










<PAGE>
                                TIME WARNER INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

DESCRIPTION OF BUSINESS

    Time Warner Inc. ('Time Warner' or the 'Company') is the world's leading
media and entertainment company. Time Warner's principal business objective is
to create and distribute branded information and entertainment copyrights
throughout the world. Time Warner classifies its business interests into six
fundamental areas: Cable Networks, consisting principally of interests in cable
television programming; Publishing, consisting principally of interests in
magazine publishing, book publishing and direct marketing; Music, consisting
principally of interests in recorded music and music publishing; Filmed
Entertainment, consisting principally of interests in filmed entertainment,
television production and television broadcasting; Cable, consisting principally
of interests in cable television systems; and Digital Media, consisting
principally of interests in Internet-related and digital media businesses.

    Each of the business interests within Cable Networks, Publishing, Music,
Filmed Entertainment, Cable and Digital Media 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) leading cable television networks, such as
HBO, Cinemax, CNN, TNT and TBS Superstation, (2) magazine franchises, such as
Time, People and Sports Illustrated and direct marketing brands such as Time
Life Inc. and Book-of-the-Month Club, (3) 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, (4) the unique and
extensive film, television and animation libraries owned or managed by Warner
Bros. and New Line Cinema, and trademarks such as the Looney Tunes characters,
Batman and The Flintstones, (5) 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, (6) Time Warner Cable, currently the largest operator of
cable television systems in the U.S. and (7) Internet websites, such as CNN.com
and Entertaindom.com.

    Financial information for Time Warner's various business segments is
presented herein as an indication of financial performance (Note 16). Except for
start-up losses incurred in connection with The WB Network and Digital Media,
Time Warner's principal business segments generate significant operating income
and cash flow from operations. The cash flow from operations generated by such
business segments 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 segments
amounted to $1.298 billion in 1999, $800 million in 1998 ($1.330 billion on a
pro forma basis) and $912 million in 1997.

BASIS OF PRESENTATION

  Consolidation of TWE

    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 and digital media 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 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 MediaOne Group,
Inc. ('MediaOne').

    Since 1993, Time Warner historically had not consolidated TWE and certain
related companies (the 'Entertainment Group') for financial reporting purposes
because MediaOne had rights that allowed it to

                                      F-25










<PAGE>
                                TIME WARNER INC.
          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  --  (CONTINUED)

participate in the management of TWE's businesses. However, in August 1999, TWE
received a notice from MediaOne concerning the termination of its covenant not
to compete with TWE. The termination of that covenant is necessary for MediaOne
to complete its proposed merger with AT&T Corp. ('AT&T'). As a result of the
termination notice and the operation of the TWE partnership agreement,
MediaOne's rights to participate in the management of TWE's businesses
terminated immediately and irrevocably. MediaOne retains only certain protective
governance rights pertaining to certain limited matters affecting TWE as a
whole.

    Because of this significant reduction in MediaOne's rights, Time Warner's
1999 financial statements reflect the consolidation of the Entertainment Group,
which substantially consists of TWE, retroactive to the beginning of 1999. Time
Warner's historical financial statements for prior periods have not been
changed, but are no longer comparable to 1999 because the Entertainment Group
was reflected on an unconsolidated basis using the equity method of accounting.
Accordingly, in order to enhance comparability, pro forma financial statements
for 1998 reflecting the consolidation of the Entertainment Group are presented
supplementally.

  1998 Stock Split

    Common stock, paid-in-capital, stock options, per common share and average
common share amounts give effect to a two-for-one common stock split that
occurred on December 15, 1998.

  Reclassifications

    Certain reclassifications have been made to the prior years' financial
statements to conform to the 1999 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.

    Investments in 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 greater than one year. If there
are resale restrictions greater than one year, or if the investment is not
publicly traded, then the investment is accounted for at cost. Unrealized gains
and losses on investments accounted for at market value are reported net-of-tax
as a component of accumulated other comprehensive income (loss) 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 TRANSLATION

    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

                                      F-26










<PAGE>
                                TIME WARNER INC.
          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  --  (CONTINUED)

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 as a component of
accumulated other comprehensive income (loss) in accumulated deficit.

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 and cash flows from investments and 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 receivable, film inventory, artist and author
advances and investments, recorded as assets in the consolidated balance sheet.
Accounts receivable and sales of product 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 receivable, individual films and
television product, individual artist and author advances, and investments may
change based on actual results and other factors.

REVENUES AND COSTS

  Publishing and Music

    The unearned portion of paid magazine subscriptions is deferred until
magazines are delivered to subscribers. Upon each delivery, a proportionate
share of the gross subscription price is included in revenues. Magazine
advertising revenues are recognized when the advertisements are published.

    In accordance with industry practice, certain products (such as magazines,
books, home videocassettes, compact discs, DVDs and cassettes) are sold to
customers with the right to return unsold items. Revenues from such sales are
recognized when the products are shipped based on gross sales less a provision
for future returns.

    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. Returned
goods included in inventory are valued at estimated realizable value, but not in
excess of cost.

  Cable and Cable Networks

    A significant portion of cable system and cable network 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 costs of
rights to exhibit feature films and other programming on the cable networks
during one or more availability periods ('programming costs') generally are
recorded when the programming is initially available for exhibition, and are
allocated to the appropriate availability periods and amortized as the
programming is exhibited.

  Digital Media

    Digital media revenues primarily are derived from advertising and e-commerce
activities. Advertising revenues are recognized in the period that the
advertisements are exhibited. Revenues from e-commerce activities are recognized
when the products are sold.

                                      F-27










<PAGE>
                                TIME WARNER INC.
          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  --  (CONTINUED)

  Filmed Entertainment

    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 completed
principally 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 under these licensing agreements. For cash contracts, the
related revenues will not be recognized until such product is available for
telecast under the contractual terms of the related license agreement. For
barter contracts, the related revenues will not be recognized until the product
is available for telecast and the advertising spots received under such
contracts are either used or sold to third parties. All of these 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
unamortized 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'). Library product 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
generally 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 generally include the unamortized cost of completed
theatrical and television films allocated to the secondary markets, theatrical
films in production and the Library.

  Proposed Changes to Film Accounting Standards

    In October 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants ('AcSEC') issued an exposure
draft of a proposed Statement of Position, 'Accounting by Producers and
Distributors of Films' (the 'SOP'). The proposed rules would establish new
accounting standards for producers and distributors of films, including changes
in revenue recognition and accounting for advertising, development and overhead
costs.

    AcSEC currently is in the process of finalizing these proposed rules. Based
on AcSEC's conclusions reached as of the end of 1999, the SOP would require that
advertising costs for theatrical and television product

                                      F-28










<PAGE>
                                TIME WARNER INC.
          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  --  (CONTINUED)

be expensed as incurred. This compares to Time Warner's existing policy of
capitalizing and then expensing advertising costs for theatrical product over
the related revenue streams. In addition, the SOP would require development
costs for abandoned projects and certain indirect overhead costs to be charged
directly to expense, instead of those costs being capitalized to film costs,
which currently is required under the existing accounting model. The SOP would
also require all film costs to be classified in the balance sheet as a
noncurrent asset. The proposed SOP's provisions in other areas, such as revenue
recognition, generally are consistent with Time Warner's existing accounting
policies.

    At the time that Time Warner adopts the final provisions of the SOP, it
expects to record a one-time, noncash, after-tax charge of approximately $400 to
$425 million primarily to reduce the carrying value of its film inventory. This
charge will be reflected as a cumulative effect of a change in accounting
principle.

    The provisions of the SOP are still being deliberated by AcSEC and could
change prior to the issuance of a final standard, which is expected to occur by
the end of the second quarter of 2000. The SOP is expected to be effective for
calendar-year companies on January 1, 2001, with early application encouraged.
Time Warner expects to adopt the provisions of the SOP upon issuance.

  Revenue Classification Changes

    In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, 'Revenue Recognition in Financial Statements'
('SAB 101'), which will be effective for Time Warner in the second quarter of
2000. SAB 101 clarifies certain existing accounting principles for the
recognition and classification of revenues in financial statements. While Time
Warner's existing revenue recognition policies are consistent with the
provisions of SAB 101, the new rules are expected to result in some changes as
to how the filmed entertainment industry classifies its revenues, particularly
relating to distribution arrangements for third-party and co-financed joint
venture product. As a result, Time Warner is in the process of evaluating the
overall impact of SAB 101 on its consolidated financial statements. It is
expected that both annual revenues and costs in Time Warner's filmed
entertainment businesses will be reduced by an equal amount of approximately
$1.5 to $2 billion as a result of these classification changes. However, other
aspects of SAB 101 are not expected to have a significant effect on
Time Warner's consolidated financial statements.

ADVERTISING

    Through 1999, 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
have been 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
generally are 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 $250 million at the end of 1999 and $282
million at the end of 1998 ($282 million on a pro forma basis), respectively.
Advertising expense, excluding theatrical and television product, amounted to
$1.511 billion in 1999, $1.154 billion in 1998 ($1.438 billion on a pro forma
basis) and $1.080 billion in 1997.

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.

                                      F-29










<PAGE>
                                TIME WARNER INC.
          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  --  (CONTINUED)

FINANCIAL INSTRUMENTS

    Effective July 1, 1998, Time Warner adopted FASB Statement No. 133,
'Accounting for Derivative Instruments and Hedging Activities' ('FAS 133'). FAS
133 requires that all derivative financial instruments that qualify for hedge
accounting, such as interest rate swap contracts and foreign exchange contracts,
be recognized in the financial statements and measured at fair value regardless
of the purpose or intent for holding them. Changes in the fair value of
derivative financial instruments are either recognized periodically in income or
shareholders' equity (as a component of comprehensive income), depending on
whether the derivative is being used to hedge changes in fair value or cash
flows. The adoption of FAS 133 did not have a material effect on Time Warner's
primary financial statements, but did reduce comprehensive income in 1998 by $18
million in the accompanying consolidated statement of shareholders' equity.

    The carrying value of Time Warner's financial instruments approximates fair
value, except for differences with respect to long-term, fixed-rate debt
(Note 7) and certain differences relating to cost method investments and other
financial instruments that are not significant. The fair value of financial
instruments 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, 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
sixteen years for furniture, fixtures, cable television and other equipment.
Property, plant and equipment consists of:

<TABLE>
<CAPTION>
                                                                    DECEMBER 31,
                                                         -----------------------------------
                                                            1999        1998         1998
                                                         HISTORICAL   PRO FORMA   HISTORICAL
                                                         ----------   ---------   ----------
                                                                     (MILLIONS)
<S>                                                      <C>          <C>         <C>
Land and buildings.....................................   $ 1,606      $ 1,764     $   963
Cable television equipment.............................     8,671        7,648       1,035
Furniture, fixtures and other equipment................     4,048        3,714       1,400
                                                          -------      -------     -------
                                                           14,325       13,126       3,398

    Less accumulated depreciation......................    (5,597)      (5,089)     (1,407)
                                                          -------      -------     -------

Total..................................................   $ 8,728      $ 8,037     $ 1,991
                                                          -------      -------     -------
                                                          -------      -------     -------
</TABLE>

INTANGIBLE ASSETS

    As a creator and distributor of branded information and entertainment
copyrights, Time Warner has a significant and growing number 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,
generally are 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

                                      F-30










<PAGE>
                                TIME WARNER INC.
          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  --  (CONTINUED)

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 $1.298
billion in 1999, $800 million in 1998 ($1.330 billion on a pro forma basis) and
$912 million in 1997. Accumulated amortization of intangible assets at December
31, 1999 and 1998 amounted to $8.3 billion and $3.9 billion ($7.4 billion on a
pro forma basis), 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 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
is accounted for as a reduction of goodwill.

    The principal operations of the Entertainment Group are conducted by
partnerships. Time Warner's income tax expense for all periods 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.

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. Generally, 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.

INCOME (LOSS) PER COMMON SHARE

    Basic income (loss) per common share is computed by dividing the net income
(loss) applicable to common shares after preferred dividend requirements by the
weighted average of common shares outstanding during the period. Weighted-
average common shares include shares of Time Warner's common stock and
Series LMCN-V common stock. Diluted income (loss) per common share adjusts basic
income (loss) per common

                                      F-31










<PAGE>
                                TIME WARNER INC.
          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  --  (CONTINUED)

share for the effects of convertible securities, stock options and other
potentially dilutive financial instruments, only in the periods in which
such effect is dilutive.

COMPREHENSIVE INCOME

    In accordance with FASB Statement No. 130, 'Reporting Comprehensive Income,'
Time Warner reports 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, gains
and losses on certain derivative financial instruments and foreign currency
translation gains and losses.

    The following summary sets forth the components of other comprehensive
income (loss) accumulated in shareholders' equity:

<TABLE>
<CAPTION>
                                                                                        ACCUMULATED
                                       FOREIGN                       DERIVATIVE            OTHER
                                      CURRENCY        UNREALIZED     FINANCIAL         COMPREHENSIVE
                                     TRANSLATION       GAINS ON      INSTRUMENT           INCOME
                                       LOSSES         SECURITIES   GAINS (LOSSES)         (LOSS)
                                     -----------      ----------   --------------      -------------
                                                               (MILLIONS)
<S>                                  <C>              <C>          <C>                 <C>
Balance at December 31, 1998.......     $ (83)           $  5           $(38)              $(116)
1999 activity......................       (63)            221              9                 167
                                        -----            ----           ----               -----

Balance at December 31, 1999.......     $(146)           $226           $(29)              $  51
                                        -----            ----           ----               -----
                                        -----            ----           ----               -----
</TABLE>

2.  CABLE TRANSACTIONS

    Time Warner, TWE and the TWE-Advance/Newhouse Partnership ('TWE-A/N')
completed a series of significant transactions in 1999 and 1998. These
transactions, which related to the cable television business and related
ancillary businesses, enhanced Time Warner Cable's geographic clustering of
cable television properties or reduced existing debt and/or Time Warner Cable's
share of future funding requirements for such businesses. These transactions are
discussed more fully below.

GAIN ON SALE OR EXCHANGE OF CABLE TELEVISION SYSTEMS AND INVESTMENTS

    During the past three years, largely in an effort to enhance their
geographic clustering of cable television properties, Time Warner and TWE sold
or exchanged various cable television systems and investments. The 1999
transactions included a number of transactions generally involving large
exchanges of cable television systems. In these transactions, Time Warner Cable
exchanged cable television systems serving approximately (i) 575,000 subscribers
for other cable television systems of comparable size owned by TCI
Communications, Inc. ('TCI'), a subsidiary of AT&T (the 'TCI Cable Trades') and
(ii) 314,000 subscribers for other cable television systems of comparable size
owned by MediaOne. In addition, in 1999, Time Warner Cable obtained sole control
of certain partnerships previously held with Fanch Communications, retaining
cable television systems serving approximately 158,000 subscribers and
approximately $280 million of net cash proceeds, in exchange for its interests
in other cable television systems formerly owned by such partnerships. The
systems acquired by Time Warner Cable were accounted for under the purchase
method of accounting for business combinations. As such, the net assets received
were recorded at fair value based on the negotiated terms of the transactions.
In connection with these and other transactions, the operating results of
Time Warner include net pretax gains of $2.247 billion in 1999, $108 million in
1998 and $212 million in 1997.

    Because a substantial portion of these pretax gains was recognized by TWE,
and TWE was reported on an unconsolidated basis for all periods prior to 1999,
these gains were either classified in Time Warner's operating

                                      F-32










<PAGE>
                                TIME WARNER INC.
          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  --  (CONTINUED)

income or Time Warner's equity in the pretax income of the Entertainment Group
in the accompanying consolidated statement of operations. In particular, Time
Warner's operating income includes pretax gains of $2.247 billion in 1999,
$18 million in 1998 ($108 million on a pro forma basis) and $12 million in 1997.
In 1998 and 1997, Time Warner's equity in the pretax income of the Entertainment
Group included pretax gains of $90 million and $200 million, respectively.

TIME WARNER TELECOM

    Time Warner Telecom Inc. ('Time Warner Telecom'), an integrated
communications provider that provides a wide range of telephony and data
services to businesses, was formed in July 1998 when Time Warner, TWE and
TWE-A/N completed a reorganization of their business telephony operations (the
'Time Warner Telecom Reorganization'). As part of that reorganization,
(i) the business telephony operations conducted by Time Warner, TWE and TWE-A/N
were each contributed to Time Warner Telecom and (ii) TWE's and TWE-A/N's
interests in Time Warner Telecom were distributed to their partners, Time
Warner, MediaOne and the Advance/Newhouse Partnership ('Advance/Newhouse'),
a limited partner in TWE-A/N. No gain or loss was recognized on the transaction.
Time Warner's initial interest in Time Warner Telecom was recorded based on the
historical cost basis of the contributed net assets.

    In May 1999, Time Warner Telecom completed an initial public offering of 20%
of its common stock (the 'Time Warner Telecom IPO'). Time Warner Telecom issued
approximately 21 million shares of common stock at a price of $14 per share
and raised net proceeds of approximately $270 million. Approximately
$180 million of these proceeds were used to pay obligations owed to Time Warner
and TWE. In turn, Time Warner and TWE used those proceeds principally to
reduce bank debt. In connection with the Time Warner Telecom IPO and certain
related transactions, Time Warner's ownership interest in Time Warner
Telecom was diluted from 62% to 48%. As a result, Time Warner recognized a
gain of approximately $115 million before providing for deferred taxes. This
gain has been included in interest and other, net, in Time Warner's 1999
consolidated statement of operations.

    As of December 31, 1999, Time Warner Telecom is owned 48% by Time Warner,
15% by MediaOne, 15% by Advance/Newhouse and 22% by other third parties. Time
Warner's interest in Time Warner Telecom is being accounted for under the equity
method of accounting.

PRIMESTAR

    In April 1998, TWE and Advance/Newhouse transferred 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
Partners' and collectively, the 'Primestar Assets') to Primestar, Inc.
('Primestar'), a separate holding company. As a result of that transfer and
similar transfers by the other previously existing partners of Primestar
Partners, Primestar Partners became an indirect wholly owned subsidiary of
Primestar. In exchange for contributing its interests in the Primestar Assets,
TWE received approximately 48 million shares of Primestar common stock
(representing an approximate 24% equity interest) and realized approximately
$240 million of debt reduction. As a result of this transaction, effective as of
April 1, 1998, TWE deconsolidated the DBS Operations and the 24% equity interest
in Primestar received in the transaction is being accounted for under the equity
method of accounting. This transaction is referred to as the 'Primestar Roll-up
Transaction.'

    In the fourth quarter of 1998, TWE recorded a charge of approximately $210
million principally to reduce the carrying value of its interest in Primestar.
This charge reflected a significant decline in the fair value of Primestar
during that quarter. The decline in Primestar's value was confirmed by the sale
of its operations and assets to DirecTV, a competitor of Primestar owned by
Hughes Electronics Corp., which occurred during the first half of 1999.


                                      F-33










<PAGE>
                                TIME WARNER INC.
          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  --  (CONTINUED)

    As a result of the sale to DirecTV, Primestar began to wind down its
operations during 1999. Time Warner recognized its share of Primestar's 1999
losses under the equity method of accounting. Such losses are included in
interest and other, net in Time Warner's 1999 consolidated statement of
operations. As of December 31, 1999, Primestar has substantially completed the
wind down of its operations. As such, future wind-down losses are not expected
to be material to Time Warner's operating results.

    On a historical basis, the 1998 charge has been included in Time Warner's
equity in the pretax income of the Entertainment Group and, on a pro forma basis
for 1998, in Time Warner's interest and other, net in the accompanying
consolidated statement of operations.

TCI CABLE TRANSACTIONS

    During 1999 and 1998, Time Warner, TWE, TWE-A/N and TCI completed a number
of significant cable-related transactions. These transactions consisted of
(i) the formation in December 1998 of a cable television joint venture in Texas
(the 'Texas Cable Joint Venture') that is managed by Time Warner Cable, (ii) the
expansion in August 1998 of 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) the TCI Cable Trades in 1999,
as previously discussed above. The Kansas City joint venture is being accounted
for under the equity method of accounting.

    The Texas Cable Joint Venture is a 50-50 cable television joint venture
between TWE-A/N and TCI. TWE-A/N contributed cable television systems serving
approximately 545,000 subscribers, subject to approximately $650 million of
debt. TCI contributed cable television systems serving approximately 565,000
subscribers, subject to approximately $650 million of debt. TWE-A/N did not
recognize a gain or loss on the transaction and the initial investment in the
Texas Cable Joint Venture was recorded based on the historical cost basis of
the contributed net assets. The Texas Cable Joint Venture is being accounted
for under the equity method of accounting.

    As a result of the formation of the Texas Cable Joint Venture, the combined
debt of Time Warner and TWE was reduced by approximately $650 million. Also, as
a result of the Texas and Kansas City transactions, Time Warner and TWE
benefited from the geographic clustering of cable television systems and the
number of subscribers under the management of Time Warner Cable was increased by
approximately 660,000 subscribers.

ROAD RUNNER JOINT VENTURE

    In June 1998, Time Warner, TWE, TWE-A/N, MediaOne, Microsoft Corp.
('Microsoft') and Compaq Computer Corp. ('Compaq') formed a joint venture to
operate and expand Time Warner Cable's and MediaOne's existing high-speed online
businesses (the 'Road Runner Joint Venture'). In exchange for contributing these
operations, Time Warner received a common equity interest in the Road Runner
Joint Venture of 10.7%, TWE received a 25% interest, TWE-A/N received a 32.9%
interest and MediaOne received a 31.4% interest. In exchange for Microsoft and
Compaq contributing $425 million of cash to the Road Runner Joint Venture,
Microsoft and Compaq each received a preferred equity interest therein that is
convertible into a 10% common equity interest (the 'Preferred Equity
Interests'). Accordingly, on a fully diluted basis, the Road Runner Joint
Venture is owned 8.6% by Time Warner, 20% by TWE, 26.3% by TWE-A/N, 25.1% by
MediaOne, 10% by Microsoft and 10% by Compaq. No gain or loss was recognized on
the transaction. As such, each of Time Warner's, TWE's and TWE-A/N's initial
interest in the Road Runner Joint Venture was recorded based on the historical
cost basis of the contributed net assets. In addition, each of Time Warner's,
TWE's and TWE-A/N's interest in the Road Runner Joint Venture is being accounted
for under the equity method of accounting because of certain approval rights
held by MediaOne.

    If the Road Runner Joint Venture does not successfully complete a public
offering of its common stock by December 31, 2001, Microsoft and Compaq may put
their Preferred Equity Interests back to the venture at an

                                      F-34










<PAGE>
                                TIME WARNER INC.
          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  --  (CONTINUED)

independently determined fair value, plus any accrued and unpaid dividends at
a rate of 6% per annum. Microsoft and Compaq also have the right to put their
Preferred Equity Interests back to the venture upon the occurrence of certain
early termination events, as set forth in the partnership agreement. If these
termination rights are triggered and exercised, the put price paid to Microsoft
and Compaq will equal the amount of their original investment plus a cumulative
annual preferred return of 15%.

    The aggregate $425 million of capital contributed by Microsoft and Compaq is
being used by the Road Runner Joint Venture to continue to expand the roll out
of high-speed online services. Time Warner Cable has entered into an affiliation
agreement with the Road Runner Joint Venture, pursuant to which Time Warner
Cable provides Road Runner's high-speed online services to customers in its
cable franchise areas through its technologically advanced, high-capacity cable
architecture. In exchange, Time Warner Cable initially retains 70% of the
subscription revenues and 30% of the national advertising and transactional
revenues generated from the delivery of these online services to its cable
subscribers. Time Warner Cable's share of these subscription revenues will
change periodically to 75% by 2006.

TWE-A/N TRANSFERS

    As of December 31, 1999, TWE-A/N owned cable television systems (or
interests therein) serving approximately 6.7 million subscribers, of which
5.5 million subscribers were served by consolidated, wholly owned cable
television systems and 1.2 million subscribers were served by unconsolidated,
partially owned cable television systems. TWE-A/N had approximately
$1.4 billion of debt at December 31, 1999.

    TWE-A/N is owned approximately 64.8% by TWE, the managing partner, 33.3% by
Advance/Newhouse and 1.9% indirectly by Time Warner. On a historical basis for
1999 and on a pro forma basis for 1998, the financial position and operating
results of TWE-A/N have been consolidated by Time Warner and the partnership
interest owned by Advance/Newhouse is reflected in Time Warner's consolidated
financial statements as minority interest. On a historical basis for all periods
prior to 1999, the financial position and operating results of TWE-A/N have been
consolidated by TWE and reflected by Time Warner under the equity method of
accounting. 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, 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.

    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 in TWE-A/N, and completed certain
transactions relating to Paragon Communications ("Paragon" and 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. Prior to this transaction, the economic ownership
of Paragon was held 50% by subsidiaries of Time Warner, 25% beneficially by TWE
and 25% beneficially by TWE-A/N. The debt assumed by TWE-A/N has been guaranteed
by TWI Cable and certain of its subsidiaries, including Paragon. The TWE-A/N
Transfers were accounted for effective as of January 1, 1998. Time Warner and
TWE-A/N accounted for this transaction at fair value. However, because the fair
value of the consideration received approximated Time Warner's carrying value
of the net assets transferred, Time Warner did not recognize a gain or loss
on the transaction.

    Paragon was a partnership formerly owning cable television systems serving
approximately 1 million subscribers. 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.

                                      F-35










<PAGE>
                                TIME WARNER INC.
          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  --  (CONTINUED)

Accordingly, effective as of January 1, 1998, Time Warner has consolidated
Paragon, which it formerly accounted for under the equity method of accounting.
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.

    On a pro forma basis, giving effect to the TWE-A/N Transfers as if they had
occurred at the beginning of 1997, Time Warner would have reported for the year
ended December 31, 1997, revenues of $13.233 billion, depreciation expense of
$375 million, operating income before noncash amortization of intangible assets
of $2.068 billion, operating income of $1.219 billion, equity in the pretax
income of the Entertainment Group of $679 million, income before extraordinary
item of $307 million ($.01 loss per common share) and net income of $252 million
($.06 loss per common share).

3.  FILMED ENTERTAINMENT TRANSACTIONS

1999 GAIN ON TERMINATION OF VIDEO DISTRIBUTION AGREEMENT

    In March 1999, Warner Bros. and Metro-Goldwyn-Mayer, Inc. ('MGM') terminated
a long-term distribution agreement under which Warner Bros. had exclusive
worldwide distribution rights for MGM/United Artists home video product. In
connection with the early termination and settlement of this distribution
agreement, Warner Bros. recognized a net pretax gain of approximately
$215 million, which has been included in operating income in the accompanying
consolidated statement of operations.

1999 GAIN ON SALE OF INTEREST IN CANALSATELLITE

    In December 1999, Warner Bros. sold its 10% interest in CanalSatellite, a
satellite television distribution service in France and Monaco, to Canal+, a
large French media and entertainment company. In connection with the sale,
Warner Bros. recognized a pretax gain of $97 million, which has been included in
operating income in the accompanying consolidated statement of operations.

1999 WARNER BROS. RETAIL STORES WRITE-DOWN

    In the fourth quarter of 1999, Warner Bros. recorded a one-time, noncash
pretax charge of $106 million to reduce the carrying value of certain fixed
assets and leasehold improvements used in its retail stores. This charge
resulted from a plan adopted in December 1999 that is designed to improve the
performance of Warner Bros.'s retail store operations. The plan is expected to
be executed largely over a three-year period and involves closing certain
underperforming stores, transforming other stores into smaller and more
efficient stores, and exploiting potential e-commerce opportunities.

    The charge represents the excess of the carrying value of the assets used in
Warner Bros.'s retail stores over the discounted future operating cash flows,
adjusted to reflect a shorter recovery period due to planned store closures. The
charge has been included in operating income in the accompanying consolidated
statement of operations.

1998 SALE OF SIX FLAGS

    In April 1998, TWE sold its remaining 49% interest in Six Flags
Entertainment Corporation ('Six Flags') to Premier Parks Inc. ('Premier'), a
regional theme park operator, for approximately $475 million of cash. TWE used
the net, after-tax proceeds from this transaction to reduce debt by
approximately $300 million. 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. As of
                                      F-36










<PAGE>
                                TIME WARNER INC.
          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  --  (CONTINUED)

December 31, 1999, approximately $330 million of the original $400 million gain
on the sale of TWE's interest had been deferred principally as a result of
uncertainties surrounding its realization. Those uncertainties relate to ongoing
litigation as described in Note 17 and TWE's continuing guarantees of Premier's
long-term obligations to make minimum payments to the limited partners of the
Six Flags Over Texas and Six Flags Over Georgia theme parks. If current trends
continue, Time Warner expects the deferred gain to be recognized over the next
several years, subject to the resolution of the Six Flags litigation.
That is, the deferred gain will not fall below the estimated exposure relating
to the Six Flags litigation. In addition, upon closing of the America Online-
Time Warner merger, any portion of the deferred gain not attributable to the
Six Flags litigation is likely to be eliminated in purchase accounting.

4.  INVESTMENT IN ENTERTAINMENT GROUP

PARTNERSHIP STRUCTURE

    Time Warner's investment in the Entertainment Group consists substantially
of its investment in TWE, as well as certain related companies. TWE is a
Delaware limited partnership that was capitalized in 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. 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 Series B Capital. The remaining
25.51% limited partnership interests in the Series A Capital and Residual
Capital of TWE are held by MediaOne. Certain Time Warner subsidiaries are the
general partners of TWE ('Time Warner General Partners').

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 following table. 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 100% 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-37










<PAGE>
                                TIME WARNER INC.
          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  --  (CONTINUED)

    A summary of the priority of Undistributed Contributed Capital, Time
Warner's ownership of Undistributed Contributed Capital and Cumulative Priority
Capital at December 31, 1999 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>
Series A Capital........................           $5.6             $14.5        13.00%            74.49%
Series B Capital........................            2.9(d)            7.7        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 generally is 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 its 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 also is 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 Series A Capital and Series B Capital, in order of priority, at
rates of 13.00% and 13.25% per annum, respectively, 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, and then 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 $2.759 billion, $326 million and $614 million
in 1999, 1998 and 1997, 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, although it does not appear likely at this
time that such targets will be achieved. In addition, MediaOne has an option to
obtain up to an additional 6.33% of Series A Capital and Residual Capital
interests. The determination of the amount of additional interests that MediaOne
is eligible to acquire is based on the compounded annual growth rate of TWE's
adjusted cable EBITDA, as defined in the option agreement, over the life of the
option. The option is exercisable at any time through May 2005. The option
exercise price is dependent upon the year of exercise and

                                      F-38










<PAGE>
                                TIME WARNER INC.
          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  --  (CONTINUED)

ranges from an exercise price of approximately $1.3 billion in 2000 to
$1.8 billion in 2005. Either MediaOne or TWE may elect that the exercise price
be paid with partnership interests rather than cash.

SUMMARIZED FINANCIAL INFORMATION OF THE ENTERTAINMENT GROUP

    As previously described in Note 1, Time Warner's historical financial
statements for 1999 and pro forma financial statements for 1998 reflect the
consolidation of the Entertainment Group, effective as of the beginning of each
year. However, in order to facilitate an analysis of Time Warner's results of
operations and financial condition for all historical periods in which the
Entertainment Group was not consolidated, set forth below is summarized
financial information of the Entertainment Group. The summarized financial
information reflects the TWE-A/N Transfers effective as of January 1, 1998, the
Primestar Roll-up Transaction effective as of April 1, 1998, the formation of
the Road Runner Joint Venture effective as of June 30, 1998, the Time Warner
Telecom Reorganization effective as of July 1, 1998 and the formation of the
Texas Cable Joint Venture effective as of December 31, 1998.

<TABLE>
<CAPTION>
                                                            YEARS ENDED DECEMBER 31,
                                                           ---------------------------
                                                            1999      1998      1997
                                                           -------   -------   -------
                                                                   (MILLIONS)
<S>                                                        <C>       <C>       <C>
OPERATING STATEMENT INFORMATION
Revenues.................................................  $13,164   $12,256   $11,328
Depreciation and amortization............................   (1,364)   (1,436)   (1,386)
Business segment operating income(a).....................    4,227     1,724     1,461
Interest and other, net(b)...............................     (818)     (945)     (338)
Minority interest........................................     (427)     (284)     (324)
Income before income taxes...............................    2,909       423       727
Income before extraordinary item.........................    2,759       331       642
Net income...............................................    2,759       331       619
</TABLE>

---------
(a) Includes a net pretax gain of approximately $215 million in 1999 in
    connection with the early termination and settlement of a long-term, home
    video distribution agreement, a pretax gain of approximately $97 million in
    1999 relating to the sale of an interest in CanalSatellite, a one-time,
    noncash pretax charge of approximately $106 million in 1999 relating to
    certain Warner Bros.'s retail stores and net pretax gains of approximately
    $2.119 billion in 1999, $90 million in 1998 and $200 million in 1997 related
    to the sale or exchange of certain cable television systems and investments.

(b) 1998 includes a pretax charge of approximately $210 million principally to
    reduce the carrying value of an interest in Primestar. 1997 includes a
    pretax gain of approximately $250 million related to the sale of an interest
    in E! Entertainment Television, Inc.

                                      F-39










<PAGE>
                                TIME WARNER INC.
          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  --  (CONTINUED)


<TABLE>
<CAPTION>
                                                              YEARS ENDED DECEMBER 31,
                                                              ------------------------
                                                               1999     1998     1997
                                                              ------   ------   ------
                                                                     (MILLIONS)
<S>                                                           <C>      <C>      <C>
CASH FLOW INFORMATION
Cash provided by operations.................................  $2,713   $2,288   $1,799
Capital expenditures........................................  (1,475)  (1,603)  (1,565)
Investments and acquisitions................................    (478)    (388)    (172)
Investment proceeds.........................................     948    1,246      520
Collection of loan to Time Warner...........................     400       --       --
Borrowings..................................................   2,658    1,514    3,400
Debt repayments.............................................  (2,764)  (1,898)  (3,085)
Issuance of preferred stock of subsidiary...................      --       --      243
Redemption of preferred stock of subsidiary.................    (217)      --       --
Capital distributions.......................................  (1,200)  (1,153)    (934)
Other financing activities, net.............................    (155)    (241)    (100)
Increase (decrease) in cash and equivalents.................     430     (235)     106
</TABLE>

<TABLE>
<CAPTION>
                                                                DECEMBER 31,
                                                              -----------------
                                                               1999      1998
                                                              -------   -------
                                                                 (MILLIONS)
<S>                                                           <C>       <C>
BALANCE SHEET INFORMATION
Cash and equivalents........................................  $   517   $    87
Total current assets........................................    5,311     4,187
Total assets................................................   24,843    22,241
Total current liabilities...................................    5,723     4,940
Long-term debt..............................................    6,655     6,578
Minority interests..........................................    1,815     1,522
Preferred stock of subsidiary...............................       --       217
Time Warner General Partners' Senior Capital................       --       603
Partners' capital...........................................    7,149     5,210
</TABLE>

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.

    Through July 1999, the Time Warner General Partners held senior priority
capital interests ('Senior Capital') in TWE. At that time, the Time Warner
General Partners received a $627 million distribution from TWE in full
redemption of the remaining portion of their Senior Capital interests plus
related priority capital return. This distribution increased the cumulative cash
distributions received from TWE relating to the Time Warner General Partners'
Senior Capital interests to $2.1 billion. A portion of the proceeds received
from the July 1999 distribution was used to repay all $400 million of
outstanding borrowings under Time Warner's credit agreement with TWE.

    At December 31, 1999 and 1998, the Time Warner General Partners had recorded
$1.292 billion and $1.130 billion, respectively, of stock option related
distributions due from TWE, based on closing prices of Time Warner common stock
of $72.31 and $62.06, 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 1999, the Time Warner General
Partners received distributions from TWE in the amount of $1.2 billion,
consisting of $627 million of Senior Capital distributions (representing the
return of $454 million of contributed capital and the distribution of
$173 million of priority capital return), $347 million of tax-related
distributions and $226 million of stock option related distributions. During
1998, the Time Warner General Partners received

                                      F-40










<PAGE>
                                TIME WARNER INC.
          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  --  (CONTINUED)


distributions from TWE in the amount of $1.153 billion, consisting of
$579 million of Senior Capital distributions (representing the return of
$455 million of contributed capital and the distribution of $124 million of
priority capital return), $314 million of tax-related distributions and
$260 million of stock option related distributions. 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. 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.

    In addition, in connection with the Time Warner Telecom Reorganization in
1998, TWE made a $191 million noncash distribution to its partners, of which
certain wholly owned subsidiaries of Time Warner received an interest in Time
Warner Telecom recorded at $143 million based on TWE's historical cost of the
net assets (Note 2).

5.  OTHER INVESTMENTS

    Time Warner's other investments consist of:

<TABLE>
<CAPTION>
                                                                    DECEMBER 31,
                                                         -----------------------------------
                                                            1999        1998         1998
                                                         HISTORICAL   PRO FORMA   HISTORICAL
                                                         ----------   ---------   ----------
                                                                     (MILLIONS)
<S>                                                      <C>          <C>         <C>
Equity-method investments..............................    $1,012      $1,042        $483
Cost-method investments................................        73         177          12
Fair-value investments(a)..............................     1,011         446         299
                                                           ------      ------        ----
Total..................................................    $2,096      $1,665        $794
                                                           ------      ------        ----
                                                           ------      ------        ----
</TABLE>

---------

(a) Principally includes investments in Internet-related and digital media
    businesses and investments relating to Time Warner's deferred compensation
    plans.

    The following discussion presents information on Time Warner's equity
investees and separately highlights some of the more significant and strategic
investments held by Time Warner.

EQUITY-METHOD INVESTMENTS

    At December 31, 1999, companies accounted for using the equity method
include: Time Warner Telecom (48% owned), the Road Runner Joint Venture (55%
owned on a fully diluted basis), certain cable television system joint ventures
(generally 50% owned), Courtroom Television Network (50% owned), the Columbia
House Company partnerships (50% owned), other music joint ventures (generally
50% owned), American Family Enterprises (50% owned), Comedy Partners, L.P. (50%
owned) and Primestar (24% owned). A summary of combined financial information as
reported by the equity investees of Time Warner is set forth below:

                                      F-41










<PAGE>
                                TIME WARNER INC.
          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  --  (CONTINUED)

<TABLE>
<CAPTION>
                                                           YEARS ENDED DECEMBER 31,
                                               ------------------------------------------------
                                                  1999        1998         1998         1997
                                               HISTORICAL   PRO FORMA   HISTORICAL   HISTORICAL
                                               ----------   ---------   ----------   ----------
                                                                  (MILLIONS)
<S>                                            <C>          <C>         <C>          <C>
Revenues.....................................    $3,064      $3,604       $1,275       $1,336
Depreciation and amortization................      (418)       (749)         (43)         (13)
Operating income (loss)......................        64        (266)          (1)          80
Net loss.....................................      (346)       (461)        (109)         (36)
Current assets...............................     1,570       1,848        1,183          792
Total assets.................................     5,214       7,293        2,065        1,132
Current liabilities..........................     1,294       1,215          587          418
Long-term debt...............................     3,367       4,724        1,807        1,303
Total liabilities............................     4,807       6,163        2,464        1,791
Total shareholders' (deficit) or partners'
  capital....................................       407       1,130         (399)        (659)
</TABLE>

TIME WARNER TELECOM

    As discussed more fully under Note 2, Time Warner has a 48% interest in Time
Warner Telecom. Time Warner Telecom is an integrated communications provider
that provides a wide range of telephony and data services to businesses in a
number of metropolitan areas across the United States. As of December 31, 1999,
based on Time Warner's ownership of 50.4 million shares of Class B common stock
and the $49.9375 market price of Time Warner Telecom's publicly traded Class A
common stock, the market value of Time Warner's interest in Time Warner Telecom
was $2.5 billion.

ROAD RUNNER JOINT VENTURE

    As discussed more fully under Note 2, Time Warner, TWE and TWE-A/N have a
collective 55% interest in the Road Runner Joint Venture on a fully diluted
basis. The Road Runner Joint Venture operates a high-speed online service that
connects customers to the Internet at speeds significantly faster than telephone
dial-up services. As of December 31, 1999, the Road Runner Joint Venture had
approximately 550,000 subscribers in 37 markets that pass more than 13 million
homes.

CABLE TELEVISION SYSTEM JOINT VENTURES

    Time Warner Cable has an approximate 50% weighted-average interest in a
number of unconsolidated cable television systems that served an aggregate 1.7
million subscribers as of December 31, 1999. For 1999, these cable television
systems reported combined operating income of $231 million and combined
depreciation and amortization of $267 million. In addition, at the end of 1999,
these cable television systems had debt of approximately $1.9 billion.

OTHER INVESTMENTS

    Time Warner has a number of other fair value method investments, including
interests in Internet-related and digital media businesses. These interests
generally consist of common equity and common equity equivalents. As of
December 31, 1999, Internet-related and digital media investments included
2,252,252 of common share equivalents in OpenTV Corp., a designer and marketer
of digital interactive television software and components; 349,612 of common
share equivalents in Intervu Inc., a service provider for Internet audio and
video delivery solutions; 2,486,742 of common share equivalents in
Healtheon/WebMD Corp., an end-to-end Internet healthcare company connecting
physicians and consumers to the entire healthcare industry; 5,170,509 of common
share equivalents in Fortune City, an international online community; and
2,627,080 of common share


                                      F-42










<PAGE>
                                TIME WARNER INC.
          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  --  (CONTINUED)

equivalents in Hoover's Inc., an Internet provider of news, financial and other
information on various companies and industries.

    Time Warner's ownership and voting interests in these companies are
generally less than 20%, which is not large enough to exert significant
influence. As such, these publicly traded investments are accounted for at
market value. As of December 31, 1999, the aggregate market value of these
publicly traded investments approximated $450 million, resulting in unrealized
pretax gains of approximately $350 million included as a component of other
comprehensive income in shareholders' equity.

6.  INVENTORIES

    Inventories consist of:

<TABLE>
<CAPTION>
                                 DECEMBER 31, 1999      DECEMBER 31, 1998      DECEMBER 31, 1998
                                --------------------   --------------------   --------------------
                                     HISTORICAL             PRO FORMA              HISTORICAL
                                --------------------   --------------------   --------------------
                                CURRENT   NONCURRENT   CURRENT   NONCURRENT   CURRENT   NONCURRENT
                                -------   ----------   -------   ----------   -------   ----------
                                                            (MILLIONS)
<S>                             <C>       <C>          <C>       <C>          <C>       <C>
Film costs:
  Released, less
    amortization..............  $  777      $  966     $  665      $1,052      $ 51       $  308
  Completed and not
    released..................      73          17        199          76        20           --
  In process and other........       8         864         25         811         2          240
  Library, less
    amortization..............      --       1,554         --       1,668        --        1,007
Programming costs, less
  amortization................     820         800        883         612       457          345
Magazines, books, recorded
  music and other
  merchandise.................     504          --        486          --       416           --
                                ------      ------     ------      ------      ----       ------
Total.........................  $2,182      $4,201     $2,258      $4,219      $946       $1,900
                                ------      ------     ------      ------      ----       ------
                                ------      ------     ------      ------      ----       ------
</TABLE>

    Excluding the Library, the unamortized cost of completed films at
December 31, 1999 amounted to $1.8 billion, over 90% of which is expected to be
amortized within three years after release.

7.  LONG-TERM DEBT

    Long-term debt consists of:

<TABLE>
<CAPTION>
                                                                              DECEMBER 31,
                               WEIGHTED AVERAGE                   ------------------------------------
                               INTEREST RATE AT                      1999         1998         1998
                              DECEMBER 31, 1999     MATURITIES    HISTORICAL   PRO FORMA    HISTORICAL
                              ------------------   -------------  ----------   ----------   ----------
                                                                               (MILLIONS)
<S>                           <C>                  <C>            <C>          <C>          <C>
Bank credit agreement
  borrowings................        6.85%              2002        $ 4,846      $ 3,945      $ 1,234
Commercial paper............        6.46%              2000            360           62           --
Fixed-rate senior notes and
  debentures................        8.03%            2000-2036      12,277       12,296        8,491
Variable-rate senior
  notes.....................        5.93%              2031            600        1,200        1,200
                                                                   -------      -------      -------
Total.......................                                       $18,083      $17,503      $10,925
                                                                   -------      -------      -------
                                                                   -------      -------      -------
</TABLE>

BANK CREDIT AGREEMENT

    Time Warner has a revolving credit facility (the 'Bank Credit Agreement')
that permits borrowings in an aggregate amount of up to $7.5 billion, with no
scheduled reduction in credit availability prior to maturity in

                                      F-43










<PAGE>
                                TIME WARNER INC.
          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  --  (CONTINUED)

November 2002. The borrowers under the Bank Credit Agreement are Time Warner and
a number of its consolidated subsidiaries, consisting of Time Warner Companies,
Inc. ('TW Companies'), Turner Broadcasting System, Inc. ('TBS'), TWI Cable, TWE
and TWE-A/N. Borrowings under the Bank 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
of 35 basis points) and each borrower is required to pay a commitment fee of
 .125% per annum on the unused portion of its commitment, 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 Bank 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 SENIOR NOTES

    In 1999, TW Companies redeemed all of its $600 million principal amount of
Floating Rate Reset Notes due July 29, 2009. The aggregate redemption cost of
approximately $620 million was funded with borrowings under the Bank Credit
Agreement.

    The only variable-rate senior notes outstanding at the end of 1999 were $600
million principal amount of Floating Rate Reset Notes due December 30, 2031 that
are redeemable at the election of the holders on December 30, 2001 (the
'Five-Year Floating Rate Notes'). 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.

ZERO-COUPON CONVERTIBLE NOTES

    During 1998, approximately $1.15 billion accreted amount of zero-coupon
convertible notes due 2013 (the 'Zero-Coupon Convertible Notes') were converted
into an aggregate 37.4 million shares of Time Warner common stock. To partially
offset the dilution resulting from this conversion, Time Warner incurred a
corresponding $1.15 billion of debt and used the proceeds therefrom to
repurchase common stock.

INTEREST EXPENSE AND MATURITIES

    Time Warner periodically refinances its debt in an effort to lower its
overall cost of borrowings and to stagger debt maturities. In connection with
such refinancings, Time Warner recognized an extraordinary loss on the
retirement of debt of $12 million in 1999 and $55 million in 1997.

    At December 31, 1999, Time Warner had interest rate swap contracts to pay
floating-rates of interest and receive fixed-rates of interest on $400 million
notional amount of indebtedness, which resulted in approximately 34% of Time
Warner's underlying debt being subject to variable interest rates (Note 15).

    Interest expense amounted to $1.519 billion in 1999, $891 million in 1998
($1.451 billion on a pro forma basis) and $1.049 billion in 1997. The weighted
average interest rate on Time Warner's total debt, including TWE's debt and the
effect of interest rate swap contracts, was 7.6% and 7.3% at December 31, 1999
and 1998, respectively.

    Annual repayments of long-term debt for the five years subsequent to
December 31, 1999 consist of $500 million due in 2000, $5.8 billion due in 2002,
$48 million due in 2003 and $523 million due in 2004. Such
                                      F-44










<PAGE>
                                TIME WARNER INC.
          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  --  (CONTINUED)

repayments exclude the aggregate redemption price of $600 million in 2001
relating to the Five-Year Floating Rate Notes, the year in which the holders
thereof may first exercise their redemption options. Time Warner has the intent
and ability under the Bank Credit Agreement to continue to refinance its
borrowings on a long-term basis.

FAIR VALUE OF DEBT

    Based on the level of interest rates prevailing at December 31, 1999, the
fair value of Time Warner's fixed rate debt approximated its carrying value.
Based on the level of interest rates prevailing at December 31, 1998, the fair
value of Time Warner's fixed-rate debt exceeded its carrying value by $1.098
billion ($1.862 billion on a pro forma basis). Unrealized gains or losses on
debt do not result in the realization or expenditure of cash and generally are
not recognized for financial reporting purposes unless the debt is retired prior
to its maturity.

8.  BORROWINGS AGAINST FUTURE STOCK OPTION PROCEEDS

    In connection with Time Warner's common stock repurchase program (Note 12),
Time Warner has a $1.3 billion revolving credit facility that provides for
borrowings against future stock option proceeds (the 'Stock Option Proceeds
Credit Facility'). Borrowings under the Stock Option Proceeds Credit Facility
are principally used to fund stock repurchases. At December 31, 1999 and 1998,
Time Warner had outstanding borrowings against future stock option proceeds of
$1.243 billion and $895 million, respectively.

    As of December 31, 1999, the Stock Option Proceeds Credit Facility provided
for borrowings of up to $1.3 billion, of which up to $125 million was reserved
solely for the payment of interest and fees thereunder. Borrowings under the
Stock Option Proceeds Credit Facility generally bear interest at LIBOR plus a
margin equal to 75 basis points and are principally expected to be repaid from
the cash proceeds received from the exercise of designated employee stock
options. The receipt of such stock option proceeds in excess of $1.3 billion
through March 2000, and thereafter in full on a cumulative basis, must be used
to permanently reduce the borrowing availability under the facility. At
December 31, 1999, based on a closing market price of Time Warner common stock
of $72.31, the aggregate value of potential proceeds to Time Warner from the
exercise of outstanding vested, 'in the money' stock options covered under the
facility was approximately $1.8 billion, representing a 1.4 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. Time Warner had placed
76 million shares in escrow at December 31, 1999, 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 210 million shares held
in escrow.

    Because borrowings under the Stock Option Proceeds Credit Facility are
expected to be principally repaid by Time Warner from the cash proceeds related
to the exercise of employee stock options, Time Warner's principal credit rating
agencies have concluded that such borrowings and related financing costs are
credit neutral and are excludable from debt and interest expense for purposes of
evaluating the Company's leverage and coverage ratios.


                                      F-45










<PAGE>
                                TIME WARNER INC.
          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  --  (CONTINUED)

9.  INCOME TAXES

    Domestic and foreign pretax income are as follows:

<TABLE>
<CAPTION>

                                                              YEARS ENDED DECEMBER 31,
                                                           ------------------------------
                                                            1999        1998        1997
                                                           ------    ----------    ------
                                                                     (MILLIONS)
<S>                                                        <C>       <C>           <C>
Domestic.................................................  $3,184        $486       $728
Foreign..................................................     316         100        104
                                                           ------        ----       ----
Total....................................................  $3,500        $586       $832
                                                           ------        ----       ----
                                                           ------        ----       ----
</TABLE>

    Current and deferred income taxes (tax benefits) provided are as follows:

<TABLE>
<CAPTION>
                                                              YEARS ENDED DECEMBER 31,
                                                           ------------------------------
                                                            1999        1998        1997
                                                           ------    ----------    ------
                                                                     (MILLIONS)
<S>                                                        <C>       <C>           <C>
Federal:
    Current(a)...........................................  $  470       $ 436       $191
    Deferred.............................................     556        (259)        49
Foreign:
    Current(b)...........................................     240         260        205
    Deferred.............................................       9         (49)        (3)
State and Local:
    Current(a)...........................................     179         166         88
    Deferred.............................................      86        (136)         1
                                                           ------       -----       ----
Total....................................................  $1,540       $ 418       $531
                                                           ------       -----       ----
                                                           ------       -----       ----
</TABLE>

---------

(a) Includes utilization of tax carryforwards of $198 million in 1999, $126
    million in 1998 and $109 million in 1997. Excludes federal and state and
    local tax benefits of $486 million in 1999, $478 million in 1998 and $165
    million in 1997 resulting from the exercise of stock options and vesting of
    restricted stock awards, which were credited directly to paid-in-capital.
    Excludes current tax benefits of $9 million in 1999 and $37 million in 1997
    resulting from the retirement of debt, which reduced the extraordinary
    losses in such years.

(b) Includes foreign withholding taxes of $120 million in 1999, $113 million in
    1998 and $114 million in 1997.

    The differences between income taxes expected at the U.S. federal statutory
income tax rate of 35% 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,
                                                           --------------------------
                                                            1999      1998      1997
                                                           ------    ------    ------
                                                                   (MILLIONS)
<S>                                                        <C>       <C>       <C>
Taxes on income at U.S. federal statutory rate...........  $1,225     $205      $291
State and local taxes, net of federal tax benefits.......     172       20        58
Nondeductible goodwill amortization......................     173      170       170
Other nondeductible expenses.............................       9       13        11
Foreign income taxed at different rates, net of U.S.
    foreign tax credits..................................     (37)      --         9
Other....................................................      (2)      10        (8)
                                                           ------     ----      ----
Total....................................................  $1,540     $418      $531
                                                           ------     ----      ----
                                                           ------     ----      ----
</TABLE>
                                      F-46










<PAGE>
                                TIME WARNER INC.
          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  --  (CONTINUED)


    Significant components of Time Warner's net deferred tax liabilities are as
follows:

<TABLE>
<CAPTION>
                                                                DECEMBER 31,
                                                              ----------------
                                                               1999      1998
                                                              ------    ------
                                                                 (MILLIONS)
<S>                                                           <C>       <C>
Assets acquired in business combinations....................  $2,635    $3,158
Depreciation and amortization...............................   2,240     1,112
Unrealized appreciation of certain marketable securities....     155         4
Other.......................................................     422       452
                                                              ------    ------
Deferred tax liabilities....................................   5,452     4,726
                                                              ------    ------
Tax carryforwards...........................................     231       304
Accrued liabilities.........................................     572       513
Receivable allowances and return reserves...................     223       217
Other.......................................................     192       201
                                                              ------    ------
Deferred tax assets.........................................   1,218     1,235
                                                              ------    ------
Net deferred tax liabilities................................  $4,234    $3,491
                                                              ------    ------
                                                              ------    ------
</TABLE>

    U.S. income and foreign withholding taxes have not been recorded on
permanently reinvested earnings of foreign subsidiaries aggregating
approximately $1.1 billion at December 31, 1999. 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, 1999 consisted of $93 million
of net operating losses, $123 million of investment tax credits and $76 million
of alternative minimum tax credits. The utilization of certain carryforwards is
subject to limitations under U.S. federal income tax laws. Except for the
alternative minimum tax credits which do not expire, the other U.S. federal tax
carryforwards expire in varying amounts as follows for income tax reporting
purposes:

<TABLE>
<CAPTION>
                                                                  CARRYFORWARDS
                                                              ----------------------
                                                                 NET      INVESTMENT
                                                              OPERATING      TAX
                                                               LOSSES      CREDITS
                                                              ---------   ----------
                                                                    (MILLIONS)
<S>                                                           <C>         <C>
2000........................................................     $ 1         $ 25
2001........................................................       1           36
2002........................................................      --           32
2003........................................................      --           13
Thereafter up to 2012.......................................      91           17
                                                                 ---         ----
                                                                 $93         $123
                                                                 ---         ----
                                                                 ---         ----
</TABLE>

10. MANDATORILY REDEEMABLE PREFERRED SECURITIES

REDEMPTION OF REIT PREFERRED STOCK

    In 1997, a newly formed, substantially owned subsidiary of TWE (the 'REIT')
issued 250,000 shares of preferred stock ('REIT Preferred Stock'). The REIT was
intended to qualify as a real estate investment trust under the Internal Revenue
Code of 1986, as amended.

    In March 1999, the REIT redeemed all of its shares of REIT Preferred Stock
at an aggregate cost of $217 million, which approximated net book value. The
redemption was funded with borrowings under TWE's bank credit agreement.

                                      F-47










<PAGE>
                                TIME WARNER INC.
          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  --  (CONTINUED)


REDEMPTION OF HASBRO-RELATED PREFERRED TRUST SECURITIES

    In 1995, Time Warner, through TW Companies, 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 common
stock of Hasbro, Inc. ('Hasbro') 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.

PREFERRED TRUST SECURITIES

    In 1995, Time Warner, through TW Companies, 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 TW Companies 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. If TW Companies elects to redeem these securities, the redemption
amount would be in each case at an amount per Preferred Trust Security equal to
$25 per security, 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. REDEMPTION OF SERIES M PREFERRED STOCK

    In December 1998, Time Warner redeemed all of its outstanding shares of
10 1/4% Series M Preferred Stock. The aggregate redemption cost of approximately
$2.1 billion was funded with proceeds from the issuance of lower-cost debt. As a
result of this redemption, preferred dividend requirements in Time Warner's 1998
consolidated statement of operations include a one-time effect of $234 million
relating to the redemption premium paid in connection therewith.

    Because the weighted-average interest rate of the debt is approximately 400
basis points lower than the dividend rate of the Series M Preferred Stock and
the interest on the debt is tax deductible (whereas dividends are not), Time
Warner has realized over $100 million of annual cash savings as a result of this
redemption.

12. SHAREHOLDERS' EQUITY

    At December 31, 1999, shareholders' equity of Time Warner included 8.4
million shares of convertible preferred stock, 114.1 million shares of Series
LMCN-V common stock and 1.173 billion shares of common stock (net of 22.1
million shares of common stock in treasury). Time Warner currently is authorized
to issue up to 250 million shares of preferred stock, up to 5 billion shares of
common stock and up to 600 million shares of additional classes of common stock,
including Series LMCN-V common stock. Shares of Series LMCN-V common stock
have substantially identical rights as shares of Time Warner's common stock,
except shares of Series LMCN-V common stock have limited voting rights and are
non-redeemable.

                                      F-48










<PAGE>
                                TIME WARNER INC.
          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  --  (CONTINUED)

CONVERTIBLE PREFERRED STOCK

    Over the past two years, Time Warner issued approximately 112.6 million
shares of common stock in connection with the conversion of 27 million shares of
convertible preferred stock. After those conversions, and the conversion in
January 2000 of substantially all outstanding shares of Series F preferred
stock into 12.3 million shares of common stock, Time Warner has approximately
5.4 million shares of convertible preferred stock outstanding. Such shares are
convertible into approximately 22.7 million shares of Time Warner common stock.

    The principal terms of each outstanding series of convertible preferred
stock (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 4.16528 shares of Time Warner common stock at a conversion
price of $24 per share (based on its liquidation value) and (3) 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 four votes on any such matter.

    Holders of Series E preferred stock and Series J preferred stock will
receive a $3.75 annual dividend per share through January 4, 2001 and May 2,
2000, respectively. Thereafter, holders of Series E preferred stock and Series J
preferred stock 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 (the 'Common Equivalent Dividend
Rate'). Holders of Series F preferred stock and Series I preferred stock will
continue to receive dividends based on the Common Equivalent Dividend Rate.

    Time Warner has the right at any time to redeem for cash or exchange for
Time Warner common stock, shares of Series I preferred stock at their
liquidation value or stated conversion price. Time Warner also has the right at
any time to exchange for Time Warner common stock, shares of Series F preferred
stock and to redeem such shares for cash at any time on or after January 4,
2001. These rights also are exercisable at any time on or after May 2, 2000 for
shares of Series J preferred stock and January 4, 2001 for shares of Series E
preferred stock.

COMMON STOCK REPURCHASE PROGRAM

    In January 1999, Time Warner's Board of Directors authorized a new common
stock repurchase program that allows the Company to repurchase, from time to
time, up to $5 billion of common stock. This program was expected to be
completed over a three-year period. However, in connection with Time Warner's
agreement to merge with America Online, Time Warner currently has suspended its
stock repurchase program.

    During 1999, Time Warner acquired 28.4 million shares of its common stock at
an aggregate cost of $1.896 billion. These repurchases increased the cumulative
shares purchased under this and its previous common stock repurchase program
begun in 1996 to approximately 123.5 million shares at an aggregate cost of
$4.936 billion, or approximately $40 per share.

1998 STOCK SPLIT

    In December 1998, a two-for-one common stock split was effectuated by the
payment of a 100% stock dividend in the amount of 558.2 million shares of common
stock (the '1998 Stock Split'). The 1998 Stock Split did not affect the number
of shares of Series LMCN-V common stock outstanding in 1998. In May 1999, Time
Warner amended the terms of its Series LMCN-V common stock, which effectively
resulted in a two-for-one stock split and the issuance of approximately 57
million shares of Series LMCN-V common stock (the 'LMCN-V Stock Split'). As a
result, each share of Series LMCN-V common stock now is equivalent effectively
to one share of common stock instead of two. Because the equivalent number of
shares of common

                                      F-49










<PAGE>
                                TIME WARNER INC.
          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  --  (CONTINUED)

stock did not change, the LMCN-V Stock Split did not have any
effect on Time Warner's consolidated financial statements.

DILUTIVE SECURITIES AND HOLDERS OF RECORD

    At December 31, 1999, Time Warner had convertible securities and outstanding
stock options that were convertible or exercisable into approximately 158.6
million shares of common stock (as adjusted for the January 2000 conversion of
Series F preferred stock). Similarly, those securities were convertible or
exercisable into approximately 242.2 million shares of common stock at
December 31, 1998 and 363.6 million shares at December 31, 1997. In addition,
Time Warner has placed a number of shares of common stock in escrow under its
Stock Option Proceeds Credit Facility (see Note 8).

    At February 29, 2000, 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.

SHAREHOLDER RIGHTS PLAN

    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 $75
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.

    In connection with Time Warner's agreement to merge with America Online,
Inc. ('America Online') entered into in January 2000, Time Warner amended the
rights plan to provide that the consummation of the merger and the other
transactions contemplated by the merger agreement with America Online would not
trigger the exercise of rights under the rights plan. See Note 20 for a summary
of the terms of the America Online-Time Warner merger.

                                      F-50










<PAGE>
                                TIME WARNER INC.
          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  --  (CONTINUED)


INCOME (LOSS) PER COMMON SHARE BEFORE EXTRAORDINARY ITEM

    Set forth below is a reconciliation of basic and diluted income (loss) per
common share before extraordinary item for each period.

<TABLE>
<CAPTION>
                                                           YEARS ENDED DECEMBER 31,
                                           ---------------------------------------------------------
                                              1999          1998           1998            1997
                                           HISTORICAL   PRO FORMA(a)   HISTORICAL(a)   HISTORICAL(a)
                                           ----------   ------------   -------------   -------------
                                                     (MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S>                                        <C>          <C>            <C>             <C>
Income (loss) applicable to common
  shares before extraordinary
  item -- basic.........................     $1,908        $ (372)        $ (372)         $  (18)
Interest savings, net of tax(b).........         43            --             --              --
Preferred dividends.....................         52            --             --              --
                                             ------        ------         ------          ------
Income (loss) applicable to common
  shares before extraordinary
  item -- diluted.......................     $2,003        $ (372)        $ (372)         $  (18)
                                             ------        ------         ------          ------
                                             ------        ------         ------          ------
Average number of common shares
  outstanding -- basic..................    1,267.0       1,194.7        1,194.7         1,135.4

Dilutive effect of stock options........       72.6            --             --              --
Dilutive effect of convertible preferred
  shares................................       58.7            --             --              --
                                             ------        ------         ------          ------
Average number of common shares
  outstanding -- diluted................    1,398.3       1,194.7        1,194.7         1,135.4
                                            -------       -------        -------         -------
                                            -------       -------        -------         -------
Income (loss) per common share before
  extraordinary item:
  Basic.................................     $ 1.51        $ (.31)        $ (.31)         $ (.01)
                                             ------        ------         ------          ------
                                             ------        ------         ------          ------
  Diluted...............................     $ 1.43        $ (.31)        $ (.31)         $ (.01)
                                             ------        ------         ------          ------
                                             ------        ------         ------          ------
</TABLE>

---------

(a) 1998 and 1997 basic and diluted loss per common share before extraordinary
    item are the same because the effect of Time Warner's stock options and
    convertible preferred stock was antidilutive.

(b) Reflects the required use of a portion of the proceeds from the future
    exercise of employee stock options to repay all outstanding borrowings under
    Time Warner's stock option proceeds credit facility.

13. STOCK-BASED COMPENSATION PLANS

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 with
exercise prices equal to, or in excess of, fair market value at the date of
grant. Accordingly, in accordance with APB 25 and related interpretations,
compensation cost generally is not 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 method set forth in
FASB Statement No. 123, 'Accounting for Stock-Based Compensation' ('FAS 123'),
Time Warner's net income and basic and diluted net income (loss) per common
share would have been changed to the pro forma amounts indicated below:

                                      F-51










<PAGE>
                                TIME WARNER INC.
          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  --  (CONTINUED)


<TABLE>
<CAPTION>
                                                               YEARS ENDED DECEMBER 31,
                                                              ---------------------------
                                                               1999      1998      1997
                                                              -------   -------   -------
                                                                   (MILLIONS, EXCEPT
                                                                  PER SHARE AMOUNTS)
<S>                                                           <C>       <C>       <C>
Net income:
    As reported.............................................  $1,948     $ 168     $ 246
                                                              ------     -----     -----
                                                              ------     -----     -----
    Pro forma...............................................  $1,852     $ 106     $ 200
                                                              ------     -----     -----
                                                              ------     -----     -----
Net income (loss) per basic common share:
    As reported.............................................  $ 1.50     $(.31)    $(.06)
                                                              ------     -----     -----
                                                              ------     -----     -----
    Pro forma...............................................  $ 1.42     $(.36)    $(.10)
                                                              ------     -----     -----
                                                              ------     -----     -----
Net income (loss) per diluted common share:
    As reported.............................................  $ 1.42     $(.31)    $(.06)
                                                              ------     -----     -----
                                                              ------     -----     -----
    Pro forma...............................................  $ 1.36     $(.36)    $(.10)
                                                              ------     -----     -----
                                                              ------     -----     -----
</TABLE>

    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 1999, 1998 and
1997: dividend yields of 0.3%, 0.5% and 1%, respectively; expected volatility of
23.4%, 21.6% and 21.9%, respectively; risk-free interest rates of 5.3%, 5.5% and
6.4%, respectively; and expected lives of 5 years in all periods. The weighted
average fair value of an option granted during the year was $21.18 ($12.50, net
of taxes), $11.13 ($6.57, net of taxes) and $6.58 ($3.88, net of taxes) for the
years ended December 31, 1999, 1998 and 1997, respectively. In each period, 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
$95.10 and $19.49 ($11.50, net of taxes), respectively, in 1999; $49.54 and
$9.45 ($5.58, net of taxes), respectively, in 1998; and $32.45 and $6.29 ($3.71,
net of taxes), respectively, in 1997.

    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, 1997..................................   195,734     $15.98
Granted.....................................................    16,544      22.41
Exercised...................................................   (32,632)     13.66
Cancelled...................................................      (942)     18.89
                                                               -------
Balance at December 31, 1997................................   178,704     $16.99
Granted.....................................................    18,100      37.71
Exercised...................................................   (48,323)     15.01
Cancelled...................................................      (417)     28.01
                                                               -------
Balance at December 31, 1998................................   148,064     $20.14
Granted.....................................................    12,954      68.50
Exercised...................................................   (24,257)     16.49
Cancelled...................................................      (893)     46.17
                                                               -------
Balance at December 31, 1999................................   135,868     $25.23
                                                               -------
                                                               -------
</TABLE>

                                      F-52










<PAGE>
                                TIME WARNER INC.
          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  --  (CONTINUED)


<TABLE>
<CAPTION>
                                                                  DECEMBER 31,
                                                           ---------------------------
                                                            1999      1998      1997
                                                           -------   -------   -------
                                                                   (THOUSANDS)
<S>                                                        <C>       <C>       <C>
Exercisable..............................................  106,728   112,471   145,616
Available for future grants..............................   21,635    11,207    12,771
</TABLE>

    The following table summarizes information about stock options outstanding
at December 31, 1999:

<TABLE>
<CAPTION>
                                                OPTIONS OUTSTANDING              OPTIONS EXERCISABLE
                                       -------------------------------------   -----------------------
                                                      WEIGHTED-
                                                       AVERAGE     WEIGHTED-                 WEIGHTED-
                                         NUMBER       REMAINING     AVERAGE      NUMBER       AVERAGE
RANGE OF                               OUTSTANDING   CONTRACTUAL   EXERCISE    EXERCISABLE   EXERCISE
EXERCISE PRICES                        AT 12/31/99      LIFE         PRICE     AT 12/31/99     PRICE
-------------------------------------  -----------   -----------     -----     -----------   ---------
                                       (THOUSANDS)                             (THOUSANDS)
<S>                                    <C>           <C>           <C>         <C>           <C>
Under $10............................      6,104      0.6 years     $ 9.08         6,104      $ 9.08
$10.00 to $15.00.....................     18,760      2.6 years     $12.11        18,760      $12.11
$15.01 to $20.00.....................     46,331      3.9 years     $18.28        44,974      $18.27
$20.01 to $30.00.....................     33,265      5.4 years     $22.06        29,547      $21.94
$30.01 to $45.00.....................     15,874      7.9 years     $35.08         6,403      $34.68
$45.01 to $65.00.....................      5,070      8.5 years     $54.35           928      $48.67
$65.01 to $103.74....................     10,464      9.0 years     $69.96            12      $69.16
                                         -------                                 -------
Total................................    135,868      5.0 years     $25.23       106,728      $18.93
                                         -------                                 -------
                                         -------                                 -------
</TABLE>

    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 $13.88 for options granted prior to the TWE capitalization on June 30, 1992.
There were 44.8 million options held by employees of TWE at December 31, 1999,
34.7 million of which were exercisable.

RESTRICTED STOCK PLANS

    Time Warner also has various restricted stock plans for employees and
non-employee directors of the Board. Under these plans, shares of common stock
are granted which do not vest until the end of a restriction period, generally
between three to five years. In accordance with APB 25 and related
interpretations, Time Warner recognizes compensation cost for restricted stock
awards ratably over the vesting period based on the fair market value of the
shares on the date of grant.

    At December 31, 1999, Time Warner had approximately 190,000 shares of
restricted stock outstanding. During 1999, Time Warner issued 99,400 shares of
restricted stock at a weighted-average fair value of $64.24. Grants of
restricted stock in prior years were not significant. In addition, compensation
cost recognized in connection with restricted stock grants was not material in
any period.

EFFECT OF AMERICA ONLINE-TIME WARNER MERGER ON STOCK-BASED COMPENSATION PLANS

    In connection with Time Warner's agreement to merge with America Online
entered into in January 2000, all Time Warner stock options and restricted
stock outstanding at that time became fully vested, pursuant to the terms of
Time Warner's stock option and restricted stock plans.
See Note 20 for a summary of the terms of the America Online-Time Warner merger.

14. BENEFIT PLANS

    Time Warner and its subsidiaries have defined benefit pension plans covering
most domestic employees. Pension benefits are based on formulas that reflect the
employees' years of service and compensation levels
                                      F-53










<PAGE>
                                TIME WARNER INC.
          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  --  (CONTINUED)

during their employment period. Time Warner's common stock represents
approximately 13% and 12% of plan assets at December 31, 1999 and 1998,
respectively. A summary of activity for Time Warner's defined benefit
pension plans is as follows:

<TABLE>
<CAPTION>
                                                            YEARS ENDED DECEMBER 31,
                                                ------------------------------------------------
                                                   1999        1998         1998         1997
                                                HISTORICAL   PRO FORMA   HISTORICAL   HISTORICAL
                                                ----------   ---------   ----------   ----------
                                                                   (MILLIONS)
<S>                                             <C>          <C>         <C>          <C>
COMPONENTS OF PENSION EXPENSE
Service cost..................................    $ 107        $  95        $ 53         $ 45
Interest cost.................................      118          110          74           68
Expected return on plan assets................     (132)        (108)        (73)         (62)
Net amortization and deferral.................       (3)           2           2            1
                                                  -----        -----        ----         ----
Total.........................................    $  90        $  99        $ 56         $ 52
                                                  -----        -----        ----         ----
                                                  -----        -----        ----         ----
</TABLE>

<TABLE>
<CAPTION>
                                                                    DECEMBER 31,
                                                         -----------------------------------
                                                            1999        1998         1998
                                                         HISTORICAL   PRO FORMA   HISTORICAL
                                                         ----------   ---------   ----------
                                                                     (MILLIONS)
<S>                                                      <C>          <C>         <C>
CHANGE IN PROJECTED BENEFIT OBLIGATION
Projected benefit obligation at beginning of year......    $1,749      $1,451       $  990
Service cost...........................................       107          95           53
Interest cost..........................................       118         110           74
Actuarial (gain) loss(a)...............................      (427)        159           98
Benefits paid..........................................       (70)        (66)         (52)
                                                           ------      ------       ------
Projected benefit obligation at end of year............     1,477       1,749        1,163
                                                           ------      ------       ------

CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year.........     1,480       1,203          839
Actual return on plan assets...........................       266         303          191
Employer contribution..................................        21          34           16
Benefits paid..........................................       (64)        (60)         (46)
                                                           ------      ------       ------
Fair value of plan assets at end of year...............     1,703       1,480        1,000
                                                           ------      ------       ------
Overfunded (unfunded) projected benefit obligation.....       226        (269)        (163)
Additional minimum liability(b)........................       (40)        (37)         (33)
Unrecognized actuarial gain(a).........................      (589)        (26)         (16)
Unrecognized prior service cost........................        26          21           16
                                                           ------      ------       ------
Accrued pension expense................................    $ (377)     $ (311)      $ (196)
                                                           ------      ------       ------
                                                           ------      ------       ------
</TABLE>

---------
(a) Reflects certain changes in actuarial assumptions made during 1999,
    including a shortening of the expected service period and an increase in the
    discount rate.

(b) The additional minimum liability is offset fully by a corresponding
    intangible asset recognized in the consolidated balance sheet.

<TABLE>
<CAPTION>
                                                                      DECEMBER 31,
                                                          ------------------------------------
                                                             1999         1998         1997
                                                          ----------   ----------   ----------
<S>                                                       <C>          <C>          <C>
WEIGHTED-AVERAGE PENSION ASSUMPTIONS
Discount rate...........................................     7.75%        6.75%        7.25%
Expected return on plan assets..........................        9%           9%           9%
Rate of compensation increase...........................        6%           6%           6%
</TABLE>

                                      F-54










<PAGE>
                                TIME WARNER INC.
          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  --  (CONTINUED)


    Included above are projected benefit obligations and accumulated benefit
obligations for unfunded defined benefit pension plans of $174 million and $145
million as of December 31, 1999, respectively; and $118 million and $97 million
as of December 31, 1998, respectively ($157 million and $124 million on a pro
forma basis).

    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 $100 million in
1999, $84 million in 1998 ($119 million on a pro forma basis) and $83 million in
1997. Contributions to the savings plans are based upon a percentage of the
employees' elected contributions. Contributions to the profit sharing plans
generally are determined by management and approved by the boards of directors
of the participating companies.

15. DERIVATIVE FINANCIAL INSTRUMENTS

    Time Warner uses derivative financial instruments principally to manage the
risk that changes in interest rates will affect either the fair value of its
debt obligations or the amount of its future interest payments and, with regard
to foreign currency exchange rates, to manage the risk that changes in exchange
rates will affect the amount of unremitted or future royalties and license fees
to be received from the sale of U.S. copyrighted products abroad. The following
is a summary of Time Warner's risk management strategies and the effect of these
strategies on Time Warner's consolidated financial statements.

INTEREST RATE RISK MANAGEMENT

  Interest Rate Swap Contracts

    Interest rate swap contracts are used to adjust the proportion of total debt
that is subject to variable and fixed interest rates. Under an interest rate
swap contract, Time Warner either agrees to pay an amount equal to a specified
variable-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 variable-rate amount and
to pay a fixed-rate amount. The notional amounts of the contract 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 counterparty credit risk.

    Time Warner accounts for its interest rate swap contracts differently based
on whether it has agreed to pay an amount based on a variable-rate or fixed-rate
of interest. For interest rate swap contracts under which Time Warner agrees to
pay variable-rates of interest, these contracts are considered to be a hedge
against changes in the fair value of Time Warner's fixed-rate debt obligations.
Accordingly, the interest rate swap contracts are reflected at fair value in
Time Warner's consolidated balance sheet and the related portion of fixed-rate
debt being hedged is reflected at an amount equal to the sum of its carrying
value plus an adjustment representing the change in fair value of the debt
obligations attributable to the interest rate risk being hedged. In addition,
changes during any accounting period in the fair value of these interest rate
swap contracts, as well as offsetting changes in the adjusted carrying value of
the related portion of fixed-rate debt being hedged, are recognized as
adjustments to interest expense in Time Warner's consolidated statement of
operations. The net effect of this accounting on Time Warner's operating results
is that interest expense on the portion of fixed-rate debt being hedged is
generally recorded based on variable interest rates.

    For interest rate swap contracts under which Time Warner agrees to pay
fixed-rates of interest, these contracts are considered to be a hedge against
changes in the amount of future cash flows associated with Time

                                      F-55










<PAGE>


                                TIME WARNER INC.
          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  --  (CONTINUED)

Warner's interest payments of Time Warner's variable-rate debt obligations.
Accordingly, the interest rate swap contracts are reflected at fair value in
Time Warner's consolidated balance sheet and the related gains or losses on
these contracts are deferred in shareholders' equity (as a component of
comprehensive income). These deferred gains and losses are then amortized as
an adjustment to interest expense over the same period in which the related
interest payments being hedged are recognized in income. However, to the extent
that any of these contracts are not considered to be perfectly effective in
offsetting the change in the value of the interest payments being hedged, any
changes in fair value relating to the ineffective portion of these contracts
are immediately recognized in income. The net effect of this accounting on Time
Warner's operating results is that interest expense on the portion of
variable-rate debt being hedged is generally recorded based on fixed interest
rates.

    At December 31, 1999, Time Warner had interest rate swap contracts to pay
variable-rates of interest (average six-month LIBOR rate of 5.8%) and receive
fixed-rates of interest (average rate of 5.5%) on $400 million notional amount
of indebtedness. This resulted in approximately 34% of Time Warner's underlying
debt being subject to variable interest rates. The $400 million notional amount
of outstanding contracts will mature during 2000. At December 31, 1998, Time
Warner had interest rate swap contracts on $1.6 billion notional amount of
indebtedness. The net gain or loss on the ineffective portion of these interest
rate swap contracts was not material in any period.

  Interest Rate Lock Agreements

    In the past, Time Warner infrequently used interest rate lock agreements to
hedge the risk that the cost of a future issuance of fixed-rate debt may be
adversely affected by changes in interest rates. Under an interest rate lock
agreement, Time Warner agrees to pay or receive an amount equal to the
difference between the net present value of the cash flows for a notional
principal amount of indebtedness based on the existing yield of a U.S. treasury
bond at the date when the agreement is established and at the date when the
agreement is settled, typically when Time Warner issues new debt. The notional
amounts of the agreement are not exchanged. Interest rate lock agreements are
entered into with a number of major financial institutions in order to minimize
counterparty credit risk.

    Interest rate lock agreements are reflected at fair value in Time Warner's
consolidated balance sheet and the related gains or losses on these agreements
are deferred in shareholders' equity (as a component of comprehensive income).
These deferred gains and losses are then amortized as an adjustment to interest
expense over the same period in which the related interest costs on the new debt
issuances are recognized in income.

    At December 31, 1998, Time Warner had outstanding interest rate lock
agreements for an aggregate $650 million notional principal amount of
indebtedness, which were settled in January 1999. Since that time, Time Warner
has not entered into any interest rate lock agreements to hedge the cost of
future issuances of fixed-rate debt. At December 31, 1999, Time Warner had
deferred approximately $30 million of net losses on interest rate lock
agreements, of which less than $1 million is expected to be recognized in income
over the next twelve months.

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
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. At
December 31, 1999, Time Warner had effectively hedged approximately half of the
estimated foreign currency exposures that principally relate to anticipated cash
flows to be remitted to the U.S. over the ensuing

                                      F-56










<PAGE>
                                TIME WARNER INC.
          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  --  (CONTINUED)


twelve-month period. To hedge this exposure, Time Warner used foreign exchange
contracts that generally have maturities of three months or less, which
generally will be rolled over to provide continuing coverage throughout the
year. Time Warner often closes foreign exchange sale contracts by purchasing
an offsetting purchase contract. Foreign exchange contracts are placed with a
number of major financial institutions in order to minimize credit risk.

    Time Warner records these foreign exchange contracts at fair value in its
consolidated balance sheet and the related gains or losses on these contracts
are deferred in shareholders' equity (as a component of comprehensive income).
These deferred gains and losses are recognized in income in the period in which
the related royalties and license fees being hedged are received and recognized
in income. However, to the extent that any of these contracts are not considered
to be perfectly effective in offsetting the change in the value of the royalties
and license fees being hedged, any changes in fair value relating to the
ineffective portion of these contracts are immediately recognized in income.
Gains and losses on foreign exchange contracts generally are included as a
component of interest and other, net, in Time Warner's consolidated statement of
operations.

    At December 31, 1999, Time Warner had contracts for the sale of $843 million
and the purchase of $468 million of foreign currencies at fixed rates. Contracts
in a net sale position primarily consisted of Japanese yen (62% of net contract
value), European currency (46%), Canadian dollars (15%) and English pounds (2%),
offset in part by contracts in a net purchase position, primarily consisting of
New Zealand dollars (34%).

    Time Warner had contracts for the sale of $755 million and the purchase of
$259 million of foreign currencies at December 31, 1998. Time Warner had
deferred approximately $1 million of net gains on foreign exchange contracts at
December 31, 1999, which is substantially expected to be recognized in income
over the next twelve months. Time Warner recognized $8 million in losses in
1999, $8 million in losses in 1998 ($10 million on a pro forma basis) and $27
million in gains in 1997, on foreign exchange contracts. These amounts were or
are expected to be largely 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.

16. SEGMENT INFORMATION

    Time Warner classifies its business interests into six fundamental areas:
Cable Networks, consisting principally of interests in cable television
programming; Publishing, consisting principally of interests in magazine
publishing, book publishing and direct marketing; Music, consisting principally
of interests in recorded music and music publishing; Filmed Entertainment,
consisting principally of interests in filmed entertainment, television
production and television broadcasting; Cable, consisting principally of
interests in cable television systems; and Digital Media, consisting principally
of interests in Internet-related and digital media businesses. Time Warner's
Digital Media segment commenced operations in 1999.

    Information as to the operations of Time Warner 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'). As a result of the
consolidation of the Entertainment Group in 1999, Time Warner's and the
Entertainment Group's business segments have been combined. Accordingly,
segment information for 1998 and 1997 has been restated in order to conform to
the new presentation. 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's Cable segment reflect (i) the TWE-A/N
Transfers effective as of January 1, 1998, (ii) the Primestar Roll-up
Transaction, effective as of April 1, 1998, (iii) the formation of the Road
Runner Joint Venture, effective as of June 30, 1998, (iv) the Time Warner
Telecom Reorganization,

                                      F-57










<PAGE>
                                TIME WARNER INC.
          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  --  (CONTINUED)

effective as of July 1, 1998 and (v) the formation of
the Texas Cable Joint Venture, effective as of December 31, 1998.

<TABLE>
<CAPTION>
                                                            YEARS ENDED DECEMBER 31,
                                                           ---------------------------
                                                            1999      1998      1997
                                                           -------   -------   -------
                                                                   (MILLIONS)
<S>                                                        <C>       <C>       <C>
REVENUES
Cable Networks...........................................  $ 6,111   $ 5,377   $ 4,823
Publishing...............................................    4,663     4,496     4,290
Music....................................................    3,834     4,025     3,691
Filmed Entertainment.....................................    8,075     7,978     7,003
Broadcasting-The WB Network..............................      384       260       136
Cable....................................................    5,374     5,342     5,240
Digital Media............................................        1        --        --
Intersegment elimination.................................   (1,109)   (1,234)     (812)
                                                           -------   -------   -------

Total business segment revenues..........................  $27,333   $26,244   $24,371
Entertainment Group revenues reported on an
  unconsolidated basis(a)................................       --   (11,662)  (11,077)
                                                           -------   -------   -------

Total consolidated revenues..............................  $27,333   $14,582   $13,294
                                                           -------   -------   -------
                                                           -------   -------   -------
</TABLE>

---------

(a) Represents amounts previously reported for the Entertainment Group, adjusted
    by intercompany eliminations and other consolidating adjustments necessary
    for Time Warner to reflect the Entertainment Group on a consolidated basis.

<TABLE>
<CAPTION>
                                                              YEARS ENDED DECEMBER 31,
                                                              ------------------------
                                                               1999     1998     1997
                                                              ------   ------   ------
                                                                     (MILLIONS)
<S>                                                           <C>      <C>      <C>
EBITA(a)
Cable Networks..............................................  $1,397   $1,160   $  964
Publishing..................................................     679      607      529
Music.......................................................     452      493      467
Filmed Entertainment(b).....................................     997      695      604
Broadcasting-The WB Network.................................     (92)     (93)     (88)
Cable(c)....................................................   3,927    1,694    1,611
Digital Media...............................................     (17)      --       --
Intersegment elimination....................................     (10)     (94)     (54)
                                                              ------   ------   ------

Total business segment EBITA................................  $7,333   $4,462   $4,033
Entertainment Group EBITA reported on an unconsolidated
  basis(d)..................................................      --   (2,166)  (1,850)
                                                              ------   ------   ------

Total consolidated EBITA....................................  $7,333   $2,296   $2,183
                                                              ------   ------   ------
                                                              ------   ------   ------
</TABLE>

---------

(a) 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
    $6.035 billion in 1999, $1.496 billion in 1998 and $1.271 billion in 1997.

(b) 1999 results include a net pretax gain of $215 million recognized in
    connection with the early termination and settlement of a long-term, home
    video distribution agreement and a pretax gain of $97 million relating to
    the sale of an interest in CanalSatellite, offset in part by a one-time,
    noncash pretax charge of $106 million relating to Warner Bros.'s retail
    stores.

(c) Includes net pretax gains relating to the sale or exchange of certain cable
    television systems and investments of approximately $2.247 billion in 1999,
    $108 million in 1998 and $212 million in 1997.

(d) Represents amounts previously reported for the Entertainment Group, adjusted
    by intercompany eliminations and other consolidating adjustments necessary
    for Time Warner to reflect the Entertainment Group on a consolidated basis.


                                      F-58










<PAGE>
                                TIME WARNER INC.
          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  --  (CONTINUED)

<TABLE>
<CAPTION>
                                                              YEARS ENDED DECEMBER 31,
                                                              ------------------------
                                                               1999     1998     1997
                                                              ------   ------   ------
                                                                     (MILLIONS)
<S>                                                           <C>      <C>      <C>
DEPRECIATION OF PROPERTY, PLANT AND EQUIPMENT
Cable Networks..............................................  $  132   $  116   $  109
Publishing..................................................      81       80       79
Music.......................................................      74       72       83
Filmed Entertainment........................................     156      172      204
Broadcasting-The WB Network.................................       1        1        1
Cable.......................................................     786      864      862
Digital Media...............................................       1       --       --
                                                              ------   ------   ------

Total business segment depreciation.........................  $1,231   $1,305   $1,338
Entertainment Group depreciation reported on an
  unconsolidated basis(a)...................................      --     (927)    (956)
                                                              ------   ------   ------

Total consolidated depreciation.............................  $1,231   $  378   $  382
                                                              ------   ------   ------
                                                              ------   ------   ------
</TABLE>

---------

(a) Represents amounts previously reported for the Entertainment Group, adjusted
    by intercompany eliminations and other consolidating adjustments necessary
    for Time Warner to reflect the Entertainment Group on a consolidated basis.

<TABLE>
<CAPTION>
                                                              YEARS ENDED DECEMBER 31,
                                                              ------------------------
                                                               1999     1998     1997
                                                              ------   ------   ------
                                                                     (MILLIONS)
<S>                                                           <C>      <C>      <C>
AMORTIZATION OF INTANGIBLE ASSETS(a)
Cable Networks..............................................  $  205   $  200   $  199
Publishing..................................................      52       38       48
Music.......................................................     273      280      301
Filmed Entertainment........................................     201      216      215
Broadcasting-The WB Network.................................       4        3       --
Cable.......................................................     563      593      600
Digital Media...............................................      --       --       --
                                                              ------   ------   ------

Total business segment amortization.........................  $1,298   $1,330   $1,363
Entertainment Group amortization reported on an
  unconsolidated basis(b)...................................      --     (530)    (451)
                                                              ------   ------   ------

Total consolidated amortization.............................  $1,298   $  800   $  912
                                                              ------   ------   ------
                                                              ------   ------   ------
</TABLE>

---------

(a) 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.

(b) Represents amounts previously reported for the Entertainment Group, adjusted
    by intercompany eliminations and other consolidating adjustments necessary
    for Time Warner to reflect the Entertainment Group on a consolidated basis.

                                      F-59










<PAGE>
                                TIME WARNER INC.
          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  --  (CONTINUED)

    Information as to the assets and capital expenditures is as follows:


<TABLE>
<CAPTION>
                                                                  DECEMBER 31,
                                                           ---------------------------
                                                            1999      1998      1997
                                                           -------   -------   -------
                                                                   (MILLIONS)
<S>                                                        <C>       <C>       <C>
ASSETS
Cable Networks...........................................  $ 9,940   $ 9,499   $ 9,441
Publishing...............................................    2,870     2,726     2,490
Music....................................................    7,483     7,354     6,797
Filmed Entertainment.....................................   10,393    10,841    10,658
Broadcasting-The WB Network..............................      284       244       113
Cable....................................................   18,380    16,094    17,766
Digital Media............................................       28        --        --
Corporate(a).............................................    1,861     1,193     1,334
                                                           -------   -------   -------

Total business segment assets............................  $51,239   $47,951   $48,599
Entertainment Group assets reported on an unconsolidated
  basis(b)...............................................       --   (16,311)  (14,436)
                                                           -------   -------   -------

Total consolidated assets................................  $51,239   $31,640   $34,163
                                                           -------   -------   -------
                                                           -------   -------   -------
</TABLE>

---------

(a) Consists principally of cash, cash equivalents and other investments.

(b) Represents amounts previously reported for the Entertainment Group, adjusted
    by intercompany eliminations and other consolidating adjustments necessary
    for Time Warner to reflect the Entertainment Group on a consolidated basis.


<TABLE>
<CAPTION>
                                                              YEARS ENDED DECEMBER 31,
                                                             --------------------------
                                                              1999     1998      1997
                                                             ------   -------   -------
                                                                     (MILLIONS)
<S>                                                          <C>      <C>       <C>
CAPITAL EXPENDITURES
Cable Networks.............................................  $  229   $   143   $   132
Publishing.................................................     106        58        77
Music......................................................     134        92        87
Filmed Entertainment.......................................     136       125       147
Broadcasting-The WB Network................................       2         1         1
Cable......................................................   1,600     1,676     1,683
Digital Media..............................................       2        --        --
Corporate..................................................      22        20        12
                                                             ------   -------   -------

Total business segment capital expenditures................  $2,231   $ 2,115   $ 2,139
Entertainment Group capital expenditures reported on an
  unconsolidated basis(a)..................................      --    (1,603)   (1,565)
                                                             ------   -------   -------

Total consolidated capital expenditures....................  $2,231   $   512   $   574
                                                             ------   -------   -------
                                                             ------   -------   -------
</TABLE>

---------

(a) Represents amounts previously reported for the Entertainment Group, adjusted
    by intercompany eliminations and other consolidating adjustments necessary
    for Time Warner to reflect the Entertainment Group on a consolidated basis.

                                      F-60










<PAGE>
                                TIME WARNER INC.
          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  --  (CONTINUED)


    Information as to operations in different geographical areas is as follows:

<TABLE>
<CAPTION>
                                                            YEARS ENDED DECEMBER 31,
                                                          -----------------------------
                                                           1999       1998       1997
                                                          -------   --------   --------
                                                                   (MILLIONS)
<S>                                                       <C>       <C>        <C>
REVENUES(a)
United States...........................................  $21,654   $ 20,803   $ 19,004
United Kingdom..........................................    1,000      1,001        937
Germany.................................................      724        695        704
Japan...................................................      629        567        589
Canada..................................................      420        429        399
France..................................................      418        390        347
Other international.....................................    2,488      2,359      2,391
                                                          -------   --------   --------

Total revenues by geographic area.......................  $27,333   $ 26,244   $ 24,371
Entertainment Group revenues reported on an
  unconsolidated basis(b)...............................       --    (11,662)   (11,077)
                                                          -------   --------   --------

Total...................................................  $27,333   $ 14,582   $ 13,294
                                                          -------   --------   --------
                                                          -------   --------   --------
</TABLE>

---------

(a) Revenues are attributed to countries based on location of customer.

(b) Represents amounts previously reported for the Entertainment Group, adjusted
    by intercompany eliminations and other consolidating adjustments necessary
    for Time Warner to reflect the Entertainment Group on a consolidated basis.

    Because a substantial portion of 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 $521 million in 1999, $286
million in 1998 ($504 million on a pro forma basis) and $237 million in 1997.
The minimum rental commitments under noncancellable long-term operating leases
are: 2000-$450 million; 2001-$442 million; 2002-$416 million; 2003-$385 million;
2004-$362 million; and after 2004-$2.809 billion.

    Time Warner's minimum commitments and guarantees under certain programming,
licensing, artists, athletes, franchise and other agreements aggregated
approximately $14.5 billion at December 31, 1999, which are payable principally
over a ten-year period.

    Time Warner is subject to a class action lawsuit alleging collusive pricing
practices by the major record companies in their capacity as distributors of
compact discs to CD wholesalers and retailers. The trial presently is scheduled
for the fall of 2000. Although management believes the case is without merit,
an adverse jury verdict could result in a material loss to Time Warner. Due to
the lack of specificity to plaintiffs' claims, a range of loss is not
determinable at this time.

    TWE also is subject to certain litigation relating to Six Flags. In December
1998, a jury returned an adverse verdict in the Six Flags matter in the amount
of $454 million. TWE and its former 51% partner in Six Flags are financially
responsible for this judgment. Management believes that there were numerous
legal errors in the case and has appealed the verdict. In management's opinion
and considering the gain deferred on the sale of Six Flags described in Note 3
to cover this potential exposure, the resolution of this matter is not expected
to have a material effect on Time Warner's financial statements.

                                      F-61










<PAGE>
                                TIME WARNER INC.
          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  --  (CONTINUED)


    Time Warner is subject to numerous other legal proceedings. In management's
opinion and considering established reserves, the resolution of these matters
will not have a material effect, individually and in the aggregate, on Time
Warner's financial statements.

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. For all periods prior to the consolidation of the Entertainment
Group in 1999, these transactions were included in Time Warner's operating
results and reported as related party transactions. However, on a historical
basis for 1999 and on a pro forma basis for 1998, these transactions have been
eliminated in Time Warner's consolidated financial statements. Nevertheless, in
order to facilitate an understanding of the effects of these transactions on
Time Warner's historical financial statements for 1998 and 1997, a summary of
significant transactions between Time Warner and TWE is provided below.

    TWE's employees 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.

    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'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 businesses have 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 and TWE's cable businesses have sold or exchanged various
cable television systems to MediaOne in an effort to strengthen their geographic
clustering of cable television properties. See Note 2 for further information.

    Time Warner had a credit agreement with TWE that allowed it to borrow up to
$400 million from TWE. Time Warner paid interest to TWE on outstanding
borrowings at a rate equal to LIBOR plus 1% per annum. In 1999, Time Warner
repaid all outstanding borrowings under this credit agreement.

    Time Warner provides TWE with certain corporate support services, including
accounting, tax, legal and administration, for which it received a fee in the
amount of $73 million in 1999 and $72 million in both 1998 and 1997.

    TWE was required to pay a $130 million advisory fee to MediaOne over a
five-year period that ended September 15, 1998 for MediaOne's expertise in
telecommunications, telephony and information technology, and its participation
in the management and technological upgrade of TWE's cable systems.

    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., Time Warner Telecom, the

                                      F-62










<PAGE>
                                TIME WARNER INC.
          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  --  (CONTINUED)

Road Runner Joint Venture 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, 1999, Time Warner had certain asset securitization
facilities, which provide for the accelerated receipt of up to approximately
$1 billion 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 receivable 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 $228 million in 1999, $17 million in 1998 and $108 million in 1997.

    Time Warner, through TWE, also has an asset securitization facility, which
effectively provides for the accelerated receipt of up to $500 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, Time Warner 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. In 1999, approximately
$15 million of proceeds were repaid under this securitization program. This
compares to net proceeds received of approximately $166 million in 1998 on
a pro forma basis.

    Additional financial information with respect to cash flows is as follows:

<TABLE>
<CAPTION>
                                                            YEARS ENDED DECEMBER 31,
                                                ------------------------------------------------
                                                   1999        1998         1998         1997
                                                HISTORICAL   PRO FORMA   HISTORICAL   HISTORICAL
                                                ----------   ---------   ----------   ----------
                                                                   (MILLIONS)
<S>                                             <C>          <C>         <C>          <C>
Cash payments made for interest...............    $1,406      $1,343        $812         $929
Cash payments made for income taxes...........       424         356         261          305
Tax-related distributions received from TWE...        --          --         314          324
Income tax refunds received...................        47          56          52           52
</TABLE>

    Noncash investing activities in 1999 included the exchange of certain cable
television systems (Note 2). Noncash investing activities in 1998 included the
exchange of certain cable television systems, the Time Warner Telecom
Reorganization, the formation of the Road Runner Joint Venture and the TWE-A/N
Transfers (Note 2). Noncash financing activities in 1999 included the conversion
of 14.2 million shares of convertible preferred stock into approximately 59.1
million shares of common stock. Noncash financing activities in 1998 included
the conversion of $1.15 billion of Zero-Coupon Convertible Notes into 37.4
million shares of common stock

                                      F-63










<PAGE>

                                TIME WARNER INC.
          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  --  (CONTINUED)

(Note 7) and the conversion of 12.8 million shares of convertible preferred
stock into approximately 53.5 million shares of common stock (Note 12).
Noncash financing activities in 1997 included the redemption of the PERCS in
exchange for Time Warner's interest in Hasbro (Note 10) and the payment of
$185 million of noncash dividends on the Series M Preferred Stock.

INTEREST AND OTHER, NET

    Interest and other, net, consists of:

<TABLE>
<CAPTION>
                                                                         YEARS ENDED DECEMBER 31,
                                                         -------------------------------------------------------
                                                            1999          1998           1998            1997
                                                         HISTORICAL     PRO FORMA     HISTORICAL      HISTORICAL
                                                         ----------     ---------     ----------      ----------
                                                                               (MILLIONS)
<S>                                                      <C>            <C>            <C>            <C>
Interest expense.......................................    $(1,519)      $(1,451)       $  (891)         $(1,049)
Gain on Time Warner Telecom IPO........................        115             -              -                -
Gain on sale of investment in Hasbro...................          -             -              -              200
Write-down of investment in Primestar..................          -          (210)             -                -
Other investment-related activity, principally net
 losses of corporate-related equity investees..........       (250)         (208)           (91)             (76)
Corporate finance-related activity, principally losses
  on asset securitization programs.....................       (145)         (101)           (76)             (16)
Miscellaneous..........................................        (98)          (80)           (70)             (32)
                                                           -------       -------        -------          -------
Total interest and other, net..........................    $(1,897)      $(2,050)       $(1,128)           $(973)
                                                           -------       -------        -------          -------
                                                           -------       -------        -------          -------
</TABLE>

OTHER CURRENT LIABILITIES

    Other current liabilities consist of:

<TABLE>
<CAPTION>
                                                                    DECEMBER 31,
                                                         -----------------------------------
                                                            1999        1998         1998
                                                         HISTORICAL   PRO FORMA   HISTORICAL
                                                         ----------   ---------   ----------
                                                                     (MILLIONS)
<S>                                                      <C>          <C>         <C>
Accrued expenses.......................................    $3,030      $2,924       $1,542
Accrued compensation...................................     1,026         835          538
Accrued income taxes...................................       105         125           93
Deferred revenues......................................       597         481          231
                                                           ------      ------       ------
Total..................................................    $4,758      $4,365       $2,404
                                                           ------      ------       ------
                                                           ------      ------       ------
</TABLE>

20. SUBSEQUENT EVENTS (UNAUDITED)

  America Online-Time Warner Merger

    In January 2000, Time Warner and America Online announced that they had
entered into an agreement to merge (the 'Merger') by forming a new holding
company named AOL Time Warner Inc. ('AOL Time Warner'). As part of the Merger,
each issued and outstanding share of each class of common stock of Time Warner
will be converted into 1.5 shares of an identical series of common stock of AOL
Time Warner. In addition, each issued and outstanding share of each class of
preferred stock of Time Warner will be converted into one share of preferred
stock of AOL Time Warner, which will have substantially identical terms except
that such shares will be convertible into approximately 6.25 shares of AOL Time
Warner common stock. Lastly, each issued and outstanding share of common stock
of America Online will be converted into one share of common stock of AOL Time
Warner.

    As a result of the Merger, the former shareholders of America Online will
have an approximate 55% interest in AOL Time Warner and the former shareholders
of Time Warner will have an approximate 45% interest in the combined entity,
expressed on a fully diluted basis. The Merger is expected to be accounted for
by

                                      F-64










<PAGE>

                                TIME WARNER INC.
          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  --  (CONTINUED)

AOL Time Warner as an acquisition of Time Warner under the purchase method of
accounting for business combinations.

    The Merger is expected to close in the fall of 2000 and is subject to
customary closing conditions, including the approval of the shareholders of each
of America Online and Time Warner and all necessary regulatory approvals. There
can be no assurance that such approvals will be obtained.

  Warner-EMI Music Merger

    In January 2000, Time Warner and EMI Group plc ('EMI') announced they had
entered into an agreement to combine their global music operations into two
jointly owned ventures, to be referred to collectively as Warner EMI Music. Time
Warner will control the joint ventures through majority board representation,
among other factors, and will account for the transaction under the purchase
method of accounting.

    As part of the transaction, each company will contribute its music
operations to the joint ventures, subject to a comparable amount of debt. As of
December 31, 1999, EMI had approximately $1.5 billion of net debt. EMI
shareholders also will receive an aggregate special cash dividend of
approximately $1.3 billion. This dividend is expected to be financed through a
combination of proceeds from debt incurred or assumed by the joint ventures and
consideration to be paid by Time Warner directly to EMI for a new class of EMI
equity securities. The new class of EMI equity securities to be held by Time
Warner will convert automatically into an 8% common equity interest in EMI,
on a fully diluted basis, if EMI's share price reaches `L'9 for a short period
of time within the first three-and-a-half years after closing.

    The transaction is expected to close by the end of 2000, subject to
customary closing conditions, including regulatory approvals and the approval of
EMI's shareholders. There can be no assurance that such approvals will be
obtained.

                                      F-65










<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>
Joseph A. Ripp                                 James W. Barge
Executive Vice President and                   Vice President and
Chief Financial Officer                        Controller
</TABLE>


                                      F-66










<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, 1999 and 1998, and the related
consolidated statements of operations, cash flows and shareholders' equity for
each of the three years in the period ended December 31, 1999. 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 auditing standards generally
accepted in the United States. 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, 1999 and 1998, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31,
1999, in conformity with accounting principles generally accepted in the United
States. 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 2, 2000


                                      F-67










<PAGE>

                                TIME WARNER INC.
                         SELECTED FINANCIAL INFORMATION

    The selected financial information for each of the five years in the period
ended December 31, 1999 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. Certain
reclassifications have been made to conform to the 1999 presentation.

    The selected historical financial information for 1999 reflects the
consolidation of the Entertainment Group, which substantially consists of TWE,
retroactive to the beginning of 1999. The selected historical financial
information for all prior periods has not been changed. However, in order to
enhance comparability, pro forma financial statements for 1998 reflecting the
consolidation of the Entertainment Group are presented supplementally.

    The selected historical financial information for 1998 reflects (i) the
TWE-A/N Transfers and (ii) the redemption of Time Warner's Series M Preferred
Stock at an aggregate cost of approximately $2.1 billion using proceeds from the
issuance of lower-cost debt.

    The selected historical financial information for 1996 reflects (i) the use
of approximately $1.55 billion of net proceeds from the issuance of Series M
Preferred Stock to reduce outstanding indebtedness and (ii) the acquisitions of
TBS and Cablevision Industries Corporation and related companies, resulting in
(a) the issuance of an aggregate 6.3 million shares of Time Warner preferred
stock having a total liquidation preference of $633 million and 365.4 million
shares of Time Warner common stock and (b) the assumption or incurrence of
approximately $4.8 billion of indebtedness.

    The selected historical financial information for 1995 reflects (i) the
acquisitions of KBLCOM Incorporated and Summit Communications Group, Inc. and
(ii) the exchange by Toshiba Corporation and ITOCHU Corporation of their direct
and indirect interests in TWE, resulting in (a) the issuance of an aggregate
29.3 million shares of Time Warner preferred stock having a total liquidation
preference of $2.926 billion and 5.2 million shares of Time Warner common stock
and (b) the assumption or incurrence of approximately $1.3 billion of
indebtedness.

    Per common share amounts and average common shares have been restated to
give effect to the two-for-one common stock split that occurred on December 15,
1998.

                                      F-68










<PAGE>

                                     TIME WARNER INC.
                       SELECTED FINANCIAL INFORMATION -- (CONTINUED)

<TABLE>
<CAPTION>
                                                                   YEARS ENDED DECEMBER 31,
                                          --------------------------------------------------------------------------
                                             1999        1998         1998         1997         1996         1995
                                          HISTORICAL   PRO FORMA   HISTORICAL   HISTORICAL   HISTORICAL   HISTORICAL
SELECTED OPERATING STATEMENT INFORMATION  ----------   ---------   ----------   ----------   ----------   ----------
                                                             (MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S>                                       <C>          <C>         <C>          <C>          <C>          <C>
Revenues................................   $27,333      $26,244     $14,582      $13,294      $10,064       $8,067
Depreciation and amortization...........    (2,529)      (2,635)     (1,178)      (1,294)        (988)        (559)
Business segment operating
  income(a)(b)(c).......................     6,035        3,132       1,496        1,271          966          697
Equity in pretax income of Entertainment
  Group(d)..............................        --           --         356          686          290          256
Interest and other, net(e)(f)...........    (1,897)      (2,050)     (1,128)        (973)      (1,102)        (866)
Income (loss) before extraordinary
  item..................................     1,960          168         168          301         (156)        (124)
Net income (loss)(g)....................     1,948          168         168          246         (191)        (166)
Net income (loss) applicable to common
  shares (after preferred
  dividends)(g)(h)......................     1,896         (372)       (372)         (73)        (448)        (218)
Per share of common stock:(h)
  Basic net income (loss)...............   $  1.50      $  (.31)    $  (.31)     $  (.06)     $  (.52)      $ (.28)
  Diluted net income (loss).............   $  1.42      $  (.31)    $  (.31)     $  (.06)     $  (.52)      $ (.28)
  Dividends.............................   $   .18      $   .18     $   .18      $   .18      $   .18       $  .18
Average common shares:
  Basic.................................   1,267.0      1,194.7     1,194.7      1,135.4        862.4        767.6
  Diluted...............................   1,398.3      1,194.7     1,194.7      1,135.4        862.4        767.6
</TABLE>

---------

 (a) 1999 Business segment operating income includes a net pretax gain of
     approximately $215 million relating to early termination and settlement of
     a long-term, home video distribution agreement, a pretax gain of $97
     million relating to the sale of an interest in CanalSatellite and a
     one-time and noncash pretax charge of $106 million relating to Warner
     Bros.'s retail stores.

 (b) Business segment operating income includes net pretax gains related to the
     sale or exchange of certain cable television systems and investments of
     approximately $2.247 billion in 1999, $18 million in 1998 ($108 million on
     a pro forma basis) and $12 million in 1997.

 (c) Business segment operating income in 1995 includes $85 million in losses
     relating to certain businesses and joint ventures owned by the Music
     division which were restructured or closed.

 (d) Time Warner's equity in the pretax income of the Entertainment Group
     includes approximately $120 million of net losses in 1998 and $450 million
     of gains in 1997 relating to the sale or exchange of various cable
     television systems and other investment-related activity.

 (e) Interest and other, net includes an approximate $115 million pretax gain in
     1999 recognized in connection with the initial public offering of a 20%
     interest in Time Warner Telecom, Inc. and a net pretax charge of $210
     million on a pro forma basis in 1998 relating to the write-down of TWE's
     carrying value of Primestar.

 (f) 1997 Interest and other, net includes a $200 million pretax gain relating
     to the disposal of Time Warner's interest in Hasbro and the related
     redemption of certain mandatorily redeemable preferred securities of a
     subsidiary.

 (g) Net income (loss) includes an extraordinary loss on the retirement of debt
     of $12 million in 1999, $55 million in 1997, $35 million in 1996 and $42
     million in 1995.

 (h) 1998 preferred dividend requirements include a one-time effect of $234
     million relating to the premium paid in connection with the redemption of
     Time Warner's Series M Preferred Stock.


                                      F-69










<PAGE>


                                TIME WARNER INC.
                SELECTED FINANCIAL INFORMATION  --  (CONTINUED)

<TABLE>
<CAPTION>
                                                                     DECEMBER 31,
                                      --------------------------------------------------------------------------
                                         1999        1998         1998         1997         1996         1995
                                      HISTORICAL   PRO FORMA   HISTORICAL   HISTORICAL   HISTORICAL   HISTORICAL
SELECTED BALANCE SHEET INFORMATION    ----------   ---------   ----------   ----------   ----------   ----------
                                                                      (MILLIONS)
<S>                                   <C>          <C>         <C>          <C>          <C>          <C>
Cash and equivalents................   $ 1,284      $   529     $   442      $   645      $   514      $ 1,185
Total assets........................    51,239       47,951      31,640       34,163       35,064       22,132
Debt due within one year............        22           25          19            8           11           34
Long-term debt......................    18,083       17,503      10,925       11,833       12,713        9,907
Borrowings against future stock
  option proceeds...................     1,243          895         895          533          488           --
Company-obligated mandatorily
  redeemable preferred securities of
  subsidiaries......................       575          792         575          575          949          949
Series M exchangeable preferred
  stock.............................        --           --          --        1,857        1,672           --
Shareholders' equity:
  Preferred stock liquidation
    preference......................       840        2,260       2,260        3,539        3,559        2,994
  Equity applicable to common
    stock...........................     8,873        6,592       6,592        5,817        5,943          673
  Total shareholders' equity........     9,713        8,852       8,852        9,356        9,502        3,667
Total capitalization................    29,636       28,067      21,266       24,162       25,335       14,557
</TABLE>

                                      F-70










<PAGE>



                                TIME WARNER INC.
                  QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
                                      EQUITY IN                                                  DILUTED
                                       PRETAX                 NET INCOME       BASIC NET           NET
                        OPERATING      INCOME                   (LOSS)           INCOME           INCOME         DIVIDENDS
                        INCOME OF     (LOSS) OF      NET     APPLICABLE TO     (LOSS) PER       (LOSS) PER          PER
                        BUSINESS    ENTERTAINMENT   INCOME      COMMON           COMMON           COMMON          COMMON
  QUARTER    REVENUES   SEGMENTS        GROUP       (LOSS)     SHARES(e)     SHARE(e)(f)(g)   SHARE(e)(f)(g)    SHARE(f)(g)
-----------  --------   ---------   -------------   ------   -------------   --------------   --------------   -------------
                                            (MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S>          <C>        <C>         <C>             <C>      <C>             <C>              <C>              <C>
1999(a)

1st(b)       $ 6,091     $  943         $ --        $ 138        $ 120            $ .10           $ .10           $.045

2nd(b)         6,531      1,701           --          593          575              .46             .43            .045

3rd(b)         6,723      1,287           --          369          360              .28             .27            .045

4th(b)         7,988      2,104           --          848          841              .65             .62            .045

Year(b)       27,333      6,035           --        1,948        1,896             1.50            1.42             .18

1998(a)

1st          $ 3,137     $  170         $107        $ (62)       $(144)           $(.12)          $(.12)          $.045

2nd(c)(d)      3,672        384          166          101           23              .02             .02            .045

3rd            3,578        315          164           39          (37)            (.03)           (.03)           .045

4th(c)(d)      4,195        627          (81)          90         (214)            (.17)           (.17)           .045

Year(c)(d)    14,582      1,496          356          168         (372)            (.31)           (.31)            .18

<CAPTION>

               BASIC       DILUTED         COMMON
              AVERAGE      AVERAGE        STOCK(g)
               COMMON       COMMON     ---------------
  QUARTER    SHARES(g)    SHARES(g)     HIGH     LOW
-----------  ----------   ----------   ------   ------
               (MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S>          <C>          <C>          <C>      <C>
1999(a)
1st(b)        1,243.1      1,243.1     $72.44   $58.88
2nd(b)        1,249.3      1,403.7      78.25    62.00
3rd(b)        1,288.9      1,397.8      77.31    58.50
4th(b)        1,286.5      1,391.8      72.31    59.63
Year(b)       1,267.0      1,398.3      78.25    58.50
1998(a)
1st           1,156.6      1,156.6     $37.75   $29.06
2nd(c)(d)     1,192.6      1,192.6      44.44    36.06
3rd           1,202.6      1,202.6      50.00    39.00
4th(c)(d)     1,227.2      1,227.2      63.13    37.56
Year(c)(d)    1,194.7      1,194.7      63.13    29.06
</TABLE>

---------

 (a) The 1999 quarterly financial information reflects the consolidation of the
     Entertainment Group, which substantially consists of TWE, retroactive to
     the beginning of 1999. Time Warner's 1998 historical quarterly financial
     information has not been changed.

 (b) Time Warner's income per common share in 1999 has been affected by certain
     significant nonrecurring items. These items consisted of (i) a net pretax
     gain of approximately $215 million in the first quarter relating to the
     early termination and settlement of a long-term, home video distribution
     agreement, (ii) a net pretax gain of approximately $97 million in the
     fourth quarter in connection with the sale of an interest in
     CanalSatellite, (iii) a noncash pretax charge of approximately $106 million
     in the fourth quarter relating to Warner Bros.'s retail stores, (iv) an
     approximate $115 million pretax gain in the second quarter in connection
     with the initial public offering of a 20% interest in Time Warner Telecom
     Inc., (v) gains relating to the sale and exchange of various cable
     television systems and investments of $771 million in the second quarter,
     $477 million in the third quarter and $999 million in the fourth quarter,
     thereby aggregating to $2.247 billion for the year and (vi) an
     extraordinary loss of $12 million in the third quarter relating to the
     retirement of debt. The aggregate net effect of these items in 1999 was to
     increase income per common share by $.10 in the first quarter, $.34 in the
     second quarter, $.20 in the third quarter and $.45 in the fourth quarter,
     thereby aggregating to $1.11 per common share for the year.

 (c) Time Warner's income (loss) per common share in 1998 has been affected by
     certain significant nonrecurring items. These items consisted of gains and
     losses relating to the sale or exchange of various cable television systems
     and other investment-related activity and the effect of redeeming Time
     Warner's Series M Preferred Stock. The aggregate net effect of these items
     in 1998 was to increase (decrease) income per common share by $.03 in the
     second quarter of 1998, and $(.28) in the fourth quarter of 1998, thereby
     aggregating to $(.25) per common share for the year.

 (d) Time Warner's equity in the pretax income (loss) of the Entertainment Group
     for 1998 includes net gains of approximately $90 million for the year
     relating to the sale or exchange of certain cable television systems and
     investments, of which approximately $70 million was recorded in the second
     quarter of 1998. In addition, Time Warner's equity in the pretax income
     (loss) of the Entertainment Group for the fourth quarter of 1998 includes a
     charge of approximately $210 million principally to reduce the carrying
     value of an interest in Primestar.

 (e) After preferred dividend requirements. Preferred dividend requirements for
     the fourth quarter of 1998 include a one-time increase of $234 million
     ($.19 loss per common share) relating to the premium paid in connection
     with the redemption of Time Warner's Series M Preferred Stock.

 (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.

 (g) Previously reported amounts give effect to the two-for-one common stock
     split that occurred on December 15, 1998.


                                      F-71










<PAGE>


                                TIME WARNER INC.
                           SUPPLEMENTARY INFORMATION
                  CONDENSED CONSOLIDATING FINANCIAL STATEMENTS

    Time Warner Companies, Inc. ('TW Companies') and Turner Broadcasting System,
Inc. ('TBS' and, together with TW Companies, the 'Guarantor Subsidiaries') are
wholly owned subsidiaries of Time Warner Inc. ('Time Warner'). Time Warner, TW
Companies and TBS have fully and unconditionally, and jointly and severally,
guaranteed all of the outstanding publicly traded indebtedness of each other.
Set forth below are condensed consolidating financial statements of Time Warner,
including each of the Guarantor Subsidiaries, presented for the information of
each company's public debtholders. Separate financial statements and other
disclosures relating to the Guarantor Subsidiaries have not been presented
because management has determined that this information would not be material
to such debtholders. The following condensed consolidating financial statements
present the results of operations, financial position and cash flows of
(i) Time Warner, TW Companies and TBS (in each case, reflecting investments in
its consolidated subsidiaries under the equity method of accounting), (ii) the
direct and indirect non-guarantor subsidiaries of Time Warner and (iii) the
eliminations necessary to arrive at the information for Time Warner on a
consolidated basis. These condensed consolidating financial statements should be
read in conjunction with the accompanying consolidated financial statements of
Time Warner.

                     CONSOLIDATING STATEMENT OF OPERATIONS
                      FOR THE YEAR ENDED DECEMBER 31, 1999

<TABLE>
<CAPTION>
                                                                    NON-                          TIME
                                     TIME       TW               GUARANTOR                       WARNER
                                    WARNER   COMPANIES   TBS    SUBSIDIARIES   ELIMINATIONS   CONSOLIDATED
                                    ------   ---------   ---    ------------   ------------   ------------
                                                                  (MILLIONS)
<S>                                 <C>      <C>         <C>    <C>            <C>            <C>
Revenues..........................  $   --    $   --     $868     $26,516        $   (51)       $27,333
                                    ------    ------     ----     -------        -------        -------

Cost of revenues(a)...............      --        --     (362)    (14,629)            51        (14,940)
Selling, general and
  administrative(a)...............      --        --     (228)     (7,285)            --         (7,513)
Amortization of goodwill and other
  intangible assets...............      --        --       --      (1,298)            --         (1,298)
Gain on sale or exchange of cable
  systems and investments.........      --        --       --       2,247             --          2,247
Gain on early termination of video
  distribution agreement..........      --        --       --         215             --            215
Gain on sale of interest in
  CanalSatellite..................      --        --       --          97             --             97
Write-down of retail store
  assets..........................      --        --       --        (106)            --           (106)
                                    ------    ------     ----     -------        -------        -------

Business segment operating
  income..........................      --        --      278       5,757             --          6,035
Equity in pretax income of
  consolidated subsidiaries.......   3,857     4,050      460          --         (8,367)            --
Interest and other, net...........    (266)     (621)    (148)       (772)           (90)        (1,897)
Corporate expenses................     (91)      (57)     (16)       (138)           139           (163)
Minority interest.................      --       (52)      --        (423)            --           (475)
                                    ------    ------     ----     -------        -------        -------

Income before income taxes........   3,500     3,320      574       4,424         (8,318)         3,500
Income taxes......................  (1,540)   (1,445)    (297)     (1,909)         3,651         (1,540)
                                    ------    ------     ----     -------        -------        -------

Income before extraordinary
  item............................   1,960     1,875      277       2,515         (4,667)         1,960
Extraordinary loss on retirement
  of debt, net of tax.............     (12)      (12)      --          --             12            (12)
                                    ------    ------     ----     -------        -------        -------

Net income........................  $1,948    $1,863     $277     $ 2,515        $(4,655)       $ 1,948
                                    ------    ------     ----     -------        -------        -------
                                    ------    ------     ----     -------        -------        -------
---------
(a) Includes depreciation expense
  of:.............................  $   --    $   --     $  9     $ 1,222        $    --        $ 1,231
                                    ------    ------     ----     -------        -------        -------
                                    ------    ------     ----     -------        -------        -------
</TABLE>


                                      F-72










<PAGE>


                                TIME WARNER INC.
                           SUPPLEMENTARY INFORMATION
          CONDENSED CONSOLIDATING FINANCIAL STATEMENTS -- (CONTINUED)

                     CONSOLIDATING STATEMENT OF OPERATIONS
                      FOR THE YEAR ENDED DECEMBER 31, 1998

<TABLE>
<CAPTION>
                                                                    NON-                          TIME
                                     TIME       TW               GUARANTOR                       WARNER
                                    WARNER   COMPANIES   TBS    SUBSIDIARIES   ELIMINATIONS   CONSOLIDATED
                                    ------   ---------   ---    ------------   ------------   ------------
                                                                  (MILLIONS)
<S>                                 <C>      <C>         <C>    <C>            <C>            <C>
Revenues..........................   $ --     $   --     $720     $13,886        $   (24)       $14,582
                                     ----     ------     ----     -------        -------        -------

Cost of revenues(a)...............     --         --     (303)     (7,223)            24         (7,502)
Selling, general and
  administrative(a)...............     --         --     (211)     (4,591)            --         (4,802)
Amortization of goodwill and other
  intangible assets...............     --         --       --        (800)            --           (800)
Gain on sale or exchange of cable
  systems and investments.........     --         --       --          18             --             18
                                     ----     ------     ----     -------        -------        -------

Business segment operating
  income..........................     --         --      206       1,290             --          1,496
Equity in pretax income of
  consolidated subsidiaries.......    770      1,283      327          --         (2,380)            --
Equity in pretax income of
  Entertainment Group.............     --         --       --         423            (67)           356
Interest and other, net...........    (98)      (704)    (159)       (103)           (64)        (1,128)
Corporate expenses................    (86)       (55)     (16)        (64)           135            (86)
Minority interest.................     --        (52)      --          --             --            (52)
                                     ----     ------     ----     -------        -------        -------

Income before income taxes........    586        472      358       1,546         (2,376)           586
Income taxes......................   (418)      (322)    (212)       (816)         1,350           (418)
                                     ----     ------     ----     -------        -------        -------

Net income........................   $168     $  150     $146     $   730        $(1,026)       $   168
                                     ----     ------     ----     -------        -------        -------
                                     ----     ------     ----     -------        -------        -------
---------
(a) Includes depreciation expense
  of:.............................   $ --     $   --     $  9     $   369        $    --        $   378
                                     ----     ------     ----     -------        -------        -------
                                     ----     ------     ----     -------        -------        -------
</TABLE>


                                      F-73










<PAGE>

                                TIME WARNER INC.
                           SUPPLEMENTARY INFORMATION
          CONDENSED CONSOLIDATING FINANCIAL STATEMENTS -- (CONTINUED)

                     CONSOLIDATING STATEMENT OF OPERATIONS
                      FOR THE YEAR ENDED DECEMBER 31, 1997

<TABLE>
<CAPTION>
                                                                    NON-                          TIME
                                     TIME       TW               GUARANTOR                       WARNER
                                    WARNER   COMPANIES   TBS    SUBSIDIARIES   ELIMINATIONS   CONSOLIDATED
                                    ------   ---------   ---    ------------   ------------   ------------
                                                             (MILLIONS)
<S>                                 <C>      <C>         <C>    <C>            <C>            <C>
Revenues..........................   $ --     $   --     $523     $12,771        $    --        $13,294
                                     ----     ------     ----     -------        -------        -------

Cost of revenues(a)...............     --         --     (250)     (6,473)            --         (6,723)
Selling, general and
  administrative(a)...............     --         --     (171)     (4,229)            --         (4,400)
Amortization of goodwill and other
  intangible assets...............     --         --       --        (912)            --           (912)
Gain on sale or exchange of cable
  systems and investments.........     --         --       --          12             --             12
                                     ----     ------     ----     -------        -------        -------

Business segment operating
  income..........................     --         --      102       1,169             --          1,271
Equity in pretax income of
  consolidated subsidiaries.......    922      1,729      378          --         (3,029)            --
Equity in pretax income of
  Entertainment Group.............     --         --       --         727            (41)           686
Interest and other, net...........     (9)      (923)    (203)        211            (49)          (973)
Corporate expenses................    (81)       (54)     (12)        (60)           126            (81)
Minority interest.................     --        (71)      --          --             --            (71)
                                     ----     ------     ----     -------        -------        -------

Income before income taxes........    832        681      265       2,047         (2,993)           832
Income taxes......................   (531)      (390)    (175)     (1,032)         1,597           (531)
                                     ----     ------     ----     -------        -------        -------

Income before extraordinary
  item............................    301        291       90       1,015         (1,396)           301
Extraordinary loss on retirement
  of debt, net of tax.............    (55)       (51)      (4)        (51)           106            (55)
                                     ----     ------     ----     -------        -------        -------

Net income........................   $246     $  240     $ 86     $   964        $(1,290)       $   246
                                     ----     ------     ----     -------        -------        -------
                                     ----     ------     ----     -------        -------        -------
---------
(a) Includes depreciation expense
  of:.............................   $ --     $   --     $ 21     $   361        $    --        $   382
                                     ----     ------     ----     -------        -------        -------
                                     ----     ------     ----     -------        -------        -------
</TABLE>


                                      F-74










<PAGE>



                                TIME WARNER INC.
                           SUPPLEMENTARY INFORMATION
          CONDENSED CONSOLIDATING FINANCIAL STATEMENTS -- (CONTINUED)

                          CONSOLIDATING BALANCE SHEET
                               DECEMBER 31, 1999

<TABLE>
<CAPTION>
                                                                                       NON-                      TIME
                                                     TIME        TW                 GUARANTOR     ELIMINA-      WARNER
                                                    WARNER    COMPANIES    TBS     SUBSIDIARIES    TIONS     CONSOLIDATED
                                                    ------    ---------    ---     ------------    -----     ------------
                                                                               (MILLIONS)
<S>                                                 <C>       <C>         <C>      <C>            <C>        <C>
ASSETS
CURRENT ASSETS
Cash and equivalents..............................  $    --    $   366    $   77     $   841      $     --     $ 1,284
Receivables, net..................................       18         27        89       4,797            --       4,931
Inventories.......................................       --         --       125       2,057            --       2,182
Prepaid expenses..................................       12         --         4       1,448            --       1,464
                                                    -------    -------    ------     -------      --------     -------
Total current assets..............................       30        393       295       9,143            --       9,861

Noncurrent inventories............................       --         --       203       3,998            --       4,201
Investments in and amounts due to and from
 consolidated subsidiaries........................   17,212     16,711     9,354          --       (43,277)         --
Other investments.................................      236          7        24       2,562          (733)      2,096
Property, plant and equipment.....................       42         --        47       8,639            --       8,728
Music catalogues, contracts and copyrights........       --         --        --         782            --         782
Cable television and sports franchises............       --         --        --       8,472            --       8,472
Goodwill..........................................       --         --        --      15,458            --      15,458
Other assets......................................       91        103        65       1,382            --       1,641
                                                    -------    -------    ------     -------      --------     -------
Total assets......................................  $17,611    $17,214    $9,988     $50,436      $(44,010)    $51,239
                                                    -------    -------    ------     -------      --------     -------
                                                    -------    -------    ------     -------      --------     -------

LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable..................................  $    13    $    --    $   25     $ 1,885      $     --     $ 1,923
Participations, royalties and programming costs
 payable..........................................       --         --        35       2,932            --       2,967
Debt due within one year..........................       --         --        --          22            --          22
Other current liabilities.........................      342        190       150       4,114           (38)      4,758
                                                    -------    -------    ------     -------      --------     -------
Total current liabilities.........................      355        190       210       8,953           (38)      9,670

Long-term debt....................................    1,585      6,745       746       9,007            --      18,083
Debt due to affiliates............................       --         --     1,647         158        (1,805)         --
Borrowings against future stock option proceeds...    1,243         --        --          --            --       1,243
Deferred income taxes.............................    4,234      3,978       337       4,314        (8,629)      4,234
Unearned portion of paid subscriptions............       --         --        --         762            --         762
Other liabilities.................................      481         --       130       3,162            --       3,773
Minority interests................................       --         --        --       3,186            --       3,186
TW Companies-obligated mandatorily redeemable
 preferred securities of a subsidiary holding
 solely subordinated debentures of TW Companies...       --         --        --         575            --         575

SHAREHOLDERS' EQUITY
Due from Time Warner and subsidiaries.............       --     (1,997)     (903)     (3,791)        6,691          --
Other shareholders' equity........................    9,713      8,298     7,821      24,110       (40,229)      9,713
                                                    -------    -------    ------     -------      --------     -------
Total shareholders' equity........................    9,713      6,301     6,918      20,319       (33,538)      9,713
                                                    -------    -------    ------     -------      --------     -------
Total liabilities and shareholders' equity........  $17,611    $17,214    $9,988     $50,436      $(44,010)    $51,239
                                                    -------    -------    ------     -------      --------     -------
                                                    -------    -------    ------     -------      --------     -------
</TABLE>

                                      F-75










<PAGE>
                                TIME WARNER INC.
                           SUPPLEMENTARY INFORMATION
          CONDENSED CONSOLIDATING FINANCIAL STATEMENTS -- (CONTINUED)

                          CONSOLIDATING BALANCE SHEET
                               DECEMBER 31, 1998

<TABLE>
<CAPTION>
                                                                                       NON-                      TIME
                                                     TIME        TW                 GUARANTOR     ELIMINA-      WARNER
                                                    WARNER    COMPANIES    TBS     SUBSIDIARIES    TIONS     CONSOLIDATED
                                                    ------    ---------    ---     ------------    -----     ------------
                                                                               (MILLIONS)
<S>                                                 <C>       <C>         <C>      <C>            <C>        <C>
ASSETS
CURRENT ASSETS
Cash and equivalents..............................  $    --    $    66    $   25     $   351      $     --     $   442
Receivables, net..................................       10         56        78       2,750            (9)      2,885
Inventories.......................................       --         --       131         815            --         946
Prepaid expenses..................................       17          5        --       1,166           (12)      1,176
                                                    -------    -------    ------     -------      --------     -------
Total current assets..............................       27        127       234       5,082           (21)      5,449

Noncurrent inventories............................       --         --       156       1,744            --       1,900
Investments in and amounts due to and from
 consolidated subsidiaries........................   15,222     13,745     9,465          --       (38,432)         --
Investments in and amounts due to and from
 Entertainment Group..............................       --        919        --       4,169          (108)      4,980
Other investments.................................      211         15        24       1,194          (650)        794
Property, plant and equipment.....................       55         --        44       1,892            --       1,991
Music catalogues, contracts and copyrights........       --         --        --         876            --         876
Cable television and sports franchises............       --         --        --       2,868            --       2,868
Goodwill..........................................       --         --        --      11,919            --      11,919
Other assets......................................       65        116        59         631            (8)        863
                                                    -------    -------    ------     -------      --------     -------
Total assets......................................  $15,580    $14,922    $9,982     $30,375      $(39,219)    $31,640
                                                    -------    -------    ------     -------      --------     -------
                                                    -------    -------    ------     -------      --------     -------

LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable..................................  $    20    $    --    $   11     $   965      $     --     $   996
Participations, royalties and programming costs
 payable..........................................       --         --        31       1,168            --       1,199
Debt due within one year..........................       --         --        --          19            --          19
Other current liabilities.........................      308        229       176       1,705           (14)      2,404
                                                    -------    -------    ------     -------      --------     -------
Total current liabilities.........................      328        229       218       3,857           (14)      4,618

Long-term debt....................................    1,584      7,346       747       1,248            --      10,925
Debt due to affiliates............................       --         --     1,647         158        (1,805)         --
Borrowings against future stock option proceeds...      895         --        --          --            --         895
Deferred income taxes.............................    3,491      3,324       246       3,570        (7,140)      3,491
Unearned portion of paid subscriptions............       --         --        --         741            --         741
Other liabilities.................................      430         --       116         997            --       1,543
TW Companies-obligated mandatorily redeemable
 preferred securities of a subsidiary holding
 solely subordinated debentures of TW Companies...       --         --        --         575            --         575

SHAREHOLDERS' EQUITY
Due from Time Warner and subsidiaries.............       --     (2,313)     (479)     (2,317)        5,109          --
Other shareholders' equity........................    8,852      6,336     7,487      21,546       (35,369)      8,852
                                                    -------    -------    ------     -------      --------     -------
Total shareholders' equity........................    8,852      4,023     7,008      19,229       (30,260)      8,852
                                                    -------    -------    ------     -------      --------     -------
Total liabilities and shareholders' equity........  $15,580    $14,922    $9,982     $30,375      $(39,219)    $31,640
                                                    -------    -------    ------     -------      --------     -------
                                                    -------    -------    ------     -------      --------     -------
</TABLE>

                                      F-76










<PAGE>


                                TIME WARNER INC.
                           SUPPLEMENTARY INFORMATION
          CONDENSED CONSOLIDATING FINANCIAL STATEMENTS -- (CONTINUED)

                     CONSOLIDATING STATEMENT OF CASH FLOWS
                      FOR THE YEAR ENDED DECEMBER 31, 1999

<TABLE>
<CAPTION>
                                                                                   NON-                      TIME
                                                 TIME        TW                 GUARANTOR     ELIMINA-      WARNER
                                                WARNER    COMPANIES    TBS     SUBSIDIARIES    TIONS     CONSOLIDATED
                                                ------    ---------    ---     ------------    -----     ------------
                                                                           (MILLIONS)
<S>                                             <C>       <C>         <C>      <C>            <C>        <C>
OPERATIONS
Net income....................................  $1,948     $ 1,863    $  277     $ 2,515      $(4,655)     $ 1,948
Adjustments for noncash and nonoperating
 items:
 Extraordinary loss on retirement of debt.....      12          12        --          --          (12)          12
 Depreciation and amortization................      --          --         9       2,520           --        2,529
 Amortization of film costs...................      --          --        --       2,294           --        2,294
 Noncash interest expense.....................      --           4        --          --           --            4
 Gain on sale or exchange of cable systems and
   investments................................      --          --        --      (2,247)          --       (2,247)
 Excess (deficiency) of distributions over
   equity in pretax income of consolidated
   subsidiaries...............................  (1,675)     (1,279)      119          --        2,835           --
 Equity in losses of other investee companies
   after distributions........................      --           4        --         257           83          344
Changes in operating assets and liabilities...    (195)       (145)       85        (125)        (551)        (931)
                                                -------    -------    ------     -------      --------     -------

Cash provided by operations...................      90         459       490       5,214       (2,300)       3,953
                                                -------    -------    ------     -------      --------     -------

INVESTING ACTIVITIES
Consolidation of the Entertainment Group's
 cash and equivalents.........................      --          --        --          87           --           87
Investments and acquisitions..................      --          --        --        (870)          --         (870)
Advances to parents and consolidated
 subsidiaries.................................      --          --        --      (1,558)       1,558           --
Repayment of advances from consolidated
 subsidiaries.................................      --         140        --         232         (372)          --
Capital expenditures..........................      --          --       (14)     (2,217)          --       (2,231)
Investment proceeds...........................      --          --        --       1,084           --        1,084
                                                -------    -------    ------     -------      --------     -------

Cash provided (used) by investing
 activities...................................      --         140       (14)     (3,242)       1,186       (1,930)
                                                -------    -------    ------     -------      --------     -------

FINANCING ACTIVITIES
Borrowings....................................      --         173        --       4,159           --        4,332
Debt repayments...............................      --        (767)       --      (2,982)          --       (3,749)
Change in due to/from parent..................   1,326         316      (424)     (2,332)       1,114           --
Borrowings against future stock option
 proceeds.....................................     348          --        --          --           --          348
Redemption of mandatorily redeemable preferred
 securities of subsidiary.....................      --          --        --        (217)          --         (217)
Repurchases of Time Warner common stock.......  (1,896)         --        --          --           --       (1,896)
Dividends paid................................    (289)         --        --          --           --         (289)
Proceeds received from stock option and
 dividend reinvestment plans..................     421          --        --          --           --          421
Other.........................................      --         (21)       --        (110)          --         (131)
                                                -------    -------    ------     -------      --------     -------

Cash used by financing activities.............     (90)       (299)     (424)     (1,482)       1,114       (1,181)
                                                -------    -------    ------     -------      --------     -------

INCREASE (DECREASE) IN CASH AND EQUIVALENTS...      --         300        52         490           --          842
                                                -------    -------    ------     -------      --------     -------

CASH AND EQUIVALENTS AT BEGINNING OF PERIOD...      --          66        25         351           --          442
                                                -------    -------    ------     -------      --------     -------

CASH AND EQUIVALENTS AT END OF PERIOD.........  $   --     $   366    $   77     $   841      $    --      $ 1,284
                                                -------    -------    ------     -------      --------     -------
                                                -------    -------    ------     -------      --------     -------
</TABLE>


                                      F-77










<PAGE>


                                TIME WARNER INC.
                           SUPPLEMENTARY INFORMATION
          CONDENSED CONSOLIDATING FINANCIAL STATEMENTS -- (CONTINUED)

                     CONSOLIDATING STATEMENT OF CASH FLOWS
                      FOR THE YEAR ENDED DECEMBER 31, 1998

<TABLE>
<CAPTION>
                                                                                        NON-                      TIME
                                                       TIME        TW                GUARANTOR     ELIMINA-      WARNER
                                                      WARNER    COMPANIES    TBS    SUBSIDIARIES    TIONS     CONSOLIDATED
                                                      ------    ---------    ---    ------------    -----     ------------
                                                                                 (MILLIONS)
<S>                                                   <C>       <C>         <C>     <C>            <C>        <C>
OPERATIONS
Net income..........................................  $   168    $   150    $ 146     $   730      $(1,026)     $   168
Adjustments for noncash and nonoperating items:
 Depreciation and amortization......................       --         --        9       1,169           --        1,178
 Amortization of film costs.........................       --         --       --         542           --          542
 Noncash interest expense...........................       --         30       --          --           --           30
 Gain on sale or exchange of cable systems and
   investments......................................       --         --       --         (18)          --          (18)
 Excess (deficiency) of distributions over equity in
   pretax income of consolidated subsidiaries.......    1,767       (666)     374          --       (1,475)          --
 Excess of distributions over equity in pretax
   income of Entertainment Group....................       --         --       --         275           67          342
 Equity in losses of other investee companies after
   distributions....................................       --         --       --          90           57          147
Changes in operating assets and liabilities.........      212      2,869     (426)     (1,062)      (2,137)        (544)
                                                      -------    -------    -----     -------      -------      -------
Cash provided by operations.........................    2,147      2,383      103       1,726       (4,514)       1,845
                                                      -------    -------    -----     -------      -------      -------
INVESTING ACTIVITIES
Investments and acquisitions........................     (213)        --       --          54           --         (159)
Advances to parents and consolidated subsidiaries...       --     (2,716)      --        (263)       2,979           --
Repayment of advances from consolidated
 subsidiaries.......................................       75         --       --          --          (75)          --
Capital expenditures................................       --         --      (12)       (500)          --         (512)
Investment proceeds.................................       --         --       --         569           --          569
Proceeds received from distribution of TWE Senior
 Capital............................................       --         --       --         455           --          455
                                                      -------    -------    -----     -------      -------      -------
Cash provided (used) by investing activities........     (138)    (2,716)     (12)        315        2,904          353
                                                      -------    -------    -----     -------      -------      -------
FINANCING ACTIVITIES
Borrowings..........................................    1,584        498       --       1,661           --        3,743
Debt repayments.....................................       --       (500)     (75)     (1,817)          75       (2,317)
Change in due to/from parent........................      220         43       --      (1,798)       1,535           --
Borrowings against future stock option proceeds.....    1,015         --       --          --           --        1,015
Repayments of borrowings against future stock option
 proceeds...........................................     (653)        --       --          --           --         (653)
Repurchases of Time Warner common stock.............   (2,240)        --       --          --           --       (2,240)
Redemption of Series M Preferred Stock..............   (2,093)        --       --          --           --       (2,093)
Dividends paid......................................     (524)        --       --          --           --         (524)
Proceeds received from stock option and dividend
 reinvestment plans.................................      740         --       --          --           --          740
Other...............................................      (58)       (14)      --          --           --          (72)
                                                      -------    -------    -----     -------      -------      -------
Cash provided (used) by financing activities........   (2,009)        27      (75)     (1,954)       1,610       (2,401)
                                                      -------    -------    -----     -------      -------      -------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS.........       --       (306)      16          87           --         (203)
                                                      -------    -------    -----     -------      -------      -------
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD.........       --        372        9         264           --          645
                                                      -------    -------    -----     -------      -------      -------
CASH AND EQUIVALENTS AT END OF PERIOD...............  $    --    $    66    $  25     $   351      $    --      $   442
                                                      -------    -------    -----     -------      -------      -------
                                                      -------    -------    -----     -------      -------      -------
</TABLE>


                                      F-78



<PAGE>


                                TIME WARNER INC.
                           SUPPLEMENTARY INFORMATION
          CONDENSED CONSOLIDATING FINANCIAL STATEMENTS -- (CONTINUED)

                     CONSOLIDATING STATEMENT OF CASH FLOWS
                      FOR THE YEAR ENDED DECEMBER 31, 1997

<TABLE>
<CAPTION>
                                                                                        NON-                      TIME
                                                       TIME        TW                GUARANTOR     ELIMINA-      WARNER
                                                      WARNER    COMPANIES    TBS    SUBSIDIARIES    TIONS     CONSOLIDATED
                                                      ------    ---------    ---    ------------    -----     ------------
                                                                                 (MILLIONS)
<S>                                                   <C>       <C>         <C>     <C>            <C>        <C>
OPERATIONS
Net income..........................................  $   246    $   240    $  86     $   964      $(1,290)     $   246
Adjustments for noncash and nonoperating items:
 Extraordinary loss on retirement of debt...........       55         51        4          51         (106)          55
 Depreciation and amortization......................       --         --       21       1,273           --        1,294
 Amortization of film costs.........................       --         --       --         379           --          379
 Noncash interest expense...........................       --         95        3          --           --           98
 Gain on sale or exchange of cable systems and
   investments......................................       --         --       --         (12)          --          (12)
 Excess of distributions over equity in pretax
   income of consolidated subsidiaries..............      558         89      119          --         (766)          --
 Deficiency of distributions over equity in pretax
   income of Entertainment Group....................       --         --       --        (248)          41         (207)
 Equity in losses (income) of other investee
   companies after distributions....................       --         --       --          (9)          45           36
Changes in operating assets and liabilities.........      (95)       633       13      (1,035)           3         (481)
                                                      -------    -------    -----     -------      -------      -------
Cash provided by operations.........................      764      1,108      246       1,363       (2,073)       1,408
                                                      -------    -------    -----     -------      -------      -------
INVESTING ACTIVITIES
Investments and acquisitions........................      (19)        --       --         (94)          --         (113)
Advances to parents and consolidated subsidiaries...     (778)      (134)      --        (113)       1,025           --
Repayment of advances from consolidated
 subsidiaries.......................................       41         --       --         385         (426)          --
Capital expenditures................................       --         --      (11)       (563)          --         (574)
Investment proceeds.................................       --         --       --         187           --          187
Proceeds received from distribution of TWE Senior
 Capital............................................       --         --       --         455           --          455
                                                      -------    -------    -----     -------      -------      -------
Cash provided (used) by investing activities........     (756)      (134)     (11)        257          599          (45)
                                                      -------    -------    -----     -------      -------      -------
FINANCING ACTIVITIES
Borrowings..........................................       --      2,443      737       3,104         (871)       5,413
Debt repayments.....................................       --     (1,887)    (963)     (3,544)          --       (6,394)
Change in due to/from parent........................      113     (1,281)      --      (1,177)       2,345           --
Borrowings against future stock option proceeds.....      230         --       --          --           --          230
Repayments of borrowings against future stock option
 proceeds...........................................     (185)        --       --          --           --         (185)
Repurchases of Time Warner common stock.............     (344)        --       --          --           --         (344)
Dividends paid......................................     (338)        --       --          --           --         (338)
Proceeds received from stock option and dividend
 reinvestment plans.................................      454         --       --          --           --          454
Other...............................................       --        (14)      --         (54)          --          (68)
                                                      -------    -------    -----     -------      -------      -------
Cash used by financing activities...................      (70)      (739)    (226)     (1,671)       1,474       (1,232)
                                                      -------    -------    -----     -------      -------      -------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS.........      (62)       235        9         (51)          --          131
                                                      -------    -------    -----     -------      -------      -------

CASH AND EQUIVALENTS AT BEGINNING OF PERIOD.........       62        137       --         315           --          514
                                                      -------    -------    -----     -------      -------      -------
CASH AND EQUIVALENTS AT END OF PERIOD...............  $    --    $   372    $   9     $   264      $    --      $   645
                                                      -------    -------    -----     -------      -------      -------
                                                      -------    -------    -----     -------      -------      -------
</TABLE>

                                      F-79





<PAGE>



                                TIME WARNER INC.
                SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
                  YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997

<TABLE>
<CAPTION>
                                                                   CONSOLIDATION      ADDITIONS
                                                   BALANCE AT         OF THE          CHARGED TO                      BALANCE
                                                   BEGINNING       ENTERTAINMENT      COSTS AND                       AT END
                  DESCRIPTION                     OF PERIOD(a)       GROUP(a)          EXPENSES    DEDUCTIONS        OF PERIOD
                  -----------                     ------------   ------------------    --------    ----------        ---------
                                                                                           (MILLIONS)
<S>                                               <C>               <C>                <C>        <C>               <C>
1999:
Reserves deducted from accounts receivable:
  Allowance for doubtful accounts...............     $  316          $271             $   279      $  (288)(b)       $  578
  Reserves for sales returns and allowances.....        691           235               1,843       (1,665)(c)(d)     1,104
                                                     ------          ----             -------      -------           ------
Total...........................................     $1,007          $506             $ 2,122      $(1,953)          $1,682
                                                     ------          ----             -------      -------           ------
                                                     ------          ----             -------      -------           ------
Reserves deducted from amounts due to publishers
  (accounts payable)
  Allowance for magazine and book returns.......     $ (220)         $ --             $(1,236)     $ 1,262(d)        $ (194)
                                                     ------          ----             -------      -------           ------
                                                     ------          ----             -------      -------           ------

1998:
Reserves deducted from accounts receivable:
  Allowance for doubtful accounts...............     $  311          $ --             $   323      $  (318)(b)       $  316
  Reserves for sales returns and allowances.....        680            --               2,490       (2,479)(c)(d)       691
                                                     ------          ----             -------      -------           ------
Total...........................................     $  991          $ --             $ 2,813      $(2,797)          $1,007
                                                     ------          ----             -------      -------           ------
                                                     ------          ----             -------      -------           ------
Reserves deducted from amounts due to publishers
  (accounts payable)
  Allowance for magazine and book returns.......     $ (171)         $ --             $(1,206)     $ 1,157(d)        $ (220)
                                                     ------          ----             -------      -------           ------
                                                     ------          ----             -------      -------           ------

1997:
Reserves deducted from accounts receivable:
  Allowance for doubtful accounts...............     $  236          $ --             $   379      $  (304)(b)       $  311
  Reserves for sales returns and allowances.....        740            --               2,599       (2,659)(c)(d)       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(d)        $ (171)
                                                     ------          ----             -------      -------           ------
                                                     ------          ----             -------      -------           ------
</TABLE>

---------

 (a) In 1999, Time Warner consolidated the Entertainment Group, which
     substantially consists of TWE, retroactive to the beginning of 1999. Time
     Warner's historical financial information for prior periods have not been
     changed.

 (b) Represents uncollectible receivables charged against reserve.

 (c) Represents returns or allowances applied against reserve.

 (d) The distribution of magazines and books 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 and book revenues to the provision charged to the reserve
     for magazine and book returns that is deducted from accounts receivable
     without also considering the related offsetting activity in the reserve for
     magazine and book returns that is deducted from the liability due to the
     publishers.


                                      F-80





<PAGE>


                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

DESCRIPTION OF BUSINESS

    Time Warner Entertainment Company, L.P. ('TWE' or the 'Company') classifies
its business interests into four fundamental areas: Cable Networks, consisting
principally of interests in cable television programming; Filmed Entertainment,
consisting principally of interests in filmed entertainment, television
production and television broadcasting; Cable, consisting principally of
interests in cable television systems; and Digital Media, consisting principally
of interests in Internet-related and digital media businesses. TWE also manages
the cable properties owned by Time Warner Inc. ('Time Warner') and the combined
cable television operations are conducted under the name of Time Warner Cable.

USE OF EBITA

    TWE evaluates operating performance based on several factors, including its
primary financial measure of 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.
These business combinations include 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, which
created over $10 billion of intangible assets that generally are being amortized
over a twenty to forty year period. The exclusion of noncash amortization
charges also is 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, generally are 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.

AT&T-MEDIAONE MERGER

    At the time of this filing, MediaOne Group, Inc. ('MediaOne'), a limited
partner in TWE, had agreed to be acquired by AT&T Corp. ('AT&T'). In August
1999, TWE received a notice from MediaOne concerning the termination of its
covenant not to compete with TWE. The termination of that covenant is necessary
for MediaOne to complete its proposed merger with AT&T. As a result of the
termination notice and the operation of the TWE partnership agreement,
MediaOne's rights to participate in the management of TWE's businesses
terminated immediately and irrevocably. MediaOne retains only certain protective
governance rights pertaining to certain limited matters affecting TWE as a
whole.

AMERICA ONLINE-TIME WARNER MERGER

    In January 2000, Time Warner and America Online, Inc. ('America Online')
announced that they had entered into an agreement to merge (the 'Merger') by
forming a new holding company named AOL Time Warner Inc. ('AOL Time Warner').
The Merger will create a leading, fully integrated media and communications
company that will combine Time Warner's and TWE's collection of media,
entertainment and news brands and its technologically advanced cable
infrastructure with America Online's extensive Internet franchises and
technology. Management believes that the combined company will be well
positioned to expand the use of the Internet in consumers' everyday lives and,
accordingly, provide Time Warner's and TWE's content businesses with increased
access to consumers through a new and growing distribution medium. Management
further believes that the Merger will result in significant new business and
other value-creation opportunities,

                                      F-81





<PAGE>



                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
         OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(CONTINUED)

including additional opportunities for e-commerce, growth in subscribers for
each company's products and services, and cost and operating efficiencies from
cross-promotional and other opportunities.

    As a result of the Merger, the former shareholders of America Online will
have an approximate 55% interest in AOL Time Warner and the former shareholders
of Time Warner will have an approximate 45% interest in the combined entity,
expressed on a fully diluted basis. The Merger is expected to be accounted for
by AOL Time Warner as an acquisition of Time Warner under the purchase method of
accounting for business combinations.

    The Merger is expected to close in the fall of 2000 and is subject to
customary closing conditions, including the approval of the shareholders of each
of America Online and Time Warner and all necessary regulatory approvals. There
can be no assurance that such approvals will be obtained.

TRANSACTIONS AFFECTING COMPARABILITY OF RESULTS OF OPERATIONS

    As more fully described herein, the comparability of TWE's operating results
has been affected by certain significant transactions and nonrecurring items in
each period.

    For 1999, the significant, nonrecurring items included (i) net pretax gains
in the amount of $2.119 billion relating to the sale or exchange of various
cable television systems and investments, (ii) an approximate $215 million net
pretax gain recognized in connection with the early termination and settlement
of a long-term, home video distribution agreement, (iii) an approximate $97
million pretax gain recognized in connection with the sale of an interest in
CanalSatellite, a satellite television platform servicing France and Monaco and
(iv) a one-time, noncash pretax charge of approximately $106 million relating to
Warner Bros.'s retail stores.

    For 1998, the significant, nonrecurring items included (i) net pretax gains
of approximately $90 million relating to the sale or exchange of various cable
television systems and investments and (ii) a pretax charge of approximately
$210 million principally to reduce TWE's carrying value of its investment in
Primestar, Inc. ('Primestar').

    For 1997, the significant, nonrecurring items included (i) net pretax gains
of approximately $200 million relating to the sale or exchange of various cable
television systems, (ii) a pretax gain of approximately $250 million relating to
the sale of its interest in E! Entertainment Television, Inc.
('E! Entertainment') and (iii) an extraordinary loss of $23 million on the
retirement of debt.

    In order to meaningfully assess underlying operating trends, management
believes that the results of operations for each period should be analyzed after
excluding the effects of these significant nonrecurring gains. As such, the
following discussion and analysis focuses on amounts and trends adjusted to
exclude the impact of these unusual items. However, unusual items may occur in
any period. Accordingly, investors and other financial statement users
individually should consider the types of events and transactions for which
adjustments have been made.

    In addition to the above significant and nonrecurring items, the
comparability of TWE's Cable division results has been affected further by
certain 1998 cable-related transactions, as described more fully in Note 2 to
the accompanying consolidated financial statements. While these transactions had
a significant effect on the comparability of the Cable division's EBITA and
operating income, principally due to the deconsolidation of the related
operations, they did not have a significant effect on the comparability of TWE's
net income.

COST SAVINGS

    Since 1997, together with Time Warner, TWE has been engaged in a
company-wide cost management program. The program's purpose is to control costs
by identifying more efficient ways of conducting its

                                      F-82





<PAGE>



                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
         OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(CONTINUED)

businesses. As part of these cost savings initiatives, TWE implemented some
changes to its pension plans in 1999. As a result of these changes, and when
taken together with other changes in actuarial assumptions that include a 100
basis point increase in pension discount rates, TWE expects to reduce its
pension expense by approximately $25 million in 2000.

RESULTS OF OPERATIONS

1999 VS. 1998

    EBITA and operating income are as follows:

<TABLE>
<CAPTION>
                                                                  YEARS ENDED DECEMBER 31,
                                                         ------------------------------------------
                                                               EBITA              OPERATING INCOME
                                                         ------------------      ------------------
                                                          1999        1998        1999        1998
                                                         ------      ------      ------      ------
                                                                         (MILLIONS)
<S>                                                      <C>         <C>         <C>         <C>
Filmed Entertainment-Warner Bros(a)....................  $  787      $  498      $  665      $  369
Broadcasting-The WB Network............................     (92)        (93)        (96)        (96)
Cable Networks-HBO.....................................     527         454         527         454
Cable(b)...............................................   3,517       1,369       3,139         992
Digital Media..........................................      (8)         --          (8)         --
                                                         ------      ------      ------      ------
Total..................................................  $4,731      $2,228      $4,227      $1,719
                                                         ------      ------      ------      ------
                                                         ------      ------      ------      ------
</TABLE>

---------

(a) 1999 results include a net pretax gain of $215 million recognized in
    connection with the early termination and settlement of a long-term, home
    video distribution agreement, a $97 million pretax gain relating to the sale
    of an interest in CanalSatellite, offset in part by a one-time, noncash
    pretax charge of $106 million relating to Warner Bros.'s retail stores.

(b) The comparability of the Cable division's operating results has been
    affected by certain 1998 cable-related transactions in addition to net
    pretax gains relating to the sale or exchange of certain cable television
    systems and investments of $2.119 billion in 1999 and $90 million in 1998.

CONSOLIDATED RESULTS

    TWE had revenues of $13.164 billion and net income of $2.759 billion for the
year ended December 31, 1999, compared to revenues of $12.246 billion and net
income of $326 million for the year ended December 31, 1998.

    As previously described, the comparability of TWE's operating results for
1999 and 1998 has been affected by certain significant, nonrecurring items
recognized in each period. These nonrecurring items consisted of approximately
$2.325 billion of net pretax gains in 1999, compared to $120 million of net
pretax losses in 1998.

    TWE's net income increased to $2.759 billion in 1999, compared to $326
million in 1998. However, excluding the significant effect of the nonrecurring
items referred to earlier, net income increased by $149 million to $609 million
in 1999 from $460 million in 1998. As more fully discussed below, this
improvement principally resulted from an overall increase in TWE's business
segment operating income, offset in part by higher equity losses from certain
investments accounted for under the equity method of accounting.

    As a U.S. partnership, TWE is not subject to U.S. federal and state income
taxation. Income and withholding taxes of $150 million and $92 million for the
years ended December 31, 1999 and 1998, respectively, have been provided for the
operations of TWE's domestic and foreign subsidiary corporations.

BUSINESS SEGMENT RESULTS

    Filmed Entertainment-Warner Bros.  Revenues increased to $6.628 billion in
1999, compared to $6.051 billion in 1998. EBITA increased to $787 million in
1999 from $498 million in 1998. Operating income

                                      F-83





<PAGE>


                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
         OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(CONTINUED)

increased to $665 million in 1999 from $369 million in 1998. Revenues benefited
from increases in worldwide theatrical, home video and television distribution
operations, offset in part by lower revenues from consumer products operations.
The increase in worldwide home video revenues primarily resulted from increased
sales of DVDs. The operating results in 1999 were affected by various
significant, nonrecurring items, including an approximate $215 million net
pretax gain recognized in connection with the early termination and settlement
of a long-term, home video distribution agreement, a pretax gain of $97 million
recognized in connection with the sale of an interest in CanalSatellite and a
one-time, noncash pretax charge of $106 million relating to Warner Bros.'s
retail stores. Excluding the effect of these significant nonrecurring items,
EBITA and operating income increased principally as a result of improved results
from worldwide theatrical, home video and domestic television syndication
operations. These improvements were offset in part by lower results from
consumer products operations and lower net gains on the sale of other assets.

    The decline in Warner Bros.'s consumer products operations relates, in part,
to its retail stores. In the fourth quarter of 1999, Warner Bros. adopted a plan
designed to improve the performance of its retail stores. The plan is expected
to be executed largely over a three-year period and involves closing certain
underperforming stores, transforming other stores into smaller and more
efficient stores, and exploiting potential e-commerce opportunities. As a result
of this plan, Warner Bros. recorded a one-time, noncash pretax charge of $106
million to reduce the carrying value of certain fixed assets and leasehold
improvements used in its retail stores. The charge represented the excess of the
carrying value of those assets over the discounted future operating cash flows,
adjusted to reflect a shorter recovery period due to planned store closures.

    Broadcasting-The WB Network.  Revenues increased to $384 million in 1999,
compared to $260 million in 1998. EBITA improved to a loss of $92 million in
1999 from a loss of $93 million in 1998. Operating losses of $96 million were
the same in both 1999 and in 1998. Revenues increased principally as a result of
one additional night of weekly prime-time programming in comparison to the prior
year and advertising rate increases, offset in part by lower prime-time
television ratings. Prime-time television ratings were, and are expected to
continue to be, negatively affected by lower household delivery associated with
the WGN Superstation discontinuing its carriage of The WB Network's programming
beginning in the fall of 1999. The marginal EBITA loss improvement and flat
operating losses principally resulted from the fact that significant revenue
increases were offset by the combination of higher programming costs associated
with the expanded programming schedule and higher start-up costs associated with
The WB Network 100+ station group, a distribution alliance for The WB Network in
smaller markets.

    Cable Networks-HBO.  Revenues increased to $2.169 billion in 1999, compared
to $2.052 billion in 1998. EBITA and operating income increased to $527 million
in 1999 from $454 million in 1998. Revenues benefited primarily from an increase
in subscriptions to 35.7 million from 34.6 million at the end of 1998. EBITA and
operating income increased principally due to the revenue gains, increased cost
savings, and higher income from Comedy Central, a 50%-owned equity investee.

    Cable.  Revenues increased to $4.496 billion in 1999, compared to $4.378
billion in 1998. EBITA increased to $3.517 billion in 1999 from $1.369 billion
in 1998. Operating income increased to $3.139 billion in 1999 from $992 million
in 1998. These operating results were affected by certain cable-related
transactions that occurred in 1998 (the '1998 Cable Transactions') and by net
pretax gains of $2.119 billion recognized in 1999 and $90 million in 1998
related to the sale or exchange of various cable television systems and
investments. The 1998 Cable Transactions principally resulted in the
deconsolidation or transfer of certain operations and are described more fully
in Note 2 to the accompanying consolidated financial statements. Excluding the
effect of the 1998 Cable Transactions, revenues increased due to growth in basic
cable subscribers, increases in basic cable rates, increases in advertising and
pay-per-view revenues and an increase in revenues from providing Road
Runner-branded, high-speed online services. Similarly, excluding the effect of
the 1998 Cable Transactions and

                                      F-84





<PAGE>



                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
         OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(CONTINUED)

the one-time gains, EBITA and operating income increased principally as a result
of the revenue increases, offset in part by higher programming costs.

    As of December 31, 1999 and 1998, there were 12.6 million subscribers under
the management of TWE's Cable division.

    Digital Media.  Digital Media operating results reflect start-up costs
associated with TWE's digital media businesses, including the November 1999
launch of Entertaindom, TWE's entertainment Web destination. Digital Media had
$8 million of operating losses on $1 million of revenues during 1999. Due to the
start-up nature of these businesses, losses are expected to continue.

    Interest and Other, Net.  Interest and other, net, decreased to $818 million
of expense in 1999, compared to $945 million of expense in 1998. Interest
expense decreased to $561 million in 1999, compared to $566 million in 1998,
principally due to interest savings associated with the Company's 1998 debt
reduction efforts. There was other expense, net of $257 million in 1999,
compared to $379 million in 1998. This decrease principally related to the
absence of an approximate $210 million charge recorded in 1998 to reduce the
carrying value of an interest in Primestar, offset in part by higher losses in
1999 from certain investments accounted for under the equity method of
accounting.

    Minority Interest.  Minority interest expense increased to $427 million in
1999, compared to $284 million in 1998. Minority interest expense increased
primarily due to the allocation of a portion of the higher net pretax gains in
1999 relating to the sale or exchange of various cable television systems and
investments owned by the TWE-Advance/Newhouse Partnership ('TWE-A/N') to the
minority owners of that partnership. Excluding the significant effect of the
gains recognized in each period, minority interest expense decreased slightly in
1999 principally due to a higher allocation of losses to a minority partner in
The WB Network.

1998 VS. 1997

    EBITA and operating income are as follows:

<TABLE>
<CAPTION>
                                                                    YEARS ENDED DECEMBER 31,
                                                             --------------------------------------
                                                                  EBITA           OPERATING INCOME
                                                             ---------------      -----------------
                                                              1998     1997        1998      1997
                                                             ------   ------      -------   -------
                                                                           (MILLIONS)
<S>                                                          <C>      <C>         <C>       <C>
Filmed Entertainment-Warner Bros...........................  $  498   $  387      $  369    $  264
Broadcasting-The WB Network................................     (93)     (88)        (96)      (88)
Cable Networks-HBO.........................................     454      391         454       391
Cable(a)...................................................   1,369    1,184         992       877
                                                             ------   ------      ------    ------
Total......................................................  $2,228   $1,874      $1,719    $1,444
                                                             ------   ------      ------    ------
                                                             ------   ------      ------    ------
</TABLE>

---------

(a) The comparability of the Cable division's operating results has been
    affected by certain 1998 cable-related transactions in addition to net
    pretax gains relating to the sale or exchange of certain cable television
    systems and investments of approximately $90 million and $200 million
    recognized in 1998 and 1997, respectively.

CONSOLIDATED RESULTS

    TWE had revenues of $12.246 billion and net income of $326 million for the
year ended December 31, 1998, compared to 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.

    As previously described, the comparability of TWE's operating results for
1998 and 1997 has been affected by certain significant, nonrecurring items
recognized in each period. These nonrecurring items consisted of

                                      F-85





<PAGE>

                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
         OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(CONTINUED)

approximately $120 million of net losses in 1998, compared to approximately $450
million of net gains in 1997. In addition, net income in 1997 included an
extraordinary loss on the retirement of debt of $23 million.

    TWE's net income decreased to $326 million in 1998, compared to $614 million
in 1997. However, excluding the significant effect of the nonrecurring items
referred to above, net income increased by $229 million to $460 million in 1998,
compared to $231 million in 1997. As discussed more fully below, this
improvement principally resulted from an overall increase in TWE's business
segment operating income, including the positive effect of certain cable system
transfers in 1998 (the 'TWE-A/N Transfers'), offset in part by an increase in
interest expense associated with the TWE-A/N Transfers and higher losses from
certain investments accounted for under the equity method of accounting. The
TWE-A/N Transfers are described more fully in Note 2 to the accompanying
financial statements.

    As a U.S. partnership, TWE is not subject to U.S. federal and state income
taxation. Income and withholding taxes of $92 million and $85 million for the
years ended December 31, 1998 and 1997, respectively, have been provided for the
operations of TWE's domestic and foreign subsidiary corporations.

BUSINESS SEGMENT RESULTS

    Filmed Entertainment-Warner Bros.  Revenues increased to $6.051 billion in
1998, compared to $5.462 billion in 1997. EBITA increased to $498 million in
1998 from $387 million in 1997. Operating income increased to $369 million in
1998 from $264 million in 1997. Revenues benefited from a significant increase
in licensing fees from television production and distribution operations,
principally relating to the initial off-network domestic syndication
availability of Friends and the initial off-network basic cable availability of
ER, as well as an increase in revenues from consumer products licensing
operations. EBITA and operating income benefited principally from the revenue
gains and cost savings, offset in part by lower international syndication sales
of library product and lower results from theatrical releases. In addition,
EBITA and operating income for each period included certain one-time gains on
the sale of assets that were comparable in amount and therefore, did not have
any significant effect on operating trends.

    Broadcasting-The WB Network.  Revenues were $260 million in 1998, compared
to $136 million in 1997. EBITA decreased to a loss of $93 million in 1998 from a
loss of $88 million in 1997. Operating losses increased to $96 million in 1998
from $88 million in 1997. Revenues increased as a result of higher advertising
sales relating to improved television ratings and the addition of a fourth night
of prime-time programming in January 1998 and a fifth night in September 1998.
Despite the revenue increase, operating losses increased because of a lower
allocation of losses to a minority partner in the network. However, excluding
this minority interest effect, operating losses improved principally as a result
of the revenue gains, which outweighed higher programming costs associated with
the expanded programming schedule.

    Cable Networks-HBO.  Revenues increased to $2.052 billion in 1998, compared
to $1.923 billion in 1997. EBITA and operating income increased to $454 million
in 1998 from $391 million in 1997. Revenues benefited primarily from an increase
in subscriptions to 34.6 million from 33.6 million at the end of 1997. EBITA and
operating income improved principally as a result of the revenue gains and, to a
lesser extent, cost savings and higher income from Comedy Central, a 50%-owned
equity investee.

    Cable.  Revenues increased to $4.378 billion in 1998, compared to $4.243
billion in 1997. EBITA increased to $1.369 billion in 1998 from $1.184 billion
in 1997. Operating income increased to $992 million in 1998 from $877 million in
1997. These operating results were affected by the 1998 Cable Transactions and
by net pretax gains of $90 million recognized in 1998 and $200 million in 1997
related to the sale or exchange of various cable television systems and
investments. Excluding the effect of the 1998 Cable Transactions, revenues
increased principally as a result of an increase in basic cable subscribers,
increases in regulated cable rates and

                                      F-86





<PAGE>



                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
         OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(CONTINUED)

an increase in advertising revenues. Similarly, excluding the effect of the 1998
Cable Transactions and the one-time gains, EBITA and operating income increased
principally as a result of the revenue gains, offset in part by higher
depreciation related to capital spending.

    Interest and Other, Net.  Interest and other, net, increased to $945 million
of expense in 1998, compared to $326 million of expense in 1997. Interest
expense increased to $566 million in 1998, compared to $490 million in 1997
principally due to higher average debt levels associated with the TWE-A/N
Transfers. There was other expense, net, of $379 million in 1998, compared to
other income of $164 million in 1997, primarily due to lower investment-related
income, as well as higher losses associated with TWE's asset securitization
program. The significant decrease in investment-related income principally
resulted from the absence of an approximate $250 million pretax gain recognized
in 1997 in connection with the sale of an interest in E! Entertainment, the
inclusion of an approximate $210 million charge recorded in 1998 principally
to reduce the carrying value of an interest in Primestar and higher losses
in 1998 from certain investments accounted for under the equity method of
accounting.

    Minority Interest.  Minority interest expense decreased to $284 million in
1998, compared to $324 million in 1997. Minority interest expense decreased
primarily due to the allocation of a portion of higher net pretax gains in 1997
relating to the sale or exchange of various cable television systems owned by
TWE-A/N to the minority owners of that partnership. Excluding the effect of the
gains recognized in each period, minority interest expense for 1998 and 1997 was
comparable in amount and did not have any significant effect on operating
trends.

FINANCIAL CONDITION AND LIQUIDITY

DECEMBER 31, 1999

1999 FINANCIAL CONDITION

    At December 31, 1999, TWE had $6.7 billion of debt, $517 million of cash and
equivalents (net debt of $6.2 billion) and $7.1 billion of partners' capital.
This compares to $6.6 billion of debt, $87 million of cash and equivalents (net
debt of $6.5 billion), $217 million of preferred stock of a subsidiary, $603
million of Time Warner General Partners' Senior Capital and $5.1 billion of
partners' capital at December 31, 1998.

SENIOR CAPITAL DISTRIBUTIONS

    In July 1999, TWE paid a $627 million distribution to the Time Warner
General Partners to redeem the remaining portion of their senior priority
capital interests, including a priority capital return of $173 million. Time
Warner used a portion of the proceeds received from this distribution to repay
all $400 million of outstanding borrowings under its credit agreement with TWE.

REDEMPTION OF REIT PREFERRED STOCK

    In March 1999, a subsidiary of TWE (the 'REIT') redeemed all of its shares
of preferred stock ('REIT Preferred Stock') at an aggregate cost of $217
million, which approximated net book value. The redemption was funded with
borrowings under TWE's bank credit agreement.

CASH FLOWS

    During 1999, TWE's cash provided by operations amounted to $2.713 billion
and reflected $4.731 billion of business segment EBITA, $860 million of noncash
depreciation expense, less $2.119 billion of net pretax gains on the sale or
exchange of cable television systems and investments, $498 million of interest
payments, $132 million of income taxes, $73 million of corporate expenses, $15
million of proceeds repaid under TWE's

                                      F-87





<PAGE>


                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
         OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(CONTINUED)

asset securitization program and $41 million related to an increase in working
capital requirements, other balance sheet accounts and noncash items. Cash
provided by operations of $2.288 billion in 1998 reflected $2.228 billion of
business segment EBITA, $927 million of noncash depreciation expense and $166
million of proceeds from TWE's asset securitization program, less $90 million of
net pretax gains on the sale or exchange of cable television systems and
investments, $537 million of interest payments, $91 million of income taxes, $72
million of corporate expenses and $243 million related to an increase in working
capital requirements, other balance sheet accounts and noncash items.

    Cash used by investing activities was $605 million in 1999, compared to $745
million in 1998. The decrease principally resulted from the collection of TWE's
$400 million loan to Time Warner and lower capital expenditures, offset in part
by a $298 million decrease in investment proceeds. Investment proceeds decreased
largely relating to the 1998 sale of TWE's remaining interest in Six Flags
Entertainment Corporation and the receipt of approximately $650 million of
proceeds in 1998 upon the formation of a cable joint venture in Texas, offset in
part by the receipt of approximately $280 million of net proceeds in 1999 in
connection with an exchange of cable television systems. Capital expenditures
decreased to $1.475 billion in 1999, compared to $1.603 billion in 1998.

    Cash used by financing activities was $1.678 billion in 1999, compared to
$1.778 million in 1998. The use of cash in 1999 principally resulted from the
redemption of REIT Preferred Stock at an aggregate cost of $217 million, the
payment of $1.2 billion of capital distributions to Time Warner and $106 million
of debt reduction. The use of cash in 1998 principally reflected $1.153 billion
of distributions paid to Time Warner and the use of investment proceeds to
reduce debt in connection with TWE's 1998 debt reduction efforts.

    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 keep the business positioned for sustained,
long-term growth. Capital spending by TWE's Cable division amounted to $1.319
billion in 1999, compared to $1.451 billion in 1998. Capital spending by TWE's
Cable division for 2000 is budgeted to be approximately $1.674 billion,
reflecting higher spending on variable capital to facilitate a more aggressive
roll-out of Time Warner Cable's popular digital cable and Road Runner-branded
high-speed online service. Capital spending 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 and consistent
with Time Warner Cable's long-term strategic plan, Time Warner Cable agreed with
the Federal Communications Commission (the 'FCC') in 1996 to invest a total of
$4 billion in capital costs in connection with the upgrade of its cable
infrastructure. 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 of December 31, 1999, Time Warner Cable had
approximately $250 million remaining under this commitment, of which
approximately $50 million is expected to be incurred for the upgrade of TWE's
and TWE-A/N's owned and managed cable television systems. Management expects to
satisfy this commitment by December 31, 2000 when Time Warner Cable's
technological upgrade of its cable television systems is scheduled to be
completed.

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.

                                      F-88





<PAGE>



                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
         OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(CONTINUED)

  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 normally owns the copyrights to such creative material, it
continually generates revenue through the sale of such products across different
media and in new and existing markets. The value of film and television-related
copyrighted product and trademarks is continually realized by the licensing of
films and television series to secondary markets and the licensing of
trademarks, such as the Looney Tunes characters and Batman, to the retail
industry and other markets. In addition, technological advances, such as the
introduction of the home videocassette in the 1980's and, potentially, the
current exploitation of DVDs, 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.'s backlog, representing the amount of future revenue not yet
recorded from cash contracts for the licensing of theatrical and television
product for pay cable, basic cable, network and syndicated television
exhibition, amounted to $3.033 billion at December 31, 1999 (including amounts
relating to TWE's cable television networks of $365 million and $599 million to
Time Warner's cable television networks).

    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 received periodically
over the term of the related licensing agreements or on an accelerated basis
using a $500 million securitization facility. The portion of backlog for which
cash has not already been received has significant off-balance sheet asset value
as a source of future funding. As of December 31, 1999, including cash received
under the securitization facility and other advanced payments, approximately
$700 million of cash licensing fees had been collected against the backlog. The
backlog excludes advertising barter contracts, which are also expected to
result in the future realization of revenues and cash through the sale of
advertising spots received under such contracts.

FOREIGN CURRENCY RISK MANAGEMENT

    Time Warner uses foreign exchange contracts primarily to hedge the risk that
unremitted or future license fees owed to TWE domestic companies for the sale or
anticipated sale of U.S. copyrighted products abroad may be adversely affected
by changes in foreign currency exchange rates. As part of its overall strategy
to manage the level of exposure to the risk of foreign currency exchange rate
fluctuations, Time Warner hedges a portion of its foreign currency exposures
anticipated over the ensuing twelve month period, including those related to
TWE. At December 31, 1999, 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. To hedge this exposure, Time Warner used foreign exchange contracts that
generally have maturities of three months or less, which generally will be
rolled over to provide continuing coverage throughout the year. TWE is
reimbursed by or reimburses Time Warner for Time Warner contract gains

                                      F-89





<PAGE>

                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
         OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(CONTINUED)

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, 1999, Time Warner had contracts for the sale of
$843 million and the purchase of $468 million of foreign currencies at fixed
rates. Of Time Warner's $375 million net sale contract position, $393 million of
the foreign exchange sale contracts and $108 million of the foreign exchange
purchase contracts related to TWE's foreign currency exposure, compared to
contracts for the sale of $298 million and the purchase of $101 million of
foreign currencies at fixed rates at December 31, 1998.

    Based on Time Warner's outstanding foreign exchange contracts related to
TWE's exposure at December 31, 1999, each 5% devaluation of the U.S. dollar as
compared to the level of foreign exchange rates for currencies under contract at
December 31, 1999 would result in approximately $14 million of net 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, 1999 would result in $14 million of net unrealized
gains on contracts. Consistent with the nature of the economic hedge provided by
such foreign exchange contracts, such unrealized gains or losses largely 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.

EURO CONVERSION

    Effective January 1, 1999, the 'euro' was established as a single currency
valid in more than two-thirds of the member countries of the European Union.
These member countries have a three-year transitional period to physically
convert their sovereign currencies to the euro. By July 1, 2002, all
participating member countries must eliminate their currencies and replace their
legal tender with euro-denominated bills and coins. Notwithstanding this
transitional period, many commercial transactions are expected to become euro-
denominated well before the July 2002 deadline. Accordingly, TWE continues to
evaluate the short-term and long-term effects of the euro conversion on its
European operations, principally filmed entertainment.

    TWE believes that the most significant short-term impact of the euro
conversion is the need to modify its accounting and information systems to
handle an increasing volume of transactions during the transitional period in
both the euro and sovereign currencies of the participating member countries.
TWE has identified its accounting and information systems in need of
modification and an action plan has been formulated to address the nature and
timing of remediation efforts. Remediation efforts have begun and the plan is
expected to be substantially completed well before the end of the transitional
period. This timetable will be adjusted, if necessary, to meet the anticipated
needs of TWE's vendors and customers. Based on preliminary information, costs to
modify its accounting and information systems are not expected to be material.

    TWE believes that the most significant long-term business risk of the euro
conversion may be increased pricing pressures for its products and services
brought about by heightened consumer awareness of possible cross-border price
differences. However, TWE believes that these business risks may be offset to
some extent by lower material costs, other cost savings and marketing
opportunities. Notwithstanding such risks, management does not believe that the
euro conversion will have a material effect on TWE's financial position, results
of operations or cash flows in future periods.

YEAR 2000 TECHNOLOGY PREPAREDNESS

    TWE, like most large companies, depends on many different computer systems
and other chip-based devices for the continuing conduct of its business. TWE
took various precautions related to the fact that many older computer programs,
computer hardware and chip-based devices might have failed to recognize dates
beginning on January 1, 2000 as being valid dates, and as a result might have
failed to operate or might have operated improperly as such dates were
introduced.

                                      F-90






<PAGE>


                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
         OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(CONTINUED)

    During 1999, TWE completed its efforts to minimize the risk of disruption
related to Year 2000 issues. This program was described in TWE's reports filed
with the Securities and Exchange Commission (the 'SEC'). To date, TWE has
experienced few problems related to Year 2000 compliance, and the problems that
have been identified have been addressed. TWE is not aware of any remaining
significant problems related to Year 2000 issues but is continuing to monitor
the status of suppliers, vendors and other entities with which it
does business.

    Through the end of 1999, TWE, as a whole, incurred approximately $60 million
related to its Year 2000 remediation program, which started in 1996. These
expenditures were funded from the Company's operating cash flow. TWE anticipates
that its remediation program, and related expenditures, may continue into 2001
as temporary solutions to Year 2000 problems are replaced with upgraded
equipment. Future expenditures are not expected to be significant.

CAUTION CONCERNING FORWARD-LOOKING STATEMENTS

    The SEC encourages companies to disclose forward-looking information so that
investors can better understand a company's future prospects and make informed
investment decisions. This document, together with management's public
commentary related thereto, contains such 'forward-looking statements' within
the meaning of the Private Securities Litigation Reform Act of 1995,
particularly statements anticipating future growth in revenues, EBITA and cash
flow. Words such as 'anticipate,' 'estimate,' 'expects,' 'projects,' 'intends,'
'plans,' 'believes' and words and terms of similar substance used in connection
with any discussion of future operating or financial performance identify such
forward-looking statements. Those forward-looking statements are management's
present expectations of future events. As with any projection or forecast, they
are inherently susceptible to changes in circumstances, and TWE is under no
obligation to (and expressly disclaims any such obligation to) update or alter
its forward-looking statements, whether as a result of such changes, new
information, future events or otherwise.

    TWE operates in highly competitive, consumer driven and rapidly changing
media and entertainment businesses that are dependent on government regulation
and economic, political, social conditions in the countries in which they
operate, consumer demand for their products and services, technological
developments and (particularly in view of technological changes) protection of
their intellectual property rights. TWE's actual results could differ materially
from management's expectations because of changes in such factors. Some of the
other factors that also could cause actual results to differ from those
contained in the forward-looking statements include those identified in TWE's
other filings with the SEC and:

   - For TWE's cable business, more aggressive than expected competition from
     new technologies and other types of video programming distributors,
     including DBS and DSL; increases in government regulation of basic cable or
     equipment rates or other terms of service (such as 'digital must-carry' or
     common carrier requirements); increased difficulty in obtaining franchise
     renewals; the failure of new equipment (such as digital set-top boxes) or
     services (such as digital cable and high-speed on-line services or
     telephony over cable or video on demand) to function properly, to appeal to
     enough consumers or to be available at reasonable prices and to be
     delivered in a timely fashion; and greater than expected increases in
     programming or other costs.

   - For TWE's cable programming and television businesses, greater than
     expected programming or production costs; public and cable operator
     resistance to price increases (and the negative impact on premium
     programmers of increases in basic cable rates); increased regulation of
     distribution agreements; the sensitivity of advertising to economic
     cyclicality; and greater than expected fragmentation of consumer viewership
     due to an increased number of programming services or the increased
     popularity of alternatives to television.

                                      F-91





<PAGE>

                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
         OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(CONTINUED)


   - For TWE's film and television businesses, their ability to continue to
     attract and select desirable talent and scripts at manageable costs;
     increases in production costs generally; fragmentation of consumer leisure
     and entertainment time (and its possible negative effects on the broadcast
     and cable networks, which are significant customers of these businesses);
     continued popularity of merchandising; and the uncertain impact of
     technological developments such as DVD and the Internet.

   - For TWE's digital media businesses, their ability to locate and invest in
     profitable businesses, to develop products and services that are
     attractive, accessible and commercially viable in terms of content,
     technology and cost; their ability to manage costs and generate revenues;
     aggressive competition from existing and developing technologies and
     products; the resolution of issues concerning commercial activities via the
     Internet; including security, reliability, cost, ease of use and access;
     and the possibility of increased government regulation of new media
     services.

    In addition, TWE's overall financial strategy, including growth in
operations, maintaining its financial ratios and strengthened balance sheet,
could be adversely affected by increased interest rates, failure to meet
earnings expectations, significant acquisitions or other transactions,
consequences of the euro conversion and changes in TWE's plans, strategies and
intentions.

                                      F-92





<PAGE>

                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
                           CONSOLIDATED BALANCE SHEET
                                  DECEMBER 31,
                                   (MILLIONS)

<TABLE>
<CAPTION>
                                                               1999         1998
                                                              -------      -------
<S>                                                           <C>          <C>
ASSETS
CURRENT ASSETS
Cash and equivalents........................................  $   517      $    87
Receivables, including $1.354 billion and $765 million due
 from Time Warner, less allowances of $668 and $506
 million....................................................    3,328        2,618
Inventories.................................................    1,220        1,312
Prepaid expenses............................................      246          166
                                                              -------      -------
Total current assets........................................    5,311        4,183

Noncurrent inventories......................................    2,274        2,327
Loan receivable from Time Warner............................       --          400
Investments.................................................      774          886
Property, plant and equipment...............................    6,488        6,041
Cable television franchises.................................    5,464        3,773
Goodwill....................................................    3,731        3,854
Other assets................................................      801          766
                                                              -------      -------
Total assets................................................  $24,843      $22,230
                                                              -------      -------
                                                              -------      -------

LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES
Accounts payable............................................  $ 1,791      $ 1,473
Participations and programming costs payable................    1,717        1,515
Debt due within one year....................................        6            6
Other current liabilities, including $893 and $370 million
 due to Time Warner.........................................    2,209        1,942
                                                              -------      -------
Total current liabilities...................................    5,723        4,936

Long-term debt..............................................    6,655        6,578
Other long-term liabilities, including $1.292 and $1.130
 billion due to Time Warner.................................    3,501        3,267
Minority interests..........................................    1,815        1,522
Preferred stock of subsidiary holding solely a mortgage note
 of its parent..............................................       --          217
Time Warner General Partners' Senior Capital................       --          603

PARTNERS' CAPITAL
Contributed capital.........................................    7,338        7,341
Partnership deficit.........................................     (189)      (2,234)
                                                              -------      -------
Total partners' capital.....................................    7,149        5,107
                                                              -------      -------
Total liabilities and partners' capital.....................  $24,843      $22,230
                                                              -------      -------
                                                              -------      -------
</TABLE>

See accompanying notes.

                                      F-93





<PAGE>

                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
                      CONSOLIDATED STATEMENT OF OPERATIONS
                            YEARS ENDED DECEMBER 31,
                                   (MILLIONS)

<TABLE>
<CAPTION>
                                                               1999         1998         1997
                                                              -------      -------      -------
<S>                                                           <C>          <C>          <C>
Revenues(a).................................................  $13,164      $12,246      $11,318
                                                              -------      -------      -------

Cost of revenues(a)(b)......................................   (8,377)      (7,842)      (7,234)
Selling, general and administrative(a)(b)...................   (2,381)      (2,266)      (2,410)
Amortization of goodwill and other intangible assets........     (504)        (509)        (430)
Gain on sale or exchange of cable systems and
 investments(a).............................................    2,119           90          200
Gain on early termination of video distribution agreement...      215           --           --
Gain on sale of interest in CanalSatellite..................       97           --           --
Write-down of retail store assets...........................     (106)          --           --
                                                              -------      -------      -------

Business segment operating income...........................    4,227        1,719        1,444
Interest and other, net(a)..................................     (818)        (945)        (326)
Corporate services(a).......................................      (73)         (72)         (72)
Minority interest...........................................     (427)        (284)        (324)
                                                              -------      -------      -------

Income before income taxes..................................    2,909          418          722
Income taxes................................................     (150)         (92)         (85)
                                                              -------      -------      -------

Income before extraordinary item............................    2,759          326          637
Extraordinary loss on retirement of debt....................       --           --          (23)
                                                              -------      -------      -------

Net income..................................................  $ 2,759      $   326      $   614
                                                              -------      -------      -------
                                                              -------      -------      -------
</TABLE>

---------
(a) Includes the following income (expenses) resulting from transactions with
    the partners of TWE and other related companies:

<TABLE>
<S>                                                           <C>          <C>          <C>
   Revenues.................................................  $   564      $   695      $   431
   Cost of revenues.........................................     (266)        (220)        (167)
   Selling, general and administrative......................      (55)         (26)          18
   Gain on sale or exchange of cable systems and
    investments.............................................      308           --           --
   Interest and other, net..................................       20            6           30
   Corporate expenses.......................................      (73)         (72)         (72)

(b) Includes depreciation expense of:.......................  $   860      $   927      $   940
                                                              -------      -------      -------
                                                              -------      -------      -------
</TABLE>

See accompanying notes.
                                      F-94






<PAGE>


                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
                      CONSOLIDATED STATEMENT OF CASH FLOWS
                            YEARS ENDED DECEMBER 31,
                                   (MILLIONS)

<TABLE>
<CAPTION>
                                                               1999         1998         1997
                                                              -------      -------      -------
<S>                                                           <C>          <C>          <C>
OPERATIONS
Net income..................................................  $ 2,759      $   326      $   614
Adjustments for noncash and nonoperating items:
   Extraordinary loss on retirement of debt.................       --           --           23
   Depreciation and amortization............................    1,364        1,436        1,370
   Amortization of film costs...............................    1,897        1,936        1,833
   Gain on sale or exchange of cable systems and
    investments.............................................   (2,119)         (90)        (200)
   Equity in losses of investee companies after
    distributions...........................................      157          149           57
Changes in operating assets and liabilities:
   Receivables..............................................     (707)        (825)        (273)
   Inventories..............................................   (1,805)      (2,174)      (1,947)
   Accounts payable and other liabilities...................      798        1,178          393
   Other balance sheet changes..............................      369          352          (36)
                                                              -------      -------      -------

Cash provided by operations.................................    2,713        2,288        1,834
                                                              -------      -------      -------

INVESTING ACTIVITIES
Investments and acquisitions................................     (478)        (388)        (172)
Capital expenditures........................................   (1,475)      (1,603)      (1,565)
Investment proceeds.........................................      948        1,246          485
Collection of loan to Time Warner...........................      400           --           --
                                                              -------      -------      -------

Cash used by investing activities...........................     (605)        (745)      (1,252)
                                                              -------      -------      -------

FINANCING ACTIVITIES
Borrowings..................................................    2,658        1,514        3,400
Debt repayments.............................................   (2,764)      (1,898)      (3,085)
Issuance of preferred stock of subsidiary...................       --           --          243
Redemption of preferred stock of subsidiary.................     (217)          --           --
Capital distributions.......................................   (1,200)      (1,153)        (934)
Other.......................................................     (155)        (241)        (100)
                                                              -------      -------      -------

Cash used by financing activities...........................   (1,678)      (1,778)        (476)
                                                              -------      -------      -------

INCREASE (DECREASE) IN CASH AND EQUIVALENTS.................      430         (235)         106

CASH AND EQUIVALENTS AT BEGINNING OF PERIOD.................       87          322          216
                                                              -------      -------      -------

CASH AND EQUIVALENTS AT END OF PERIOD.......................  $   517      $    87      $   322
                                                              -------      -------      -------
                                                              -------      -------      -------
</TABLE>

See accompanying notes.

                                      F-95





<PAGE>


                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
                 CONSOLIDATED STATEMENT OF PARTNERSHIP CAPITAL
                                   (MILLIONS)

<TABLE>
<CAPTION>
                                                              TIME WARNER             PARTNERS' CAPITAL
                                                                GENERAL     -------------------------------------
                                                               PARTNERS'                  PARTNERSHIP     TOTAL
                                                                SENIOR      CONTRIBUTED    EARNINGS     PARTNERS'
                                                                CAPITAL       CAPITAL      (DEFICIT)     CAPITAL
                                                              -----------   -----------   -----------   ---------
<S>                                                           <C>           <C>           <C>           <C>
BALANCE AT DECEMBER 31, 1996................................    $1,543        $7,537        $  (963)     $ 6,574

Net income..................................................                                    614          614
Foreign currency translation adjustments....................                                    (29)         (29)
Unrealized gains on securities..............................                                      7            7
                                                                                            -------      -------
   Comprehensive income.....................................                                    592          592

Stock option, tax-related and Senior Capital
 distributions..............................................      (535)                        (723)        (723)
Allocation of income to Time Warner General Partners' Senior
 Capital....................................................       110                         (110)        (110)
                                                                ------        ------        -------      -------
BALANCE AT DECEMBER 31, 1997................................     1,118         7,537         (1,204)       6,333

Net income..................................................                                    326          326
Foreign currency translation adjustments....................                                     (1)          (1)
Unrealized gains on securities..............................                                      2            2
Realized and unrealized losses on derivative financial
 instruments................................................                                     (6)          (6)
                                                                                            -------      -------
   Comprehensive income.....................................                                    321          321

Stock option, tax-related and Senior Capital
 distributions..............................................      (579)                      (1,287)      (1,287)
Distribution of Time Warner Telecom interests...............                    (191)                       (191)
Allocation of income to Time Warner General Partners' Senior
 Capital....................................................        64                          (64)         (64)
Other.......................................................                      (5)                         (5)
                                                                ------        ------        -------      -------
BALANCE AT DECEMBER 31, 1998................................       603         7,341         (2,234)       5,107

Net income..................................................                                  2,759        2,759
Foreign currency translation adjustments....................                                      1            1
Unrealized gains on securities..............................                                     39           39
Realized and unrealized gains on derivative financial
 instruments................................................                                      5            5
                                                                                            -------      -------
   Comprehensive income.....................................                                  2,804        2,804

Stock option, tax-related and Senior Capital
 distributions..............................................      (627)                        (735)        (735)
Allocation of income to Time Warner General Partners' Senior
 Capital....................................................        24                          (24)         (24)
Other.......................................................                      (3)                         (3)
                                                                ------        ------        -------      -------
BALANCE AT DECEMBER 31, 1999................................    $   --        $7,338        $  (189)     $ 7,149
                                                                ------        ------        -------      -------
                                                                ------        ------        -------      -------
</TABLE>

See accompanying notes.


                                      F-96





<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 four fundamental areas: Cable
Networks, consisting principally of interests in cable television programming;
Filmed Entertainment, consisting principally of interests in filmed
entertainment, television production and television broadcasting; Cable,
consisting principally of interests in cable television systems; and Digital
Media, consisting principally of interests in Internet-related and digital media
businesses.

    Each of the business interests within Cable Networks, Filmed Entertainment,
Cable and Digital Media 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) HBO
and Cinemax, the leading pay-television services, (2) the unique and extensive
film, television and animation libraries of Warner Bros. and trademarks such as
the Looney Tunes characters and Batman, (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 Warner Bros.'s collection of
children's cartoons and television programming, (4) Time Warner Cable, currently
the largest operator of cable television systems in the U.S. and (5) Internet
websites, such as Entertaindom.com.

    Financial information for TWE's various business segments is presented
herein as an indication of financial performance (Note 13). Except for start-up
losses incurred in connection with The WB Network and Digital Media, TWE's
principal business segments generate significant operating income and cash flow
from operations. The cash flow from operations generated by such business
segments is considerably greater than their operating income due to significant
amounts of noncash amortization of intangible assets recognized principally in
Time Warner Inc.'s ('Time Warner') $14 billion acquisition of Warner
Communications Inc. ('WCI') in 1989 and $1.3 billion acquisition of the minority
interest in American Television and Communications Corporation ('ATC') in 1992,
a portion of which cost was allocated to TWE upon the capitalization of the
partnership. Noncash amortization of intangible assets recorded by TWE's
business segments amounted to $504 million in 1999, $509 million in 1998 and
$430 million in 1997.

    Certain of Time Warner's 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 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 MediaOne Group, Inc.
('MediaOne'). Certain of Time Warner's subsidiaries are the general partners
of TWE ('Time Warner General Partners').

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 15).

    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.

                                      F-97





<PAGE>


                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

    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 greater than one year. If there are resale
restrictions greater than one year, or if the investment is not publicly
traded, then the investment is accounted for at cost. Unrealized gains and
losses on investments accounted for at market value are reported as a component
of accumulated other comprehensive income (loss) 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.

    The effect of any changes in TWE's ownership interests resulting from the
issuance of capital by consolidated subsidiaries or equity investees to
unaffiliated parties is included in income.

FOREIGN CURRENCY TRANSLATION

    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 as a component of accumulated
other comprehensive income (loss) in partners' capital.

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 and cash flows from investments and the distribution of theatrical and
television product in order to evaluate the ultimate recoverability of accounts
receivable, film inventory and investments recorded as assets in the
consolidated balance sheet. Accounts receivable and 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
receivable, individual films and television product, and investments may change
based on actual results and other factors.

REVENUES AND COSTS

  Cable and Cable Networks

    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 costs of rights to exhibit feature films and
other programming on pay cable services during one or more availability periods
('programming costs') generally are recorded when the programming is initially
available for exhibition, and are allocated to the appropriate availability
periods and amortized as the programming is exhibited.

  Digital Media

    Digital media revenues primarily are derived from advertising and e-commerce
activities. Advertising revenues are recognized in the period that the
advertisements are exhibited. Revenues from e-commerce activities are recognized
when the products are sold.

                                      F-98





<PAGE>


                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

  Filmed Entertainment

    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 completed
principally 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 under these licensing agreements. For cash contracts, the
related revenues will not be recognized until such product is available for
telecast under the contractual terms of the related license agreement. For
barter contracts, the related revenues will not be recognized until the product
is available for telecast and the advertising spots received under such
contracts are either used or sold to third parties. All of these contractual
rights for which revenue is not yet recognizable is referred to as 'backlog.'
Excluding advertising barter contracts, Warner Bros.' backlog amounted to $3.033
billion at December 31, 1999 (including amounts relating to the licensing of
film product to TWE's cable television networks of $365 million and $599 million
to Time Warner's cable television networks).

    Inventories of theatrical and television product are stated at the lower of
unamortized 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'). Library product 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 generally 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
generally include the unamortized cost of completed theatrical and television
films allocated to the secondary markets, theatrical films in production and the
Library.

  Proposed Changes to Film Accounting Standards

    In October 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants ('AcSEC') issued an exposure
draft of a proposed Statement of Position, 'Accounting by Producers and
Distributors of Films' (the 'SOP'). The proposed rules would establish new
accounting standards for producers and distributors of films, including changes
in revenue recognition and accounting for advertising, development and overhead
costs.

    AcSEC currently is in the process of finalizing these proposed rules. Based
on AcSEC's conclusions reached as of the end of 1999, the SOP would require that
advertising costs for theatrical and television product

                                      F-99





<PAGE>



                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

be expensed as incurred. This compares to TWE's existing policy of capitalizing
and then expensing advertising costs for theatrical product over the related
revenue streams. In addition, the SOP would require development costs for
abandoned projects and certain indirect overhead costs to be charged directly to
expense, instead of those costs being capitalized to film costs, which currently
is required under the existing accounting model. The SOP would also require all
film costs to be classified in the balance sheet as a noncurrent asset. The
proposed SOP's provisions in other areas, such as revenue recognition, generally
are consistent with TWE's existing accounting policies.

    At the time that TWE adopts the final provisions of the SOP, it expects to
record a one-time, noncash pretax charge of approximately $525 to $550 million
primarily to reduce the carrying value of its film inventory. This charge will
be reflected as a cumulative effect of a change in accounting principle.

    The provisions of the SOP are still being deliberated by AcSEC and could
change prior to the issuance of a final standard, which is expected to occur by
the end of the second quarter of 2000. The SOP is expected to be effective for
calendar-year companies on January 1, 2001, with early application encouraged.
TWE expects to adopt the provisions of the SOP upon issuance.

  Revenue Classification Changes

    In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, 'Revenue Recognition in Financial Statements'
('SAB 101'), which will be effective for TWE in the second quarter of 2000.
SAB 101 clarifies certain existing accounting principles for the recognition and
classification of revenues in financial statements. While TWE's existing revenue
recognition policies are consistent with the provisions of SAB 101, the new
rules are expected to result in some changes as to how the filmed entertainment
industry classifies its revenues, particularly relating to distribution
arrangements for third-party and co-financed joint venture product. As a result,
TWE is in the process of evaluating the overall impact of SAB 101 on its
consolidated financial statements. It is expected that both annual revenues and
costs in TWE's filmed entertainment business will be reduced by an equal amount
of approximately $1.5 to $2 billion as a result of these classification changes.
However, other aspects of SAB 101 are not expected to have a significant effect
on TWE's consolidated financial statements.

ADVERTISING

    Through 1999, 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
have been 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 1999, $284 million in 1998 and $288 million
in 1997.

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

    Effective July 1, 1998, TWE adopted FASB Statement No. 133, 'Accounting for
Derivative Instruments and Hedging Activities' ('FAS 133'). FAS 133 requires
that all derivative financial instruments that qualify for hedge accounting,
such as foreign exchange contracts, be recognized in the financial statements
and measured at fair value regardless of the purpose or intent for holding them.
Changes in the fair value of derivative financial

                                     F-100





<PAGE>


                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

instruments are either recognized periodically in income or partners' capital
(as a component of comprehensive income), depending on whether the derivative is
being used to hedge changes in fair value or cash flows. The adoption of
FAS 133 did not have a material effect on TWE's financial statements.

    The carrying value of TWE's financial instruments approximates fair value,
except for differences with respect to long-term, fixed-rate debt (Note 6) and
certain differences relating to cost method investments and other financial
instruments that are not significant. The fair value of financial instruments 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, fair value is based 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
sixteen years for furniture, fixtures, cable television and other equipment.
Property, plant and equipment consists of:

<TABLE>
<CAPTION>
                                                                DECEMBER 31,
                                                              -----------------
                                                               1999      1998
                                                              -------   -------
                                                                 (MILLIONS)
<S>                                                           <C>       <C>
Land and buildings..........................................  $   545   $   797
Cable television equipment..................................    7,613     6,612
Furniture, fixtures and other equipment.....................    2,407     2,313
                                                              -------   -------
                                                               10,565     9,722
    Less accumulated depreciation...........................   (4,077)   (3,681)
                                                              -------   -------
Total.......................................................  $ 6,488   $ 6,041
                                                              -------   -------
                                                              -------   -------
</TABLE>

INTANGIBLE ASSETS

    As a creator and distributor of branded information and entertainment
copyrights, TWE has a significant and growing number 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, generally are
either expensed as incurred, or capitalized as tangible assets, as in the case
of cash advances and inventoriable product costs. However, accounting
recognition is not given to any increasing asset value that may be associated
with the collection of the underlying copyrighted material. Additionally, costs
incurred to create or extend brands, such as the start-up of The WB Network,
generally result in losses over an extended development period and are
recognized as a reduction of income as incurred, while any corresponding brand
value created is not recognized as an intangible asset in the consolidated
balance sheet. On the other hand, intangible assets acquired in business
combinations accounted for by the purchase method of accounting are capitalized
and amortized over their expected useful life as a noncash charge against future
results of operations. Accordingly, the intangible assets reported in the
consolidated balance sheet do not reflect the fair value of TWE's internally
generated intangible assets, but rather are limited to intangible assets
resulting from certain acquisitions in which the cost of the acquired companies
exceeded the fair value of their tangible assets at the time of acquisition.

    TWE amortizes goodwill over periods up to forty years using the
straight-line method. Cable television franchises, 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 $504
million in 1999, $509

                                     F-101





<PAGE>


                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

million in 1998 and $430 million in 1997. Accumulated amortization of intangible
assets at December 31, 1999 and 1998 amounted to $3.942 billion and $3.505
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.'

STOCK OPTIONS

    Time Warner has various stock option plans under which it may grant options
to purchase Time Warner common stock to employees of Time Warner and TWE. 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. Generally, the exercise price
for stock options granted to employees of TWE 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, nor charged to TWE.

COMPREHENSIVE INCOME

    In accordance with FASB Statement No. 130, 'Reporting Comprehensive Income,'
TWE reports 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 following summary sets forth the components of other comprehensive
income (loss) accumulated in partners' capital:

<TABLE>
<CAPTION>
                                         FOREIGN                      DERIVATIVE      ACCUMULATED
                                         CURRENCY      UNREALIZED     FINANCIAL          OTHER
                                       TRANSLATION      GAINS ON      INSTRUMENT     COMPREHENSIVE
                                      GAINS (LOSSES)   SECURITIES   GAINS (LOSSES)   INCOME (LOSS)
                                      --------------   ----------   --------------   -------------
                                                               (MILLIONS)
<S>                                   <C>              <C>          <C>              <C>
Balance at December 31, 1998........       $(43)          $ 9            $(6)            $(40)
1999 activity.......................          1            39              5               45
                                           ----           ---            ---             ----
Balance at December 31, 1999........       $(42)          $48            $(1)            $  5
                                           ----           ---            ---             ----
                                           ----           ---            ---             ----
</TABLE>

                                     F-102





<PAGE>


                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

RECLASSIFICATIONS

    Certain reclassifications have been made to the prior years' financial
statements to conform to the 1999 presentation.

2.  CABLE TRANSACTIONS

    In addition to continuing to use cable operating cash flow to finance the
level of capital spending necessary to upgrade the technological capability of
cable television systems and develop new services, Time Warner, TWE and the
TWE-Advance/Newhouse Partnership ('TWE-A/N') completed a series of transactions
in 1999 and 1998. These transactions, which related to the cable television
business and related ancillary businesses, enhanced Time Warner Cable's
geographic clustering of cable television properties or reduced existing debt
and/or Time Warner Cable's share of future funding requirements for such
businesses. These transactions are discussed more fully below.

GAIN ON SALE OR EXCHANGE OF CABLE TELEVISION SYSTEMS AND INVESTMENTS

    During the past three years, largely in an effort to enhance its geographic
clustering of cable television properties, TWE sold or exchanged various cable
television systems and investments. The 1999 transactions included a number of
transactions generally involving large exchanges of cable television systems. In
these transactions, Time Warner Cable exchanged cable television systems serving
approximately (i) 575,000 subscribers for other cable television systems of
comparable size owned by TCI Communications, Inc. ('TCI'), a subsidiary of AT&T
Corp. (the 'TCI Cable Trades') and (ii) 314,000 subscribers for other cable
television systems of comparable size owned by MediaOne. In addition, in 1999,
Time Warner Cable obtained sole control of certain partnerships previously held
with Fanch Communications, retaining cable television systems serving
approximately 158,000 subscribers and approximately $280 million of net cash
proceeds, in exchange for its interests in other cable television systems
formerly owned by such partnerships. The systems acquired by Time Warner Cable
were accounted for under the purchase method of accounting for business
combinations. As such, the net assets received were recorded at fair value
based on the negotiated terms of the transactions. In connection with these and
other transactions, the operating results of TWE include net pretax gains of
$2.119 billion in 1999, $90 million in 1998 and $200 million in 1997.

TIME WARNER TELECOM REORGANIZATION

    In July 1998, in an effort to combine their Time Warner Telecom operations
into a single entity that is intended to be self-financing, Time Warner, TWE and
TWE-A/N completed a reorganization of their Time Warner Telecom operations (the
'Time Warner Telecom Reorganization'), whereby (i) those operations conducted by
Time Warner, TWE and TWE-A/N were each contributed to a new holding company
named Time Warner Telecom LLC ('Time Warner Telecom'), and then (ii) TWE's and
TWE-A/N's interests in Time Warner Telecom were distributed to their partners,
Time Warner, MediaOne and the Advance/Newhouse Partnership ('Advance/Newhouse'),
a limited partner in TWE-A/N. Time Warner Telecom is an integrated
communications provider in selected metropolitan areas across the United States
where it offers a wide range of telephony and data services to business
customers. As a result of the Time Warner Telecom Reorganization, TWE and
TWE-A/N do not have continuing equity interests in the Time Warner Telecom
operations. TWE and TWE-A/N recorded the distribution of their Time Warner
Telecom operations to their respective partners based on the $242 million
historical cost of the net assets, of which $191 million was recorded as a
reduction in partners' capital and $51 million was recorded as a reduction in
minority interest in TWE's consolidated balance sheet.

PRIMESTAR

    In April 1998, TWE and Advance/Newhouse transferred 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
Partners' and collectively, the 'Primestar Assets') to Primestar, Inc.

                                     F-103







<PAGE>


                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

('Primestar'), a separate holding company. As a result of that transfer and
similar transfers by the other previously existing partners of Primestar
Partners, Primestar Partners became an indirect wholly owned subsidiary of
Primestar. In exchange for contributing its interests in the Primestar Assets,
TWE received approximately 48 million shares of Primestar common stock
(representing an approximate 24% equity interest) and realized approximately
$240 million of debt reduction. As a result of this transaction, effective as of
April 1, 1998, TWE deconsolidated the DBS Operations and the 24% equity interest
in Primestar received in the transaction is being accounted for under the equity
method of accounting. This transaction is referred to as the 'Primestar Roll-up
Transaction.'

    In the fourth quarter of 1998, TWE recorded a charge of approximately $210
million principally to reduce the carrying value of its interest in Primestar.
This charge reflected a significant decline in the fair value of Primestar
during that quarter. The decline in Primestar's value was confirmed by the sale
of its operations and assets to DirecTV, a competitor of Primestar owned by
Hughes Electronics Corp., which occurred during the first half of 1999.

    As a result of the sale to DirecTV, Primestar began to wind down its
operations during 1999. TWE recognized its share of Primestar's 1999 losses
under the equity method of accounting. As of December 31, 1999, Primestar has
substantially completed the wind down of its operations. As such, future
wind-down losses are not expected to be material to TWE's operating results.

    The foregoing losses are included in interest and other, net in TWE's 1999
consolidated statement of operations.

TCI CABLE TRANSACTIONS

    During 1999 and 1998, Time Warner, TWE, TWE-A/N and TCI completed a number
of significant cable-related transactions. These transactions consisted of (i)
the formation in December 1998 of a cable television joint venture in Texas (the
'Texas Cable Joint Venture') that is managed by Time Warner Cable, (ii) the
expansion in August 1998 of 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) the TCI Cable Trades in 1999,
as previously discussed above. The Kansas City joint venture is being accounted
for under the equity method of accounting.

    The Texas Cable Joint Venture is a 50-50 cable television joint venture
between TWE-A/N and TCI. TWE-A/N contributed cable television systems serving
approximately 545,000 subscribers, subject to approximately $650 million of
debt. TCI contributed cable television systems serving approximately 565,000
subscribers, subject to approximately $650 million of debt. TWE-A/N did not
recognize a gain or loss on the transaction and the initial investment in the
Texas Cable Joint Venture was recorded based on the historical cost basis of
the contributed net assets. The Texas Cable Joint Venture is being accounted
for under the equity method of accounting.

    As a result of the formation of the Texas Cable Joint Venture, the combined
debt of TWE and TWE-A/N was reduced by approximately $650 million. Also, as a
result of the Texas and Kansas City transactions, TWE benefited from the
geographic clustering of cable television systems and the number of subscribers
under the management of Time Warner Cable was increased by approximately 660,000
subscribers.

ROAD RUNNER JOINT VENTURE

    In June 1998, Time Warner, TWE, TWE-A/N, MediaOne, Microsoft Corp.
('Microsoft') and Compaq Computer Corp. ('Compaq') formed a joint venture to
operate and expand Time Warner Cable's and MediaOne's existing high-speed online
businesses (the 'Road Runner Joint Venture'). In exchange for contributing these
operations, Time Warner received a common equity interest in the Road Runner
Joint Venture
                                     F-104






<PAGE>


                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

of 10.7%, TWE received a 25% interest, TWE-A/N received a 32.9%
interest and MediaOne received a 31.4% interest. In exchange for Microsoft and
Compaq contributing $425 million of cash to the Road Runner Joint Venture,
Microsoft and Compaq each received a preferred equity interest therein that is
convertible into a 10% common equity interest (the 'Preferred Equity
Interests'). Accordingly, on a fully diluted basis, the Road Runner Joint
Venture is owned 8.6% by Time Warner, 20% by TWE, 26.3% by TWE-A/N, 25.1% by
MediaOne, 10% by Microsoft and 10% by Compaq. No gain or loss was recognized on
the transaction. As such, each of TWE's and TWE-A/N's initial interest in the
Road Runner Joint Venture was recorded based on the historical cost basis of
the contributed net assets. In addition, each of TWE's and TWE-A/N's interest
in the Road Runner Joint Venture is being accounted for under the equity method
of accounting.

    If the Road Runner Joint Venture does not successfully complete a public
offering of its common stock by December 31, 2001, Microsoft and Compaq may put
their Preferred Equity Interests back to the venture at an independently
determined fair value, plus any accrued and unpaid dividends at a rate of 6% per
annum. Microsoft and Compaq also have the right to put their Preferred Equity
Interests back to the venture upon the occurrence of certain early termination
events, as set forth in the partnership agreement. If these termination rights
are triggered and exercised, the put price paid to Microsoft and Compaq will
equal the amount of their original investment plus a cumulative annual preferred
return of 15%.

    The aggregate $425 million of capital contributed by Microsoft and Compaq is
being used by the Road Runner Joint Venture to continue to expand the roll out
of high-speed online services. Time Warner Cable has entered into an affiliation
agreement with the Road Runner Joint Venture, pursuant to which Time Warner
Cable provides Road Runner's high-speed online services to customers in its
cable franchise areas through its technologically advanced, high-capacity cable
architecture. In exchange, Time Warner Cable initially retains 70% of the
subscription revenues and 30% of the national advertising and transactional
revenues generated from the delivery of these online services to its cable
subscribers. Time Warner Cable's share of these subscription revenues will
change periodically to 75% by 2006.

TWE-A/N TRANSFERS

    As of December 31, 1999, TWE-A/N owned cable television systems (or
interests therein) serving approximately 6.7 million subscribers, of which
5.5 million subscribers were served by consolidated, wholly owned cable
television systems and 1.2 million subscribers were served by unconsolidated,
partially owned cable television systems. TWE-A/N had approximately
$1.4 billion of debt at December 31, 1999.

    TWE-A/N is owned approximately 64.8% by TWE, the managing partner, 33.3% by
Advance/Newhouse and 1.9% indirectly by Time Warner. TWE consolidates the
partnership, and the partnership interests owned by Advance/Newhouse and Time
Warner are 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, 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.

    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 in TWE-A/N, and completed certain
transactions relating to Paragon Communications ('Paragon' and 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. Prior to this transaction, the economic ownership
of Paragon was held 50% by subsidiaries of Time Warner, 25% beneficially by
TWE and 25% beneficially by TWE-A/N. The debt assumed by TWE-A/N has been
guaranteed by TWI Cable and certain of its subsidiaries,

                                     F-105





<PAGE>

                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

including Paragon. TWE-A/N accounted for this transaction at fair value under
the purchase method of accounting for business combinations.

    Paragon was a partnership formerly owning cable television systems serving
approximately 1 million subscribers. As part of the TWE-A/N Transfers, TWE and
TWE-A/N exchanged substantially all of their aggregate 50% 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 has consolidated 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.
The TWE-A/N Transfers were accounted for effective as of January 1, 1998 and TWE
has continued to consolidate TWE-A/N.

    On a pro forma basis, giving effect to the TWE-A/N Transfers as if they had
occurred at the beginning of 1997, TWE would have reported for the year ended
December 31, 1997, revenues of $11.379 billion, depreciation expense of $947
million, operating income before noncash amortization of intangible assets of
$1.989 billion, operating income of $1.496 billion and net income of $607
million.

3.  FILMED ENTERTAINMENT TRANSACTIONS

1999 GAIN ON TERMINATION OF VIDEO DISTRIBUTION AGREEMENT

    In March 1999, Warner Bros. and Metro-Goldwyn-Mayer, Inc. ('MGM') terminated
a long-term distribution agreement under which Warner Bros. had exclusive
worldwide distribution rights for MGM/United Artists home video product. In
connection with the early termination and settlement of this distribution
agreement, Warner Bros. recognized a net pretax gain of approximately
$215 million, which has been included in operating income in the accompanying
consolidated statement of operations.

1999 GAIN ON SALE OF INTEREST IN CANALSATELLITE

    In December 1999, Warner Bros. sold its 10% interest in CanalSatellite, a
satellite television distribution service in France and Monaco, to Canal+, a
large French media and entertainment company. In connection with the sale,
Warner Bros. recognized a pretax gain of $97 million, which has been included in
operating income in the accompanying consolidated statement of operations.

1999 WARNER BROS. RETAIL STORES WRITE-DOWN

    In the fourth quarter of 1999, Warner Bros. recorded a one-time, noncash
pretax charge of $106 million to reduce the carrying value of certain fixed
assets and leasehold improvements used in its retail stores. This charge
resulted from a plan adopted in December 1999 that is designed to improve the
performance of Warner Bros.'s retail store operations. The plan is expected to
be executed largely over a three-year period and involves closing certain
underperforming stores, transforming other stores into smaller and more
efficient stores, and exploiting potential e-commerce opportunities.

    The charge represents the excess of the carrying value of the assets used in
Warner Bros.'s retail stores over the discounted future operating cash flows,
adjusted to reflect a shorter recovery period due to planned store closures. The
charge has been included in operating income in the accompanying consolidated
statement of operations.

1998 SALE OF SIX FLAGS

    In April 1998, TWE sold its remaining 49% interest in Six Flags
Entertainment Corporation ('Six Flags') to Premier Parks Inc. ('Premier'), a
regional theme park operator, for approximately $475 million of cash. TWE

                                     F-106





<PAGE>

                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

used the net, after-tax proceeds from this transaction to reduce debt by
approximately $300 million. 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. As of December 31, 1999,
approximately $330 million of the original $400 million gain on the sale of
TWE's interest had been deferred, principally as a result of uncertainties
surrounding its realization. Those uncertainties relate to ongoing litigation
as described in Note 14 and TWE's continuing guarantees of Premier's long-term
obligations to make minimum payments to the limited partners of the Six Flags
Over Texas and Six Flags Over Georgia theme parks. If current trends continue,
TWE expects the deferred gain to be recognized over the next several years,
subject to the resolution of the Six Flags litigation. That is, the deferred
gain will not fall below the estimated exposure relating to the Six Flags
litigation. In addition, upon closing of the America Online-Time Warner merger,
any portion of the deferred gain not attributable to the Six Flags litigation
is likely to be eliminated in purchase accounting.

4.  OTHER INVESTMENTS

    TWE's other investments consist of:

<TABLE>
<CAPTION>
                                                               DECEMBER 31,
                                                              --------------
                                                              1999      1998
                                                              ----      ----
                                                                (MILLIONS)
<S>                                                           <C>       <C>
Equity method investments...................................  $542      $574
Cost and fair-value method investments......................   232       312
                                                              ----      ----
Total.......................................................  $774      $886
                                                              ----      ----
                                                              ----      ----
</TABLE>

    At December 31, 1999, companies accounted for using the equity method
included: Comedy Partners, L.P. (50% owned), certain cable system joint ventures
(generally 50% owned), the Road Runner Joint Venture (46% owned on a
fully diluted basis), Six Flags (49% owned in 1997), certain international cable
and programming joint ventures (20% to 50% owned), Courtroom Television Network
(50% owned) and Primestar (24% 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,
                                                            ------------------------------
                                                             1999        1998        1997
                                                            ------      ------      ------
                                                                      (MILLIONS)
<S>                                                         <C>         <C>         <C>
Revenues..................................................  $1,704      $2,329      $2,207
Depreciation and amortization.............................    (333)       (706)       (235)
Operating income (loss)...................................     140        (265)        118
Net loss..................................................    (130)       (352)        (82)
Current assets............................................     385         665         412
Total assets..............................................   2,919       5,228       3,046
Current liabilities.......................................     303         628         993
Long-term debt............................................   1,881       2,917       1,625
Total liabilities.........................................   2,224       3,699       2,734
Total shareholders' equity or partners' capital...........     695       1,529         312
</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 interest and other, net in the accompanying
consolidated statement of operations.

                                     F-107





<PAGE>


                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)


5.  INVENTORIES

    Inventories consist of:

<TABLE>
<CAPTION>
                                                                DECEMBER 31,
                                                 -------------------------------------------
                                                         1999                   1998
                                                 --------------------   --------------------
                                                 CURRENT   NONCURRENT   CURRENT   NONCURRENT
                                                 -------   ----------   -------   ----------
                                                                 (MILLIONS)
<S>                                              <C>       <C>          <C>       <C>
Film costs:
    Released, less amortization................  $  652      $  774     $  614      $  744
    Completed and not released.................      60          17        179          76
    In process and other.......................       8         532         23         572
    Library, less amortization.................      --         508         --         560
Programming costs, less amortization...........     411         443        426         375
Merchandise....................................      89          --         70          --
                                                 ------      ------     ------      ------
Total..........................................  $1,220      $2,274     $1,312      $2,327
                                                 ------      ------     ------      ------
                                                 ------      ------     ------      ------
</TABLE>

    Excluding the Library, the unamortized cost of completed films at
December 31, 1999 amounted to $1.502 billion, over 90% of which is expected to
be amortized within three years after release.

6.  LONG-TERM DEBT

    Long-term debt consists of:

<TABLE>
<CAPTION>
                                           WEIGHTED AVERAGE                DECEMBER 31,
                                           INTEREST RATE AT               ---------------
                                           DECEMBER 31, 1999  MATURITIES   1999     1998
                                           -----------------  ----------  ------   ------
                                                                            (MILLIONS)
<S>                                        <C>                <C>         <C>      <C>
Bank credit agreement borrowings.........        6.85%          2002      $2,496   $2,711
Commercial paper.........................        6.46%          2000         360       62
Fixed-rate senior notes and debentures...        8.56%        2002-2033    3,799    3,805
                                                                          ------   ------
Total....................................                                 $6,655   $6,578
                                                                          ------   ------
                                                                          ------   ------
</TABLE>

BANK CREDIT AGREEMENT

    TWE and TWE-A/N, together with Time Warner and certain of its consolidated
subsidiaries, have a revolving credit facility (the 'Bank Credit Agreement').
The Bank 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 Bank Credit Agreement are
Time Warner and a number of its consolidated subsidiaries, consisting of Time
Warner Companies, Inc. ('TW Companies'), Turner Broadcasting System, Inc.
('TBS'), TWI Cable, TWE and TWE-A/N. Borrowings under the Bank 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 of 35 basis points) and each borrower is required to pay a
commitment fee of .125% per annum on the unused portion of its commitment, 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 Bank
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.


                                     F-108





<PAGE>

                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DEBT GUARANTEES

    Each Time Warner General Partner has guaranteed a pro rata portion of
approximately $5.3 billion of TWE's debt and accrued interest at December 31,
1999, 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. In addition,
in connection with the TWE-A/N Transfers (Note 2), approximately $1.396 billion
of TWE-A/N's debt and accrued interest at December 31, 1999 has been guaranteed
by TWI Cable and certain of its subsidiaries.

INTEREST EXPENSE AND MATURITIES

    TWE periodically refinances its debt in an effort to lower its overall cost
of borrowings and to stagger debt maturities. In connection with such
refinancings, TWE recognized an extraordinary loss on the retirement of debt of
$23 million in 1997.

    Interest expense amounted to $561 million in 1999, $566 million in 1998 and
$490 million in 1997. The weighted average interest rate on TWE's total debt was
7.8% and 7.5% at December 31, 1999 and 1998, respectively.

    Annual repayments of long-term debt for the five years subsequent to
December 31, 1999 consist only of $3.5 billion due in 2002. This includes all
borrowings under the Bank Credit Agreement, as well as any commercial paper
borrowings supported thereby. TWE has the intent and ability under the Bank
Credit Agreement to continue to refinance its commercial paper borrowings on a
long-term basis.

FAIR VALUE OF DEBT

    Based on the level of interest rates prevailing at December 31, 1999 and
1998, the fair value of TWE's fixed-rate debt exceeded its carrying value by
$160 million in 1999 and $764 million in 1998. Unrealized gains or losses on
debt do not result in the realization or expenditure of cash and generally are
not recognized for financial reporting purposes unless the debt is retired prior
to its maturity.

7.  INCOME TAXES

    Domestic and foreign pretax income (loss) are as follows:

<TABLE>
<CAPTION>
                                                              YEARS ENDED DECEMBER 31,
                                                              -------------------------
                                                               1999      1998     1997
                                                              -------    -----    -----
                                                                     (MILLIONS)
<S>                                                           <C>        <C>      <C>
Domestic....................................................  $2,717     $438     $654
Foreign.....................................................     192      (20)      68
                                                              ------     ----     ----
Total.......................................................  $2,909     $418     $722
                                                              ------     ----     ----
                                                              ------     ----     ----
</TABLE>

                                     F-109





<PAGE>

                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

    As a partnership, TWE is not subject to U.S. federal, state or local income
taxation. However, certain of TWE's operations are conducted by subsidiary
corporations that are subject to domestic or foreign taxation. Income taxes
(benefits) of TWE and subsidiary corporations are as set forth below:

<TABLE>
<CAPTION>
                                                             YEARS ENDED DECEMBER 31,
                                                             ------------------------
                                                             1999      1998      1997
                                                             ----      ----      ----
                                                                    (MILLIONS)
<S>                                                          <C>       <C>       <C>
Federal:
    Current................................................  $ 17      $ 6       $ 2
    Deferred...............................................    --       (7)      (10)
Foreign:
    Current(a).............................................   109      106        69
    Deferred...............................................    16      (15)       22
State and local:
    Current................................................     7        4         4
    Deferred...............................................     1       (2)       (2)
                                                             ----      ---       ---
Total income taxes.........................................  $150      $92       $85
                                                             ----      ---       ---
                                                             ----      ---       ---
</TABLE>

---------
(a) Includes foreign withholding taxes of $75 million in 1999, $62 million in
    1998 and $58 million in 1997.

    The financial statement basis of TWE's assets exceeds the corresponding tax
basis by $9.2 billion at December 31, 1999, principally as a result of
differences in accounting for depreciable and amortizable assets for financial
statement and income tax purposes.

8.  PREFERRED STOCK OF SUBSIDIARY

    In 1997, a newly formed, substantially owned subsidiary of TWE (the 'REIT')
issued 250,000 shares of preferred stock ('REIT Preferred Stock'). The REIT was
intended to qualify as a real estate investment trust under the Internal Revenue
Code of 1986, as amended.

    In March 1999, the REIT redeemed all of its shares of REIT Preferred Stock
at an aggregate cost of $217 million, which approximated net book value. The
redemption was funded with borrowings under TWE's bank credit agreement.

9.  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 following table. 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-110





<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, 1999 and priority capital rates of return thereon is as set forth
below:

<TABLE>
<CAPTION>
                                                                             PRIORITY      TIME     LIMITED PARTNERS
                                                UNDISTRIBUTED   CUMULATIVE    CAPITAL     WARNER    -----------------
                                                 CONTRIBUTED     PRIORITY    RATES OF    GENERAL     TIME
PRIORITY OF UNDISTRIBUTED CONTRIBUTED CAPITAL    CAPITAL(a)      CAPITAL     RETURN(b)   PARTNERS   WARNER   MEDIAONE
---------------------------------------------   -------------   ----------   ---------   --------   ------   --------
                                                        (BILLIONS)                                    (OWNERSHIP%)
<S>                                             <C>             <C>          <C>         <C>        <C>      <C>
Series A Capital.......................             $5.6          $14.5        13.00%      63.27%    11.22%   25.51%
Series B Capital.......................              2.9(d)         7.7        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 Series A Capital and Series B Capital, in order of priority, at
rates of return ranging from 13.00% 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 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, although it does not appear likely at this time
that such targets will be achieved. In addition, MediaOne has an option to
obtain up to an additional 6.33% of Series A Capital and Residual Capital
interests. The determination of the amount of additional interests that
MediaOne is eligible to acquire is based on the compounded annual growth rate
of TWE's adjusted cable EBITDA, as defined in the option agreement, over the
life of the option. The option is exercisable at any time through May 2005.
The option exercise price is dependent upon the year of exercise and ranges from
an exercise price of approximately $1.3 billion in 2000 to $1.8 billion in 2005.
Either MediaOne or TWE may elect that the exercise price be paid with
partnership interests rather than cash.

                                     F-111





<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 1999, TWE borrowed $627 million under its bank credit agreement and
paid a distribution to the Time Warner General Partners to redeem the remaining
portion of their senior priority capital interests representing the return of
$454 million and a priority capital return of $173 million. Time Warner used a
portion of the proceeds received from this distribution to repay all $400
million of outstanding borrowings under its credit agreement with TWE. Senior
Capital distributions paid in prior periods consisted of $579 million in 1998
(representing the return of $455 million and a priority capital return of $124
million) and $535 million in 1997 (representing the return of $455 million and a
priority capital return of $80 million).

    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 $13.88, 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,
1999 and 1998, TWE had recorded a liability for Stock Option Distributions of
$1.292 billion and $1.130

billion, respectively, based on the unexercised options and the market prices at
such dates of $72.31 and $62.06, respectively, per Time Warner common share.
This liability reflects the accrual of $388 million and $973 million of Stock
Option Distributions in 1999 and 1998, respectively, when the market price of
Time Warner common stock increased during such periods. TWE paid Stock Option
Distributions to Time Warner in the amount of $226 million in 1999, $260 million
in 1998 and $75 million in 1997.

    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 $347 million
in 1999, $314 million in 1998 and $324 million in 1997.

    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.
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

                                     F-112





<PAGE>

                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

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.

    In addition, in connection with the Time Warner Telecom Reorganization, TWE
recorded a $191 million noncash distribution to its partners based on the
historical cost of the net assets (Note 2).

10. 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 with exercise prices
equal to, or in excess of, fair market value at the date of grant. Accordingly,
in accordance with APB 25 and related interpretations, compensation cost
generally has not 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 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,
                                                         --------------------------------
                                                          1999         1998         1997
                                                         ------       ------       ------
                                                                    (MILLIONS)
<S>                                                      <C>          <C>          <C>
Net income:
    As reported........................................  $2,759        $326         $614
                                                         ------        ----         ----
                                                         ------        ----         ----
    Pro forma..........................................  $2,710        $285         $584
                                                         ------        ----         ----
                                                         ------        ----         ----
</TABLE>

    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 to TWE employees in
1999, 1998 and 1997: dividend yields of 0.3%, 0.5% and 1%, respectively;
expected volatility of 23.6%, 21.7% and 22.2%, respectively; risk-free interest
rates of 5.4%, 5.5% and 6.3%, respectively; and expected lives of 5 years in all
periods.

    In December 1998, Time Warner completed a two-for-one common stock split.
Accordingly, the following stock option information gives effect to this stock
split.

    The weighted average fair value of an option granted to TWE employees during
the year was $20.61 in 1999, $11.03 in 1998 and $6.09 in 1997.

                                     F-113





<PAGE>


                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

    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, 1997..................................    60,622     $17.46
Granted.....................................................     7,839      20.68
Exercised...................................................    (7,045)     14.37
Cancelled(a)................................................    (2,412)     16.76
                                                               -------
Balance at December 31, 1997................................    59,004     $18.28
Granted.....................................................     5,767      37.82
Exercised...................................................   (15,957)     16.42
Cancelled(a)................................................    (1,073)     14.36
                                                               -------
Balance at December 31, 1998................................    47,741     $21.35
Granted.....................................................     3,809      66.17
Exercised...................................................    (6,587)     17.54
Cancelled(a)................................................      (157)     37.11
                                                               -------
Balance at December 31, 1999................................    44,806     $25.66
                                                               -------
                                                               -------
</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,
                                                              ------------------------
                                                               1999     1998     1997
                                                              ------   ------   ------
                                                                    (THOUSANDS)
<S>                                                           <C>      <C>      <C>
Exercisable.................................................  34,688   33,370   43,022
</TABLE>

    The following table summarizes information about stock options outstanding
with respect to employees of TWE at December 31, 1999:

<TABLE>
<CAPTION>
                                OPTIONS OUTSTANDING              OPTIONS EXERCISABLE
                       -------------------------------------   ------------------------
                                       WEIGHTED-
                                        AVERAGE    WEIGHTED-                  WEIGHTED-
                          NUMBER       REMAINING    AVERAGE       NUMBER       AVERAGE
        RANGE OF       OUTSTANDING    CONTRACTUAL  EXERCISE    EXERCISABLE    EXERCISE
     EXERCISE PRICES   AT 12/31/99       LIFE        PRICE     AT 12/31/99      PRICE
     ---------------   ------------   -----------  ---------   ------------   ---------
                       (THOUSANDS)                             (THOUSANDS)
    <S>                <C>            <C>          <C>         <C>            <C>
    Under $10                351      0.1 years     $ 8.37           351       $ 8.37
    $10.00 to $ 15.00      3,967      2.2 years     $12.65         3,967       $12.65
    $15.01 to $ 20.00     12,821      5.3 years     $18.52        11,488       $18.50
    $20.01 to $ 30.00     18,150      4.8 years     $21.68        16,963       $21.62
    $30.01 to $ 45.00      4,523      8.0 years     $34.69         1,522       $34.53
    $45.01 to $ 65.00      2,382      8.6 years     $55.04           396       $48.07
    $65.01 to $103.74      2,612      9.1 years     $68.07             1       $69.16
                          ------                                  ------
    Total                 44,806      5.4 years     $25.66        34,688       $20.30
                          ------                                  ------
                          ------                                  ------
</TABLE>

    TWE reimburses Time Warner for the use of Time Warner stock options on the
basis described in Note 9.

    In January 2000, Time Warner and America Online, Inc. ('America Online')
announced that they had agreed to merge. In connection with this merger, all
outstanding Time Warner stock options held by TWE employees at that time became
fully vested and exercisable, pursuant to the terms of Time Warner's stock
option plans (Note 17).

                                     F-114





<PAGE>

                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

11. BENEFIT PLANS

    TWE 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. Time Warner's common stock represents approximately 13%
and 12% of plan assets at December 31, 1999 and 1998, respectively. A summary of
activity for TWE's defined benefit pension plans is as follows:

<TABLE>
<CAPTION>
                                                            YEARS ENDED DECEMBER 31,
                                                           ---------------------------
                                                            1999      1998      1997
                                                           -------   -------   -------
                                                                   (MILLIONS)
<S>                                                        <C>       <C>       <C>
COMPONENTS OF PENSION EXPENSE
Service cost.............................................   $ 51      $ 42      $ 33
Interest cost............................................     41        36        31
Expected return on plan assets...........................    (44)      (35)      (26)
Net amortization and deferral............................     (3)       --        --
                                                            ----      ----      ----
Total....................................................   $ 45      $ 43      $ 38
                                                            ----      ----      ----
                                                            ----      ----      ----
</TABLE>

<TABLE>
<CAPTION>
                                                               DECEMBER 31,
                                                               ------------
                                                               1999   1998
                                                              -----   -----
                                                                (MILLIONS)
<S>                                                           <C>     <C>
CHANGE IN PROJECTED BENEFIT OBLIGATION
Projected benefit obligation at beginning of year...........  $ 586   $ 461
Service cost................................................     51      42
Interest cost...............................................     41      36
Actuarial (gain) loss(a)....................................   (181)     61
Benefits paid...............................................    (16)    (14)
                                                              -----   -----
Projected benefit obligation at end of year.................    481     586
                                                              -----   -----
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year..............    480     364
Actual return on plan assets................................     71     112
Employer contribution.......................................     17      18
Benefits paid...............................................    (15)    (14)
Asset transfers.............................................    (30)     --
                                                              -----   -----

Fair value of plan assets at end of year....................    523     480
                                                              -----   -----

Overfunded (unfunded) projected benefit obligation..........     42    (106)
Additional minimum liability(b).............................     (2)     (4)
Unrecognized actuarial gain(a)..............................   (181)    (10)
Unrecognized prior service cost.............................      2       5
                                                              -----   -----
Accrued pension expense.....................................  $(139)  $(115)
                                                              -----   -----
                                                              -----   -----
</TABLE>

---------

(a) Reflects certain changes in actuarial assumptions made during 1999,
    including a shortening of the expected service period and an increase in the
    discount rate.
(b) The additional minimum liability is offset fully by a corresponding
    intangible asset recognized in the consolidated balance sheet.

                                     F-115





<PAGE>


                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

<TABLE>
<CAPTION>
                                                                   DECEMBER 31,
                                                              ----------------------
                                                              1999     1998     1997
                                                              ----     ----     ----
<S>                                                           <C>      <C>      <C>
WEIGHTED-AVERAGE PENSION ASSUMPTIONS
Discount rate...............................................  7.75%    6.75%    7.25%
Expected return on plan assets..............................     9%       9%       9%
Rate of compensation increase...............................     6%       6%       6%
</TABLE>

    Included above are projected benefit obligations and accumulated benefit
obligations for unfunded defined benefit pension plans of $44 million and $33
million as of December 31, 1999, respectively; and $39 million and $27 million
as of December 31, 1998, respectively.

    Certain domestic employees of TWE participate in multi-employer pension
plans as to which the expense amounted to $34 million in 1999, $35 million in
1998 and $29 million in 1997. 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 1999, $35
million in 1998 and $30 million in 1997. Contributions to the savings plans are
based upon a percentage of the employees' elected contributions. Contributions
to the profit sharing plans generally are determined by management.

12. DERIVATIVE FINANCIAL INSTRUMENTS

    TWE uses derivative financial instruments principally to manage the risk
that changes in exchange rates will affect the amount of unremitted or future
license fees to be received from the sale of U.S. copyrighted products abroad.
The following is a summary of TWE's foreign currency risk management strategy
and the effect of this strategy on TWE's consolidated financial statements.

FOREIGN CURRENCY RISK MANAGEMENT

    Foreign exchange contracts are used primarily by Time Warner to hedge the
risk that unremitted or future license fees owed to TWE domestic companies for
the sale or anticipated sale of U.S. copyrighted products abroad may be
adversely affected by changes in foreign currency exchange rates. As part of its
overall strategy to manage the level of exposure to the risk of foreign currency
exchange rate fluctuations, Time Warner hedges a portion of its foreign currency
exposures anticipated over the ensuing twelve month period, including those
related to TWE. At December 31, 1999, 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. To hedge this exposure, Time Warner used foreign
exchange contracts that generally have maturities of three months or less, which
generally will be rolled over to provide continuing coverage throughout the
year. Time Warner often closes foreign exchange sale contracts by purchasing an
offsetting purchase contract. Time Warner reimburses or is reimbursed by TWE for
contract gains and losses related to TWE's foreign currency exposure. Foreign
exchange contracts are placed with a number of major financial institutions in
order to minimize credit risk.

    TWE records these foreign exchange contracts at fair value in its
consolidated balance sheet and the related gains or losses on these contracts
are deferred in partners' capital (as a component of comprehensive income).
These deferred gains and losses are recognized in income in the period in which
the related license fees being hedged are received and recognized in income.
However, to the extent that any of these contracts are not considered to be
perfectly effective in offsetting the change in the value of the license fees
being hedged, any changes in fair value relating to the ineffective portion of
these contracts are immediately recognized in income. Gains and losses on
foreign exchange contracts are generally included as a component of interest and
other, net, in TWE's consolidated statement of operations.

                                     F-116





<PAGE>

                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

    At December 31, 1999, Time Warner had contracts for the sale of $843 million
and the purchase of $468 million of foreign currencies at fixed rates. Of Time
Warner's $375 million net sale contract position, $393 million of the foreign
exchange sale contracts and $108 million of the foreign exchange purchase
contracts related to TWE's foreign currency exposure, primarily Japanese yen
(23% of net contract position related to TWE), European currency (70%), and
Canadian dollars (6%), compared to a net sale contract position of $197 million
of foreign currencies at December 31, 1998. TWE had deferred approximately $1
million of net losses on foreign exchange contracts at December 31, 1999, which
is substantially expected to be recognized in income over the next twelve
months. For the years ended December 31, 1999, 1998 and 1997, TWE recognized $15
million in gains, $2 million in losses and $14 million in gains, respectively,
on foreign exchange contracts, which were or are expected to be largely 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 counterparty credit risk.

13. SEGMENT INFORMATION

    TWE classifies its business interests into four fundamental areas: Cable
Networks, consisting principally of interests in cable television programming;
Filmed Entertainment, consisting principally of interests in filmed
entertainment, television production and television broadcasting; Cable,
consisting principally of interests in cable television systems; and Digital
Media, consisting principally of interests in Internet-related and digital media
businesses. Time Warner's Digital Media segment commenced operations in 1999.

    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's cable segment reflect (i) the TWE-A/N
Transfers, effective as of January 1, 1998, (ii) the Primestar Roll-up
Transaction, effective as of April 1, 1998, (iii) the formation of the Road
Runner Joint Venture, effective as of June 30, 1998, (iv) the Time Warner
Telecom Reorganization, effective as of July 1, 1998 and (v) the formation of
the Texas Cable Joint Venture, effective as of December 31, 1998.

<TABLE>
<CAPTION>
                                                            YEARS ENDED DECEMBER 31,
                                                           ---------------------------
                                                            1999      1998      1997
                                                           -------   -------   -------
                                                                   (MILLIONS)
<S>                                                        <C>       <C>       <C>
REVENUES
Filmed Entertainment-Warner Bros. .......................  $ 6,628   $ 6,051   $ 5,462
Broadcasting-The WB Network..............................      384       260       136
Cable Networks-HBO.......................................    2,169     2,052     1,923
Cable....................................................    4,496     4,378     4,243
Digital Media............................................        1        --        --
Intersegment elimination.................................     (514)     (495)     (446)
                                                           -------   -------   -------
Total....................................................  $13,164   $12,246   $11,318
                                                           -------   -------   -------
                                                           -------   -------   -------
</TABLE>


                                     F-117





<PAGE>

                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

<TABLE>
<CAPTION>
                                                              YEARS ENDED DECEMBER 31,
                                                              ------------------------
                                                               1999     1998     1997
                                                              ------   ------   ------
                                                                     (MILLIONS)
<S>                                                           <C>      <C>      <C>
EBITA(a)
Filmed Entertainment-Warner Bros.(b)........................  $  787   $  498   $  387
Broadcasting-The WB Network.................................     (92)     (93)     (88)
Cable Networks-HBO..........................................     527      454      391
Cable(c)....................................................   3,517    1,369    1,184
Digital Media...............................................      (8)      --       --
                                                              ------   ------   ------
Total.......................................................  $4,731   $2,228   $1,874
                                                              ------   ------   ------
                                                              ------   ------   ------
</TABLE>

---------

(a) 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 $4.227
    billion in 1999, $1.719 billion in 1998 and $1.444 billion in 1997.

(b) 1999 results include a net pretax gain of $215 million recognized in
    connection with the early termination and settlement of a long-term, home
    video distribution agreement and a $97 million pretax gain relating to the
    sale of an interest in CanalSatellite, offset in part by a one-time, noncash
    charge of $106 million relating to Warner Bros.'s retail stores.

(c) Includes net pretax gains relating to the sale or exchange of certain cable
    television systems and investments of $2.119 billion in 1999, $90 million in
    1998 and $200 million in 1997.


<TABLE>
<CAPTION>
                                                            YEARS ENDED DECEMBER 31,
                                                           ---------------------------
                                                            1999      1998      1997
                                                           -------   -------   -------
                                                                   (MILLIONS)
<S>                                                        <C>       <C>       <C>
DEPRECIATION OF PROPERTY, PLANT AND EQUIPMENT
Filmed Entertainment-Warner Bros. .......................   $150      $166      $181
Broadcasting-The WB Network..............................      1         1         1
Cable Networks-HBO.......................................     29        23        22
Cable....................................................    679       737       736
Digital Media............................................      1        --        --
                                                            ----      ----      ----
Total....................................................   $860      $927      $940
                                                            ----      ----      ----
                                                            ----      ----      ----
</TABLE>

<TABLE>
<CAPTION>
                                                            YEARS ENDED DECEMBER 31,
                                                           ---------------------------
                                                            1999      1998      1997
                                                           -------   -------   -------
                                                                   (MILLIONS)
<S>                                                        <C>       <C>       <C>
AMORTIZATION OF INTANGIBLE ASSETS(a)
Filmed Entertainment-Warner Bros. .......................   $122      $129      $123
Broadcasting-The WB Network..............................      4         3        --
Cable Networks-HBO.......................................     --        --        --
Cable....................................................    378       377       307
Digital Media............................................     --        --        --
                                                            ----      ----      ----
Total....................................................   $504      $509      $430
                                                            ----      ----      ----
                                                            ----      ----      ----
</TABLE>

---------

(a) 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.

                                     F-118





<PAGE>


                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

    Information as to the assets and capital expenditures is as follows:

<TABLE>
<CAPTION>
                                                                  DECEMBER 31,
                                                           ---------------------------
                                                            1999      1998      1997
                                                           -------   -------   -------
                                                                   (MILLIONS)
<S>                                                        <C>       <C>       <C>
ASSETS
Filmed Entertainment-Warner Bros. .......................  $ 8,894   $ 8,800   $ 8,098
Broadcasting-The WB Network..............................      284       244       113
Cable Networks-HBO.......................................    1,284     1,159     1,080
Cable....................................................   13,820    11,314    10,771
Digital Media............................................        3        --        --
Corporate(a).............................................      558       713       669
                                                           -------   -------   -------
Total....................................................  $24,843   $22,230   $20,731
                                                           -------   -------   -------
                                                           -------   -------   -------
</TABLE>

---------

(a) Consists principally of cash, cash equivalents and other investments.


<TABLE>
<CAPTION>
                                                            YEARS ENDED DECEMBER 31,
                                                           ---------------------------
                                                            1999      1998      1997
                                                           -------   -------   -------
                                                                   (MILLIONS)
<S>                                                        <C>       <C>       <C>
CAPITAL EXPENDITURES
Filmed Entertainment-Warner Bros. .......................  $  128    $  122    $  144
Broadcasting-The WB Network..............................       2         1         1
Cable Networks-HBO.......................................      18        23        19
Cable....................................................   1,319     1,451     1,401
Digital Media............................................       2        --        --
Corporate................................................       6         6        --
                                                           ------    ------    ------
Total....................................................  $1,475    $1,603    $1,565
                                                           ------    ------    ------
                                                           ------    ------    ------
</TABLE>

    Information as to operations in different geographical areas is as follows:

<TABLE>
<CAPTION>
                                                            YEARS ENDED DECEMBER 31,
                                                           ---------------------------
                                                            1999      1998      1997
                                                           -------   -------   -------
                                                                   (MILLIONS)
<S>                                                        <C>       <C>       <C>
REVENUES(a)
United States............................................  $10,758   $10,167   $ 9,086
United Kingdom...........................................      461       459       488
Germany..................................................      275       263       284
Japan....................................................      268       162       172
France...................................................      202       163       152
Canada...................................................      157       145       137
Other international......................................    1,043       887       999
                                                           -------   -------   -------
Total....................................................  $13,164   $12,246   $11,318
                                                           -------   -------   -------
                                                           -------   -------   -------
</TABLE>

---------

(a) 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.

                                     F-119






<PAGE>

                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

14. COMMITMENTS AND CONTINGENCIES

    TWE's total rent expense amounted to $233 million in 1999, $218 million in
1998 and $218 million in 1997. The minimum rental commitments under
noncancellable long-term operating leases are: 2000-$177 million; 2001-$176
million; 2002-$174 million; 2003-$158 million; 2004-$141 million; and after
2004-$1.076 billion.

    TWE's minimum commitments and guarantees under certain programming,
licensing, franchise and other agreements aggregated approximately $8 billion at
December 31, 1999, which are payable principally over a five-year period.

    TWE is subject to certain litigation relating to Six Flags. In December
1998, a jury returned an adverse verdict in the Six Flags matter in the amount
of $454 million. TWE and its former 51% partner in Six Flags are financially
responsible for this judgment. Management believes that there were numerous
legal errors in the case and has appealed the verdict. In management's opinion
and considering the gain deferred on the sale of Six Flags described
in Note 3 to cover this potential exposure, the resolution of this matter is
not expected to have a material effect on TWE's financial statements.

    TWE is subject to numerous other legal proceedings. In management's opinion
and considering established reserves, the resolution of these matters will not
have a material effect, individually and in the aggregate, on TWE's
consolidated financial statements.

15. RELATED PARTY TRANSACTIONS

    In the normal course of conducting their businesses, TWE and its
subsidiaries and affiliates have had various transactions with Time Warner and
its subsidiaries, 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, including accounting, tax, legal and
administration, for which TWE paid a fee in the amount of $73 million in 1999,
$72 million in 1998 and $72 million in 1997.

    TWE was required to pay a $130 million advisory fee to MediaOne over a
five-year period that ended September 15, 1998 for MediaOne's expertise in
telecommunications, telephony and information technology, and its participation
in the management and technological upgrade of TWE's cable systems.

    TWE has management services agreements with Time Warner's cable business,
pursuant to which TWE manages, or provides services to, the cable television
systems owned by Time Warner. Such cable television systems also pay fees to TWE
for the right to carry cable television programming provided by TWE's cable
networks. 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 Cable division has sold or exchanged various cable television systems
to MediaOne in an effort to strengthen its geographic clustering of cable
television properties. See Note 2 for further information.

    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

                                     F-120







<PAGE>
                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

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 had a credit agreement with TWE allowing it to borrow up to $400
million from TWE through September 15, 2000. During 1999, Time Warner used a
portion of the proceeds received from the final distribution of the Senior
Capital interests in TWE to repay all $400 million of outstanding borrowings
under this agreement.

    In addition to transactions with its partners, TWE has had transactions with
the Columbia House Company partnerships, Comedy Partners, L.P., Time Warner
Telecom, the Road Runner Joint Venture 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. 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.

16. 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 $500 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. In 1999, approximately $15
million of proceeds were repaid under this securitization program. This compares
to net proceeds received of approximately $166 million in 1998.

    Additional financial information with respect to cash flows is as follows:

<TABLE>
<CAPTION>
                                                            YEARS ENDED DECEMBER 31,
                                                           ---------------------------
                                                            1999      1998      1997
                                                           -------   -------   -------
                                                                   (MILLIONS)
<S>                                                        <C>       <C>       <C>
Cash payments made for interest..........................   $498      $537      $493
Cash payments made for income taxes, net.................    132        91        95
Noncash capital contributions (distributions), net.......    388       973       399
</TABLE>

    Noncash investing activities in 1999 included the exchange of certain cable
television systems. Noncash investing activities in 1998 included the exchange
of certain cable television systems, the Time Warner Telecom Reorganization, the
formation of the Road Runner Joint Venture and the TWE-A/N Transfers (Note 2).

                                     F-121





<PAGE>

                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

INTEREST AND OTHER, NET

    Interest and other, net, consists of:


<TABLE>
<CAPTION>
                                                                 YEARS ENDED
                                                                 DECEMBER 31,
                                                              ------------------
                                                              1999   1998   1997
                                                              ----   ----   ----
                                                                  (MILLIONS)
                                                              ------------------
<S>                                                           <C>    <C>    <C>
Interest expense............................................  $(561) $(566) $(490)
Write-down of investment in Primestar.......................    --    (210)   --
Gain on sale of investment in E! Entertainment
  Television, Inc. .........................................    --     --     250
Other investment-related activity, principally net losses on
  corporate-related equity investees........................   (185)  (119)   (38)
Corporate finance-related activity, including losses on
  asset securitization programs.............................    (58)   (25)     3
Miscellaneous...............................................    (14)   (25)   (51)
                                                               ----   ----   ----
Total interest and other, net...............................  $(818) $(945) $(326)
                                                               ----   ----   ----
                                                               ----   ----   ----
</TABLE>

OTHER CURRENT LIABILITIES

    Other current liabilities consist of:

<TABLE>
<CAPTION>
                                                               DECEMBER 31,
                                                              ---------------
                                                               1999     1998
                                                              ------   ------
                                                                (MILLIONS)
<S>                                                           <C>      <C>
Accrued expenses............................................  $1,566   $1,395
Accrued compensation........................................     381      298
Deferred revenues...........................................     262      249
                                                              ------   ------
Total.......................................................  $2,209   $1,942
                                                              ------   ------
                                                              ------   ------
</TABLE>

17. SUBSEQUENT EVENT

  America Online-Time Warner Merger

    In January 2000, Time Warner and America Online announced that they had
entered into an agreement to merge (the 'Merger') by forming a new holding
company named AOL Time Warner Inc. ('AOL Time Warner'). As a result of the
Merger, the former shareholders of America Online will have an approximate 55%
interest in AOL Time Warner and the former shareholders of Time Warner will have
an approximate 45% interest in the combined entity, expressed on a fully diluted
basis. The Merger is expected to be accounted for by AOL Time Warner as an
acquisition of Time Warner under the purchase method of accounting for business
combinations.

    The Merger is expected to close in the fall of 2000 and is subject to
customary closing conditions, including the approval of the shareholders of each
of America Online and Time Warner and all necessary regulatory approvals. There
can be no assurance that such approvals will be obtained.


                                     F-122









<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, 1999 and 1998, and the
related consolidated statements of operations, cash flows and partnership
capital for each of the three years in the period ended December 31, 1999. 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 auditing standards generally
accepted in the United States. 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, 1999 and 1998, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31,
1999, in conformity with accounting principles generally accepted in the United
States. 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 2, 2000


                                     F-123



<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, 1999 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.
Certain reclassifications have been made to conform to the 1999 presentation.

    The selected historical financial information for 1998 reflects (i) the
TWE-A/N Transfers, effective as of January 1, 1998, (ii) the Primestar Roll-up
Transaction, effective as of April 1, 1998, (iii) the formation of the Road
Runner Joint Venture, effective as of June 30, 1998, (iv) the Time Warner
Telecom Reorganization, effective as of July 1, 1998 and (v) the formation of
the Texas Cable Joint Venture, effective as of December 31, 1998. 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
deconsolidation of Six Flags resulting from the disposition by TWE of a 51%
interest in Six Flags, effective as of June 23, 1995.

<TABLE>
<CAPTION>
                                                            YEARS ENDED DECEMBER 31,
                                                 -----------------------------------------------
                                                  1999      1998      1997      1996      1995
SELECTED OPERATING STATEMENT INFORMATION         -------   -------   -------   -------   -------
                                                                   (MILLIONS)
<S>                                              <C>       <C>       <C>       <C>       <C>
Revenues.......................................  $13,164   $12,246   $11,318   $10,852   $ 9,517
Depreciation and amortization..................   (1,364)   (1,436)   (1,370)   (1,235)   (1,039)
Business segment operating income(a)(b)........    4,227     1,719     1,444     1,078       960
Interest and other, net(c).....................     (818)     (945)     (326)     (522)     (580)
Income before extraordinary item...............    2,759       326       637       210        97
Net income(d)..................................    2,759       326       614       210        73
</TABLE>

<TABLE>
<CAPTION>
                                                                  DECEMBER 31,
                                                 -----------------------------------------------
                                                  1999      1998      1997      1996      1995
SELECTED BALANCE SHEET INFORMATION               -------   -------   -------   -------   -------
                                                                   (MILLIONS)
<S>                                              <C>       <C>       <C>       <C>       <C>
Cash and equivalents...........................  $   517   $    87   $   322   $   216   $   209
Total assets...................................   24,843    22,230    20,731    19,973    18,905
Debt due within one year.......................        6         6         8         7        47
Long-term debt.................................    6,655     6,578     5,990     5,676     6,137
Preferred stock of subsidiary..................       --       217       233        --        --
Time Warner General Partners' Senior Capital...       --       603     1,118     1,543     1,426
Partners' capital..............................    7,149     5,107     6,333     6,574     6,478
</TABLE>

---------

(a) Includes net pretax gains of approximately $2.119 billion in 1999, $90
    million in 1998 and $200 million in 1997 relating to the sale or exchange of
    certain cable television systems and investments.

(b) 1999 includes a net pretax gain of approximately $215 million recognized in
    connection with the early termination and settlement of a long-term, home
    video distribution agreement, a pretax gain of $97 million relating to the
    sale of an interest in CanalSatellite and a one-time, noncash pretax charge
    of $106 million relating to Warner Bros.'s retail stores.

(c) Includes a pretax charge of approximately $210 million in 1998 to reduce the
    carrying value of an interest in Primestar and a pretax gain of
    approximately $250 million in 1997 related to the sale of an interest in E!
    Entertainment.

(d) Net income includes an extraordinary loss on the retirement of debt of $23
    million in 1997 and $24 million in 1995.

                                      F-124


<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>
1999
1st(a)......................................................  $ 2,934      $  651     $  312
2nd(a)......................................................    3,060       1,212        767
3rd(a)......................................................    3,474         863        561
4th(a)......................................................    3,696       1,501      1,119
Year(a).....................................................   13,164       4,227      2,759

1998
1st(b)......................................................  $ 2,910      $  369     $  108
2nd(b)......................................................    2,850         455        155
3rd(b)......................................................    3,220         468        172
4th(c)......................................................    3,266         427       (109)
Year(b)(c)..................................................   12,246       1,719        326
</TABLE>

---------

(a) 1999 operating income has been affected by certain significant nonrecurring
    items. These items consisted of (i) a net pretax gain of approximately $215
    million in the first quarter relating to the early termination and
    settlement of a long-term home video distribution agreement, (ii) a net
    pretax gain of approximately $97 million in the fourth quarter relating to
    the sale of an interest in CanalSatellite, (iii) a one-time, noncash pretax
    charge of approximately $106 million in the fourth quarter relating to
    Warner Bros.'s retail stores and (iv) net pretax gains relating to the sale
    and exchange of various cable television systems and investments of $760
    million in the second quarter, $358 million in the third quarter, $1.001
    billion in the fourth quarter, thereby aggregating $2.119 billion for the
    year.

(b) 1998 operating income includes net pretax gains relating to the sale and
    exchange of various cable television systems and investments of $14 million
    in the first quarter, $70 million in the second quarter, $6 million in the
    third quarter, thereby aggregating $90 million for the year.

(c) Net income (loss) for the fourth quarter of 1998 includes a charge of
    approximately $210 million principally to reduce the carrying value of an
    interest in Primestar.

                                       F-125

<PAGE>


                     TIME WARNER ENTERTAINMENT COMPANY, L.P.
                 SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
                  YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997

<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>

1999:
Reserves deducted from accounts receivable:
   Allowance for doubtful accounts................................      $271         $114       $ (95)(a)    $290
   Reserves for sales returns and allowances......................       235          456        (313)(b)     378
                                                                        ----         ----        ----        ----
Total.............................................................      $506         $570       $(408)       $668
                                                                        ====         ====       =====        ====

1998:
Reserves deducted from accounts receivable:
   Allowance for doubtful accounts................................      $218         $144      $  (91)(a)    $271
   Reserves for sales returns and allowances......................       206          338        (309)(b)     235
                                                                        ----         ----        ----        ----
Total.............................................................      $424         $482       $(400)       $506
                                                                        ====         ====       =====        ====

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
                                                                        ====         ====       =====        ====
</TABLE>


(a) Represents uncollectible receivables charged against the reserve.
(b) Represents returns or allowances applied against the reserve.

                                     F-126

<PAGE>

                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
                                                                          SEQUENTIAL
 EXHIBIT                                                                     PAGE
 NUMBER                            DESCRIPTION                              NUMBER
 ------                            -----------                              ------
<S>        <C>                                                             <C>
2.          Agreement and Plan of Merger dated as of January 10, 2000,         *
            between the Registrant and America Online, Inc. ('AOL')
            (which is incorporated herein by reference to  Exhibit 2.1
            to the Registrant's Current Report on Form 8-K dated
            January 10, 2000 (the 'January 2000 Form 8-K')).

3.(i)(a)    Restated Certificate of Incorporation of the Registrant as         *
            filed with the Secretary of State of the State of Delaware
            on 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 Amendment of Restated Certificate of                *
            Incorporation of the Registrant as filed with the
            Secretary of State of the State of Delaware on May 26,
            1999 (which is incorporated herein by reference to Exhibit
            3.(i)(b) of the Registrant's Quarterly Report on Form 10-Q
            for the quarter ended June 30, 1999 (the 'June 1999
            Form 10-Q')).

 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 Amendment 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 LMC Common Stock of the Registrant as filed
            with the Secretary of State of the State of Delaware on
            May 26, 1999 (which is incorporated herein by reference
            to Exhibit 3.(i)(f) of the Registrant's June 1999 Form 10-Q).

 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 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)(h)   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)(i)   Certificate of Amendment 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
            LMCN-V Common Stock of the Registrant as filed with the
            Secretary of State of the State of Delaware on May 26, 1999
            (which is incorporated herein by reference to Exhibit 3.(i)(i)
            of the Registrant's June 1999 Form 10-Q).

</TABLE>

                                       i

<PAGE>

<TABLE>
<CAPTION>
                                                                          SEQUENTIAL
 EXHIBIT                                                                     PAGE
 NUMBER                            DESCRIPTION                              NUMBER
 ------                            -----------                              ------
<S>        <C>                                                             <C>
 3.(i)(j)   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)(k)   Certificate of Elimination 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 D Convertible Preferred Stock of the Registrant as
            filed with the Secretary of State of the State of Delaware
            on March 17, 2000.

 3.(i)(l)   Certificate of the Voting Powers, Designations, Preferences        *
            and Relative, Participating, Optional or Other Special
            Rights, and Qualifications, Limitations or Restrictions
            Thereof, of Series 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)(m)   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)(n)   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')).

 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 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)(p)   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) of the Registrant's 1996
            Form 10-K).

 3.(i)(q)   Certificate of Elimination 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 G Convertible Preferred Stock of the Registrant as
            filed with the Secretary of State of the State of Delaware
            on March 19, 1999 (which is incorporated by reference to
            Exhibit 3.(i)(m) to the Registrant's Annual Report on
            Form 10-K for the year ended December 31, 1998 (the '1998
            Form 10-K')).

 3.(i)(r)   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).

</TABLE>

                                       ii

<PAGE>

<TABLE>
<CAPTION>
                                                                          SEQUENTIAL
 EXHIBIT                                                                     PAGE
 NUMBER                            DESCRIPTION                              NUMBER
 ------                            -----------                              ------
<S>        <C>                                                             <C>
 3.(i)(s)   Certificate of Elimination 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 H Convertible Preferred Stock of the Registrant as
            filed with the Secretary of State of the State of Delaware
            on March 19, 1999 (which is incorporated herein by reference
            to Exhibit 3.(i)(o) to the Registrant's 1998 Form 10-K).

 3.(i)(t)   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)(u)   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)(v)   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)(w)   Certificate of Elimination 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
            March 19, 1999 (which is incorporated herein by reference to
            Exhibit 3.(i)(s) to the Registrant's 1998 Form 10-K).

 3.(i)(x)   Certificate of the Voting Powers, Designations, Preferences        *
            and Relative, Participating, Optional or Other Special
            Rights, and Qualifications, Limitations or Restrictions
            Thereof, of 10 1/4% Series M Exchangeable Preferred Stock of
            the Registrant as filed with the Secretary of State of the
            State of Delaware on October 10, 1996 (which is incorporated
            herein by reference to Exhibit 4.15 to the Registrant's S-8
            Registration Statement).

 3.(ii)     By-laws of the Registrant as of November 19, 1998 (which are       *
            incorporated herein by reference to Exhibit 3.(ii) to the
            Registrant's 1998 Form 10-K).

 4.1        Rights Agreement (the 'Rights Agreement') dated as of              *
            October 10, 1996 between the Registrant and ChaseMellon
            Shareholder Services L.L.C. ('ChaseMellon') (which is
            incorporated herein by reference to Exhibit 4.17 to the
            Registrant's S-8 Registration Statement).

 4.2        Amendment No. 1 to the Rights Agreement dated as of December       *
            15, 1998, between the Registrant and ChaseMellon (which is
            incorporated herein by reference to Exhibit 4.2 to the
            Registrant's 1998 Form 10-K).

 4.3        Amendment No. 2 to the Rights Agreement dated as of January        *
            21, 1999 between the Registrant and ChaseMellon (which is
            incorporated herein by reference to Exhibit 4.3 to the
            Registrant's 1998 Form 10-K).

 4.4        Amendment No. 3 to the Rights Agreement dated as of January        *
            10, 2000 between the Registrant and ChaseMellon (which is
            incorporated herein by reference to Exhibit 4 to the
            Registrant's Amendment No. 1 on Form 8-A/A to the Registrant's
            Registration Statement on Form 8-B as filed with the Commission
            on January 31, 2000).

</TABLE>

                                      iii

<PAGE>

<TABLE>
<CAPTION>
                                                                          SEQUENTIAL
 EXHIBIT                                                                     PAGE
 NUMBER                            DESCRIPTION                              NUMBER
 ------                            -----------                              ------
<S>        <C>                                                             <C>
 4.5        Indenture dated as of June 1, 1998 among the Registrant,           *
            Time Warner Companies, Inc. ('TWCI'), Turner Broadcasting
            System, Inc. ('TBS') and The Chase Manhattan Bank, as
            Trustee ('Chase Manhattan') (which is incorporated herein by
            reference to Exhibit 4 to the Registrant's Quarterly Report
            on Form 10-Q for the quarter ended June 30, 1998).

 4.6        Indenture dated as of April 30, 1992, as amended by the            *
            First Supplemental Indenture, dated as of June 30, 1992,
            among Time Warner Entertainment Company, L.P. ('TWE'), TWCI,
            certain of TWCI's subsidiaries that are parties thereto and
            The Bank of New York ('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')).

 4.7        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')).

 4.8        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).

 4.9        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 (File
            No. 1-12259) ('TWE's 1993 Form 10-K')).

 4.10       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 (File
            No. 1-12259)).

 4.11       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 (which is
            incorporated herein by reference to Exhibit 4.7 to the
            Registrant's Annual Report on Form 10-K for the year ended
            December 31, 1997 (the '1997 Form 10-K)).

 4.12       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 (which is
            incorporated herein by reference to Exhibit 4.8 to the
            Registrant's 1997 Form 10-K).

 4.13       Indenture dated as of January 15, 1993 between TWCI and            *
            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)).

 4.14       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 (File No. 1-8637)).

 4.15       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 (File No. 1-8637)).

 4.16       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).

</TABLE>

                                       iv

<PAGE>

<TABLE>
<CAPTION>
                                                                         SEQUENTIAL
                                                                          SEQUENTIAL
 EXHIBIT                                                                     PAGE
 NUMBER                            DESCRIPTION                              NUMBER
 ------                            -----------                              ------
<S>        <C>                                                             <C>
 4.17       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').

 4.18       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).

 4.19       Sixth Supplemental Indenture dated as of March 17, 1998            *
            among the Registrant, TWCI, TBS and Chase Manhattan, as
            Trustee (which is incorporated herein by reference to
            Exhibit 4.15 to the Registrant's 1997 Form 10-K).

 4.20       Trust Agreement dated as of April 1, 1998 among the                *
            Registrant, as Grantor and U.S. Trust Company of California,
            N.A., as Trustee (which is incorporated herein by reference
            to Exhibit 4.16 to the Registrant's 1997 Form 10-K).

10.1        Time Warner 1986 Stock Option Plan, as amended through
            March 16, 2000.

10.2        1988 Stock Incentive Plan of Time Warner Inc., as amended
            through March 16, 2000.

10.3        Time Warner 1989 Stock Incentive Plan, as amended through
            March 16, 2000.

10.4        Time Warner 1993 Stock Option Plan, as amended through
            March 16, 2000.

10.5        Time Warner 1994 Stock Option Plan, as amended through
            March 16, 2000.

10.6        Time Warner Corporate Group Stock Incentive Plan, as amended
            through March 16, 2000.

10.7        Time Warner 1997 Stock Option Plan, as amended through
            March 16, 2000.

10.8        Time Warner 1988 Restricted Stock Plan for Non-Employee
            Directors, as amended through March 16, 2000.

10.9        Time Warner 1996 Stock Option Plan for Non-Employee
            Directors, as amended through March 16, 2000.

10.10       Deferred Compensation Plan for Directors of Time Warner, as        *
            amended through November 18, 1993 (which is incorporated
            herein by reference to Exhibit 10.9 to TWCI's 1993
            Form 10-K (File No. 1-8637)).

10.11       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).

10.12       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 (File No. 1-8637)).

10.13       Time Warner Inc. Deferred Compensation Plan (the 'Deferred         *
            Compensation Plan') (which is incorporated herein by Reference
            to Exhibit 4 to the Registrant's Registration Statement on
            Form S-8 filed with the Commission on December 18, 1998
            (Registration No. 333-69161)).

10.14       Amendment No. 1 to the Deferred Compensation Plan, effective on
            June 18, 1999.

10.15       Amendment No. 2 to the Deferred Compensation Plan, effective on
            September 13, 1999.

10.16       Amendment No. 3 to the Deferred Compensation Plan, effective on
            October 25, 1999 except where otherwise indicated.

10.17       Amendment No. 4 to the Deferred Compensation Plan, effective on
            October 25, 1999 except where otherwise indicated.

10.18       Amendment No. 5 to the Deferred Compensation Plan, effective on
            November 15, 1999, except where otherwise indicated.
</TABLE>

                                       v

<PAGE>

<TABLE>
<CAPTION>
                                                                          SEQUENTIAL
 EXHIBIT                                                                     PAGE
 NUMBER                            DESCRIPTION                              NUMBER
 ------                            -----------                              ------
<S>        <C>                                                             <C>
10.19       Amendment No. 6 to the Deferred Compensation Plan, effective on
            March 15, 2000, except where otherwise indicated.

10.20       Amended and Restated Employment Agreement effective as of          *
            January 1, 1998, as amended December 2, 1998, between the
            Registrant and Gerald M. Levin (which is incorporated herein
            by reference to Exhibit 10.13 to the Registrant's 1998
            Form 10-K).

10.21       Amended and Restated Employment Agreement effective as of          *
            January 1, 1998, as amended December 15, 1998, between the
            Registrant and R.E. Turner ('Turner') (which is incorporated
            herein by reference to Exhibit 10.14 to the Registrant's
            1998 Form 10-K).

10.22       Amended and Restated Employment Agreement effective as of          *
            January 1, 1999, between the Registrant and Richard D.
            Parsons (which is incorporated herein by reference to
            Exhibit 10.15 to the Registrant's 1998 Form 10-K).

10.23       Amended and Restated Employment Agreement effective as of          *
            January 1, 1998, as amended December 2, 1998, between the
            Registrant and Peter R. Haje (which is incorporated herein
            by reference to Exhibit 10.16 to the Registrant's 1998
            Form 10-K).

10.24       Amended and Restated Employment Agreement effective as of          *
            January 1, 1999, between the Registrant and Richard J.
            Bressler (which is incorporated herein by reference to
            Exhibit 10.17 to the Registrant's 1998 Form 10-K).

10.25       Amended and Restated Employment Agreement effective as of          *
            April 1, 1998, as amended December 2, 1998, between the
            Registrant and Timothy A. Boggs (which is incorporated
            herein by reference to Exhibit 10.18 to the Registrant's
            1998 Form 10-K).

10.26       Amended and Restated Employment Agreement effective as of          *
            April 1, 1998, as amended December 2, 1998, between the
            Registrant and John A. LaBarca (which is incorporated herein
            by reference to Exhibit 10.19 to the Registrant's 1998
            Form 10-K).

10.27       Employment Agreement effective as of January 11, 1999              *
            between the Registrant and Andrew J. Kaslow (which is
            incorporated herein by reference to Exhibit 10.20 to the
            Registrant's 1998 Form 10-K).

10.28       Employment Agreement effective as of July 1, 1999, between
            the Registrant and Joan N. Sumner.

10.29       Employment Agreement effective as of July 12, 1999, between
            the Registrant and Joseph A. Ripp.

10.30       Employment Agreement effective as of January 1, 2000,
            between the Registrant and Christopher P. Bogart.

10.31       Employment Agreement effective as of January 1, 2000,
            between the Registrant and Edward A. Adler.

10.32       Voting Agreement dated as of January 10, 2000 between AOL          *
            and certain stockholders of the Registrant (which is
            incorporated herein by reference to Exhibit 99.1 of the
            Registrant's January 2000 Form 8-K).

10.33       Stock Option Agreement dated as of January 10, 2000 between        *
            AOL and the Registrant (which is incorporated herein by
            reference to Exhibit 99.2 of the Registrant's January 2000
            Form 8-K).

10.34       Stock Option Agreement dated as of January 10, 2000 between        *
            AOL and the Registrant (which is incorporated herein by
            reference to Exhibit 99.3 of the Registrant's January 2000
            Form 8-K).

10.35       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 (File No. 1-8637) ('TWCI's September 1996
            Form 8-K')).
</TABLE>

                                       vi

<PAGE>

<TABLE>
<CAPTION>
                                                                          SEQUENTIAL
 EXHIBIT                                                                     PAGE
 NUMBER                            DESCRIPTION                              NUMBER
 ------                            -----------                              ------
<S>        <C>                                                             <C>
10.36       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).

10.37       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's Partners') (which is incorporated
            herein by reference to Exhibit 10.22 to the Registrant's
            1996 Form 10-K).


10.38       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).

10.39       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).

10.40       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 (which is
            incorporated herein by reference to Exhibit 10.26 to the
            Registrant's 1997 Form 10-K).

10.41       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).

10.42       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 (File No. 1-12878)).

10.43       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).

10.44       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 (File No.
            1-8637) ('TWCI's August 1995 Form 8-K')).

10.45       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).

10.46       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) (File No. 1-12878)).
</TABLE>

                                      vii

<PAGE>

<TABLE>
<CAPTION>

                                                                          SEQUENTIAL
 EXHIBIT                                                                     PAGE
 NUMBER                            DESCRIPTION                              NUMBER
 ------                            -----------                              ------
<S>        <C>                                                             <C>
10.47       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 (File No. 1-12878)
            ('TWE's September 1994 Form 8-K')).

10.48       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).

10.49       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
            (File No. 1-12878)).

10.50       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).

10.51       Transaction Agreement No. 2 dated as of June 23, 1998 among        *
            Advance Publications, Newhouse, Advance/Newhouse, TWE,
            Paragon Communications ('Paragon') and TWE-AN Partnership
            (which is incorporated herein by reference to Exhibit 10.38
            to the Registrant's 1998 Form 10-K).

10.52       Transaction Agreement No. 3 dated as of September 15, 1998         *
            among Advance Publications, Newhouse, Advance/Newhouse, TWE,
            Paragon and TWE-AN Partnership (which is incorporated herein
            by reference to Exhibit 10.39 to the Registrant's 1998
            Form 10-K).

10.53       First Amendment to the Partnership Agreement of TWE-AN             *
            Partnership dated as of February 12, 1998 among TWE,
            Advance/Newhouse and TW Holding Co. (which is incorporated
            herein by reference to Exhibit 10.40 to the Registrant's
            1998 Form 10-K).

10.54       Second Amendment to the Partnership Agreement of TWE-AN            *
            Partnership dated as of December 31, 1998 among TWE,
            Advance/Newhouse and Paragon (which is incorporated herein
            by reference to Exhibit 10.41 to the Registrant's 1998
            Form 10-K).

10.55       Third Amendment to the Partnership Agreement of TWE-AN             *
            Partnership dated as of March 1, 1999 among TWE,
            Advance/Newhouse and Paragon (which is incorporated herein
            by reference to Exhibit 10.42 of the Registrant's 1998
            Form 10-K).

12.1        Ratio of Earnings to Fixed Charges of the Registrant.

12.2        Ratio of Earnings to Fixed Charges of TWE.

21          Subsidiaries of the Registrant.

23          Consent of Ernst & Young LLP, Independent Auditors.

27          Financial Data Schedule.

99.1        Annual Report on Form 11-K of the Time Warner Savings Plan
            for the year ended December 31, 1999 (to be filed by
            amendment).

99.2        Annual Report on Form 11-K of the Time Warner Thrift Plan
            for the year ended December 31, 1999 (to be filed by
            amendment).

99.3        Annual Report on Form 11-K of the TWC Savings Plan for the
            year ended December 31, 1999 (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.

                                      viii